The main point Keynes is remembered for--at least as I recall from my college economics-- is the idea that public debt must be enlarged in times of economic crisis because the normal process of investment dries up. In effect, governments must try to put people to work and create aggregate demand, projects aimed at putting money in people's pockets so they spend more on products that produce more jobs in other sectors, etc.
As opposed to classical economics, where the markets are left alone and "iron laws of wages" determined who gets paid what, Keynes, saw that an economy was govern by "animal spirits". The visceral attitudes caused business to go into thrift mode precisely when the general welfare of a country could least afford it: in bad times.
By increasing the money supply you grow your way out of an economic slump.
Once a certain point of recovery is reached, the private sector "rentier" and corporate groups will step in to boost up the now revived system and the government can go back to a regulatory role to prevent the sort of stock-market/mortgage bubble disaster we have just started slowly recovering from.This can also be called "saving capitalism from the capitalists."
But how do we get in such sticky situations in the USA? And just how rational is the stock market/financial sector in the first place? How does it differ from a bunch of "turf accountants" or a casino or even a beauty contest? This was brought up recently in a report on National Public Radio's "Weekend Edition". A transcript of the story and a link to the audio report is available here: http://www.npr.org/blogs/money/2011/01/14/132906135/ranking-cute-animals-a-stock-market-experiment
“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment Interest and Money, 1936).
In other words value-determination is often so far off track in general that investors are placing values on a stock, or a house to use the mortgage market, based not on their private needs but on the hunch that something will grow and grow creating a bubble. When enough investors guess wrong about what demand for housing or a tech company is really worth, we get a economic recession...or worse.
Whether you agree with Keynes theories or not, he did a service to breaking up the idea that markets couldn't be steered away from troubled times, but had to be "free", as the economist F.A. Hayak and Milton Friedman in later times believed and expounded upon. There was a role for the public sector, an idea that today is under attack again as further regulation is sought to prevent another boondoggle that only ends with banks getting paid off by the government for their follies while giving many of these CEOs and their minions big bonuses for their gross misjudgements.
For this idea alone, and for stripping away the notion of markets as best guided by "invisible hands", Keynes "beauty contest" is worth remembering.
I honestly have to say that I do NOT understand economics at all, but it does seem to me that people need to be working,and want to be working, to spend money. I'm really tired of "spculators" determing what we will pay for goods and services. I don't know what derivitives are, and I don't play the market because I don't understand it. Heck, I had trouble keeping a checkbook straight!
ReplyDeleteanother new word for me Doug - thanks
ReplyDeleteabsolutely - anyone that believes that markets will always get it right is misguided. Even in a world of far greater market information/visibility than Keynes (or Friedman) could ever have imagined - the time it takes for a market to behave rationally carries too great a social price for my liking.
ReplyDeleteI have a heck of a time with economics myself, Jacquie. Suffice to say that when the speculative/financial sector gets to be too big a part of the economy and has too much power in the halls of our alledged Representatives, watch out America!
ReplyDeleteThere is a branch of American economics and political operators who regard under-regulated "market" rationality as something akin to a natural law, Ian. And, as you say, after the damage is done it takes a long time and a lot of collateral human damage for these entities to return to balance.
ReplyDeleteAnd, yes, in an era of arcane and complex computer-generated trading schemes, the packaging and repackaging of toxic "securities" that can infect the global market, et al, the "social price" is too high.
I'd agree with that Doug, the problem is that Friedman and Hayek have changed the world beyond recognition.
ReplyDeleteNow Keynesian solutions are as outmoded as Marxist ones I think.....the state has been largely privatised and its functions have been outsourced.
Keynes is the economist of big government within a mixed market economy and a form of social democracy that eventually gave rise to Reaganomics or Thatcherism because of its uncritical dismissal of the profit motive.
On that latter point I think Keynes was naive and it was ultimately that refusal to accept that in a system where capital retains the upper hand it will behave against the interests of the populace when profits are threatened. It's not really rocket science but Keynes wanted a world where the western elite would generously disseminate the pickings of the world trade to a a content and docile domestic workforce and consumer base.
All this was blown out of the water by the Yom Kipur War in October 1973 ...that is what sank Keynesianism I think.....and the end of the longest period of sustained economic growth in the history of planet Earth didn't really help much either!
Yes, AA, one need only look at how much private outsourcing of security and contracting goes on currently in war zones like Afghanistan to realize how much the public and the private are locked in a siamese grafting. He was right for his times, more right I believe than the American conservatives who recommended austerity in government as a tonic to the Depression.
ReplyDeleteI doubt Lord Keynes would have had much good to say about Reaganism; he believed in a society that allowed first and foremost for "full employment" and away from "the arbitrary and inequitable distributuin of wealth and income."
Perhaps he felt the profit motive couldn't be dismissed due to human nature, (and, in America at least, a wholesale fear of the very word "socialism"after Wordl War II, in name if not in deeds).
Keynes was looking for a way to take the sharp edges off the free marketeers in Britian and America. In that sense one program can expect to stave off recurrances because selfishness and fear make for a potent combination from those corporate entitiies who have the money and men and women in suits to steer the general welfare toward the goal of "socialism for the rich."
Reagan's tax-cut mantra and our current "domestic policy by, of and for bond traders and investment bankers" bare witness to this return to a "Gilded Age". I had rather hoped these "good old days" were behind us. We appear to be in a histoical loop.
An excellent analysis on your part I'd say, AA. The war of 1973 in the Middle East, coupled withthe rise of the OPEC power bloc, did shake things up. Somehow, in a way I'm not sure of at this writing, it breathed new life in old-style 19th Century conservative formulas that disparaged "bleeding heart liberalism" in the USA in favor of good old Yankee xenophobia and dog-eat-dog Spenserism.