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To Keynes or not to no longer the question.

I was sent by a friend on Facebook to this article and started writing a response, it was getting involved so I decided to blog it instead.

First, note his use of the terms "insufficient deficits" he's putting words in Krugman's mouth by equating (conflating) the idea of spending in order to boost employment and thus help kick the economy out of the duldrums with an amorphous general idea of a "deficit" which every one agrees is a bad thing from the sound of it. However, the spending of mere few billion that was done nation wide in the early 50's on the US highway program (which aided the deficit as they were spending without an immediate eye to profit) returned in the succeeding decades trillions of fact the facilitation of the inter continental commerce industry boosted the US economy and continue to explain much of it's success in comparison to nations that do not have such a built up commerce infrastructure.

"Do Krugman's assertions make any sense at all? After seeing the above two charts, how can anyone in his right mind think that our economic sluggishness is due to insufficient deficits and a timid Fed?"

So, the author screws up horribly on that point. Another term he uses is "inflation" he sounds like one of those monists that thought that stagflation of the 70's was caused by the Fed flooding the market with dollars and boosting inflation, as if any attempt to boost dollars creates inflation but this last period has been pretty much devoid of any inflationary pressures despite large increases in the circulation of the dollar by the fed. Again, he's asserting a word that many people take as a boogie man, he's conflating boosting the circulation of the dollar directly with "inflation" and that is absolute nonsense it is not working that way now..they are correlated only through multiple variables and in this regime they are actually anti correlated.

"Soaring commodity prices — which of course are consistent with the Peter Schiff view of the world, and not at all with the Keynesian "it's all about demand" view — just "muddied this issue to some extent." But we can just throw that out because we just know, deep down, that the Keynesian models are right and the right-wing models are wrong."

No, he throws it out because commodities prices soaring is also not directly correlated with anything predicted by a Keynsian view. Commodities have their values set primarily by two things a) demand and b) perception. We are in a regime now where the *perception* of safety of wealth in commodities is high. Investors and people perceive high prices in oil predominantly because of now historical incidents. The wars in Iraq and Afghanistan and turmoil in oil exporters. Also all the talk of the oil boon soon running out is not helping things...perception is skewing the demand curve so that it anti correlates with true value. Ditto for gold, accept the perception in this case lies in the false idea that gold "holds its value" .....go ahead convert your money to gold and when perception crashes as the economy recovers ...what how much of your value poofs into smoke as demand doesn't match it if you don't sell in time.

"A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian framework—the resulting body of work largely composing New Keynesian economics."

Also, the quote from your article above is disingenuous as the ideas of perception modulating value/demand has been factored into refined Keynsian models(see quote above) why is this guy talking as if modern day Keynsians are 100% married to the original conception?? That's like calling all Darwinists married to the kooky ideas that Darwin had in his theory that weren't true to explain some species and interactions, but that is not what modern Darwinists do...for example we know today that our DNA (which Darwin knew nothing about) is subject to dna inclusion within the life of individuals for cross inheritance between *different* species..Darwin didn't think this was possible yet it is today part of modern Darwinist theory. Anyway...the author is smart in that his methods would fool a lot of Americans who don't catch these type of subtleties (particularly as they are so egregious in the right wing media) but not smart enough. If one looks at the history (fortunate for me this stuff just bubbles up to mind) one sees that though it is not cut and dried it really isn't rocket science either.


A complex interaction between real supply, real demand and *perceived* value determines how markets move. Determine how effective floods of capital will be in a given economic environment and determine how those markets will react to various forms of they attempts to boost employment by spending on projects that promise returns on investment in the form of boosted productivity and consumer spending or otherwise. The key modulating factor that economic models have a hard time getting a finger on is this perception. Today, commodities like gold and oil are at all time highs not because they are rare and in demand but because there is a *perception* that they are rare. The private corporations that hold the true keys to supply of both aren't about to tell the governments everything they know about the availability of supply even if they are mandated to tell details of quantities extracted (easy enough to leave deposits in the Earth and let supply dwindle to tweak demand and prices back up as the political winds churn). This is a major failing in the metering tools used by the government to keep corporations honest and it explains much of the behavior of the markets that is anti correlated to *classical* Keynsian views...but as indicated above, he never really formalized in a mathematical way his views...others did, some got things right others got things wrong (Phillips curve) but the general idea of Keynsian principles are sound...the only gotcha is the spending that is done must be smart spending otherwise there will be a net negative effect, there will be inflation and unemployment as Friedman predicted in the 60's. All of these modulations are part of the same spectrum of interacting variables and are not mutually exclusive...if only more people would realize that.


Peter said…
nice rebut; but I have a few objections: first, I disagree with your initial premise. many economists and politicians don't seem to think that a "deficit" is a bad thing, or else why would they advocate going further into debt to solve our economic problems?

also, there is no way to tell if we overpaid for the highway infrastructure program (no price system, no way to compare it). it probably would have been built privately (and more efficiently) anyway; however, road construction had already been monopolized by the federal govt 30 years earlier during the Depression (and they didn't do squat for those 3 decades).

and I wish I had converted my money into Gold in 2000 when it was $300 an ounce, versus the $1,800 that is goes for today.

also micro economics 101: prices are set by (1) demand and (2) supply. not perception.

give Mises a read if you get a chance one day. he's one of the grandfathers of heterodox / Austrian economics.

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