Keynesian economics, the solution??

Pride Fighter

Now I am not an economist but from what I have read this seems to be the way our economy should go now that we are in recession. It was the prevalent economic model from the 40's to the 70's. It created near full employment in the States and Europe. It collapsed in the 70's mainly as a result of the oil crisis.

I think a tweaked form of this economic model could work. If we secured energy security we would be insulated from a potential oil crisis. It appears to be the preferred model of economics for Obama's stimulus package and various other ones throughout the world.

So is it the solution? Or should we revert to neoliberalism/Reganism/Thatcherism?

tolosenc

The problem is it can be quite protectionist, which in a globaliswd economy doesn't work.

The problem we face at the moment is not that neo-liberalism has a flaw, but it's more like many sectors were youg teenagers. Under liberalism, there is little regulation. So the boundaries were pushed a bit too far, much like many of us did between 13 and 15. Hopefully once this situation is sorted, the economy will have learned from it's mistakes.

Really, interventionist policies are backward and generally lead to inefficiency. This is just my opinion, but Keynes essentially recommended public sector beaurocracy as the RESOLUTION to private sector inefficiency.

Essentially, the quick way out of this situation is tax cuts and the abandonment of certain public services. But maybe we should wade it out and learn from our mistakes. I mean, there's no questioning that free-market capitalism is a great system!

silverharp

Pride Fighter wrote: »

Now I am not an economist but from what I have read this seems to be the way our economy should go now that we are in recession. It was the prevalent economic model from the 40's to the 70's. It created near full employment in the States and Europe. It collapsed in the 70's mainly as a result of the oil crisis.

I think a tweaked form of this economic model could work. If we secured energy security we would be insulated from a potential oil crisis. It appears to be the preferred model of economics for Obama's stimulus package and various other ones throughout the world.

So is it the solution? Or should we revert to neoliberalism/Reganism/Thatcherism?

You get one chance to go from creditor to debtor after that throwing more money at the problem cant work (aka Japan). Simple logic would say that if too much money and debt caused the problem you cant get out of it by throwing more money and debt at it, So no a keyensian wont work, anyone suggesting it would be part of a group that would benefit regardless of the cost to the rest of the economy.
The problem will sort itself out when asset prices come down to sustainable levels and enough debt is wrung out of the system. Simple:pac:

Time Magazine

Keynesianism failed for more reasons than the oil crises.

http://www.marginalrevolution.com/marginalrevolution/2008/12/fiscal-policy-a.html

The Keynesian Multiplier is a very flawed theory. Contrary to what many people like to believe, Keynes himself accepted that his early work (General Theory of 1936) overstated the importance of fiscal stimulus.

It has been latched onto by social democrats because it suits their political perspectives. "Keynesian Economics" (scare-quotes because Keynes changed his mind) might be a reasonable attempt at how to distribute money, but it's not a great way to avoid depression.

Monetarism ftw.

DadaKopf

Keynesian policies did run aground in the 1970s for many reasons. A lefty would say that the advanced capitalist world could not solve the profitability crisis - one explanation is that as the 'West' developed, people demanded higher living standards and wages, which decreased firms' profits. However, growing global equality also contributed to a collapse in demand relative to the need for firms to produce more to scrape more profit out of workers as more money went to wages. In other words, because so many people were poor, they couldn't afford to buy a growing amount of crap produced by the West.

I don't fall on the neoliberal side of this debate, but it was also the case that governments were finding it hard to manage their economies and maintain support through public expenditures. Added to this was the growth of corporate capitalism where investors began demanding short-term returns, not long-term stable income and employment.

But what happened in response was to destroy the kinds of structures and controls that were established - many for good reason. States and financial institutions concocted a plan to liberalise everything and allow financial power to reign supreme. The Bretton Woods system (the system that contributed to economic stability) was abandoned and banks created all kinds of new products to meet the demands of investors. Everything became short-term with the central money-making tactic being the blowing and bursting of bubbles, one after the other. Eventually, banks became so powerful that they could convince governments to let them self-regulate. This wasn't a neo-classical free market, it was a cartel. But then the music stopped. The thing was that things weren't so bad when banks were trading real assets which could be priced by the market; when Consolidated Debt Obligations and these other over-the-counter derivatives were created, they didn't have any real value. They only had value in as far as the risk analysts gave them (all?) a triple-A rating. When people stopped believing the hype, nobody knew what the losses were because the 'products' the banks had created had no market value.

Now, what we've got are two systems that failed. What's new, eh? Nothing's lasted forever. I certainly think we'll get more state regulation, but what's happening right now is a monumental struggle between goliaths of geopolitics. At best, I think we'll have a hybrid form of state-regulated capitalism. It's a great moment for transformative politics but in the end, we'll enter a new era which, after a time, that'll collapse, too. And, who knows, by then, it'll be war.

nesf

Pride Fighter wrote: »

So is it the solution? Or should we revert to neoliberalism/Reganism/Thatcherism?

Firstly, I think the above is a false dilemma. We aren't forced to choose either Keynesianism or neoliberalism and no other choice is available. Liberal economic thought and theory is very much divided on how much Government is enough and which areas are amenable to Government expenditure and which aren't along with debate on what forms of spending work and what forms don't.

Secondly, the key problem is this, does fiscal stimulus work? Does spending 100 million euro generate more than 100 million euro of GDP? There are two problems here: a) can Governments figure out efficient ways to spend the money and limit themselves only to these and b) is there enough "good investments" to spend the money on? Fiscal stimulus generally involves (for Western countries) borrowing money to do it. So does the stimulus generate enough economic activity to justify borrowing the money in the first place?

SeanW

I've been reading about Ron Pauls presidential run and his subsequent political action group "Campaign For Liberty." Although I would not call myself a devout Austrian at this point, I accept most of the fundamental principals of Austrian economics as presented there.

We got into this mess by overstimulating the economy with cheap credit - destroying savings, debasing our currencies and pushing people to spend spend spend until they were up their eyeballs in debt - now we're devaluing our currencies even further, inflating more, borrowing more and spending more trying to re-inflate the bubble and I don't share the optimism that it will work. On the contrary I think it will only damage us further with more dependence on soveirgn borrowing at government level and no point in saving (and thus creating real capital) at the level of individiuals. I can very much see how a continuously inflating currency has the potential to destroy the middle class and/or keep poor people from getting there.

As and when the current crisis passes, I would like the European Central Bank to consider purchasing precious metals/assets and fixing the Euro to them - like gold at for example, €1,000 per troy ounce - redeemable from the ECB at that rate, similar to the US$ pre 1971. Then leave € interest rates to the free market, i.e. the level of savings and the demand for borrowing those savings.

That all being said I'm not against government spending as a rule - but I think there is a greater need for fiscal responsibility and that where money is to be spent on investments, it should be on things that have value - such as certain transport infrastructure projects - and only for the value of the project as it shows merit, not simply simply "make work" jobs for stimulii - in the Great Depression the U.S. gov't borrowed money to pay people to dig ditches then fill them back up, along with other destructive activities that just made things worse.

Time Magazine

SeanW wrote: »

As and when the current crisis passes, I would like the European Central Bank to consider purchasing precious metals/assets and fixing the Euro to them - like gold at for example, €1,000 per troy ounce - redeemable from the ECB at that rate, similar to the US$ pre 1971. Then leave € interest rates to the free market, i.e. the level of savings and the demand for borrowing those savings.

Leave the setting of interest rates to the market? Are you serious?

Pride Fighter

nesf wrote: »

Firstly, I think the above is a false dilemma. We aren't forced to choose either Keynesianism or neoliberalism and no other choice is available. Liberal economic thought and theory is very much divided on how much Government is enough and which areas are amenable to Government expenditure and which aren't along with debate on what forms of spending work and what forms don't.

Secondly, the key problem is this, does fiscal stimulus work? Does spending 100 million euro generate more than 100 million euro of GDP? There are two problems here: a) can Governments figure out efficient ways to spend the money and limit themselves only to these and b) is there enough "good investments" to spend the money on? Fiscal stimulus generally involves (for Western countries) borrowing money to do it. So does the stimulus generate enough economic activity to justify borrowing the money in the first place?

Good post, cheers. As I said in my OP I am not an economist. You seem to speak sense:)

declanx

The greed of the markets will twist Keynesian beyond recognition. I found his personal life far more interesting.