Tuesday, January 29, 2013

From 'The Economic Consequences of Mr. Churchill'

J.M. Keynes, "The Economic Consequences of Mr. Churchill" (1925):
The truth is that we stand mid-way between two theories of economic society.  The one theory maintains that wages should be fixed by reference to what is "fair" and "reasonable" as between classes.  The other theory - the theory of the economic Juggernaut - is that wages should be settled by economic pressure, otherwise called "hard facts," and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups.

The gold standard, with its dependence on pure chance, its faith in "automatic adjustments," and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine.  I think that they are immensely rash in their regardlessness, in their vague optimism and comfortable belief that nothing really serious ever happens.  Nine times out of ten, nothing really serious does happen - merely a little distress to individuals or to groups.  But we run a risk of the tenth time (and are stupid into the bargain) if we continue to apply the principles of an Economics which was worked out on the hypotheses of laissez-faire and free competition to a society which is rapidly abandoning these hypotheses.
Basic economic theory typically ignores the role of social norms in labor markets.  To some degree, that's ok - we can't have everything in every model, and the basic models (i.e., intermediate micro) give some useful insights.  The danger comes when economists - and the consumers of economics - forget that the models are (over) simplifications.

The context for Keynes's essay was Britain's return to the gold standard at an overvalued level - Winston Churchill was the Chancellor of the Exchequer at the time - but much of it holds up well 88 years later as an essay on the danger of "internal devaluation" such as we're seeing now in Spain.


The Arthurian said...

It is always a pleasure to read Keynes.

I had to look it up. Wikipedia says internal devaluation is "an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs".

Its aim is to restore international competitiveness.

In Chapter 24, Keynes seemed not to think highly of internatilnal competitiveness:
"...But if nations can learn to provide themselves with full employment by their domestic policy... there need be no important economic forces calculated to set the interest of one country against that of its neighbours."

Bill C said...

Yes... there are times when I think economics should just be "what Keynes said", but that would make it harder to justify our salaries.

That's a fair point that "international competitiveness" may be over-rated, but adjusting monetary policy to achieve some arbitrary currency value also forces inappropriate domestic policy (e.g., deflation in 1920's Britain).