What the world needs now — John Maynard Keynes

1 Nov, 2014 at 18:42 | Posted in Economics | 4 Comments

Is there a doctor in the house? The global economy is failing to thrive, and its caretakers are fumbling. Greece took its medicine as instructed and was rewarded with an unemployment rate of 26 percent. Portugal obeyed the budget rules; its citizens are looking for jobs in Angola and Mozambique because there are so few at home. Germans are feeling anemic despite their massive trade surplus. In the U.S., the income of a median household adjusted for inflation is 3 percent lower than at the worst point of the 2007-09 recession, according to Sentier Research. Whatever medicine is being doled out isn’t working. Citigroup Chief Economist Willem Buiter recently described the Bank of England’s policy as “an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions, and half-developed insights.” And that, he said, is better than things countries are trying elsewhere.

There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.

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The big question is whether today’s international financial architecture is up to the challenge of restoring balance to global trade and investment. The IMF, to its credit, has pivoted away from the austere prescriptions of the “Washington Consensus” that it championed through the 1990s and toward a more Keynesian perspective. “His thinking is more relevant at the current juncture than it had been in previous troughs of the global economy,” says Gian Maria Milesi-Ferretti, deputy director of the IMF’s research department.

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So goes the fighting among the physicians as the patient ails. Keynes saw the same kind of flailing at the start of the Depression. “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand,” he wrote in 1930. “The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.” Keynes himself has shown us the way out.

Peter Coy/Bloomberg Businessweek