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The Keynesians Answer Back

Last week's debate has naturally generated some response from defenders of Keynes who have found fault with my and Jamie Whyte's characterization of Keynes's views, or who have simply found fault with our…personalities!

Over at Tax Research UK, for instance, Richard Murphy and some of his friends observe that, besides being humorless, Jamie and I must also lack the basic human ability to "empathize" with others (which is, when you get down to brass tacks, just a tiny step away from coming right out and calling us a couple of sadists), for how could we otherwise be opposed to unbridled government spending and bailouts? Concerning the last, Mr. Murphy takes for granted that in suggesting that insolvent banks ought to have been allowed to fail I meant that they ought to have been left to collapse, leaving depositors out in the cold. Murphy's implicit view that collapse is the only alternative to bailouts is of course one that insolvent bankers themselves are happy to see promulgated. Nevertheless it is perfectly unfounded, as I indicate in my contributions to the blog in question, where I refer to what some have styled the "Swedish" alternative.

At Social Democracy a post-Keynesian blogger who styles himself "Lord Keynes" similarly misinterpreted my "liquidationist" stand, inviting what became a long exchange with me there that was interesting in part because by engaging in it I learned that trying to argue with a dreaded Post-Keynesian can after all be a lot more rewarding, as well as a lot more pleasant, than trying to argue with many Rothbardians!

Finally, at Prime another post-Keynesian, Victoria Chick (who I reckon one of my favorite "Keynesian" economists, for what it's worth) accuses Jamie Whyte and me of committing eight serious "fallacies" in our part of the debate. As I only just finished replying to her post, and my answers–one for each of the supposed "fallacies"–still await moderation, I reproduce the latter here (you must consult the original blog for the accusations themselves):

1. Hayek as “an opponent of financial excess”

The suggestion that deregulation was responsible for the sub-prime excess is unfounded. The Glass-Steagall “repeal” of 1999 merely allowed investment banks to have commercial bank subsidiaries; since it was the investment banks themselves rather than their (smallish) commercial bank subsidiaries that got in hot water, the reform made no difference except by making it easier to rescue tottering stand-alone investment banks through bank mergers. As for deregulation in the ’80s, the supposed link to the sub prime boom here is too obviously tenuous to be worthy of comment.

2. Keynesian policy as “promoting the big state”

It’s true that Keynes himself was what today would be considered a (long-run) fiscal conservative. This is a point I myself made in an excised portion of the debate. However it is also true that the Keynesian suggestion that expansionary policies are generally capable (see below) of combating non-trivial levels of unemployment has been seized upon by politicians as justifying government profligacy.

3. The inflation of the 1970s as “the fault of Keynesian policies”

I don’t recall myself blaming “Keynesianism” for the inflation of the 70s. On the contrary: in part of the debate that was edited I specifically observed that Keynes had been a consistent advocate of price-level stabilization. As for the 70s, in the U.S. inflation started creeping up in the 60s, partly because of the Vietnam war but also at the urging of prominent self-styled Keynesians who insisted that higher inflation would bring lower unemployment, as had appeared to be the case earlier in the decade. The so-called stable “Phillips Curve” is not something critics of Keynesianism invented: it was the brainchild of self-styled Keynesians themselves, and it did certainly play its part in the Vietnam-era escalation of U.S. inflation rates.

4. Keynes as “advocate of deficit spending”


5. Keynes as “a supporter of wasteful expenditures”

Whether he intended the consequence or not, Keynes’s “pyramid building” rhetoric licensed wasteful government spending. It’s a shame that he isn’t around to assail those who have abused his arguments so. But even a smallish dose of public-choice theory should have sufficed to predict what politicians would make out of the suggestion that any sort of spending is capable of combating depression and, indeed (if Lord Skidelsky is to be taken at his word) capable of promoting long-run economic growth!

6. Roosevelt’s New Deal as “trivial in scale and impact”

Romer wasn’t “compromised” by her earlier writings on the New Deal: she was simply embarrassed by them once she found herself leading the economic team of an administration committed to fiscal stimulus. The evidence and argument contained in her key writings on the 30s remain as solid as ever. Moreover, she is far from alone in having argued that major components of the New Deal, and the NRA especially, were either ineffective or actually counterproductive in ending the depression.

Indeed, Keynes himself believed that the NRA would impede rather than hasten recovery, and said so in a letter to Roosevelt written after the act’s passage. The letter reads in part,

“I am not clear, looking back over the last nine months, that the order of
urgency between measures of Recovery and measures of Reform has been duly
observed, or that the latter has not sometimes been mistaken for the former. In
particular, I cannot detect any material aid to recovery in N.I.R.A., though its
social gains have been large. The driving force which has been put behind the
vast administrative task set by this Act has seemed to represent a wrong choice
in the order of urgencies. The Act is on the Statute Book; a considerable amount
has been done towards implementing it; but it might be better for the present to
allow experience to accumulate before trying to force through all its details. That
is my first reflection–that N.I.R.A., which is essentially Reform and probably
impedes Recovery, has been put across too hastily, in the false guise of being
part of the technique of Recovery.”

(Interested readers can read the whole letter here.)

7. The 2008-9 financial rescue as “‘Keynesian”

Well, here is Keynesian support for bank bailouts. Q.E.D.

By the way, it has been suggested by some (not here) that in opposing such I in effect favored simply letting banks collapse. But the suggestion that collapse is the only alternative to bailouts ignores what some term the “Swedish approach”, which was the alternative I had in mind.

8. The failure of stimulus as “a failure of Keynesian policy”

Sorry, but it’s back to pyramids again: the Keynesian argument is that the problem is solely one of inadequate demand, so that, much as public works and such might be preferred, any sort of fiscal [stimulus] should help; and it was on such grounds that U.S. proponents of fiscal stimulus didn’t trouble themselves over just where stimulus money would go in arriving at their (ultimately very wrong) estimates of the “multiplier” effects we could all look forward to. If more orthodox Keynesians think that all this was a mistake, I am glad to hear it. But they still need to explain how to reconcile their ideal stimulus with the workings of real world (democratic) governments.

Addendum: Soon after this posting Mr. Murphy shut-down comments on his blog entry. Perhaps I'm being too uncharitable in supposing that this had anything to do with the accumulation of negative feedback he was receiving, much of which was evidently from sympathetic, regular readers. Mr. Murphy, in any event, allowed himself the following last words:

"Trouble is – I’ve never known an empathic person who can find a cent of sympathy for Hayek and Hayekians."

Meaning, I surmise, either (1) that he couldn't hear all those people shouting "Yo Hayek" in the BBC podcast or (2) that he maintains that every one of them was incapable of empathy.

Methinks the man doth protest too much.