Thursday, May 19, 2011

Some Keynes links

- Giovanni Dosi talks about the confluence between Schumpeter and Keynes at the Institute for New Economic Thinking website. I think this is very important. Some people see Keynes as saying "saving is bad and spending is good". I think that's a strange way to look at it. I see Keynes as saying "investment is good and investment doesn't always match up with savings". The latter perspective, which stresses animal spirits, etc. - this sort of view of Keynes that is more common at the Institute for New Economic Thinking - is quite commensurate with a Schumpterian entrepreneurial view of the economy.

- Brad DeLong defends Keynes against Jacques Rueff booster Benn Steil.

- Dominique Strauss-Kahn is in the news for things besides his economics, but his vision for the IMF has been similar to that of Keynes. He has pushed for the broader Keynesian vision of the IMF in the past, which was vetoed at the Bretton Woods conference. Strauss-Kahn is out of the picture, and that is a good thing. But that's not going to stop people from making this point about the role of the IMF. I don't think we've heard the end of plans for the SDRs that more closely mirror Keynes's original vision of the bancor.

- Finally, I recently came across a collection of John Maynard Keynes's Newton related papers. It's mostly letters, invoices, etc. associated with his efforts to collect Newton's papers in the 1940s. There's some really fascinating stuff in here.

And a quiz - who called Keynes a "well-known bourgeois and implacable enemy of Bolshevism"?


  1. I don't know what the original vision of Keynes for the IMF was, but I understand, from the book of IMF insider Frederic Mishkin, that it was initially meant to be an international lender of last resort.

    Now, however, it has become a lender of first resort, and the only lender to be resorted to, for many Third World governments. The IMF has carelessly wasted so much money on Russia and Indonesia, that it has virtually subsidised failure and lack of honesty in those governments. Obviously, any government that isn't failing is less likely to get IMF funding. And a government that is, will get continuous lending of long term loans at low rates. It is basically free money.

    While banks may impose conditions on households to whom they lend, the IMF can't bind conditions on households. And political pressures mean that they have to continue lending, not stop lending, so all their conditions can never be implemented. What a wasteful source of moral hazard.

  2. By the way, I don't want to push it too much, but I really think you should read and comment on Skidelsky's Democracy v. Finance whenever you get the time.

    I ask it, because I think you as a moderate Burkean would have a lot to say about those who believe traditional institutions and systems should be undermined, if they lead to greater democracy.

  3. The same guy who also wrote:

    "the best way to destroy the capitalist system [is] to debauch the currency."

    and nailed what politics is actually and always about:

    He was pretty smart.

  4. Prateek Sanjay,

    "It is natural for opposition politicians to want to exploit a government’s difficulties to win power. But a fiscal crisis calls for political self-restraint. Opposition parties should refrain from shorting their government politically at a time when markets are doing so financially.

    "Ideally, there should be a time-limited all-party agreement on a plan of action, which would represent the limit of what is politically feasible. Unfortunately, political disunity in the face of financial pressure always ends up being far more damaging to democracy and the economy than instinctive patriotism."

    I don't know anything about European politics, but this sounds like he's asking that all parties with their very different agendas come to a politically impossible agreement instead of choosing a course by whoever wins the vote. Is it even feasible that there could be an agreement like this?

    Based on his points, I think he's just backing up an argument for the PIIGS to get out of the Euro. It seems like the only option he leaves.

  5. Kuehn,

    What does Skidelsky mean by:

    "John Maynard Keynes wanted to force surplus countries to either spend or lend."

    It too closely matches my uncharitable view of Keynes as a violent usurper who wanted to centralise way too much power. So I must be wrong...

  6. This is a good opportunity to answer mobsrule's question and clarify Prateeks point of what I mean by Keynes's view of the IMF.

    Keynes essentially wanted the IMF to be a global central bank and an institution for clearing international transactions. He wanted to create the bancor as a new reserve currency - a move that was opposed by the U.S. who saw the emergence of the dollar as a reserve currency as an important strategic opportunity. Having a non-national reserve currency like the bancor would avoid the Triffin dilemma that finally broke the Bretton Woods system in 1971. It would also more easily allow for global monetary expansion which was previously contingent on the speed with which we could dig yellow metal out of holes in the ground.

    The point about "forcing surplus countries to spend or lend" is a reference to Keynes's plan to tax current account surpluses through his proposed International Clearing Union (we got the current IMF instead of the ICU) to put into the reserve fund. Because the bancor would have a fixed exchange rate with national currencies, deflationary pressure would force current account deficit countries to balance their accounts. The idea was that current account balances would tend toward zero.

    That's the gist of it. Recent proposals I've heard for a Keynes-like reform of the IMF is to have SDRs play the role of the bancor but with floating exchange rates with national currencies. This seems more consistent with what Keynes advised in 1923 in the Tract on Monetary Reform, where he touted India's policy of devaluing currency and keeping domestic prices stable. It would be interesting to look into exactly why Keynes started advocating fixed exchange rates in the 1940s.

  7. Why should current account balances tend towards zero?

    Supposing that incomes of people in Nigeria start rising a little faster, and instead of exporting their oil, they start consuming more of it at home as they buy more automobiles, and start causing Nigeria to have a current account deficit.

    Would this be an undesirable situation?

  8. Kuehn,

    Would you answer Prateek Sanjay's question? I don't understand why countries would allow themselves to be forced into a regime where a one-world bank taxed a country for (in aggregate) deferring consumption. This sounds like Fazzari's "there is no savings" writ large.

  9. I don't see a good reason for it either Prateek.

    Maybe on very excessive ends like the Chinese surplus and the U.S. deficit. These imbalances have the potential to create debt bubbles like we just saw, as well as discontinuous currency adjustments (although this is ruled out in Keynes's fixed exchange rate system... which also seems odd to me). But even on the extreme end there are reasons for it: oil producing countries, etc.

    The more appealing element of Keynes's plan to me is the non-national reserve currency - not the fixed exchange rates, and not the current account surplus policies.

  10. "He wanted to create the bancor as a new reserve currency - a move that was opposed by the U.S. who saw the emergence of the dollar as a reserve currency as an important strategic opportunity."

    Why have a reserve currency at all? And honestly, it has had a bunch of terribly long term consequences for the U.S. It helps along American militarism for one thing.


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