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Daniel Johnson: We should begin with Keynes. Robert, you've just published an important new book, The Return of the Master, which has already had a great impact here and abroad. Why is this great economist, who died more than half a century ago, still in your view the key thinker for those who want to understand the present situation, and what part of his legacy do you think is the most important?

Robert Skidelsky: He still provides the best explanation of how economies can crash, and also of how they can then stay in a depressed state for a long time. He overturned the classical view of his time — which actually was then revived — that markets are always efficient and that economies are always self-correcting without very much trouble. The effect of his theory was to give governments a definite role in both preventing big upsets, and, if big disturbances occurred, in getting economies out of the holes they were liable to stumble into and remain in for a long time.

DJ: Tim, you too respect Keynes as an economist, but I think you take a slightly different view from Robert's about what part of his legacy matters now.

Tim Congdon: Keynes wrote a lot about the Gold Standard, and indeed about many different currency standards — his first book was about the Indian monetary system, of all things — and he realised that in the 20th century we couldn't base our monetary regime on gold, or indeed on any precious metal. We needed to manage the currency, and manage it with a view to achieving price stability and a stable economy which would generate, as far as possible, high employment. I agree with all of that entirely.

The debates are about the extent of his enthusiasm for fiscal policy, for high government spending and for a large state sector. Robert has written a wonderful biography of Keynes, which I think will be definitive. But even that biography shows that Keynes had second thoughts about whether it really was a good thing for governments to be trying actively to manage the economy through budget policy.

DJ: Robert, how much do you think the present stimulus policies that have been very widely adopted across the Western world owe to Keynes, and are they working? Was this the right way to go, in your view?

RS: The stimulus has come in two forms. There's been a monetary stimulus, that is to say that governments have printed money; and there's been a fiscal stimulus, that is that their budget deficits have expanded. And both are in the mould of Keynes. Without Keynes they might not have done any of these things, and the test of that is that before, in the actual Great Depression, governments did all the wrong things. And that's one of the reasons why the economy slid down, all the way, 12 quarters of decline.

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Ralph Mugrave
October 23rd, 2010
12:10 PM
In your flax economy you say that printing money destroys “the value of the participants' cash balances”. So how come the monetary base of the U.S. increased by an astronomic and unprecedented amount 18 months ago, yet inflation is currently at record lows? As distinct from the above evidence, and moving on to the INTENTION behind money printing, the intention or objective is to bring sufficient extra demand to bring full employment, but not so much as to cause excess inflation. Also in your flax economy you make the very unrealistic assumption that there is only one final product, namely clothing, and that the market for this is saturated. But let’s run with that assumption. An economy where there are no consumers who want any more goods or services is an economy where there is no unemployment. That is there is no one who wants to work extra hours so as to consume more. No Keynsian with any common sense would advocate money printing (or any other method of increasing demand) in these circumstances.

Richard Allan
March 30th, 2010
12:03 AM
I'm an economics graduate from the LSE, and I don't understand why this article concentrates on those parts of "macroeconomics" which we only teach to first-year students, and abandon in embarassment by the end of even a three-year Bachelor's degree. The ideas being discussed in this article have absolutely no currency with the economists that I've known. The idea that printing money, or increasing consumption, can somehow increase wealth is ludicrous. Anyone constructing a theoretical economy in his head should be able to see this for himself. Printing money will discourage people from holding cash balances; this will INCREASE instability in the economy by leaving people more vulnerable to liquidity demands. Increasing consumption can only destroy accumulated wealth all the faster. Let's say we have an economy where one worker grows food, another flax, and a third weaves flax into linen. They each "hoard" cash in expectation of future spending requirements. Now suddenly the demand for linen and therefore flax drops off; perhaps the market for clothing has become saturated. What's the commonsense response? Telling the two textile workers to find new jobs. But this would cause "excess capacity" in the economy (the land would have to be ploughed under before it could grow anything else, and the sewing machines are worthless) and "unemployment", which Keynesians can't allow. So what's their solution? Print money, destroying the value of the participants' cash balances, and use it to "stimulate the demand" for textiles, presumably by buying the stuff up and burning it (as we all know occurred during the New Deal). This allows the textile workers to keep their jobs! But what happens to savers? Well, either they have to shrug their shoulders and eliminate their "real savings", leaving them vulnerable to "liquidity shocks" (like a sudden bout of illness rendering them unable to work), or they switch their cash savings for, well, REAL savings; ie. stored food. But assuming the economy is producing the maximum amount of food possible (at least until the flax land is repurposed, which we've decided to prevent for the sake of the textile industry), increasing the amount of "hoarded" food is surely worse for food consumption than any amount of "hoarded" cash. At least someone was eating the damn stuff beforehand! So if the farmer decides to stop saving, and is then laid low by illness, there will be a very sudden "panic" in the economy as textile workers scramble for food production. But if workers replace their cash savings with food savings, inflation won't work any more! You can't print food with which to buy clothes; and since the farmer doesn't want to trade food for clothes (he has enough already), and doesn't want to hold cash (loses its value too quickly), we'll end up with the textile industry collapsing either way! The only difference is that in the meantime, we forced people to make an undesired switch from cash savings to either "no savings" (more volatility in the economy as a result of unpredictable expenditures) or "real savings" (reducing the supply of real goods for consumption). The "fiscal" alternative is a similar Devil's bargain. Either take the farmer's food in taxes now, or borrow food from him, promising to tax him later to pay back his own debt (Ricardian Equivalence shows that these two are exactly similar in terms of effects). If the taxes cause him to scale back his production of food, then you've reduced real wealth in the economy. But if they don't, then surely the taxable proceeds would be better invested somewhere else than in a failing line of business? The same can be said if inflation somehow doesn't cause anyone to alter his cash balances; the concept of opportunity cost means that wasting money (and goods!) by putting them to bad use is just as bad as destroying them. The only way that printing money can increase wealth is if there is genuinely idle capital in the economy which could be devoted to the production of real value (ie. happiness), but for whatever reason, is not. However, the only plausible mechanism by which this capital could be put to work by printing money is if wages are "sticky downwards", so the workers are effectively refusing to work for a utility-maximising wage. But firstly, printing money to force down their real wages was a stupid idea in Keynes's time (where index-linked wage contracts were already becoming commonplace) and is an even more stupid idea nowadays. It will just not have the desired effect. And secondly, if workers refuse to work for a utility-maximising wage, this must be regarded as a voluntary decision on their part; and as a believer in the Harm Principle, I don't believe it's the government's role to reverse voluntary decisions (or "indecisions"). And thirdly, I find it far more likely that diverting any funds to government will be used to reward unproductive special interests than to match genuine demand with genuine excess capacity. In conclusion, I find that this entire article is based on a vision of economics that is (i) out of favour with the economics establishment, (ii) easily disprovable by thought-experiment to anyone capable of consecutive thought, and (iii) a mere attempt to justify government intervention in the economy for its own sake, and for the sake of increasing the "mystique" surrounding economics in order to justify an increase in economists' salaries. The fact that it has attracted no comments thus far is evidence that it has been treated by the readers with the confusion and indifference that it deserves; I simply couldn't allow it to go unchallenged myself.

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