Thursday, December 25, 2008

More praise for Keynes

Martin Wolf writes, “We are all Keynesians now.” [This exact sentence was used by Krugman and Stiglitz in the beginning of their past columns. In fact, this has been a popular starting sentence among writers who want to discuss the connection between Keynesianism, present financial crisis, and increasing government spending in the economy!]

Three relevant Keynesian stuff, according to Wolf:

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

I like the second one: that economy cannot be analyzed in the same way as an individual business. This also means sum of individual units does not equal to a whole, i.e. the sum of outputs generated from self-interested individual’s actions does not equal to the output generated from one big player’s action. Micros do not add up to macro!!

And, very nice (and comforting) words about Keynes:

Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

…Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care.

Again, not that Keynes did not say markets don’t work. He said markets do not always work, so government should fill the gap. He treated markets and governments not as substitutes but as some form of complementary forces.

Here is an old article from Time magazine, which put Keynes’ picture on its cover page and named him Person of the Year in 1965. More here.