Thursday, 12 March 2009

We are all Keynesians now?

Over at the Economist they are having a debate on the motion: This house believes that we are all Keynesians now.

Defending the proposition is Professor Brad DeLong. He says
I regret that I cannot deliver on my promise: to make the case that "We are all Keynesians now." I cannot because it is not true: we are not all Keynesians now.
But adds later
So now, I cannot say we are all Keynesians now. The most I can say is that we should all be Keynesians now—and we should be.
Read more here.

Against the proposition is Professor Luigi Zingales. He says
What does "being Keynesian" mean? Simply believing in the role of demand-side factors in the determination of aggregate output is an insufficient characterisation.
And adds later
Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.
Read more here.

Over at the excellent Organizations and Markets blog Peter Klein writes, with regard to the second Zingales paragraph quoted above
Three comments: First, the “hangover” metaphor, while not exactly accurate, is an effective way to communicate the basics of the Mises-Hayek malinvestment theory of the business cycle. Use it! Second, Zingales’s description applies equally well to the 1930s and 1940s, when the Keynesian consensus emerged. It’s important to remember that massive deficit spending to “cure” the Depression began with Hoover and Roosevelt in the early 1930s, long before the General Theory appeared. Keynes’s book did not propose a new direction for economic policy; it provided an allegedly scientific rationale for policies already in place, policies government officials were eager to defend and protect. (The use of expansionary fiscal and monetary policy to increase output had long been derided by serious economists as nonsense, as the domain of “monetary cranks” and other snake-oil salesmen).

Third, the Keynesian delusion afflicts not only policymakers, but professional economists as well. I’ve long suspected that the appeal of Keynes to people like Krugman and DeLong is ultimately based on aesthetic, not scientific, grounds. Deep in their hearts, they just don’t like private property, markets, and individual choice. They don’t think ordinary people are capable of making wise decisions and think they, the elites, should be in charge. They resent the fact that most people don’t want their lives controlled by liberal intellectuals. Technical arguments about the effectiveness of monetary and fiscal policy, the relationship between aggregate demand and output, the experience of the 1930s, and the like are really beside the point. For Keynesian economists, the belief that markets are naturally unstable in the absence of government planning is a matter of faith.
Check the debate out, looks like it could be fun. You can also add in your own comments and vote on the proposition. So far 61% are against.

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