Sunday, October 19, 2008


The FT profiles the "Man in the News: John Maynard Keynes." Ed Crooks writes:
The key to Keynes was his commitment to preserving the market economy by making it work. He was dismissive of Marxism but believed the market economy could survive only if it earned the support of the public by raising living standards.

The role of the economist, he believed, was to be the guardian of “the possibility of civilisation”, and no economist has ever been more suited for that role.

In the Washington Post, Keynes' biographer Robert Skidelsky writes "We Forgot Everything Keynes Taught Us" -

No one has bettered Keynes in his understanding of the psychology of financial markets. "Most . . . of our decisions to do something positive . . . can only be taken as a result of animal spirits . . . If animal spirits are dimmed . . . enterprise will fade and die" is one famous remark. "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done" is another. Professional investment, he wrote, is like "a game of Snap, of Old Maid, of Musical Chairs," whose object is to pass on the Old Maid -- the toxic debt -- to one's neighbor before the music stops. What makes the game toxic is not greed, which is universal, but uncertainty masquerading as certainty.

"The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made," Keynes wrote in his great book "The General Theory of Employment, Interest, and Money" in 1936. We disguise this uncertainty from ourselves by assuming that the future will be like the past, that existing opinion correctly sums up future prospects, and by copying what everyone else is doing. But any view of the future based on "so flimsy a foundation" is liable to "sudden and violent changes. The practice of calmness and immobility, of certainty and security suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct . . . the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning yet in a sense legitimate where no solid basis exists for a reasonable calculation." Keynes accused economics of being itself "one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future."

While Skidelsky is right that Keynes' discussion of the psychology of investment booms and busts is too often neglected - it has been left out of the "Keynesian" economic models in our textbooks - I woudn't go so far as to say that we've forgotten everything Keynes taught us. A number of people have lately been invoking another important Keynesian lesson, the role of government in propping up "effective demand" through fiscal policy.

In the Guardian, Brad DeLong explains how policymakers dealing with the financial crisis have gone from Plan A through Plan F. Next up:

If Plan F fails, we move to Plan G: we pull the Keynesian fire alarm and begin an enormous government infrastructure building programme in the whole North Atlantic to keep away depression.
Paul Krugman is ready to break the glass:

[R]ight now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold...

[T]here’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more — but nobody expects this to do more than provide a slight economic boost.

On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

1 comment:

Dov Henis said...

Real And Virtual Energy, And Keynesian Salvation Prospects

A. From an earlier post:

In the present return to Keynesian steering out of the catastrophic world economy crisis the government is called to stimulate demand through fiscal measures, to effect a balancing act, 'creating' just enough money to cover a 'natural' amount of economic activity, without gliding either towards inflation or unemployment.

This is, in effect, assigning to money and credit in the economy the functional attributes of energy in life's evolution.

However whereas energy, life's and evolution's monetized currency, the capacity of acting or being active, is real, money and credit are virtual reality. Their functionality depends on the image-environment experienced through human sensory-imagination stimuli. This smacks of psychology or faith-religion.

So what are the odds that a Keynesian course will steady the rocking boat? The odds are like odds of other things that depend on human reactions-attitudes. This steadying course will be as effective as the conformation of the 'people' with the 'hopeful' reactions-attitudes on which the
Keynesian assumption is based.

B. Odds of economy's salvation via Keynesian prospects

- Economy's salvation via Keynesian prospects depends on the "people's" reactions-attitudes to sensory-imagination stimuli effected in them by their societal environment.

- The stimuli thus effected depend, in turn, on the cultural constitution of the "people".

- It is difficult, very difficult, to modify human culture by decree or even by revolution. Human culture changes normally by evolution, a slower, more basic, process than by decree or revolution or even - as exposed in the present world economy - than by reaction to a catastrophe. The evidence of this is all around us nowadays in the world stock markets, and in the lobbyings of inflated-bubbled-businesses for public help lest the "people" are hurt by recession due to the collapse of the bubbles.

The present tone of the world's culture, and even ethics, including the banners of a variety of types and shades of greed, has been set by the 20th century Technology Culture. Its essence is the legitimacy and admiration of gaining capital via virtual activities, activities without or beyond production of real assets, real life resources.

So the odds of the economy's salvation via Keynesian prospects are, in the long run, proportional to the odds that the culture of Earth's humanity will evolve towards ever more rational self-organization...which is, how unsurprisingly rational, the odds of every organism to survive...

Dov Henis
(A DH Comment From The 22nd Century)