An Offer to Debate Keynesian Economics

On the 8th of August I received this very intriguing email. Who it was from does not matter. But it was a kind email from someone with the right kind of attitude but who is irritated about my Keynesian views. He therefore thought that they ought to be tested in an open forum. This was the email:

Dear Steven

As someone who finds myself in consistent disagreement with your opinion writing on economics, I was wondering if you’d be interested in a public debate on some of the issues you’ve advanced in recent times, for instance concerning the effects of Keynesian stimulus.

I think it might be quite a fun event and I’m sure we could ensure a good attendance from interested parties from both the left and right of the political spectrum.

If you’re interested, let me know and I’ll investigate what venues are available.


Interested I most certainly was. So on the next day, I wrote back to say that such a prospect has a very great appeal to me but that I would only be willing to debate with someone with a training in economics. There are too many matters that are common ground even for those of us on opposite sides of the Keynesian fence that we would not have to dispute. It is just too hard to have to deal with first principles since, if I were to debate someone with no background in the subject, we would have no common ground. I therefore wrote back as follows:

It is an intriguing idea and it could be fun, but to be honest I don’t see just exactly what we would debate. The world is filled with people who think we in Australia have been saved from who knows what by the $43 billion waste program and these frequently find the notion of someone producing for profit anathema. For many, governments spending is a good in itself. But if the aim is growth, productiveness, higher living standards, full employment, less poverty and stable prices then the stimulus has taken us backwards as we are finding out more and more each day. So do we debate the facts, the theory or some counterfactual which we can each invent to our heart’s content. Or is the question whether Keynesian economics is the fraud that I think it is? The international experience has now answered that question with almost not a word in reply, other than that the stimulus was either too small or of the wrong sort. (Along the lines of there’s nothing wrong with communism – it just hasn’t been tried.) Or is the question, what’s so special about Australia – why did wasteful public spending appear to work here and nowhere else?

So my question to you is what would you have in mind as the resolution to be put to the floor? Because I cannot actually see what standing you have on any economic issue since that seems to be very far from your own expertise. And if you wish to debate some other aspect of the stimulus, what would that be? Economic policy as performance art could be interesting but not really my kind of thing. Economics in a post-modern world? Economics in the age of plenty? In the long run is Keynes himself dead? The future of the history of economic theory? Economics and culture? Is all true art a commercial activity? Are artists entrepreneurs? If Shakespeare wrote for money, does that make his plays bad literature? Just musing along.

Or perhaps I have misunderstood and that it would not be you personally I would debate but someone from within the economics community. That would, of course, be a different matter and I would be much more interested in something along those lines. Then we could manoeuver our tanks and guns into position but in a way that would, hopefully, make the issues clear, or at the very least show where the lines of division are.

Let me just say that I don’t rule such a debate out and am far more positive about it than negative. If you are still interested after receiving this, please spell out in more detail what exactly you have in mind and I will discuss with my seconds how to respond. But it is good to know that I have at least brought the various problems I raise to the attention of someone who would like to discuss these things further.

Kind regards

After a longish pause, I did receive a further reply.

Hi Steve

sorry not to get back to you sooner.

While I am saddened at your estimation of my economics prowess, and a little nonplussed (are not these issues of public policy about which any informed citizen should be able to engage in debate about?) I am keen to move the idea forward. So – would you be interested in a debate with some “capital-E” economists, such as Ian McAuley or John Quiggin? …

Let me know and I will go ahead an approach John, Ian or another economist or public policy scholar you might wish to nominate.


Well, I was in. Sounded like a lot of fun. All I asked is that some other economist be found who would at this late date stand up for Keynes and Keynesian theory. So back I wrote:

Well, I could not turn down an offer such as this if you can find us a “capital-E” economist who would like to take this on. The theory is of course all one way while the facts of the world are all the other way so I wonder if anyone would like to try their hand at defending the indefensible. But it should be quite instructive all round.

I will let you think through who might be on the other side. John Quiggin would be perfect since we both have recently published books to flog that offer contrasting visions of economic theory that are both critical of the mainstream but are also totally at odds with each other. There are others but it would be important that whoever it is has standing within the profession.

The only constraint, if it is a constraint, is that I will be presenting a paper at Oxford in September so whatever you arrange will need to be after I return on 12 September. But really, the wheres and the whens and the hows I will leave to you to work out as a proposal although almost anything at all in a neutral venue would probably suit me very well.

So I’m in. And very serious topic though it is, it should be fun. Thank you for even thinking about this as a possibility.

Kind regards


And there it has been left. I have heard nothing further which actually doesn’t surprise me. Reading about how Lord Skidelsky was blown to bits trying to defend Keynes must make it harder to find someone to step forward. Keynesian economics is now, as I wrote above, indefensible. It is still the mainstream theory, of course, taught as valid in every standard economics text (except my own) but it is now dead in every possible policy way. But if the debate is still of interest, and someone really does wish to take it on, I would try my hand at a defence of what every other textbook describes as the indefensible.

I would go even farther than this. I would not only argue that Keynes is wrong – what could be easier than that? – but would argue that Say’s Law is right. As every economist has been instructed for three quarters of a century, this ancient nineteenth century principle is utterly and irredeemably wrong. So what danger could there be for anyone to take on such an obviously one-sided debate, with one lonely academic taking on the entire might of the world of economic theory. Really, what possible danger could there be?

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44 Responses to An Offer to Debate Keynesian Economics

  1. Tim Quilty

    Keynesian economics might be down, but given it is still the mainstream theory being taught in schools and unis, generation after generation of economists will be turned out itching to put it back into practice. This zombie will not stay dead.

  2. Tom Valentine

    Steve,I prefer the term mainstream Economics rather than Keynesian Economics.Keynes can hardly be blamed if people persist in applying his 1936 model to a period in which many of his basic assumptions are not vaguely relevant.

  3. Jim Rose

    Tom Valentine,

    are you excluding new keynesian macroeconomics such as set out by Mankiw at in preference for set out with pride by Alan Blinder?

    You mainstream has a debatable width and flow?

  4. Dan Nolan

    I’m fairly certain the person approaching you was Ben Eltham. He was pretty shitted off with you on the twitters in response to your argument in the Drum about the stimulus program.

  5. ar

    What, no one would stand and express “full confidence” in Keynesian economics?

  6. sdfc

    It depends what you mean about Keynesian economics.
    If you mean demand management over the long term then I don’t have full confidence in Keynes but if you mean his description of an economy in financial crisis and what should be done about it then I do.

  7. .

    You’re an enigma sdfc. I don’t know why you think the bit of Keynesianism you like has been shown to work.

  8. sdfc

    Keynes was spot on in his analysis of a financial crisis. He has been proved right. Monetary policy has become largely ineffective when it comes to demand. In a deflationary environment fiscal policy works with monetary policy to boost the money supply.
    As for whether Keynesian policies have been successful, we know that outside price stability QE2 has been a failure. The stimulus is rolling off.

    Public investment and consumption spending has been contracting and weighing on growth for the last three quarters. The stimulus is winding down so you’re going to have to look for another excuse as to why the US economy is in a funk.

    The level of household debt and the state of the housing market might provide you with a clue.

    I’m not one who believes in a fairly tale ending for the US economy. This is going to weigh on them for years.

  9. Jim Rose

    Keynes was spot on in his analysis of a financial crisis. He has been proved right. Monetary policy has become largely ineffective when it comes to demand. In a deflationary environment fiscal policy works with monetary policy to boost the money supply.

    The great depression occurred in countries that had banking crises and countries that did not. Canada is one example – no bank failures and indeed no central bank until 1935 – but a deep depression.

    You are mixing up causes with effects. The US great depression started in 1929; the banking crises were in 1930 and 1933.

    The monetary policy pursued by the Fed from 1929 to 1933 was motivated by the economic interests of its member banks and their political representatives.

    The U.S. Bank failures, at least in the early stages, were concentrated among smaller banks.

    The most influential figures in the federal reserve system were big-city bankers who deplored this competition from smaller banks, so their disappearance may have been viewed with complacency and as an opportunity to win market share.

    The Fed’s monetary policy produced a massive differential failure rate between member and non-member banks in which the latter were eliminated at a rate at least five times higher than the former.

    Fed member banks faced substantially less competition in the banking market after the house-cleaning than before.

    The Fed was acting as the agent of congressmen serving on important oversight committees, who in turn were representing the interests of the member banks in their states.

    Bank failure rate data across states shows that failure rates of non-member banks in the early 1930s were significantly higher in states with representation on the House Banking and Currency Committee.

  10. Steve

    There are more than a few vacant shop fronts here in Canberra as I write. They were all more than ready to supply, but their supply apparently created no demand. How so?

  11. coz

    oh it was all won or lost in the correspondance. Your correspondant is clearly superior in that he/she spoke clearly, concisely and in plain english, understandable to a wide range of readers. unfortunately you couldn’t meet that standard.

  12. .


    There are more than a few vacant shop fronts here in Canberra as I write. They were all more than ready to supply, but their supply apparently created no demand. How so?

    Conversely, food stamps do not create employment.

  13. .


    I had no problem in reading any of the correspondence.

    Perhaps you need more practice?

  14. John Williams

    Well handled, Sir.
    I dips me lid.
    “Really, what possible danger could there be?” you ask.
    Well, the likes of Quiggin would look a right mug….if he were stupid enough to take the bait.
    He wouldn’t like that.

  15. coz



    I had no problem in reading any of the correspondence.

    Perhaps you need more practice?

    not weally – I had no problem reading it either, but if you need to respond to a 4 line email with pointy headed 28 line demands for jargon based discussion then what is it you are hiding? I’m not an economist but I went to an extremely jargon heavy faculty and I learnt to see through jargon and verbosity. It’s more particularly inappropriate in those who are supported financially by the average taxpayer, ie academics or public servants.

  16. sdfc


    The standout feature in the GFC and the GD is the banking system was left with a whole pile of non-performing loans. Business and households were left with financial obligations they could no longer meet.

    A simple exchange economy analysis assumes that this is of little importance. However from a monetary and financial point of view it is very important.

    High levels of private sector debt and falling income are a deadweight on activity. As income falls the real burden of the debt increases further impairing private sector balance sheets.

    The recession of 1929-30 would have passed if the financial system wasn’t in such poor shape due to the huge run-up in private sector debt outstanding.

    Don’t know much about the depression in Canada only to say it would hardly be surprising if the US depression was a huge drag on their economy given their close proximity.

    We can say however that Australia didn’t have a financial collapse and exited the depression relatively quickly once the terms of trade turned. Australia had a relatively low level of private sector debt.

    The US lost 42% of its banks including 36% of member banks between June 29 and June 33. Quibbling over failure rates between member banks and non-member banks and trying to blame it on government favouritism lacks credibility.

    Non-member banks basically said we don’t want to be in the Federal Reserve System. We don’t believe in their rules or the need for a lender of last resort.

  17. .

    Do you macro nerds actually give a shit about things like, you know the dustbowl, North American heatwave etc?

    About 21.5% of employment was in agriculture in 1930. It was 7.7% of GDP.

    The drought lasted from 1930-1939, intensifying after 1933 and ramping up to a peak phase during 1935 and 1936.

  18. JC


    that must have been the impact of global warming and to think, they didn’t even know.

  19. sdfc

    Yes there was a drought Dot but it was by no means the major driver of the fall in output.

    The US banking sector very nearly collapsed at various times during the 1930-33 period. The US economy grew quite strongly from 1933 to 1937 until tighter fiscal and monetary policy sent the economy back into recession.

    Macro nerds pay attention to financial variables. That neoclassical economics ignores them is a major flaw.

  20. wreckage


    And just look how little Australian Ag sector productivity increased during the latter years of the Howard government! It’s like the mainstays of the Ag export economy suddenly stopped growing food. Probably something to do with banking regulations, I expect.

  21. JC

    The fiscal tightening in 37 had nothing to do with it, SDFC. It was the fed tightening fighting non existent inflation that turned the economy back into recession.

  22. .

    The US economy grew quite strongly from 1933 to 1937 until tighter fiscal and monetary policy sent the economy back into recession.

    Nothing to do with braindead microeconomic policies?

    What proportion of losses in GDP did ag. contribute to?

    Half a million were homeless (in the dust bowl alone) in 1936 and 2.5 million have moved away to the cities by 1940. The population was 127 million in 1936.

    It might seem insignificant but remember the industry they were in and this was after a trade war.

  23. Peter Patton

    Keynesian economics might be down, but given it is still the mainstream theory being taught in schools and unis

    Not true. By Week 4, the unis have basically finished not only Keynes, but also the IS-LM model, before getting into the serious stuff – inflation, open market economies, labour markets, then government policy. Keynes’ name is rarely used, and even then mostly as an historical fun fact.

  24. Peter Patton

    My last uni macro course was taught by a dude from Nigeria. He thought that things like Keynesianism and Marxist were relics from an age of voodoo, because they hand billions of dollars over to politicians and empire-building bureacrats. He’s right.

  25. Peter Patton

    Even with this dude, he still lectured on models that purport to show the “crowding-IN” effect of government expenditure, and devoted just as much time to models, which purport to show the nirvana of no legislative minimum-wage level, as he did to models, which purport to show the opposite.

    The last couple of weeks were devoted to government fiscal and monetary policy from Malcol Fraser on, by putting the different models together. That was interesting. But I finished the course with an almost religious belief in the intellectual boganism that is orthodox academic macro, and that I wouldn’t give any of the bums a nickel of my money to invest.

  26. wreckage

    But I finished the course with an almost religious belief in the intellectual boganism that is orthodox academic macro

    I’m assuming that you meant something other than what you said, there 😛

  27. coz

    av taxpayer pays for universities, salaries and real estate in which ‘economists’ and other jargonists are trained, in the idealistic notion that the findings of trained academics will be of benefit to the shareholders (ie av taxpayers) – however what happens in practice is that the employees (students and lecturers) go on to spit in the face of the shareholders/owners, for their ‘stupidity’. Not good business practice and it aint gonna work, it doesn’t represent a ‘dividend’ on the investment, the only thing that keeps universities going is the false notion that the money comes from some kinda neutral money tree.

  28. John Quiggin

    Just for info, I got a request on this, but had to decline because of other commitments.

    If you don’t go ahead earlier, I’ll be glad to do it some time next year. I don’t imagine the issues will have gone away by then.

  29. Abu Chowdah


    There are more than a few vacant shop fronts here in Canberra as I write. They were all more than ready to supply, but their supply apparently created no demand. How so?

    That was my initial question about Say’s Law when, like you, I first heard it mentioned. I suggest you buy Steve’s new book, to start.

  30. amortiser

    There are more than a few vacant shop fronts here in Canberra as I write. They were all more than ready to supply, but their supply apparently created no demand. How so?

    Just maybe the price of their stock at sale will not generate the revenue necessary to cover their costs and generate a profitable rate of return on their investment compared to what can be generated elsewhere. That is generally the ultimate cause of business failure.

    There will be demand for the stock at a lower price at a liquidation sale.

    The premise of your statement is that Say’s Law guarantees business success. That is a false premise and a clear misunderstanding of Say’s Law.

  31. Jim Rose

    The US lost 42% of its banks including 36% of member banks between June 29 and June 33.

    SDFC, Ohanian reminds that most of the Depression-era banks that closed were either small or merged.

    The share of deposits in banks that closed or were temporarily suspended operations for the four years from years 1930–1933 was 1.7 percent, 4.3 percent, 2 percent, and 11 per cent, respectively.

    The major point is why were the debts to banks non-performing in the first place?

    Lee Ohanian and Hal Cole refer to the 1921 depression frequently in their attacks on monetary and banking explanations of the U.S. great depression.

    If the 20% deflation of the 1930s caused the Great Depression, why didn’t the 20% deflation of the 1920s also cause a major depression and banking panics?

    About 0.5% of banks, measured by deposits, were suspended or failed in the Depression of 1921-1922; a mere 0.2% of total deposits was ultimately lost.

    Monetary and banking panic explanations of the 1930s U.S. depression must not only explain why no prolonged depression in 1921, but also why:
    • the Depression was so immediately severe well-before a significant monetary contraction and the banking panics,

    • why the Depression was so asymmetric across sectors, and

    • industrial sector wages were persistently well above their market-clearing level but agricultural wages fell by 40%.

    • Canada was even more depressed in the 1930s than the U.S. but had not a single bank failure.

    The bad debts were the result of prior economic shocks. what were these shocks?

  32. Sinclair Davidson

    taxpayer pays for universities, salaries and real estate in which ‘economists’ and other jargonists are trained

    International students pay for the training of economists.

  33. .

    Haha yes they do and I’ve had to basically collect the debts…LOL

  34. sdfc


    I don’t put much stock in what Ohanian says. He approaches everything from a neoclassical perspective, which leads him to dismiss finance as the major cause of the malaise because it doesn’t fit with his favoured theories.

    In the US, total bank deposits of reporting banks fell ~28% between June 1929 and June 1933. That’s deflation of the money supply. The US financial system came under stress in the latter half of 1929 when income started to fall and household financial assets slumped in value.

    The 1920-21 depression was Fed policy, they instigated it and they ended it. Private sector debt to GDP was much smaller.

    The question as to why the depression was uneven across sectors would depend on the dynamics of those particular sectors. Why is there an assumption that the depression should be uniform across sectors anyway? That seems to me to be a rather naive assumption.

    Nominal wages fell during the period. The decline in income increased the real debt burden. Real wages rose as they did during the robust recovery from the second half of 1933 to 1937.

    As for the Canadian depression. It seems to have been driven by the falling exports, the terms of trade and crop failures. With ~33% of your labourforce employed in agriculture this to me doesn’t seem open to dispute. With your massive neighbour next door in depression followed by increases in trade barriers by that neighbour, national income is going to take a battering. They were obviously overly reliant on one sector of the economy. The renewed slump in 1937 provides more than a hint that the depression in Canada was largely an echo of what occurred in the US.
    As for the Canadian banks, the Canadian banking system was dominated by large banks with multiple branches. The US banking system was dominated by small regional banks.

    Just how does all this invalidate the hypothesis that the US depression was financially driven?

    Neoclassical economics is at pains to separate the financial sector from the economy at large and therefore fails to have anything meaningful to say about the depression.

    What were the shocks that led to a rise in bad debts?

    We could start with the run-up in private sector credit leading into the depression. Lower income as the result of a declining activity means the burden of servicing these debts rises.

    The mistake neoclassical economics makes is that it assumes deflation will automatically end a depression, however for that analysis to work you need to ignore the financial sector, private sector balance sheets and business incentives. Every business decision is ultimately a financial decision.

  35. Jim Rose

    sdfc, ohanian spends a lot of time exploring financial explanations of depressions. He does not dismiss it.

    see, for example, Harold L. Cole & Lee E. Ohanian, 2001. “Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression,” In NBER Macroeconomics Annual 2000, Volume 15, pages 183-260

  36. Jim Rose

    p.s sdfc, thanks for the long reply, more later

  37. Jim Rose

    see Ohanian’s ‘The Economic Crisis from a Neoclassical Perspective’ for an extended discussion of possible links between financial shocks and the current recession.

  38. coz

    International students pay for the training of economists.

    If that is the case, it’s a relatvely recent phenomenon and you probably need to use the word ‘currently’. It wouldn’t cover the costs in establishing these institutons and would only apply to some faculties.

  39. Jim Rose

    The financial explanation for the Great Recession argues that the near-failure of large financial institutions reduced financial intermediation services (mechanisms for borrowing and lending) and led to spikes in interest rate spreads.

    Proponents often argue that the Great Depression was deep and protracted because of banking crises, and so draw parallels to the Great Recession, but

    1. The 40 percent decline in the number of U.S. banks between 1929 and 1933 had little impact on actual banking capacity because most of the banks that were lost were either very small or merged.

    2. The share of deposits in banks that closed or suspended operation between 1930 and 1933 was 1.7 percent, 4.3 percent, 2 percent and 11 percent in each respective year.

    More to the point is timing: the U.S. Depression was “Great” well before any of the monetary contractions or banking crises occurred.

    Industrial sector hours worked dropped by 29 per cent in the United States before the first big bank crisis in late 1930 and before the big falls in the money stock of the USA.

    The 1930s Depression would have been severe in the absence of the banking and financial crises.

    The drawing lessons from the Depression era financial crises to other economic downturns is premature.

    The most challenging issue regarding the financial explanation of the great recession is why the economic weakness has continued for so long after the worst of the financial crisis passed in late 2008.

    HT: Lee Ohanian, various papers

  40. Jim Rose

    sdfc, Oh Canada.

    Canadian exports plus imports accounted for about 50% of GDP in 1929.

    Trade cannot explain more than a third of the Great Depression in Canada.

    Suppose that a reduction in exports will lead to a one-for-one reduction in output.

    Exports were roughly 25% of the Canadian GNP in 1929.

    By 1932 exports had fallen by slightly more than half their 1929 level.

    If factors used in the production of exports could not be reallocated, which is an important assumption, this could account for a decline of 13.5% in output at most.

    This is roughly one-third of the actual decline in real GNP per capita in 1930s Canada.

    The fall in output that can be attributed to a decline in trade with the United States is less than half of this figure — less than 6%.

    The above abstracts from domestic and imported goods can be imperfect substitutes.

    If this is the case, the domestic country is partially unable to substitute away from imports as their relative price increases. This will lower investment, which will reduce Canadian output.


  41. Sinclair Davidson

    If that is the case, it’s a relatvely recent phenomenon and you probably need to use the word ‘currently’. It wouldn’t cover the costs in establishing these institutons and would only apply to some faculties.

    Been the case since the 1990s – many universities were set up long before Whitlam nationalised the fee structure.

  42. sdfc

    Hi Jim

    I have read several Ohanian papers, including “Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression,” and he consistently dismisses financial shocks as a major contributor to the severity of the depression.

    I’m sorry but he is pushing a barrow and as such gets things badly wrong.

    The US banking system was dominated by small, regional banks.

    The US Banking and Monetary Statistics 1914-41 show:

    ~47% of banks failed between mid 1929 and mid-1933.

    Total deposits of reporting banks fell 27% between mid-1929 and mid-1933.

    Just because a bank doesn’t fail doesn’t mean its balance sheet is not severely impaired.

    The run up in private sector debt during the 20s followed by the deflation of the 30s means that not only were bank balance sheets impaired but also those of the wider private sector.

    Trying to separate the initial 1929-30 recession from the banking panics of 30-33 as somehow unrelated events is a road to nowhere.

    We know why he takes this stance however and that is because he is deadset on blaming the depression on high real wages. However he fails to account for the fact that the precipitous decline in output occurred in a period when nominal wages were falling, while rising nominal wages are associated with the recovery from 1933-37 and again during the period after the 1937-38 recession leading to the war. Real wages rose in most years of the 30s.

    No-one is arguing that there are no recessions outside of financial crises but rather that in the aftermath of a credit boom economies are more vulnerable to economic shocks and once those shocks occur the downturn is magnified by the financial crisis, particularly if deflation is permitted to set in.

    Financial decisions made during a boom are justified by the expected income of those boom conditions. Once the expected income proves to be a mirage the highly indebted private sector has problems meeting those prior financial obligations. At the end of the day it becomes a cash flow issue.

    Irving Fisher’s “Debt Deflation Theory of Great Depressions” is an excellent paper on the subject

    I read that paper by, Amaral. it was practically the first one to come up when I decided to have a look at the Canadian economy considering you are so keen to discuss it.

    Firstly once again we are confronted with a neoclassical analysis of the depression which not only ignores financial conditions but also ignores income.

    We are told a 50% decline in exports would only account for a 13.5% fall in output. As if the export sector in Canada was self contained and a decline in farm income would not transmit across the wider economy. Given an estimated 33% of Canadian workers were employed in the agricultural sector this lacks credibility in my opinion.

    The 1947 Canadian year book shows cash income from farm products in 1932 was less than half its 1928 value. With an estimated 33% of Canadian workers employed in agriculture at the end of the 1920s, it is highly likely the trade sector had a major impact on the severity of the depression in Canada.

    As for the Canadian banking system in the 30s, according to Kryzanowski and Robert’s “Solvency of the Canadian Banking System, 1922-40”, all the major Canadian banks were insolvent during the 1930-35 period, “at a minimum”. In other words the Canadian banking system was severely impaired.

    The lack of bank runs can be put down to the implied government guarantee of deposits, in place since 1923.

    I apologise in advance if I don’t get the chance to follow up your reply. I’m off on a trip later this week and have a fair bit to organise.

    Thanks for the debate. It’s always good to be challenged by someone who takes time to make an actual argument.

  43. sdfc

    That’s massively long-winded.

  44. Bill Unkles

    This debate leaves me frustrated, as with all ideologically driven discussions. Keynesian stimulus has proven appropriate in certain times and these seem to be more so when Government has the capacity through accumulated savings or at least low debt to provide a short to medium term stimulus.

    However, the stagflation of the 1970s clearly illustrated the problems with the politically opportune continuation of stimulus beyond its use by date. Much as I hate to admit it, monetary economics provided an appropriate way out of that mess.

    While successive US and some european administrations since 1984 would claim to be monetarist, their fiscal profligacy would indicate otherwise. I doubt Keynes would have endorsed this continued growth of deficits. Nor I suspect would Hayek or Freidman have approved of the ridiculously low interest rates prevailing in most countries through the first years of this century, when growth was strong. We seem to allow our politicians and bankers to provide the abuse the basis of each approach, but no one listens to economists during the boom, they just blame us when it goes pear shaped.

    Both approaches have something to offer at the right time and in the right circumstances. Currently stimulus in the US and Europe is probably failing as it is pointless building on previously over inflated expenditures by Governments and easy finance from banks. Might also have something to do with high cost structures in these countries reflecting the impacts of continued stimulus.

    As for the Australian GFC stimulus, it would seem to have been of little benefit other than keeping short term confidence up. Its failure if that be the case, is probably less related to theory than appallingly inept administration of expenditure programs, which has undermined public confidence in Government. The application of sound evaluation of these programs may have slowed their roll out, but provided a targeted expenditure program that addressed inefficiencies in the economy could well have proven more effective.

    Is there a case for horses for courses, or does a new theory need to be developed?

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