Wednesday, June 6, 2012

John Cassidy gives up on defending Keynesianism to the skeptics

(HT Russ Roberts) What do you think?

He writes: "The reaction to the May employment report has been depressingly predictable: Republicans have been gleefully proclaiming that President Obama’s fiscal stimulus didn’t work. Many people who commented on my post about the political impact of the job figures parroted the same line, arguing that the lacklustre economy demonstrates Keynesianism is a bust.

Having spent much of the past three years reading and writing about this subject, I wonder whether it is even worth engaging with these arguments. The aversion to government spending, and government activity generally, which animates many Americans isn’t actually based on economics, or logic: it is an emotionally driven belief system, founded upon a cockeyed view of American history and buttressed by a variety of right-wing shibboleths."

I can definitely sympathize with this, but clearly because I maintain this blog the way I do, I think the stakes are high enough that its worth engaging. The other reason is that while there are frustrating skeptics out there, there are good, reasonable ones too.

I liked this point by Cassidy as well: "The real policy debate isn’t about Keynesianism versus the free market, it is about magnitudes and techniques: How much stimulus is necessary? And how should it be divided between government spending and tax cuts?" And we could throw in "how should it be divided between fiscal and monetary policy?".

Those are the really interesting questions, not this false choice between Keynesianism and free markets. This is another big reason why Keynesians hate talking to a lot of the skeptics. "Debating Keynesianism" to them means accusing Keynesians of not advocating, not trusting, or not understanding the market.

Put yourself in our shoes. What if I harangued Bob Murphy every day for being an Austrian and not understanding the importance of markets. He'd get pretty tired of it and he'd feel justified in thinking I'm a little ignorant of what he thinks.

Now, there is room for legitimate disagreement. They often think that government and markets are more or less a contradiction. We don't (like I've said before - I'm not a libertarian because I don't think it's strong enough on liberty). That's obviously why these discussions of markets occur. Hashing that out is valuable. But you really need that understanding of the source of the disagreement, otherwise you end up telling Keynesians they don't like markets and Keynesians end up thinking you're a cooky ideologue.


  1. I think this perceived antagonism between Keynesianism and markets is grounded in how both sides of this argument frame themselves. Libertarians present themselves as friends of free markets all the time, making very few (and qualified) concessions, whereas Keynesianism, being the most influential of macrotheories, is a staple of a left-liberal academia that hasn't been completely kind to markets over the last century.

    Of course it's nonsense to claim that any concerns about aggregate demand is a slippery slope to a control economy and a massive welfare state, but I haven't met very many Keynesians who truly share the conception of free markets and small government presented by libertarians. Another cause of the confusion is that the most visible advocates of stimulus aren't even economists, but liberal journalists, talking heads and bloggers who are all too eager to repeat the idea that the poor are rotting in the streets because of the evil markets.

    Not to say libertarians aren't also culpable - it's probably very tempting for arrogant 19-year old freshmen who've just discovered Mises and Rand to challenge established anti-market agents of Big Brother such as yourself! It's also very hard to abandon one-dimensional political spectra based on shallow affiliations, and instead form opinions as a process of values vis-à-vis tradeoffs.

    1. "established anti-market agents of Big Brother such as yourself!"

      Both adjectives there being completely fallacious, of course :)

    2. There is no scientific guideline at which point a government is 'intervening' in the economy. From the ground up, decisions about legislation impact the workings of markets. This is before we even get into the fact that firms with market power also have a notable impact, particularly banks, who decide where capital flows to.

      Reminds me of a comment I once saw: "Libertarians only want the state to intervene when they want it to. This is completely different from non-libertarians, who only want the state to intervene when they want it to."

    3. Of course, the anarcho-capitalists *think* they gotten around this by having "no" state. But really all they have done is make _The Ethics of Liberty_ or something else like that their state.

    4. They also appear to endorse the idea of insurance companies to provide what are commonly considered public goods, whilst simultaneously defending monopolies. So if an insurance company that can use force is the only game in town, what does that make it??

  2. Of the people who have commented thus far on this post (including Daniel himself), I am most sympathetic to Watoosh. So as a disclaimer, yes of course I have seen confident teenage libertarians spouting off critiques of (say) neoclassical utility functions when they obviously don't know what they're talking about.

    However Daniel, I really think this is an abuse of language when you write: ...not this false choice between Keynesianism and free markets.

    There is no meaningful definition of "free market" that matches up with "Keynesian" or (I imagine) your own specific worldview.

    If you want to walk that back and say that you are a supporter of "markets" or of "the market," OK I am fine with that. You obviously aren't a socialist, and I get why it would frustrate you to be lectured on the benefits of decentralized markets.

    Yet, I really do think you are changing the meaning of words if you say you support "the free market." For example, do you favor the legalization of all drugs, getting rid of the minimum wage, abolishing OSHA and the FDA, and getting rid of any other licensing laws that still survive?

    I don't know exactly your policy views, but unless you agreed to all of the above, I don't think you support "the free market." That's just not what the term has meant in American political economy for 100 years.

  3. I don't think it's really fair to claim "the free market TM" for absolutists alone. In terms of political reality in the last 50 years or so, it makes sense to talk about people who favored both free markets and for example, licensing of doctors.

  4. Anonymous, OK, I am willing to be big tent on this. But there's no way on God's green Earth that I will ever agree with Daniel that it makes sense to include Paul Krugman and Keynes himself as people who recognize the virtues of "the free market," and say that there is a false dichotomy between Keynesianism and the free market. Can you agree with me on that?

    So yes, if you want to draw the boundary line somewhere towards the "allows for gov't intervention" past not only Rothbard but also Friedman and Ayn Rand, OK that's fine, but it has to stop way the heck short of Krugman.

    1. I don't know Bob. A lot of people look at the coercions that libertarians don't mind and really scratch their heads over how they could feel such ownership of the phrase.

      The other thing is a Xeno's paradox issue. Yes, even aside from the coercive externally imposed costs where I actually think you guys are anti-liberty there are things I would have the government do that you wouldn't. You seem to think this puts "free market" out of bounds. But the same discussion goes on with democracy. Clearly we aren't a "pure" democracy - we have republican structures that alter a "pure" democracy somewhat. If you told vocal advocates of the 1789 Constitution that they cannot claim to be supporters of democracy or "recognize the virtue" of democracy for that reason, they wouldn't think much of the accusation. You clearly draw Xenos line at a very different place than most of the rest of the population.

      And there is a word for that - not "free market economist" but "anarcho-capitalist" or "Rothbardian". You are very different, we all are clear on that. That should be demarcated somehow. But I'm not sure cordoning off "free market" as your own private reserve is a sensible solution. Certainly its a solution that would confuse a lot of people outside the libertarian community.

      If you asked the average AEA member whether they support free markets, I'm guessing they would say yes. If you insist to them that they actually don't I think they'd be confused. I'm not sure your sense of the term is as widespread as you like to think.

      I have to say, I do hate broad, vague critiques of "the invisible hand" for precisely this reason. Stiglitz, much as I like him, is guilty of doing this a lot. Krugman does it on occasion as well. I hate it because it reinforces the false dichotomy. To my ears, when Stiglitz and Krugman do this and basically forfeit the terminology it sounds like a libertarian forfeiting the word "freedom" to the Bush administration.

      But of course the Bush administration thought they were being genuine in their claims about freedom, just like you feel like you're being genuine in your claims to free markets. People see things differently, that's the bottom line.

    2. Of course, there are some disagreements regarding what free-markets look like. Things such as Piguvian taxes, intellectual property rights et al are different ways to view free markets. But surely, the massive fiscal interventions advocated by Keynesians in certain times is way outside free markets. So are many regulations. (I'm thinking of things such as capital requirements as opposed to say disclosure requirements) That doesn't necessarily mean advocates of such things do not recognize value in free markets, but they cannot be legitimately be said to be favoring free markets.

  5. Two things I've forgotten to mention:

    (a) The idea that less legislation will make a market 'freer' ignores the theory of the second best - for example, many 'free market' advocates would want to remove legal privilege for both unions and monopolies. However, if you do only one or the other you create a situation in which the market is far less 'free', but free marketeers would see this as a good move; a move towards 'free markets.'

    (b) The idea that all regulations 'hamper' the market in the name of some other goal. This just isn't true - stopping arms races can make everybody better off (e.g. the famous example of hockey players who didn't wear helmets to look tough, but were happy when it was legally required for them to do so). Furthermore, laws that protect people from risk can encourage risk taking and make an economy more dynamic - limited liability, consumer protection, even safety nets for workers.

    1. The theory of second best says nothing of freedom. It speaks of economic efficiency. While many free-marketeers do believe that economic prosperity will result from freer markets, that does not make the two terms identical. Most supporters of free markets will readily admit that sometimes a market failure occurs and the government by resolving it will make market participants more prosperous. It is the ability of the government to do so reliably that we question.


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