Tuesday, July 24, 2012

Two Keynes links

1. John Gray asks "what would Keynes do?", HT my lovely wifey. There's lots of great discussion of his evolution since Bloomsbury, but this was the real meat of the article: "It's hard to imagine Keynes sharing such a simple-minded view. As he would surely recognise, the problem isn't just a deepening recession, however serious. We face a conjunction of three large events - the implosion of the debt-based finance-capitalism that developed over the past twenty years or so, a fracturing of the euro resulting from fatal faults in its design, and the ongoing shift of economic power from the west to the fast-developing countries of the east and south.

Interacting with each other, these crises have created a global crisis that old-fashioned Keynesian policies cannot deal with. Yet it's still Keynes from whom we have most to learn. Not Keynes the economic engineer, who is invoked by his disciples today. But Keynes the sceptic, who understood that markets are as prone to fits of madness as any other human institution and who tried to envisage a more intelligent variety of capitalism."

I think this is right and important to consider. We have an aggregate demand problem because of the financial crisis, the eurozone problems, and probably some more secular savings glut/transitional issues too. The demand problem has a clear government response. But we should not forget the causes of the demand problem, and we should not expect demand management to fix a broken banking system or currency union. We have no reason to expect that out of demand management. That requires other solutions.

2. LK contrasts the economic system of Marx and that of Keynes. The two - obviously - are like night and day. A Keynesian social order is non-sensical without private property, decentralized ownership and decision making, and free citizens. Marx and Communism even before Stalinism, was adamantly opposed to all of this. Marx had some interesthing things to say. I've particularly enjoyed reading his thoughts on Jean Baptiste Say and general gluts. In a lot of ways he did better than Malthus on all that. He's an interesting guy, but he was still a theorist of brutality. This idea that Marxism was sanitary before Lenin and Stalin came along to muddy it up is complete hogwash. The totalitarianism is all there in the original. It's not that it had to wait for Lenin and Stalin - it was always there, it's just easier to turn a blind eye to when it's on paper. This is not to condemn all socialism (although I think it's a foolish thing to get caught up in). Strictly identifying Marxism with socialism writ more broadly is a mistake that unfortunately a lot of Americans make.


  1. Regarding the BBC article by John Gray...I saw that earlier today. I agree with Gray that Keynes himself was a much more flexible and adaptable character when he was alive, so his solution to the global financial crisis would probably have been much different if Keynes were to come back and see what has transpired.

    Regarding Marx and Keynes - according to Dr. Michael Emmett Brady, like Adam Smith, all three have one thing in common: an opposition to unbridled speculative activity. Dr. Brady agrees with Keynes by saying that Marx's central error was to follow in Ricardo's footsteps.

    Note that neither Brady nor I agree with Marx's conclusions or policy implications. I, like Brady, am just pointing out a historical attitude toward speculative activity. I wonder if some historian of economic thought has written a book on this or something...

    1. Question for you BA.... What, according to you, is "speculative activity"?

    2. Out of curiosity, why do you ask? It's not that the question is a bad one, speculation itself can be difficult to define, but Graham does provide a good explanation for it, at least according to Wikipedia.

    3. Graham wrote: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

      Who's "thorough analysis" though?

      In most cases an investor believes he has "safety of principal and a satisfactory return" otherwise he wouldn't invest. Start-up companies are only a partial exception, the investor who puts money in 50 start-up companies knows many will fail, but believes that those who succeed will ensure a good return to counteract the failures.

      Economics has to have clear definitions. Now, how would you separate "speculative" investments from others?


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