Tag Archives: john maynard keynes

Keynes comments on our new-found love of austerity

Summary: We’re living in an time of deja vu. Our Af-Pak War repeats the mistakes of Vietnam; Europe’s economic policy repeats mistakes of the 1930’s. Slow and stupid are the two sins God always punishes.

(1) Mark Thoma (Prof economics, U Oregon) coined a term for the advocates of austerity now (i.e., increase savings during a recession; they fit no current school of economic theory) — Correction on 21 June: it was coined by Rob Parenteau of The Richebacher Letter (source).

Who is correct, Keynes who argued that budget cuts in a recession make things worse — his “paradox of thrift” — or the austerians who say that budget cuts restore “confidence in the markets” and make things better? {source}

As usual, John Maynard Keynes gives us a pithy answer. He wrote to American journalist Walter Case on 14 September 1931:

To read the newspapers just now is to see Bedlam let loose. Every person in the country of super asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come, and triumphantly announces how, by refraining from every form of economic activity we can become prosperous again.

(2) For a clear explanation of the issues, I recommend “Now and Later“, Paul Krugman, op-ed in the New York Times, 20 June 2010 — Opening:

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A note about the US economy and the recent elections (yes, we’re nuts)

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One core reality too-often ignored in post-election analysis: the role of the economy. Americans tend to vote their pocketbook in elections to Congress and the Presidency.

This is nuts, on many levels.

Who sets economic policy?
How long between policy changes and results?
How do policy-makers navigate?
But at least they have economic theory to guide them!
And so the American people rationally votes…

(1) Who sets economic policy?

The most important agency setting US economic is the Federal Reserve. The Fed can act quickly to change one of the fastest-acting economic variables (monetary policy). “Fast” means over 6 – 9 months. The President and Congress have little influence over the Fed, except by the slow process of new appointments — and the atomic bomb of limiting its power.

(2) How long between policy changes and results?

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Economic theory as a guiding light for government action in this crisis

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Economic theory as a guiding light for government action in this crisis. But which theory? The dominant Keynesian economic theory, or that of the Austrian School? (see the links at the end for background information about each).

Here is an excerpt from the Drobny Global Monitor of 5 March 2009, by Andres Drobny (see his bio at the end). It not only provides a major expert’s perspective on our situation, but also illustrates the complexity and limitations of today’s economic theory — factors often lost in the politicized discussion about the appropriate public policy response to this recession (or depression).

Excerpt

One of the debates out there is whether the governments should keep ‘bailing out’ institutions to prevent a cascade of defaults. Or, just let them go bust, let the ‘haircuts’ fall where they fall, get it over with and then allow firms to restructure and start again. Avoid the Japanese mistake of prolonging the misery.

It is sometimes suggested that the former idea is somehow ‘Keynesian’. And, the latter is often described as ‘Austrian’.

Now, it is true that some Keynesians argue in favor of ‘bailouts’. And, Governments generally seem to be following both a bailout strategy and the more traditional Keynesian idea of fiscal stimulus during a slump. It is also true that some famous Austrians have been known to favor the default strategy. Yet, this discussion misses the point. None of this is actually what the various theories suggest. There’s a profound difference between policy prescriptions associated with a theoretical perspective, and the underlying theories themselves.

And, looking back at the simple principles of Austrian and Keynesian theories provides some clarity of what we are currently living through, how the policy debates fit in, and what is evolving in financial markets. It also helps us assess the increasingly popular ‘bond bubble’ concept that has been circulating this year.

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A situation report about the global economy, as the flames break thru the firewalls

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Summary: The global economy continues to fall towards debt deflation (see here), rare and never cured (WWII was not a “cure”.) This is a brief look at current dynamics, and the short and medium term futures. At over 2000 words, it is already too long; supporting logic and evidence must await later posts.

This is all speculation. I say this up front, to avoid having to fill the text with “perhaps” and “maybe” in every sentence. I hope I these guesses are wrong.

Contents

Global summary
Asia
What about the US?
Looking ahead, what can we expect for America?
Looking beyond the downturn, what can we expect?
The big unknown
Do you believe this forecast?
Conclusions

1. Global summary

Metrics of economic activity are almost all falling. Many are falling rapidly; some are in free fall.

The world moves from a financial crisis — in which governments bail out banks — to a larger crisis in which entire nations must need bailouts. Iceland was the first. A long sick list is growing: the UK, Ireland, Spain, Italy, and many emerging nations (esp in Eastern Europe).

2. Asia

Asia, so dependent on exports, falls into a depression (often defined as 4 quarters with real GDP down 10%).

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Economics is not a morality tale

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Western civilization can be seen as the liberation of technical theory (science, in the broadest sense) from moral values. This battle continues to this day. It is so much easier and enjoyable to be a witch-doctor than a scientist (again, in the broad sense as devoted to rational thought).

Machiavelli divorced poltical theory from the personal morality of the ruler — a ruler must do the right thing for his people, even at the cost of going to Hell (Shakespear sketches this out pleasantly in Measure for Measure).
Modern medicine broke the connection (so evident in the Gospels) that sickness is not the consequence of sin (with a few possible exceptions).
Keynes broke the connection between economic cycles and sin.

The current reminder of this dearly learned insight

“Keynes offers us the best way to think about the financial crisis“, Martin Wolf, Financial Times, 23 December 2008 — Exp note #3. Excerpt:

I see three broad lessons.

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

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