Keynes and Keynesian Economics in Light of the Financial Crisis

The economic societies of the United States meet over the first few days of the year, with the meeting this year in Boston. This is the full conference program which is gigantic. My interest is what is being said about the sad state of economic theory and its inability to provide guidance on how to find our way out of the present low state of our economies. This was the part of the conference I was most interested in myself:

Keynes and Keynesian Economics in Light of the Financial Crisis

So in its own way, you might say that these issues were on the agenda. However, not only was this the sole manifestation across the hundreds of papers given during the conference, but this was also not in anyways part of the mainstream program, only tucked away as part of the program devoted to the history of economic thought. Clearly, none of this is of any genuine interest to virtually the entire profession. Nevertheless, all credit to Robert Dimand for putting the session together, and for treating this as the serious contemporary issue it is. These were the papers found in this session.

Keynes and Financial Crises
ROBERT DIMAND (Brock University)

The global economic and financial crisis that began in 2007 has renewed interest in Keynes’s analysis of whether the economic system is self-adjusting and of his proposals for ending depression. This analysis is complemented by Keynes’s more specific accounts of financial crisis, notably in his incisive “The Consequences to the Banks of the Collapse in Money Values” (in his Essays in Persuasion, 1931) and his Harris Foundation Lectures, a body of work that is much less well-known.

Keynes, Wages and Employment in Light of the Great Depression
HARALD HAGEMANN (Universität Hohenheim)

The wage-employment relationship is one of the central and most controversial issues in the General Theory. . . . and etc for another 200 or so words.

James Meade and Keynesian Economics
SUE HOWSON (University of Toronto)

James Meade (1907-1995), although Oxford-educated, was one of the very first Keynesians, a member of the Cambridge “circus” which met to analyze and criticize Keynes’s just published Treatise on Money in the early months of 1931. Not only did he use Keynesian ideas in his writings throughout his long career; he was a major player in the implementation of Keynesian policies in Britain during and immediately after World War II. My paper will discuss his encounters with Keynes and his use and development of Keynesian economics in his own academic and policy work.

Not that you should think that Keynesian economics was mentioned nowhere else. It showed up one more time, under “Heterodox Macroeconomics”, a session put on by the Union for Radical Political Economics. But I do love his first line, which is something the rest of the profession would prefer to forget. I’ve put it in bold just because, and left the rest in just to see how tedious this stuff can be.

Keynes is Dead — Long Live Marx
ISMAEL HOSSEIN-ZADEH

Many liberal/progressive economists envisioned a new dawn of Keynesianism in the 2008 financial meltdown. More than five years later, it is clear that the much-hoped-for Keynesian prescriptions are completely ignored. Why? Keynesian economists’ answer: “neoliberal ideology,” which they trace back to President Reagan. Using a Marxian method of inquiry, this study argues, by contrast, that the rise/dominance of neoliberalism has much deeper roots than pure ideology, that the transition from Keynesian to neoliberal economics started long before Reagan was elected President and that the Keynesian reliance on the ability of the government to re-regulate and revive the economy through policies of demand management rests on an optimistic perception that the state can control capitalism. Contrary to such hopeful perceptions, public policies are more than simply administrative or technical matters of choice. More importantly, they are class policies—hence, continuation/escalation of neoliberal policies under the Obama administration, and frustration of Keynesian/liberal economists. The study further argues that the Marxian theory of unemployment, based on his theory of the reserve army of labor, provides a much robust explanation of the protracted high levels of unemployment than the Keynesian view, which attributes the plague of unemployment to the “misguided policies of neoliberalism.” Likewise, the Marxian theory of subsistence or near-poverty wages provides a more cogent account of how or why such poverty levels of wages, as well as a generalized predominance of misery, can go hand-in-hand with high levels of profits and concentrated wealth than the Keynesian perceptions, which view high levels of employment and wages as necessary conditions for an expansionary economic cycle.

The largest single problem with economic theory today is that economists do not even know they have a problem. But the second most important problem is that what ought to have been the most important part of the entire program was relegated to students of the history of economic thought, which is the one area of economic theory economists are trying to rid themselves of. It’s as if these are issues so completely settled that no one any longer has to waste their time thinking about any of it at all.

AND LET ME JUST ADD THIS: From the Wall Street Journal, The Depression That Was Fixed by Doing Nothing. Before Keynes, there was no such thing as a Keynesian stimulus, but recessions got fixed anyway:

Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.

What to do? “Nothing” was the substantive response of the successive administrations of Woodrow Wilson and Warren G. Harding. Well, not quite nothing. Rather, they did what few 21st-century policy makers would have dared: They balanced the federal budget and—via the still wet-behind-the-ears Federal Reserve—raised interest rates rather than lowering them. Curiously, the depression ran its course. Eighteen months elapsed from business-cycle peak to business-cycle trough—following which the 1920s roared.

That was what they did, but with the low state of economic knowledge today, there is little likelihood anyone will understand why it worked.

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8 Responses to Keynes and Keynesian Economics in Light of the Financial Crisis

  1. Blogstrop

    The low state of economic knowledge today …

    Yes, I’m one who needs to read Mises et al, and have started that process. But here’s the thing. Contrary to popular myth, many of us boomers learned from our early years that thrift was good and that living within your means was normal. It might appear simplistic, but many of us think that the basics of household management apply to the nation. We have been confirmed in that view by observing the way various governments have acted since the 1960s. There have been two disastrous periods of Labor government, one quite recent, and one of a more sensible sort, although tarnished by the commencement of a faustian bargain with the enviro-loons, the genesis of the Greens.

  2. Southern Man

    It’s as if these are issues so completely settled that no one any longer has to waste their time thinking about any of it at all.

    The power of the paradigm. It is the same with evolution in the area of science. The leftist intelligentsia has taught students over generations to regard them as synonymous, despite the patent absurdity of the evolutionary construct. Couple this with the failure to teach critical thinking skills, and you get blind dogma.

  3. Tel

    They balanced the federal budget and—via the still wet-behind-the-ears Federal Reserve—raised interest rates rather than lowering them.

    In absence of the Fed, interest rates were rising anyhow. The NY broker rates were peaking about 6 months before the Fed started reacting. An institution such as the Fed can put a ceiling on rates (basically by injection of new money) but cannot put a floor on rates (if someone else wants to lend cheaper they can).

    The only way any reserve bank can control rates is by always lending lower than the natural rate (become the lender of first resort). Because this would cause chaos if such a line of credit was offered to everyone, they make sure the new money goes into the safe hands of the politically connected.

  4. .

    It might appear simplistic, but many of us think that the basics of household management apply to the nation.

    With many of the parents of boomers growing up or delayed starting their families due to the great depression, it was a lesson well learnt.

    You should read Mises as well. Reading Human Action is not time wasted. A tough text yes, but absolutely crystal clear and encompasses a vast area of topics.

    The do nothing approach needs more promotion. Wilson, Harding but also later with the Australian experience. Compare that to the waste of the New Deal.

  5. maurie

    Its amazing how despite such widespread keynesian idiocy capitalism usually finds a way to survive & at times even thrive. Never the less when nations such as Australia are riddled with Keynes stupidity courtesy of our union puppets & so many others, its frightening to imagine thelevel of success our society could sustain if the union party & the fake Greens were outlawed.

  6. Pyrmonter

    Dot – the Premiers Plan was nothing?

    By all means, something different – in the weird world of inter-war Australia, administered prices could be changed by fiat in a way that seems remarkable to modern eyes – and not a matter of Keynesian stimulus (unless you accept it as a “crowding in” argument that allowed the re-opening of access to the London capital markets) but nothing like what the US experience in 20/21, an event that deserves much greater study.

  7. .

    Keynesians would say it was ‘doing nothing’, but no, it was classical economics applied to policy I suppose. Budgets were balanced and the economy recovered once commodity prices began to recover, the exchange rate was lowered and it was export led.

    It is amazing that we transitioned to manufacturing during the period – the recovery could have been even quicker without trade protectionism, which sealed the fate of the US.

  8. Yohan

    Apparently Warren G. Harding just liked to sit around the White House, play poker and smoke cigars. Inadvertently he was the perfect leader to have during an economic crises.

    Many liberal/progressive economists envisioned a new dawn of Keynesianism in the 2008 financial meltdown. More than five years later, it is clear that the much-hoped-for Keynesian prescriptions are completely ignored.

    Pure comedy gold.

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