Roger Bootle: We now face Keynesian conditions and need truly Keynesian solutions
[Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte.]
This has raised a hornets’ nest of controversy, with people holding forth with much sound and fury – and often signifying nothing. So I want to ask what, if anything, the teaching of this long-dead economist has to offer us today.
John Maynard Keynes, born in 1883, died in 1946; present at the Versailles negotiations in 1919; Britain’s representative at the Bretton Woods conference in 1944; father of the two key institutions of the post–war monetary order, the International Monetary Fund and the World Bank; author of The General Theory of Employment, Interest and Money; and, most importantly, the origin of the adjective “Keynesian”.
This is a word which has all but lost its original meaning. Like fascist, or feminist, it began describing a set of beliefs, but it has become a term of abuse or approbation, wielded by those who have, for the most part, not the faintest idea of what it actually means. So I want to give my version of “Everything you wanted to know about Keynes and were afraid to ask.” I think I can reduce Keynes’ view to seven essential propositions.
1. The economic system is naturally prone to periods of depression.
2. When one occurs, the system is not necessarily self-correcting.
3. Such depressions are not the result of individual choice. On the contrary, individuals en masse can become trapped in a depression which is in no one’s interest but which, as individuals, no one can counter-act.
4. This represents pure waste. Unemployed workers want to work, and businesses want to use their productive capacity. If they did, then the things they produced would be available for all to buy, and the incomes they received would enable them to purchase the products of others.
5. For individuals it may be appropriate to react to difficult times by saving more. Yet collectively this is a disaster. One man’s saving is another man’s reduced income. Extra borrowing by the Government, if it encourages more output, can be self-financing.
6. The key is aggregate demand. In normal circumstances it is possible to influence this by changes in interest rates. But there is a level below which interest rates cannot go and at that point conventional monetary policy is powerless. Moreover, even if interest rates can be lowered this may have no effect if people cannot or will not borrow.
7. At this point, aggregate demand can only be boosted by the Government borrowing more, either to spend directly or to give to others to spend via tax cuts or the like.
This Keynesian view first hit the world like a bombshell, then became accepted as commonplace to the point of banality, and subsequently was dismissed as irrelevant or dangerous. What went wrong?
Two things. First, although the Keynesian framework is a useful way of thinking about all economic conditions, it is both valid and truly radical only in depression conditions.
Second, the Keynesians went too far. Keynes’ treatment of inflation was sketchy at best. Understandably. In the Great Depression, inflation was scarcely public enemy number one. But the Keynesians took this a stage further. Some said inflation did not matter. Others felt that even though it did matter they would be able to control it through prices and incomes policies. The result was that under Keynesian management the economy was operated at too a high a level of aggregate demand for too long and inflation was let loose...
Read entire article at Daily Telegraph (UK)
This has raised a hornets’ nest of controversy, with people holding forth with much sound and fury – and often signifying nothing. So I want to ask what, if anything, the teaching of this long-dead economist has to offer us today.
John Maynard Keynes, born in 1883, died in 1946; present at the Versailles negotiations in 1919; Britain’s representative at the Bretton Woods conference in 1944; father of the two key institutions of the post–war monetary order, the International Monetary Fund and the World Bank; author of The General Theory of Employment, Interest and Money; and, most importantly, the origin of the adjective “Keynesian”.
This is a word which has all but lost its original meaning. Like fascist, or feminist, it began describing a set of beliefs, but it has become a term of abuse or approbation, wielded by those who have, for the most part, not the faintest idea of what it actually means. So I want to give my version of “Everything you wanted to know about Keynes and were afraid to ask.” I think I can reduce Keynes’ view to seven essential propositions.
1. The economic system is naturally prone to periods of depression.
2. When one occurs, the system is not necessarily self-correcting.
3. Such depressions are not the result of individual choice. On the contrary, individuals en masse can become trapped in a depression which is in no one’s interest but which, as individuals, no one can counter-act.
4. This represents pure waste. Unemployed workers want to work, and businesses want to use their productive capacity. If they did, then the things they produced would be available for all to buy, and the incomes they received would enable them to purchase the products of others.
5. For individuals it may be appropriate to react to difficult times by saving more. Yet collectively this is a disaster. One man’s saving is another man’s reduced income. Extra borrowing by the Government, if it encourages more output, can be self-financing.
6. The key is aggregate demand. In normal circumstances it is possible to influence this by changes in interest rates. But there is a level below which interest rates cannot go and at that point conventional monetary policy is powerless. Moreover, even if interest rates can be lowered this may have no effect if people cannot or will not borrow.
7. At this point, aggregate demand can only be boosted by the Government borrowing more, either to spend directly or to give to others to spend via tax cuts or the like.
This Keynesian view first hit the world like a bombshell, then became accepted as commonplace to the point of banality, and subsequently was dismissed as irrelevant or dangerous. What went wrong?
Two things. First, although the Keynesian framework is a useful way of thinking about all economic conditions, it is both valid and truly radical only in depression conditions.
Second, the Keynesians went too far. Keynes’ treatment of inflation was sketchy at best. Understandably. In the Great Depression, inflation was scarcely public enemy number one. But the Keynesians took this a stage further. Some said inflation did not matter. Others felt that even though it did matter they would be able to control it through prices and incomes policies. The result was that under Keynesian management the economy was operated at too a high a level of aggregate demand for too long and inflation was let loose...