The enemy is Keynesian macro

I’m afraid you can talk about debt and deficits to the end of time but unless you understand that the true enemy is macroeconomic theory with its emphasis on aggregate demand your chances of turning round The Titanic are approximately zero. This is the equation of economic death: Y=C+I+G+(X-M). If this is not the focus, then things will just continue as they are until the crash comes and no one is willing to lend to us any more. Two bits from today.

First there was Jennifer Oriel with her Budget 2017: forget the fake patriotism and get working on debt. She sees the point, I suppose, but where is her full-blooded attack on the underlying theory? This is her hardest para but it is hardly a call to arms.

If the government drifts away from fiscal conservatism and ­engorges itself on the elusive promise of growth, it risks driving Australia off the fiscal cliff. It must downsize to reduce debt and ­repair the deficit. It could begin by cutting the morbidly obese ministry down to size. If the Coalition’s patriotism is more than mere rhetoric then it must make plain the case for an Australia-first budget by simplifying the taxation system, dropping the spin and putting the national interest first.

And then there was marcus with his terrifying statistics and historical record. This is a major public service: What did we get for our $400 billion loan? It really is the most blood-curdling analysis I have come across except that other than a few of us out here on the periphery, no one’s blood has been curdled. You really should read it, but my guess is that with aggregate demand at the core of economic theory, the general belief is that this debt and spending has saved us from a fate far worse than our current levels of debt.

Completely wrong, but we still have a lot of capital to run down before we truly hit the skids. So along the way we will put Labor back in who will blame it on Malcolm, or at least Tony. If you do not understand that the problem is the economics of Keynes and the theory of aggregate demand deficiency, you are not even at first base in understanding what needs to be done and why.

This entry was posted in Classical Economics, Economics and economy. Bookmark the permalink.

12 Responses to The enemy is Keynesian macro

  1. stackja

    Pearce, Sir George Foster (1870–1952)
    by B. Beddie

    This article was published in Australian Dictionary of Biography, Volume 11, (MUP), 1988

    Sir George Foster Pearce (1870-1952), politician, was born on 14 January 1870 at Mount Barker, South Australia, fifth of eleven children of English parents James Pearce, blacksmith, and his wife Jane, née Foster. Educated at Red Hill Public School, he left at 11. He obtained farm work which he found ‘hard and unpleasant’ and he so much disliked the drinking habits of his fellow workers that he remained a teetotaller throughout his life. Eventually he became a carpenter in Adelaide but, losing work in the depression of 1891, moved to Perth where he found a job in his trade. He joined the Amalgamated Society of Carpenters and Joiners and by 1893 was actively working in the Trades and Labor Council and in its Progressive Political League.

    When Pearce later received a letter from an economics graduate asserting that his actions in 1931 had been discredited by the writings of Keynes, he noted: ‘1 lb of fact is worth a ton of theory. Proof of pudding eating and Aus. took hard route 1ST country to recover’.

  2. Fulcrum

    Choose any social disaster and the odds are Keynes lies at the heart of it.

  3. John Carpenter

    Neither party has any intention of cutting spending.Labor will do the opposite because deficits don’t matter and according to Krugman debt never has to be repaid.The other gang will make token,halfhearted efforts to slow down the rate of increase hoping to be bailed out by a resurgence in economic growth which will always be just over the horizon until the China mega correction smashes that dream.So it will all come down to more tax and money illusion wealth confiscation.The plebs are getting jumpy and moving into real assets knowing that the central planners at the Central Bank will continue their covert negative real interest rate central plan.In the system devised by Jefferson an outlier like Trump could emerge from nowhere to break the logjam and save the republic.

  4. The Vengeful Ghost of Fiona Watson's Moggie

    No fiat currency: no funding of Keynesian nonsense, no endless subsidising of cultural marxism, no enslavement of the middle and lower classes through ever growing debt burdens.

    Your demon is a lesser demon. The great enemy is fiat currency.

  5. Ray

    We need to understand one thing from the outset, Keynes never supported the use of debt for the funding of recurrent expenditure. His suggestion that a demand stimulus could be employed to boost the economy was in response to a very specific set of circumstances wherein a diminishing return to capital meant that profitable investment projects would dry up and a savings glut would ensue. In such a circumstance, Keynes recommended that the government borrow to fund infrastructure projects only, not welfare programs. Further, Keynes was a stringent proponent of a balanced budget over the cycle and saw his demand management only as a short term measure.

    The modern reinterpretation of Keynes’ General Theory mostly comes from the work of John Hicks, partly because few economists bother to read Keynes directly, after all, it is not an easy read. As a result, much of what is passed off as Keynes, is really the neoclassical synthesis.

    However, if we concern ourselves with what Keynes actually wrote, he is correct to suggest that in the specific circumstances of a diminishing return to capital resulting in a savings glut, his prescription of a fiscal demand stimulus is probably not a bad thing. Where Keynes went wrong is the implicit assumption that his savings glut would be anything other than a fleeting occurrence. In my time I have seen one such savings glut, which began in September 2008 and lasted possibly six months at most. Unfortunately for Keynes’ approach, it is unlikely that any government could react fast enough to make a difference in a six month savings glut.

    Therefore, in theory, there is a case to support Keynes’ approach, although in practice it is unlikely to have any real benefit. Yet notwithstanding this drawback in Keynesian macro, he never suggested the use of deficit spending as it is being used at present.

  6. Empire GTHO Phase III


    Would you care to offer an explanation for the 2008 glut you observed?

  7. Ray

    If we move on from Keynes, we have had many permutations of macroeconomics since he wrote the General Theory. The Neoclassical Synthesis, which most people claim to be Keynesian, emerged a year after the General Theory and was the mainstay of macroeconomic thought until the Lucas critique and the emergence of New Classical Economics. This was followed by New Keynesianism before we were able to settle on the current prevailing ideas which are centred on the New Neoclassical Synthesis.

    New Neoclassical Synthesis is an amalgam of the New Classical and New Keynesian ideas, taking the real business cycle and the use of micro foundations from the former and nominal rigidities from the latter. Thus the current state of demand management is intended to account for the effect of nominal rigidities in the market. Note that there is no mention here of Keynes’ diminishing return to capital such that current demand management theories have absolutely nothing to do with Keynes.

    Whilst there is nothing wrong with the practice of compensating for nominal rigidities, we need to bear in mind that these rigidities are short term by nature, perhaps washing through the economy in around eighteen months. This then is the real problem with modern macroeconomics, it is the fact that we are using tools designed to manage short term nominal rigidities to manage long term outcomes. This does not work.

  8. Irreversible

    Huzza! Lord Kates charges forth in the new crusade! Macroeconomic Theory or Death! HUZZA!

  9. Tel

    Is that like a Word macro virus? I’ve heard they can cause a lot of problems.

  10. Steve Kates

    Very pleasing to find Ned’s list of articles but what pleased me the most was finding this quote from James Mill from 1808. Economists once knew what they have since almost entirely forgotten.

    When goods are carried to market what is wanted is somebody to buy. But to buy, one must have wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation. . . . Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate.

    A proper theory of recession then follows from this, as also explained by Mill, although even better explained by his son.

  11. Ray

    Ned, thank you for the suggested reading on savings gluts. It would have been useful had I, in fact, stated that a savings glut was the cause of the economic malaise which has affected global economies over recent years. Indeed, if you had bothered to read my comments, you would notice that I was explaining what Keynes believed and not what I believed. Indeed, you would probably also have noticed that I suggested where Keynes got it wrong.

    As indicated, I think very clearly, I have known one savings glut in my career. It began in September 2008 and lasted a few months. Over that time, global credit markets evaporated because of the closure of the inter-bank market. For example, there was not a single corporate bond issuance from the collapse of Lehman’s until OBB, the Austrian railway operator, managed to get an issue away in December 2008. Even then, it took several months for global bond markets to get back to normal. As a result, it is beyond question that investment activity all but dried up in the last quarter of 2008, a savings glut in anyone’s language, not withstanding the blind ideological driven views coming from those who still subscribe to the largely discredited Austrian Business Cycle Theory.

    However, agreeing that a savings glut can occur is very different from subscribing to a Keynesian approach to repairing the position. The problem for Keynes’ approach is that the timing of savings gluts are such that government responses will inevitably be so slow that the market will have corrected itself before any stimulus can have a beneficial impact and would thus do more harm than good.

    More importantly, to accept that savings gluts can occur, is not the same as arguing that they are the cause of our economic problems. In this context, when I stated “in my time I have seen one such savings glut”, it was intended not as a justification for Keynes but as an argument against his theory, for savings gluts are extremely rare and of very short duration. Yet we have experienced a number of recessions and countless more years of expansionary fiscal policy without any hint of a savings glut.

    Keynes was a very intelligent man who added much to our understanding of economics. However, this does not mean we should all become Keynesians for much of what he wrote was wrong. After all, it is not for nothing that what is described today as Keynesian economics has very little to do with the teachings of Keynes himself. Instead, we need to understand Keynes rather than just dismiss his writings out of hand.

Comments are closed.