“The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us. ....
Keynes's genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.
.... Contemporary "liquidationists" insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.
Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care. …
The urgent task is to return the world economy to health.
The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak. Given the correction of household spending under way in the deficit countries, this period of high government spending is, alas, likely to last for years. …
The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.
…
As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us. The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible. We have done a disturbingly poor job of this in recent years. We must do better. …
As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.”
Martin Wolf, "Keynes offers us the best way to think about the financial crisis", Financial Times (24 December 2008).
Martin Wolf is associate editor and chief economics commentator at the Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 for services to financial journalism. He is a visiting fellow of Nuffield College, Oxford University, and a special professor at the University of Nottingham. Mr. Wolf is a former World Bank economist.
The return of Lord Keynes as the major intellectual force on the current policy making stage marks a completely unexpected comeback by a great thinker whose ideas had -- or so I and others thought -- been superseded by Friedman, Buchanan, Lucas and Barro. While the ideas of Keynes were thought to be foundational and it was granted that much of our understanding of a modern economy derives largely from his work, uses his concepts, and tests his conjectures and assertions, it was nonetheless felt that at its core Keynesianism was much too simplistic in its short-term focus and its failure to incorporate adequately microeconomic incentives and rationality and it ignored the complexities of policy implementation. Keynes’ emphasis on government spending was seen as ignoring the difficulties of spending large amounts of money expeditiously and efficiently and in a timely manner. It also appeared that the impact of extra government spending that Keynes proposed was less than his theory predicted and that the increases in spending worsened the long-term budgetary outlook. While never completely displaced, Keynesian thinking was gradually supplemented by other streams of thought and eventually much greater emphasis was given to monetary policy as the main tool of macroeconomic management.
But now a Keynesian government spending stimulus and tax cuts are all the rage in Washington. President-Elect Obama has yet to put forward his “stimulus package” but it is said it might be as much as a trillion dollars, and amount equal to well over $3000 for every man, woman and child in the country. That’s a lot of money and there is not an interest group in the country that does not have its hand out. Granted the present economic situation is unprecedented (well, not really unprecedented, as current unemployment is about a percentage point below that of the downturn of the early 1990s and 2½ percentage points below that of the downturn of the early 1980s), and I suppose the government should do something. And there is nothing that a politician loves to do more than spend, so Keynes and his theories are now in vogue.
I wonder how long it will be before we once again conclude that pure Keynesian economics is an inadequate basis for policy formulation?
Thanks to Larry Willmore for the Tdj.
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