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.

keynesjmThere 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.

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.

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

4 Comments

  1. I have been proposing for the last two decades a modern day version of the “Keynes Plan” that Keynes presented at Bretton Woods. My plan is called the INCU –International Money Clearing Union. This would work to assure no nations ran persistent trade surplus at the balance of payments,

    I can not even get some heterodox economists interested!

    Also I have argued (from Keynes) that the law of comparative advantage has no relevance in explaining why the Chinese are running huge trade surpluses — or Germany!! ANYONE OUT THERE INTERESTED?

    Given the stupidity of mainstream economists –from Paul Samuelson to Milton Friedman– who controlled economic thought in the last half of the 20th century– it is not surprising no one takes my Post Keynesian arguments seriously. Even Keynes would have trouble selling his ideas today!

    Paul Davidson

    • What economists need now — the correct theory
      Comment on Paul Davidson

      .

      In my papers I have quoted you saying:

      “…, before accepting the conclusions of any economist’s model as applicable to the real world, the careful student should always examine and be prepared to criticize the applicability of the fundamental postulates of the model; for, in the absence of any mistake in logic, the axioms of the model determine its conclusions.” (Davidson, 2002, p. 41)

      Currently, economists do not understand how the economy works. We therefore have good reason to look closely at the axiomatic foundations.

      I agree with you that standard economics has been refuted once and for all and that its axioms are unacceptable. Perhaps you do not agree with me that Post Keynesianism has been refuted, too (2011; 2014b).

      But certainly you remember that Keynes has called for a paradigm shift:

      “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

      Perhaps it is a really good idea to make a fresh attempt with a ‘non-Walrasian-Keynesian’ set of objective structural axioms (see 2014a).

      .

      Egmont Kakarot-Handtke
      .

      References
      Davidson, P. (2002). Financial Markets, Money and the Real World. Cheltenham, Northampton, MA: Edward Elgar.

      Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–15. URL http://ssrn.com/abstract=1966438.

      Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper Series, 2511741: 1–30. URL http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665.

      Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792.

      Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

  2. If national trade surpluses are a problem, are massive income surpluses also a problem?

  3. We need a LOT more than another Keynes.

    I live 16 km from Thorstein Veblen’s childhood home and and 10 blocks from his undergraduate college and I know no one within 100 km who could discuss his economic theories for two minutes. Yet if it weren’t for guys like Veblen, Keynes would have never gained traction in USA. If you read Veblen’s critique of Keynes’ Economic Consequences of the Peace, you will see that Veblen considered Keynes nearly hopeless.

    Yes, the economic ideas that drove the settlement of the USA West were indeed FAR advanced compared to a British investment banker. We don’t need another Keynes—we need another Veblen, or Henry Carey, or Peter Cooper, or Daniel Raymond. You teach the ideas of those who actually understood economic development and folks like Keynes are just a detail.


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