The Keynes Hayek Rematch

Keynes and Social Democracy Today

Argentina s Use and Abuse of Keynes

Keynes versus the Classics Round Two

The Triumphant Return of John Maynard Keynes

Keynes called this the paradox of thrift saving slows down recovery.

Keynes looked forward to a time, perhaps 2050, when everyone (in England, at least) would be able to have the lifestyle of a Keynes. And, because he imagined that no sane person could want more of the necessities, conveniences, and luxuries of life than a Keynes had, the economic problem would be solved.

As Paul Krugman recently reminded us, John Maynard Keynes perhaps put it best

Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies profit expectations. Hayek demands more austerity, Keynes more spending.

Ferguson s cause is American neo conservatism, coupled with a relentless aversion to Keynes and Keynesians. His latest defense of fiscal austerity came immediately after the United Kingdom s recent election, when he wrote in the Financial Times that, Labour should blame Keynes for their defeat.

Similarly, Keynes watched in horror as economic policymakers blundered repeatedly in the years following WWI, through the upheavals of the 1920s, and into the Great Depression of the 1930s. In 1925, Keynes criticized the insouciance of those who sit in the top tier of the machine.

Some 70 years ago, during the Great Depression, John Maynard Keynes formulated his theory of unemployment, which described how government action could help restore full employment. While conservatives vilified him, Keynes actually did more to save the capitalist system than all the pro market financiers put together.

A few years later, Keynes proposed a fix to the problem. In The General Theory of Employment, Interest, and Money, Keynes explained how booms are created when investments which will in fact yield, say, 2 in conditions of full employment are made in the expectation of a yield of, say, 6 and are valued accordingly.

If globalization is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.

The British economist John Maynard Keynes worried that countries would not use sterling to settle trading balances with each other if the pound were not viewed as a reliable store of value. The future position of the City of London, according to Keynes, depended on the pound sterling continuing to serve the business world as the equivalent of gold.

The Giants, who have now lost four of their last five matches, are at home to Milton Keynes in their next match on Friday.

But I do think that this discussion is the most important debate in the field of macroeconomics since John Maynard Keynes wrestled with similar questions in the 1930s. For Keynes, the answer was clear, and it was something close to what is being argued by Summers and Krugman indeed, his conclusions are what transformed him from a monetarist into a Keynesian.

Kicillof has gained international recognition as the public face of Argentina s fight against the so called vulture funds that want to extort full payment on Argentine bonds that they purchased for a few pennies on the dollar. But, before joining President Cristina Fernández de Kirchner s cabinet, Kicillof was known in Argentine intellectual circles as the author of the book Volver a Keynes (Return to Keynes).

Argentines today feel much like Dorothy did when she first landed in Oz they are not in the safe and familiar Kansas anymore. But Keynes is not to blame.

So, for all his distinction as a philosopher of freedom, Hayek deserved to lose his battle with Keynes in the 1930 s. He deserves to lose today s rematch as well.

The most notorious symptom of this was the emergence of stagflation simultaneously rising inflation and unemployment. Something had gone wrong with the system of economic management bequeathed by John Maynard Keynes.

But this was just the flip side of what Keynes had worried about insufficient global aggregate demand. The search for return contributed to the reckless leverage and risk taking that underlay this crisis.

Over the following century, economists like John Stuart Mill, Walter Bagehot, Irving Fisher, Knut Wicksell, and John Maynard Keynes devised a list of steps to take in order to avoid or cure a depression.

This kind of problem already worried John Maynard Keynes at the time of the post World War II Bretton Woods negotiations. Outsiders can force a country to spend less by refusing to lend to it.

After initial dislocations, the eventual outcome would fulfill John Maynard Keynes dream of an international currency system in which both creditors and debtors share responsibility for maintaining stability. And Europe would avert the looming depression.

And Hayek found it reassuring to know that he and Keynes agreed so completely. This raises the question What is really preventing economists and policymakers from devising or even seeking a unified theory of economics?

As John Maynard Keynes recognized, trade restrictions can protect or generate employment during economic recessions. But what may be desirable under extreme conditions for a single country can be highly detrimental to the world economy.

At first glance, Kicillof seems to be correct this looks like textbook Keynesian reflation. But Keynes would not have approved of the macroeconomic policies pursued by Fernández and her predecessor and husband, the late Néstor Kirchner.

In The General Theory of Employment, Interest and Money, Keynes ends by summarizing the strengths and weaknesses of the capitalist system. On one hand, capitalism offers the best safeguard of individual freedom, choice, and entrepreneurial initiative.

The neo classical revolution believed that markets were much more cyclically stable than Keynes believed, that the risks in all market transactions can be known in advance, and that prices will therefore always reflect objective probabilities.

Keynes saw that it is the financial markets precariousness which creates no small part of our contemporary problem of securing sufficient investment. That rings truer today more than 70 years later than in his own day.

Economics does not have an ideology, he retorted. Quoting John Maynard Keynes, he pointed out that economics is a method that helps people to think straight and reach the correct answers, with no foreordained policy conclusions.

True, great thinkers like John Maynard Keynes and the late Nobel laureate James Tobin floated various ideas for taxing financial transactions as a way to reduce economic volatility. (Tobin s tax applied specifically to foreign exchange trading.)

This, once again, calls for an activist government policy. Yet, as Keynes would have argued, it is important that the expansion of government involvement is informed by sound economics rather than political ideology, social democratic or otherwise.

But I would argue, as Keynes did, that the boom, not the slump, is the time for austerity at the Treasury. To try to cut spending in a slump, as Osborne is doing, is to prolong the slump.

Moreover, for Keynes, t he game of professional investment is intolerably boring and over exacting to anyone who is entirely exempt from the gambling instinct whilst he who has it must pay to this propensity the appropriate toll...

But the market system relies on a particular motive for action Keynes called it love of money which tends to undermine traditional moral teaching. The paradox of capitalism is that it converts avarice, greed, and envy into virtues.

Almost a century ago, at World War I s end, John Maynard Keynes offered a warning that holds great relevance today. Then, as now, creditor countries (mainly the US) were demanding that deeply indebted countries make good on their debts.

At issue here is the oldest unresolved dilemma in economics are market economies naturally stable or do they need to be stabilized by policy? Keynes emphasized the flimsiness of the expectations on which economic activity in decentralized markets is based.

In today s crisis, muddling through would be a recipe for a continuation of the crisis and secular stagnation of the type once described by Alvin Hansen, a contemporary of Keynes. Hansen predicted that capitalism would suffer from a permanent underinvestment crisis.

Secretly, the hope in Berlin, Paris, and other European capitals appears to be that Obama will still sort things out. If he succeeds as a super Keynes, no one will have had to take any risks with their own political future.

But work sharing raises technical problems if increased suddenly to deal with an economic crisis like the one we are now experiencing. These problems preclude the sudden movement toward the ideal of greater leisure that thinkers like Keynes and Theobald proclaimed.

The center of fiscal conservatism is Germany, while Anglo Saxon countries are still drawn to John Maynard Keynes. This division is complicating matters enormously, because close international cooperation is needed to correct the global imbalances that remain at the root of the crisis.

John Maynard Keynes thought that most economic decision making occurs in ambiguous situations in which probabilities are not known. He concluded that much of our business cycle is driven by fluctuations in animal spirits, something in the mind and not understood by economists.

The makers of modern Europe saw that unstable and politically abused money would be a European nightmare, and lead to destructive national animosities and antagonisms. They were supported by the twentieth century s two most influential economists, Friedrich von Hayek and John Maynard Keynes.