House of Paine

krug on high keynes

here's the krug-man on JMK 
                      ( general theory )





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In the spring of 2005 a panel 
of “conservative scholars and policy leaders” 
was asked to identify
 the most dangerous books
 of the 19th and 20th centuries.... 
Charles Darwin and Betty Friedan
 ranked high on the list.

 But The General Theory 
of Employment, Interest, and Money
 did very well, too.

 In fact, John Maynard Keynes beat out
 V.I. Lenin and Frantz Fanon. 


Keynes, who declared in the book’s
 oft-quoted conclusion that 
“soon or late, it is ideas, not vested interests,
 which are dangerous for good or evil,” 
[384] would probably have been pleased.

Over the past 70 years 
The General Theory has shaped the views
 even of those who haven’t heard of it, 
or who believe they disagree with it.

 A businessman who warns that falling confidence 
poses risks for the economy 
is a Keynesian, whether he knows it or not.

 A politician who promises 
that his tax cuts will create jobs
 by putting spending money 
in peoples’ pockets is a Keynesian,
 even if he claims to abhor the doctrine.

 Even self-proclaimed supply-side economists,
 who claim to have refuted Keynes, 
fall back on unmistakably Keynesian stories
 to explain why the economy 
turned down in a given year....

It’s probably safe to assume 
that the “conservative scholars and policy leaders”
 who pronounced The General Theory 
one of the most dangerous books 
of the past two centuries haven’t read it.

 But they’re sure it’s a leftist tract,
 a call for big government and high taxes.... 
[T]he arrival of Keynesian economics 
in American classrooms 
was delayed by a nasty case
 of academic McCarthyism.

 The first introductory textbook
 to present Keynesian thinking,
 written by the Canadian economist Lorie Tarshis, 
was targeted by a right-wing pressure campaign
 aimed at university trustees. 

As a result of this campaign,
 many universities that had planned
 to adopt the book for their courses 
cancelled their orders,
 and sales of the book,
 which was initially very successful,
 collapsed.

 Professors at Yale University,
 to their credit,
 continued to assign the book; 
their reward was to be attacked
 by the young William F. Buckley 
for propounding “evil ideas.” 

But Keynes was no socialist 
- he came to save capitalism,
 not to bury it.

 And there’s a sense in which
 The General Theory was... a conservative book....
 Keynes wrote during a time of mass unemployment,
 of waste and suffering
 on an incredible scale. 
A reasonable man might well have concluded
 that capitalism had failed,
 and that only... the nationalization
 of the means of production - 
could restore economic sanity.... 
Keynes argued that these failures 
had surprisingly narrow, technical causes... 
because Keynes saw the causes of mass unemployment
 as narrow and technical, 
he argued that the problem’s solution
 could also be narrow and technical: 
the system needed a new alternator,
 but there was no need to replace the whole car.

 In particular,
 “no obvious case is made out 
for a system of State Socialism 
which would embrace most of the economic life 
of the community.”... 

Keynes argued that much less intrusive 
government policies could ensure 
adequate effective demand, 
allowing the market economy 
to go on as before. 

Still, there is a sense 
in which free-market fundamentalists are right 
to hate Keynes. 

If your doctrine says that free markets,
 left to their own devices,
 produce the best of all possible worlds,
 and that government intervention
 in the economy always makes things worse, 
Keynes is your enemy.

 And he is an especially dangerous enemy 
because his ideas have been vindicated 
so thoroughly by experience.

Stripped down, the conclusions of The General Theory
 might be expressed 
as four bullet points:

Economies can and often do suffer
 from an overall lack of demand,
 which leads to involuntary unemployment 

The economy’s automatic tendency 
to correct shortfalls in demand,
 if it exists at all, 
operates slowly and painfully 

Government policies to increase demand,
 by contrast, 
can reduce unemployment quickly 

Sometimes increasing the money supply 
won’t be enough to persuade 
the private sector to spend more
, and government spending
 must step into the breach 


To a modern practitioner of economic policy,
 none of this - except, possibly, the last point - 
sounds startling 
or even especially controversial. 

But these ideas weren’t just radical 
when Keynes proposed them;
 they were very nearly unthinkable.

 And the great achievement 
of The General Theory 
was precisely to make them thinkable....

So now let’s talk about the core of the book,
 and what it took for Keynes to write it.... 

In Book I, as Keynes gives us
 a first taste of what he’s going to do, 
he writes of Malthus,
 whose intuition told him 
that general failures of demand were possible,
 but had no model to back that intuition:

 “[S]ince Malthus was unable 
to explain clearly
 (apart from an appeal to the facts of common observation)
 how and why effective demand 
could be deficient or excessive
, he failed to provide an alternative construction; 
and Ricardo conquered England 
as completely as the Holy Inquisition conquered Spain"

.”... That need to “provide an alternative construction”
 explains many of the passages in The General Theory 
that, 70 years later, 
can seem plodding or even turgid.... 
When you’re challenging a long-established orthodoxy,
 the vision thing doesn’t work 
unless you’re very precise about the details.... 

Keynes’s struggle with classical economics
 was much more difficult 
than we can easily imagine today.

 Modern introductory economics textbooks 
- the new book by Krugman and Wells included - 
usually contain a discussion 
of something we call the “classical model” 
of the price level. 

But that model offers far too flattering a picture 

we call the classical model today 
is really a post-Keynesian attempt
 to rationalize pre-Keynesian views.... 

The real classical model... was, 
essentially, a model of a barter economy,
 in which money and nominal prices 
don’t matter, 
with a monetary theory of the price level
 appended in a non-essential way, 
like a veneer on a tabletop.

 It was a model in which Say’s Law applied.... 
One measure of how hard it was for Keynes 
to divest himself of Say’s Law 
is that to this day some people deny 
what Keynes realized - 
that the “law” is, at best,
 a useless tautology when individuals
 have the option of accumulating money
 rather than purchasing real goods and services....


There’s a widespread impression 
among modern macroeconomists t
hat we’ve left Keynes behind,
 for better or for worse.

 But that impression, I’d argue, 
is based either on a misreading or a nonreading....
 If you don’t read Keynes himself
, but only read his work 
as refracted through various interpreters,
 it’s easy to imagine 
that The General Theory is much cruder than it is.
... Let me address one issue in particular:
 did Paul Samuelson,
 whose 1948 textbook introduced 
the famous 45-degree diagram 
to explain the multiplier,
 misrepresent what Keynes was all about? 

There are commentators who insist passionately 
that Samuelson defiled the master’s thought

. Yet I can’t see any significant difference
 between Samuelson’s formulation 
and Keynes’s own equation for equilibrium employment,
 right there in Chapter 3: [29].

 Represented graphically, 
Keynes’s version looks a lot like Samuelson’s diagram; 
quantities are measured in wage units 
rather than constant dollars, 
and the nifty 45-degree feature is absent,
 but the logic is exactly the same.

The bottom line, then, 
is that we really are all Keynesians now

 A very large part of what modern macroeconomists do 
derives directly from The General Theory;
 the framework Keynes introduced 
holds up very well to this day.

Yet there were, of course, important things 
that Keynes missed or failed to anticipate.

 The strongest criticism one can make
 of The General Theory is that Keynes 
mistook an episode for a trend. 

He wrote in a decade 
when even a near-zero interest rate
 wasn’t low enough to restore full employment,
 and brilliantly explained 
the implications of that fact - 
in particular, the trap in which the Bank of England
 and the Federal Reserve found themselves,
 unable to create employment
 no matter how much they tried 
to increase the money supply. 

He knew that matters had not always been thus.
 But he believed, wrongly, 
that the monetary environment of the 1930s 
would be the norm from then on....
 In the United States the era 
of ultra-low interest rates ended in the 1950s... 
Yet the United States has, 
in general, succeeded in achieving
 adequate levels of effective demand.

 The British experience has been similar.
 And although there is large-scale unemployment
 in continental Europe,
 that unemployment seems 
to have more to do with supply-side issues 
than with sheer lack of demand.... 
[Keynes] underestimated the ability 
of mature economies to stave off 
diminishing returns. 

Keynes’s “euthanasia of the rentier”
 was predicated on the presumption 
that as capital accumulates,
 profitable private investment projects 
become harder to find.... 
[T]he euthanasia of the rentier 
does not seem imminent. 
But there’s an even more important factor 
that has kept interest rates relatively high, 
and monetary policy effective: 
persistent inflation,
 which has become embedded in expectations.... 
[E]ven now, when inflation is considered low, 
most of the 20-year rate reflects
 expected inflation rather 
than expected real returns.

The irony is that persistent inflation,
 which makes The General Theory 
seem on the surface somewhat less 
directly relevant... 
can be attributed in part to Keynes’s influence,
 for better or worse.
 For worse: the inflationary takeoff 
of the 1970s was partly caused
 by expansionary monetary and fiscal policy,
 adopted by Keynes-influenced governments 
with unrealistic employment goals....
 For better: both the Bank of England,
 explicitly, and the Federal Reserve, implicitly, 
have a deliberate strategy
 of encouraging persistent low
 but positive inflation, 
precisely to avoid finding themselves
 in the trap Keynes diagnosed....

What makes The General Theory truly unique...
 is that it combined towering intellectual achievement
 with immediate practical relevance 
to a global economic crisis.... 

There has been nothing 
like Keynes’s achievement 
in the annals of social science. 

Perhaps there can’t be.
 Keynes was right about the problem of his day:
 the world economy had magneto trouble,
 and all it took to get the economy
 going again was a surprisingly narrow,
 technical fix. 

But most economic problems probably do 
have complex causes and don’t have easy solutions....