Monday, December 19, 2011

Bye Bye Keynes Via The Washington Post

Robert Samuelson is given a weekly platform in the Washington Post to express his opinions on economic affairs. They often coincide with those of the Post's editors who have been deficit hawks since Obama was elected to office. In this article Samuelson conludes that if Keynes were alive today he would not propose a government stimulus when government debt is at such high levels. Of course, Keynes is not alive to challenge that contention, but when he was alive he urged FDR to increase government spending under similar conditions of high government debt. Keynes would have preferred that governments run surpluses in good times in order fund stimulus in bad times, but he was an advocate for government stimulus in the Great Depression.

Samuelson presents many weak arguments against government stimulus in his article. I do not want to waste my time, and yours, by pointing out the weakness in his arguments. I would rather provide some of the reasons why Keynes has been under attack by conservative economists, since many of his ideas achieved prominence after spending on WW II got us out of the Great Depression.

Keynes believed that purpose of the economy was to improve the living standards of the ordinary citizen. He believed that economic growth would relieve people from their struggles to provide the means for their survival. He imagined a time in which people would have the leisure to engage in some of the more important things in life that he and his class were free to pursue. He also believed that the capitalist system, in cooperation with the state, could make that happen and preserve individual liberty better than competing economic systems that were popular among intellectuals in his time. Persistent unemployment was a threat to capitalism and to his vision of an economy that had the capability of providing a better life for everyone. He came to the conclusion that the economy was inherently unstable and that it was not self correcting. This violated a fundamental assumption of classical economics that prices would always adjust to maintain full employment. Wages would fall during downturns and lead to more demand for labor, and interest rates would fall if the level of savings exceeded the demand for savings by business for investment purposes. That would lead to more consumption and higher levels of business investment. Keynes argued that falling wages would only lead to lower levels of consumption and price deflation. He also argued that lower interest rates would not stimulate business investment in periods of over-capacity and weak demand for products and services.

Conservatives also believed that the financial system allocated resources to their best uses. Keynes had a very dim view about the way that Wall Street allocated resources. He compared the process to a beauty contest in which investors were engaged in the game of trying to predict which contestant other investors would believe to be most attractive under the prevailing circumstances. This led Keynes to make a case for the state to play a role by fostering investments in particular areas. Industrial policy has always been anathema to conservatives.

Keynes also believed that income inequality led to weak aggregate demand. Those with high incomes would save a higher percent of their earnings than low wage earners who spent most of their income. Moreover, he did not believe that the savings of high income earners were necessary to fund investments in the economy. The retained earnings of businesses provided sufficient funds for that purpose along with the savings from pension funds and the float available to insurance companies. Keynes was not fond of the rentier class in England that was able to live on inherited assets and did not provide productive work to earn a living. He anticipated the euthanasia of the rentier class.

In summary, conservatives hate Keynes for reasons that have nothing to do with the current level of government deficits. His ideas undermine the edifice of neo-liberal, or neo-conservative economics, which dominate in academia and provide the ideological basis for a limited role of the state in an economy that is inherently stable and self-correcting via market forces. Keynes wanted to put an end to laissez faire economics. The backlash against Keynes is primarily due to the concern that the doctrine of laissez faire, which was used to justify deregulation of the banking system and "innovations" that enabled the financial crisis, would come under renewed attack. Conservatives believe that a good offense is superior to a good defense. They equate Keynesian ideas with socialism and or communism because these are curse words to the general public. It matters not to conservatives that Keynes was attempting to save capitalism by making it work better for most people.

Economists in the US, even so-called "New Keynesians", are not going to resurrect Keynes. They are interested in some of the problems in classical theory that lead to market imperfections, but they assume the general tenets of classical theory, and they base macroeconomics on the foundation of classical microeconomics. They are not ready to dismiss the paradigm upon which their reputations and grants are based. It will take changes in the political environment to change economics and that will not be pushed by the benefactors of the prevailing ideology. It will have to come from popular movements.

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