Comments on: Happy Keynesian New Year

By: Peter Klein

Peter Klein — Sat, 02 Jan 2010 20:07:00 +0000

Steve, as for your comments, well, I’m not sure. I haven’t seen anything like this since the Anita Bryant concert.

By: srp

srp — Sat, 02 Jan 2010 09:03:47 +0000

Peter:

Please don’t call me Craig. Shirley you’re not serious.

By: Recomendaciones « intelib

Recomendaciones « intelib — Wed, 30 Dec 2009 17:15:05 +0000

[...] Happy Keynesian New Year, by Craig Pirrong [...]

By: Jason

Jason — Wed, 30 Dec 2009 06:20:44 +0000

What then you you call the world before 2008? You know, the years when people looked to the actions of a single person sitting in a single central bank with utmost trepidation?

By that charge, every year for the past 30 years has been a Keynesian new year. Why harp on this particular one?

The world before Keynes, presumably Hayekian, now was that such a wonderful place?

By: Peter Klein

Peter Klein — Wed, 30 Dec 2009 05:39:34 +0000

Great point, Craig. I think Keynes himself didn’t believe that entry into government service magically transformed the ordinary ignorant person into a super-knowledgeable genius, but that certain people already were super-knowledgeable geniuses — primarily, himself and his Bloomsbury buddies — and that this elite cadre should run the economy. Obviously mundane public-choice concerns wouldn’t apply to these Nietzschean supermen.

One small correction: As I understand the GT, Keynes applied the term “animal spirits” not to an irrational pessimism that caused investment to collapse in the face of negative demand shocks, but to the irrational optimism that brought about long-term investment in the first place. Because investors cannot predict other investors’ expectations (the “Keynesian beauty contest” problem), no one will invest in long-term projects, unless overcome by animal spirits or “spontaneous optimism.” The solution, for Keynes, was the socialization of investment (the “euthanasia of the rentier”). (BTW Keynes never considered that private investors can overcome the beauty-contest problem, and other capital-market inefficiencies, by establishing large, diversified firms with internal capital markets.)

By: srp

srp — Wed, 30 Dec 2009 02:56:52 +0000

I think the modern Keynesians actually believe that everyone can see the problem of “inadequate” aggregate demand and idle resources, but that there is a collective action problem that is most easily solved by the government. The idea is that I’ll hire people if I think everybody else will hire, but if nobody else hires then I don’t want to either. It’s a big coordination problem with multiple equilibria and the government is just doing the “obvious” thing of pushing everybody to the high-output equilibrium, no omniscience necessary.

A mechanism like that may kick in as part of any given downturn, but I think the Keynesians overrate its importance, especially in circumstances like our current one. There are other mechanisms that are implicated in downturns as well.