Monday, February 6, 2012

Good sentences on Keynesianism

From Karl Smith: "The point, however, is getting all wrapped up in government policy is likely to obscure your vision of how the economy works. And, it is working in a way that looks thoroughly Keynesian to me." (emphasis mine)

Some people obsess about government and the economy. Some people put it center stage in explaining what ails us in the economy. When you view things like that, of course, "what the government should do" either by intervening or cutting back intervention, is what you go to first in thinking about economic fluctuations. That's the wrong way to look at it. The economy is a dynamic system with its own laws of motion. Yes, there are smart things a government can do and dumb things a government can do, and I personally try to advocate the smart things and criticize the dumb things. But that can't be the center of how you see the economy working.

This is why, when students learn Keynesianism, they first learn a model without government in it. This is why Keynes didn't talk about government until later in his book. The market isn't helpless without government, and you have to understand it's laws of motion before you start thinking about what you might or might not want government to do.

[There's lots of other good stuff in Karl's post - including a discussion of thinking about the future]


  1. Even if one presumes the nonexistence of government, the models of Keynesianism would reflect similar results in a world where private sector conducts fiscal stimuli.

    Instead of a rise in G, you look at the rise in I.

    And private individuals have conducted stimuli during panics, as J. P. Morgan did in 1905.

  2. An excellent point.

    When I taught my students how to derive the multiplier, I kept everything in on the RHS so the multiplier was a coefficient on: (1.) autonomous spending, (2.) investment, and (3.) government spending. Old Keynesianism loves all three of 'em.

    And then we reasoned through the fact that a straight-up multiplier implies a much bigger effect than we actually observe. Why the discrepancy?

    That motivates a discussion of crowding out in the loanable funds market and rising demand for cash from increasing income levels.

    No student at AU is taught that everything relies on government or that government responses are costless.

  3. I think you misinterpret how Vedder and Gallaway reached their conclusions. They didn't start with government, they ended with government. They have a specific view of how the economy works, and it's not Keynesian, and thus they conclude that if there is mass unemployment then it must be the fault of government. Out of Work revolves around theory that affirms their conclusions. They aren't the first and only economists to blame mass unemployment on government.

    1. First, this: "they conclude that if there is mass unemployment then it must be the fault of government" is precisely my point about Vedder and Gallaway.

      Second, I'm still P.O.ed about them, so forgive my dragging them in.

      QJAE editor just emailed and said no guarantee, but prospects for my reply are good because the editors like to facilitate exchanges between authors.

    2. Right, but they didn't reach that conclusion from starting at the end (as you seem to think). They reach that conclusion because they believe the free market cannot possibly lead to mass unemployment.


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