Wednesday, August 18, 2010

Keynes and the crisis

"The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history. But now that the man in the street has become aware of what is happening, he, not knowing the why and wherefore, is as full to-day of what may prove excessive fears as, previously, when the trouble was first coming on, he was lacking in what would have been a reasonable anxiety. He begins to doubt the future. Is he now awakening from a pleasant dream to face the darkness of facts? Or dropping off into a nightmare which will pass away?"
- JMK, "The Great Slump of 1930"

- For my non-economics-inclined readers, David Indiviglio offers a very good, clear, simple account of why Keynesians are often skeptical that monetary policy will work in depression conditions.

- Paul Krugman discusses what we would expect to see with a liquidity preference theory of interest and what we would expect to see with a loanable funds theory of interest, and comes down on the liquidity preference side. Keynes adamently said in a 1937 article on the subject that he had a pure liquidity preference theory of interest, and not a hybrid approach like Hicks's. I'm personally more of a Hicksian, and I think Keynes might have been too, eventually, if he weren't as enamored with his General Theory. I imagine Krugman is more of a Hicksian himself, but for the purposes of this post the sharper contrast Krugman presents is fine.

- Robert Skidelsky argues that the ECB and European governments are worrying about the wrong problems.

Economic crisis wiki?
So some comments on this post got me frustrated that (1.) my "necessary but not sufficient" approach to macroeconomics is still coming across as "us vs. them", and (2.) apparently my arguments and evidence are still unclear to regular readers of this blog. So here I appealed to people for advice on free wiki software. My thought was this - it seems like it would be valuable to set up an economic crisis wiki to construct an evolving narrative of what caused the economic crisis. I think Keynesian processes have been important, but I don't think that's the only thing going on and I don't think Keynesians processes dominate other downturns. It seems to me some sort of wiki platform would allow people of different views to construct a narrative over time of what happened. People more knowledgeable about finance than I am could fill in more detail on the events of late 2008 and their relevance. You could link to data and other sources. My concern, of course, would be that it would turn into Wikipedia's economics articles, where you have something passable as an introduction to a topic and then a series of "well X disagrees because of this, this, and this". Wikis seem prone to the continuation of the same approach that I think is the problem with macroeconomics - the idea that these theories have to conflict, rather than that they are all describing real processes that operate simultaneously. I'm not sure how you would cut down on that sort of entrenchment that happens on Wikipedia? And then sometimes there are just bad ideas - you'd want to differentiate between cases where an argument is actually bad and an argument that is framed in an unnecessarily combative way. When I get a little more time I think I may check out the options on this. It seems like it might be a good idea. I've mentioned various things in the past on here, but they're scattered across dozens of blog posts. It would be nice to have an assembled, evolving narrative that incorporates multiple views on the crisis in a real synthesis.

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