Debating Keynesian economics with a Keynesian

We are slowly but ever so surely finding our standard of living slipping away. In spite of all that public spending and the deficits and mounting debt – well actually because of all these things – we are slowing going under. Most of us find we are doing without some things we took for granted not that long ago. Whether you look to the US, the UK, Europe, Japan or Australia, a return to rising real incomes and full employment continues to look ever more remote.

And it’s not for lack of public sector “stimulus”. Those deficits continue and even so the money market geniuses keep worrying about deflation. What are we to do? More QE? More debt? More government subsidies for projects that cannot be funded through the revenues they are expected to earn? These are the textbook answers from the textbooks provided to every economic student in the world.

It is all the same Keynesian rot that has not only never worked on any occasion that it has been tried, it has always with no exception made economic conditions worse. If you know of some example where public spending led to recovery, please let me know. For myself, I can give you chapter and verse on all of the failures, and yet nothing seems to be more everlasting than a textbook theory that is simple, plausible and wrong.

I am now in the midst of an online debate with Louis-Philippe Rochon, an Associate Professor of economics, founding co-editor of the Review of Keynesian Economics and co-editor of New Directions in Post-Keynesian Economics. It has been organised by Edward Elgar between two of its authors, and I have just had my first go in an exchange of letters. I have also discussed this debate at Quadrant Online.

The problem remains for me remains as it always was:

What I can tell you from personal experience is that the notion of aggregate demand as a driver of economic activity is now so universally believed that it is nearly impossible to get anyone even to see that it might possibly be wrong, that there is another way of thinking about things. But before Keynes came on the scene, no economist, other than a handful of cranks, ever thought that economies were driven from the demand side.

To deny the independent existence of aggregate demand is so conceptually disorienting to an economist educated any time over the past half century that it is near impossible to get them even to see what you mean. But I have had my go and I expect Louis-Phillipe to answer in the next day or so. I am pleased that he has taken this on, but I remain curious how he will respond. I can only say that no one has ever been brave enough to take this on before. I have had plenty of slanging and ignorant comment. But if it is possible to show that aggregate demand for anything however wasteful can ever promote economic growth and higher employment – NBN, mothballed desal plants, bridges to nowhere – I hope to hear it now.

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26 Responses to Debating Keynesian economics with a Keynesian

  1. Tel

    There are plenty of people still think that the NBN would have been running just fine if only it wasn’t for Abbott / Turnbull / Hockey. More annoyingly, there are people who honestly think that Opticomm fiber is an NBN service, and insist on calling it that.

    Keynesian economists believe whatever is necessary to feel OK about collecting that pay packet and coming home to their families. If Gruber couldn’t explain it to you, I certainly can’t.

  2. sfw

    I spend some of my time in the company of secondary school teachers. All of them have degrees yet none have ever been exposed to economic thinking. A few have a vague idea of Keynes and his ideas but that’s as far as it goes. Around 99% of them vote Labor/Green. If I try to explain how the production of goods and services or the adding of value is what creates wealth, they just don’t get it. They all have a vague understanding of the idea of demand driving an economy and it’s simple idea that makes sense to those who are not inclined to take their thoughts further. The fact that they all have a uni education and I left school in year ten makes them believe that they possess a natural intelligence more so than people like me.

    What can be done? Perhaps start in secondary school teaching classical ideas to year 8’s onwards. This must be almost mathematics free and rely on the concept of capital, production and value adding. Obviously the current crop of school teachers are incapable of this and a new generation must be trained. It’s not going to happen in the short to medium term if ever.

  3. stackja

    Keynes found allies with the 1930s socialists. The socialists still believe they know best how to spend other people’s money. Again if Keynes was the solution. Why do we still have a problem?

  4. Gleambright

    This post comes across with a desperate tone, and rightfully so. Of course there exists still a core of people who understand the pre-Keynes economic concepts, yet they are not heard, and are everpowered by the self serving majority, one of the terminal illnesses of democracy. However, to remain positive, can anyone here come up with practical real world solutions to this issue? To date I hear few, while our leaders wilingly lead the economy to its demise and those who do know, look on in dismay.

  5. AP

    It’s like believing you can make something tied to a rope move by pushing on the end of the rope.

  6. @SeditionaryI

    Even though economics for most is as exciting as watching garbage fester, most problems can be reduced to a few core elements, thus, success or failure can usually be gauged in simple measures or outcomes, or lack there-of.

    So, if “front-ending” an economy through stimulus spending is meant to create wealth, growth and all that good stuff, then, why is the US of A and the Union of Soviet Socialist Europe broke and getting broker? The simple outcome, or lack there-of is fair proof, and proof enough to say, that much of modern economics is one half is accumulated bull derived fecal matter, and the other half plain old wishful thinking.

  7. Andrew

    There used to be people who believed that the Rudd-Goose stimulus was an example of a successful stimulus. For some reason, the fact that the GFC ended months before they did anything (and years before the bulk of the spending programme) wasn’t a problem to their argument.

    “If the Libs were in power we would be in recession” they would cry. I would point to a chart of the Dow Jones and say “according to credit and equity markets, the recovery began around Feb 19 2009 – please point me to their unique policies they enacted that saw our economy grow through a 4% contraction in the US, Europe and Japan.”

    Then they would argue that deposit guarantees (which the Goose opposed) saved the economy and constituted a unique policy. Even though every other country on earth had one first and it didn’t save them.

    Possibly now that we are broke they might change their tune. Probably not though – like Stigman and Kruglitz, the problem is we didn’t have MORE stimulus.

  8. Zippy The Younger

    Possibly now that we are broke they might change their tune. Probably not though – like Stigman and Kruglitz, the problem is we didn’t have MORE stimulusOther People’s Money.

    fixed

  9. Hydra

    Just another thing that goes in the basket of “leftist luvvies” thinking their opinions are more valid than those that are not leftist luvvies.

    It doesn’t matter how much evidence you present them with, taking the ideological highground means that they will always be ignorant. And even worse, it means they get votes, too.

  10. Farmer Gez

    Keynes is like a fad diet for lefty economists. Exercising monetary policy while consuming your way to economic health. Sadly once the monetary policy lapses the old fiscal drag weighs you down and the bad habits are back. A lean diet and plenty of motivation is the answer but nobody has the stomach for it.

  11. Pusnip

    Having now read Rochon’s reply, I’d have to fast that he’s ahead on points. I hope you have a good rejoinder coming, Steve.

  12. .

    Tel
    #1518600, posted on November 20, 2014 at 8:00 pm
    There are plenty of people still think that the NBN would have been running just fine if only it wasn’t for Abbott / Turnbull / Hockey. More annoyingly, there are people who honestly think that Opticomm fiber is an NBN service, and insist on calling it that.

    RGR had 3.5 years to get it up and running and had about 1.5% of the network installed, witha 7 year delivery timeframe.

    What a joke.

  13. .

    Pusnip
    #1519049, posted on November 21, 2014 at 10:06 am
    Having now read Rochon’s reply, I’d have to fast that he’s ahead on points. I hope you have a good rejoinder coming, Steve.

    Having studied economics and not believing in magic puddings, I know this is impossible.

  14. Alex Davidson

    Keynesianism appeals and survives because of 2 things: free lunches and democracy unlimited.

    Armed with the idea that numbers count above all, the mindless army is roaming and raiding at will, gorging itself on other people’s money.

    Support for Keynesianism won’t end until we manage to put democracy back in its box.

  15. truth

    I can’t wait for your reply to Louis Phillipe.

    His reply to you could almost have been written by Kevin Rudd, whose essay after the GFC made similar arguments.

    IMHO, the Keynesians , the Left —the Democrats—own the GFC.

    The GFC resulted not from fatal flaws in the market, but from big government [ Clinton administration] interference in the market by forcing banks to give ninja loans to poor minorities with no jobs or cash flow of any kind to keep up the payments, and the fallout of that—-the directives to the banks being brutally enforced by LW community activist groups [ often thugs], licenced by Clinton et al to do so.

    The Clinton administration deregulated the Community Re-investment Act to allow low-interest home loans to low income-earners, and repealed the Glass-Steagall Act to make it possible for regular banks to become megabanks with unprecedented power and wealth.

    The next step to disaster occurred when those newly-enabled behemoths—enabled at the stroke of Clinton Treasury Secretary Robert Rubin’s pen, who before the ink was dry , slid over to a job on a massive salary at one of the megabanks he created—it occurred when those huge banks began to use their new-found power to take the ninja loans Clinton had mandated, and bundle them into derivatives—the mortgage-backed securities and accompanying credit default swaps that were distributed around the world.

    The rationale seems to have been that the cash flow incorporated in the derivatives was ‘safe as houses’ because it comprised the historically safe mortgage repayments of responsible ordinary citizens, backed by Fannie Mae and Freddie Mac.

    But these mortgages were taken out not by ordinary citizens , but by people who were unable to meet their payments, meaning the derivatives flooding the world were often worthless.

    Louis Phillippe seems to be saying that no one in the profession predicted the crisis, as he sneers —re non-Keynesians—- that ….[ ‘they could not even see the crisis until it was right under their noses.’ ]

    But the Bush administration predicted it in 2003.

    They proposed very strongly a comprehensive review and overhaul of the oversight and regulation of Fannie Mae and Freddie Mac, warning of the meltdown that we later saw.

    The Democrats –especially Barney Frank—not only opposed the investigation and the proposed oversight, but demonised and vilified the Republicans calling for it—–employing all the old Left wing ridicule and propaganda —that the Republicans just didn’t care about the poor etc etc.

    Most of the filthy rich bankers who benefited from the whole thing were big-government [ but crony government] Democrats like Rubin, and Dems were also the ones supping most lavishly at the government trough of F&F—Obama one of the most egregious even as a junior Senator.

    So I think Louis Phillipe, in his attempt to flog the fairytale that big government is good for us all and lack of its meddling hand caused the GFC—— is trying to snow us with myths and half-truths garnished with French flair and a dash of creatively-recovered memory.

  16. Alex Davidson

    The response from Rochon is pretty much as expected: full of unsupported assertions presented as fact; tacitly presuming that we are all collectivists and happy to be ruled by technocrats; and written as if the concepts of property rights and individual freedom never existed.

    It’s a sad state of affairs when a strident socialist who practices the politics of envy and believes in mysticism carries the title of Associate Professor of Economics.

  17. sdfc

    Steve Kates
    This has been the essence of Keynesian theory from that day to this.
    There is unemployment because the community is saving too much.

    No
    There is unemployment because the community is investing too little.

  18. .

    and repealed the Glass-Steagall Act to make it possible for regular banks to become megabanks with unprecedented power and wealth.

    This has/had nothing to do with it.

    Carter Glass reformed his own act in 1935, and the rules had not been followed since the 1960s as there were many, many loopholes.

    The bill (Gramm Bailey Leach) was sponsored by two Republican Congressmen and a Republican Senator.

  19. .

    and bundle them into derivatives—the mortgage-backed securities and accompanying credit default swaps that were distributed around the world.

    A MBS is not a derivative.

  20. .

    There is unemployment because the community is investing too little.

    No, they have made forced savings in credit that has misallocated resources.

    You cannot by fiat liquidate land and capital that has been manipulated to produce consumer goods to then in turn mandate the inputs now create capital goods to avert underinvestment in economic projects, and a re-balancing of consumer and capita good production.

    Keynesian policy doesn’t even target that.

  21. sdfc

    That’s gobbledegook Dot.

    Investment drives the business cycle.

    You seem to favour a hands off approach to financial crises.

  22. The Pugilist

    sdfc, I think what dot is getting at (rightly in my view) is that Keynesian theory assumes away the structure of production. Hence it is not merely the level of investment in anything that matters but rather the composition of the stock of capital that needs to be corrected. It is the unbalanced composition of the capital stock that drives financial crises in the first place. A financial crisis occurs because too many low return projects get funded. Merely targeting a greater level of investment can worsen the situation.

  23. danger mouse

    Steve, are you saying that we won’t be saved by burying bottles of banknotes?!

  24. sdfc

    Pugilist

    What about the structure of production? You think the problem is we have too many houses?

    Financial crises occur because of the private sector is overstretched with financial liabilities.

    How is the capital stock to be “corrected” in the absence of fresh investment.

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