Should We All Be Keynsians Now?
Posted by Jacques Chester on Wednesday, November 12, 2008
It’s a common refrain that “we’re all Keynsians now”, as government after government turns to fiscal levers to try and avert recession.
Yet just a year ago inflation was zooming up the list as a potential threat. And, in actual fact, it still is.
If I interrogate my extremely limited knowledge of economics, this phenomenon — inflation and economic downturn — is called ’stagflation’. And if I push into the matter further, I notice that the stagflation of the 1970s directly undermined a key Kenynsian tenet: that inflation and unemployment were inversely related phenomena.
The aftermath of this paradox was no doubt a glut of witty economics pundits walking about saying “we’re all monetarists now”.
I’d be interested in hearing how and why I am utterly wrong, and that I should exhort the government to borrow a trillion dollars forthwith to spend on infrastructure projects with their naturally infinite and judicious wisdom.
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This entry was posted on Wednesday, November 12th, 2008 at 5:07 PM and filed under Economics and public policy, Politics - international, Politics - national.
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11 Responses to “Should We All Be Keynsians Now?”
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Jacques, there’s no connection whatsoever between the real world and libertarian economics. You can “interrogate my extremely knowledge of economics” as much as you like, but it ain’t never going to make any sense, to you or to anyone else.
Posted on 12-Nov-08 at 6:49 pm | PermalinkHa! A fairly embarrassing typo.
Posted on 12-Nov-08 at 7:04 pm | PermalinkBut I was referring to my first exposure to macroeconomics, which started at Keynes.
Posted on 12-Nov-08 at 7:05 pm | PermalinkFirst i think you need to step off the (common but not universal) conceit of economics by pure reason.
we can’t speak of “key tenets” of the broad mess of economic views and analysis called Keynesianism because it isn’t a philosophical position or a set of conclusions come to by logical progression.
It’s only the best attempt to explain reality based on waht is observed, and of course when the facts change, keynesianism changes its mind.
Which is why the logic based hypothesies regarding inflationary expectations that arose in the 1960s, in part from Friedman, are now part of the majority of contemporary Keynesianism, because the experience of the 1970s vindicated that…in part.
What wasn’t vindicated in Monetarism included exogenous money and the notion that inflation was purely monetary (exemplified by the unfortunate experiences of the Fed and BoE in the 1980s).
And the empiricism of the St Louis equation, finanical crowding out and the like rmains ambiguous and fraught with framing issue. (the use of the emergent datasets and computing power is a nice legacy of monetarism though even if its own hypothesies didn’t always survive the extended data sets).
Arguments about whether stagflation is likely now can go on for ever. For instance do the current falling oil prices compared to the oil shocks that sparked the 20th century stagflation and dissapeared by the end mean anything.
Is there actual inflationary expectations? Has the microeconomic reform prevented the capacity of rent seekers to raise prices and wage demands like business and unions could in a less competitive age?
But if there is to be a proper discussion, we can’t start on the basis of two feuding beleif systems, or dueling bibles. There’s a mess of reality and mess of explanations of it.
On the other hand, if we want to argue on the basis of identity and the prose of favoured authors, I can suggest other topics.
Posted on 12-Nov-08 at 10:48 pm | PermalinkSherlock Holmes and Sam Spade, who has the better insight.
Would the Flash beat Superman in a foot race?
Would light sabres sever wolverine’s claws?
Jacques, countries across the world should no longer suffer from “stagflation”. For the most part, they will have both a downturn and very low inflation. Both will require a strong fiscal and monetary stimulus.
Australia may prove the exception - as it could be hit hard by a downturn plus some vestiges of inflation. But inflationary pressures won’t last long.
So we are all in Keynesian territory.
Posted on 13-Nov-08 at 5:39 am | PermalinkSo why’s Ireland increasing taxes and cutting spending?
Posted on 13-Nov-08 at 6:09 am | Permalink“What wasn’t vindicated in Monetarism included exogenous money and the notion that inflation was purely monetary (exemplified by the unfortunate experiences of the Fed and BoE in the 1980s).”
At the risk of starting a war of economic religion, I must protest. The first tenet of strict monetarism (”exogenous money”) was certainly discredited, though more by Goodhart’s Law (or its less entertaining but more profound generalisation, the Lucas Critique) than Keynesian theory. The second - that “inflation is always and everywhere a monetary phenomenon” - has never been questioned either by Keynes (who after all wrote a very thick and geeky book called “A Treatise on Money”) or Keynesians, because it’s damn near a tautology.
Only the crudest of Keynesians (of which, admittedly, some still had influence in the 60s and early 1970s but who were relegated to indoctrinating first year undergraduates in convenient simplifications after that) thought money didn’t matter to inflation. Neo-Keynesians certainly believe it matters - it’s just that saying “money matters” is not at all the same as saying “money is all that matters”.
Posted on 13-Nov-08 at 9:15 am | PermalinkSo why’s Ireland increasing taxes and cutting spending?
[Insert offensive joke about Irish logic here]
Posted on 13-Nov-08 at 9:16 am | PermalinkDD - There might be a little issue of semantics and nomenclature here.
The first is my understanding of the phrase “monetary phenomenon” which I had understood to mean the complete dismissal of demand-pull and cost-push inflation, or anything that could expand money supply other than monetary policy. I may be wrong on this, but it was the the same coin as exogenous money.
The other is the phrase “Neo-Keynesian” which until the past two weeks I had only seen used in regard to the Neo Keynesian synthesis (of the IS-LM et al), the paradigm that didn’t survive stagflation. The way it seems to be used in the past 2 weeks is referring to what I had always seen referred to as New Keynesian. An linguistically identical term, but referring to the larger bulk of macro since the late 70s.
Posted on 13-Nov-08 at 3:15 pm | PermalinkThe current rhetoric of Gordon Brown seems to point in the correct direction. Which surprises me a little because I haven’t generally thought very highly of Gordon Brown.
http://www.timesonline.co.uk/tol/news/politics/article5129620.ece
He is coping stick for the suggestion that tax cuts should be paid for with government borrowing. I hope he ignores the stick and cuts UK taxes and convinces the rest of the world to follow his lead. Tax cuts are precisely what the UK and the rest of the world need. Although not for the demand side reasons that Keynesians typically cite.
Posted on 13-Nov-08 at 8:16 pm | PermalinkIreland’s increasing tax and cutting spending makes me think that in a few years time we can look back at a bunch of experiments for dealing with this downturn and see who did best. However, ironically, the Irish formula may work out OK for them because they’re such a small part of such a large economy and there are competitiveness effects from liquidating. It’s what they’ve banked on for a generation now.
Posted on 14-Nov-08 at 3:05 pm | Permalink