1. Formed for or concerned with one specific purpose
2. Improvised and often impromptuFair enough. Keynes didn't publish the General Theory until 1936.
In a Financial Times article* quoted extensively by DeLong, John Kay makes this remark about the first generation of Keynesians, who engaged in ad hoc-ery in trying to determine the consumption function (not this), "which related aggregate spending in a period to current national income," and thus get a handle on the multiplier effect:
But you would not nowadays be able to publish similar work in a good economics journal. You would be told that your model was theoretically inadequate – it lacked rigour, failed to demonstrate consistency. To be “ad hoc” is a cardinal sin. Rigour and consistency are the two most powerful words in economics today.
Kay concludes:
This is a damning indictment of macroeconomics, as practiced by the neoclassical school. I level this criticism specifically at them, since the opposing Keynesians seem to have rather useful models, and - more importantly - are not bound by giving more credence to the model than they give to the real world. And perhaps most importantly of all, Keynesians are either roundly criticized as idiots, or simply ignored, and have no influence on current policy. Neo-classicists and their near equivalents, whether of the Chicago, Austrian or Libertarian persuasions, are the opposite: if the model conflicts with reality (as it sooner or later must, models always and everywhere being simplified and therefore inaccurate approximations) then it is reality that is somehow wrong. And these are the Very Serious People who determine and influence policy.
A criticism of Keynesian economics is that it was unable to anticipate the stagflation of the 70's. That's true, it wasn't. It's funny, though, that neo-classicists, who were also equally clueless about stagflation (though I guess Friedman and Phelps did have a clue) had - and still do not have - any explanation of the high employment of the 30's, and of now, come to think of it, other than the "Great Vacation" theory.
In 1970, Keynes had already been dead for 24 years. A more vital Keynes perhaps would have made an attempt to analyze, understand and explain stagflation. That was his approach to difficulties 40 years prior, anyway. The thing to remember about Keynes is that he did not overthrow the edifice of economics as it existed in the 30's. He expanded it to include realms that were otherwise incomprehensible. It's reasonable to assume that he would have done the same in the 70's, had the rather inconvenient passing-away not long since intervened.
The problem with conservative economists of all stripes is not that they are always wrong. As hard as I am on them and their models, they get some things right, some times. The problem is that they give full credence and dependence to contrived "comprehensive and universal descriptions of the world" and little or none to contrary facts and data that actually occur in the world their models so inadequately describe.** Hence, they do not recognize that the universe of economics contains different realms, and that when in these different realms, different policy solutions are needed.
Austerity is right in certain times and places, but not at a time and place when unemployment is high and interest rates are bumping against the zero interest boundary. That they refuse to acknowledge the need for fiscal stimulus, or even that the zero interest bound is of any relevance is quite telling, ispo facto.
The Keynesian solutions were tried in the 30's, and they worked. It is quite likely they would work today, if there were the political will to employ them, rather than Very Serious (and Very Painfully Destructive) Austerity. And, since they are tried and true methods, there would be no need for an ad hoc approach.
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* You have to register with FT to read the article - but go ahead: it's free, and worth it!
** The 4th pillar of the conservative mental process manifests itself as some sort of denial of reality.
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16 comments:
(Not too sure about your choice of the word "realms". If you defined it, I missed it. Plus, it reminds me of Dungeons and Dragons.)
"A more vital Keynes"
:)...more vital than dead? a funny line.
"The thing to remember about Keynes is that he did not overthrow the edifice of economics as it existed in the 30's. He expanded it..."
Yes, and nicely put.
Great post title!
As you probably know, I am not a big fan of Keynesian monetary policy. I think about all it does is give commodity speculators a reason to cheer. That ultimately hurts the poor the most. (The poor spend more on food and gas as a percentage of their income.)
That said, I would have been much more receptive to Keynesian fiscal policy, as long as it led to sustainable job creation (i.e., something productive).
What we have instead truly is an ad hoc disaster movie. I just want to keep telling the main characters to stop opening doors. For @#$%'s sake, don't stand so close to the bed that we've made! There be monsters "lying" underneath it.
J.P. (Samara) Morgan Chase
And lastly, NEVER take big risks when there is background horror music playing. It's the first rule of horror movies! ;)
"Keynesian monetary policy" is sort of a misnomer though to describe current policies. Chicago-school monetarism -- what we're seeing today -- is not the same thing as Keynesian monetary policy, which is focused on the demand function and, specifically, placing the money into the hands of consumers, not of commodity speculators.
And by the way, Keynesian economics does have an explanation for stagflation caused by production limits on a critical non-substitutable resource, such as oil in 1973 and 1978 where major sources of oil were suddenly taken offline. If the unemployment is caused by the sudden unavailability of that critical resource, prices continue to rise because demand remains high (the problem is lack of supply, not lack of demand) despite the fact that you have unemployed people looking for work. It's the WW2 scenario -- lots of money floating around but not enough resources to produce consumer goods to buy with it -- except that during WW2 unemployment was basically non-existent because if you weren't working in the Manhattan Project or other such critical war industry, your butt was drafted, handed a gun, and sent somewhere. So anyhow, if you keep printing money in a deluded belief that this will put people to work, you just get price increases, not increased employment. This is quite readily described by Keynesian theory.
The WW2 solution to supply constraints was rationing to reduce demand, price and wage freezes, and war bonds to reduce the effective money supply by shifting it forward in time to after the war, after the supply constraints presumably had been lifted. Nixon tried the price and wage fixes to deal with the 1973 constraints but without rationing and war bonds, that was doomed to failure.
So anyhow, Keynesianism most decidedly *does* explain the 1970's stagflation. What it *doesn't* do is provide any remedy to the 1970's stagflation, because traditional Keynesian remedies are about increasing demand, not about increasing supply. So traditional Keynesian remedies are not useful when there's plenty of demand but limited supply of a critical blocking resource without which the economy cannot produce more goods.
That said, I do believe that JzB is correct that if Keynes had been alive in the 1970's, he would have factored this in to his equations and come up with something. But what, exactly, did get us out of the stagflation of the 70's? I would state that it was the shift in policy from one that balanced the investor and consumer classes to one that encouraged investment at the expense of the consumer class that ended stagflation by increasing supply and decreasing demand, and that Keynes might himself have come up with such a solution if he'd been alive in the 70's. But we'll never know, I guess.
- Badtux the Economics Penguin
BadTux,
"Keynesian monetary policy" is sort of a misnomer though to describe current policies.
You are probably right. I'm trying to use common sense to describe what I think I see, but as a physics guy and not an economist. I'm no doubt missing some of the more subtle details.
So anyhow, if you keep printing money in a deluded belief that this will put people to work, you just get price increases, not increased employment.
That is exacly what I think every time I see an economist offer negative interest rate solutions. As a saver, my very first instinct is to hoard goods and cut discretionary spending in response.That's not exactly the type of behavior that creates long-term jobs, especially in this service economy.
Note that you get the price increases with money supply increases *ONLY IF THE ECONOMY IS SUPPLY CONSTRAINED*. If the economy is *DEMAND* constrained, you get increased demand. At least, if you put the money into the pockets of consumers rather than into the pockets of speculators.
That's sort of a fundamental Keynesian observation, yo. Not exactly a "subtle detail".
Where Keynesian economics failed in the 1970's was in coming up with a prescription for what to do when the economy was supply constrained due to lack of a blocking resource, where Keynesian economics says you *don't* print money but had no prescription to otherwise deal with the situation. None of which has anything to do with Milton Friedman style Chicago monetarism, which basically says you can pep the economy up at any given time by simply ramping up the printing presses, regardless of whether the constraint is supply or demand and regardless of whether you're putting the money into the pockets of speculators or into the pockets of consumers.
I mean, this is sort of a *fundamental* difference between the two schools. Sorta like the difference between Harvard University and Uncle Joe's Beauty School. Yeah, they're both schools, but confusing the two ain't exactly easy unless you're trying.
(And as an aside, if you'd been paying attention in the 1970's when all this was going down, you would *know* this, because it was, like, even in friggin' *TIME MAGAZINE*, this being one of the rare eras when we had real journalism in America willing to explain complex stuff to ordinary people, all you had to do was pay attention. I mean, I was in friggin' *HIGH SCHOOL* and understood what I was reading there, it is *not* brain surgery!).
- Badtux the Fundamentals Penguin
Satisfying comments, Tux. Except this: "And by the way, Keynesian economics does have an explanation for stagflation caused by production limits on a critical non-substitutable resource, such as oil in 1973 and 1978 where major sources of oil were suddenly taken offline."
I think I have a book that talks about stagflation in 1970 or 1971. Does Keynesian economics have an explanation for that earlier event?
Given that the unemployment rate in 1970 averaged 4.9%, and the inflation rate in 1970 was 6.2%, I'm sort of baffled. Stagflation describes the phenomenon of high unemployment co-existing with high inflation. I would not personally consider 4.9% unemployment to be "high unemployment". 6.2% inflation is higher than historical norms but what you'd expect if you printed money in a period of mostly-full employment, i.e., quite predictable by Keynes. I.e., if someone was talking about stagflation in 1970, it must have been a theoretical construct, because there wasn't any such thing by any contemporary definition of the term.
One thing I'll also note is that there was also a demobilization from the Vietnam War that occurred starting in late 1970 (during which the "Vietnamization" process drastically reduced the number of troops in Vietnam, leaving principally advisors as air power became the principal U.S. contribution to the war) that likely increased unemployment. That likely explains the 5.6% unemployment in 1972 -- it took time for the economy to absorb the demobilized soldiers and put them to work. Still, we did not experience what I would consider to be real stagflation until the period 1975-1982, when we had both high unemployment and high inflation.
- Badtux the Numbers Penguin
"At least, if you put the money into the pockets of consumers rather than into the pockets of speculators."
And how exactly would (blunt edged) negative rate monetary policy be able to target which pockets the money goes into?
That's what I mean by a subtle difference.
And how exactly would (blunt edged) negative rate monetary policy be able to target which pockets the money goes into?
I think this is exactly why monetary policy loses its effectiveness at the zero interest bound. Fiscal policy - putting people to work rebuilding Vermont, for example - gets the money into then hands of the people who 1) need it, and 2) will spend it.
The entire country is crying for infrastructure rebuilding, and we give low interest money to rentiers.
It's a god-damned disaster.
Because the Fed is owned by creditors.
WASF,
JzB
And how exactly would (blunt edged) negative rate monetary policy be able to target which pockets the money goes into?
But Keynesian monetary isn't blunt-edged. It depends upon giving the freshly printed money out with strings attached that require creating economic activity in order to receive the money. Thus the Keynesian emphasis upon infrastructure projects, food assistance to the needy, and so forth -- all things where the money is handed out with strings attached. I.e., if you receive SNAP, you *must* spend the money on food -- there's no alternative -- and thus you foster the movement of money all the way through the food industry from grocer to distributor to processor to farmer, all of whom must themselves perform some sort of economic activity in order to receive their share of the money.
There's an argument (and Unca Milt made it) that this is *EXACTLY IDENTICAL* to just printing money and dumping it into the pockets of speculators. The thought being that money is fungible. If money is being given to bridge contractors, the thought is that money given to bridge contractors supplants other money that would be used to pay bridge contractors, which in turn ends up in the pockets of speculators. Unca Milt is perhaps correct if bridge contractors are operating in a realm of full employment. If not, if there are unemployed bridge contractors, then you are creating new economic activity by printing money to pay them rather than displacing activity.
Of course, then you have your classical/Chicago/Austrian economists who pooh-pooh the very notion of slack / underutilized resources. Which doesn't match with reality, which is that during downturns there are a wide variety of unused or underutilized resources, but then we're back to JzB's thesis that classical/Chicago/Austrian economists discard inconvenient facts that don't happen to agree with their theories. But in any event, you should now start to see the difference between Keynesian monetarism -- which is inherently tied to fiscal policy -- and Chicago school monetarism, which is about "pure" money printing.
- Badtux the Printing Penguin
BadTux,
Thus the Keynesian emphasis upon infrastructure projects, food assistance to the needy, and so forth -- all things where the money is handed out with strings attached.
You are talking about FISCAL policy. I'm talking about MONETARY policy as it relates to negative real interest rates.
Big difference.
Right, which is why it's hilarious to talk about "Keynesian monetary policy" because there's no such thing in abstraction, it is inherently tied into Keynesian *fiscal* policy. Monetary policy in abstraction divorced from fiscal policy has nothing to do with Keynesian economics, but, rather, is part of the Chicago school of monetarism. To attribute failures of the Chicago school to Keynesianism is the ultimate in hilarity, IMHO.
- Badtux the Sometimes-Keynesian Penguin
BadTux,
I agree with what you are saying. However, is Paul Krugman from the Chicago school too?
Zero lower bound blogging
But looking forward, the Taylor rule says that the Fed should cut rates a lot from here — in fact, to negative 6%.
...
This is why we need a huge fiscal stimulus, unconventional monetary policy, and anything else you can think of to fight this slump.
I'm fine with the huge fiscal stimulus, but the negative interest rate crap is literally "fueling" speculators.
Mankiw is the true nut job though, and I'm talking cuckoo crazy.
I would classify Krugman as a New Keynesian, which merges some attributes of the Chicago school with traditional Keynesianism. By unconventional monetary policy what he's talking about is monetary policy that puts money in the hands of people who are going to spend it. For example, if instead of simply buying U.S. Treasuries to print money (what the Fed currently does), you instead loaded up a helicopter with bales of $100 bills and dumped the loose bills over the 4th Ward of Houston (a deprived community with huge demands but a serious lack of cash to fulfill that demand), you would instantly create a huge amount of demand as those people rushed to Wal-Mart to spend the $100 bills they'd gotten as if manna from the sky. OR, let's say we have a debt overhang from too many people underwater on their mortgages. Unconventional monetary policy would be to immediately send everybody underwater on their mortgage a huge check to apply to the difference between what they owe and what their house is worth. The results would be to unfreeze the housing market significantly -- people would be able to sell their homes again, unlike now, where a majority of homes in many markets are locked up off the market because banks simply are not processing short sales out of some forlorn hope that housing prices will somehow take off and they'll somehow make back the 50% in value that homes have lost in many major markets.
The point being that "unconventional" monetary policy such as Krugman is describing does not look like the conventional monetary policy that the Fed is currently practicing which comprises buying and selling investment-grade instruments such as Treasuries or mortgage-backed securities on the open market. Which is a shame, because even Milton Friedman admitted that you had to resort to "unconventional" monetary policy at the zero bounds, and "Helicopter" Ben got his nickname by approvingly quoting Friedman to that effect. But the political courage to do something along those lines is lacking, Helicopter Ben is *not* cranking up his helicopters to do air drops over the 4th Ward or over South Phoenix.
- Badtux the Unconventional Penguin
BadTux,
I think we're pretty much in agreement on this now.
But the political courage to do something along those lines is lacking, Helicopter Ben is *not* cranking up his helicopters to do air drops over the 4th Ward or over South Phoenix.
I hear that. He's convinced hyperinflationists that the helicopters are running non-stop. I've yet to see one of these helicopters though.
By the way, I generally use Ben "There Is No Housing Bubble to Go Bust" Bernanke over "Helicopter" Ben.
This quote sums up my view of Keynesian vs monetarist policies.
Keynesians, however, remain skeptical about the effectiveness of monetary policy. They point out that expansionary monetary policies that increase the reserves of the banking system need not lead to a multiple expansion of the money supply because banks can simply refuse to lend out their excess reserves. Furthermore, the lower interest rates that result from an expansionary monetary policy need not induce an increase in aggregate investment and consumption expenditures because firms' and households' demands for investment and consumption goods may not be sensitive to the lower interest rates. For these reasons, Keynesians tend to place less emphasis on the effectiveness of monetary policy and more emphasis on the effectiveness of fiscal policy, which they regard as having a more direct effect on real GDP.
Cheers!
JzB
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