Is Keynesianism Dead?

[ALago1]

I'm taking a course in the history of economic thought, and of all the thinkers we've studied, Keynes has appealed to me the most. The rationale he uses, mainly that an overabundance of savings in relation to investment causes unemployment and that gov't must step in to acheive equilibrium, makes a lot of sense to me in a pure logical sense.

However, the general sentiments that I have come up with while doing independent research on the web regarding Keynes seem to think that his theories are pretty much debunked and only good for historical value.

Any economics specialists want to share their views on Keynes and whether or not he is still relevant in modern economics, and to what extend? The more specific the better! I appreciate your help so much.

[La_Serpiente]

1. Keynes is very much alive

government spending has skyrocketed within the last two years. However, that spending is missplaced. Instead, it is feeding a huge war machine.

[JackSwift]

2. Keynesianism is very much alive, but politically incorrect

for the right to acknowledge. Bush is attempting to use Keynesianism with a war economy without saying so. The neo-cons publicly claim to be monetarists, but in practice run up huge debts and government spending on wars. Traditional Keynesianism calls for social spending, not war spending. But the theory is the same.

[brainshrub]

3. Everything you need to know about economic theory is in one book:

"Wealth Of Nations" by Adam Smith.

Everything else written on the subject is a waste of paper.

[ALago1]

4. Well I think that's a little over the top

No doubt, Adam Smith is among the top tier of economists in the history of the discipline, but there have also been many advancements in the field to this day. Such advancements can be seen in terms of empirical observation and testing using econometrical methods. These models are infinitely more useful and practical then a purely theoretical treatise written 200+ years ago.

But, the classical thinkers laid the groundwork for economics to be built upon, so they deserve the most credit. So, Smith along with Marx, Ricardo, and Mill deserve top honors.

[kalashnikov]

5. dont forget krugman

[Code_Name_D]

7. Krugman is defantly making a name for himself

I am seeing it more and more on the DU all the time.

[Gulf Coast J]

11. Krugman on Keynesianism...

An essay from back in the day, but still very good.

http://web.mit.edu/krugman/www/vulgar.html
Economics, like all intellectual enterprises, is subject to the law of diminishing disciples. A great innovator is entitled to some poetic license. If his ideas are at first somewhat rough, if he exaggerates the discontinuity between his vision and what came before, no matter: Polish and perspective can come in due course. But inevitably there are those who follow the letter of the innovator's ideas but misunderstand their spirit, who are more dogmatic in their radicalism than the orthodox were in their orthodoxy. And as ideas spread, they become increasingly simplistic--until what eventually becomes part of the public consciousness, part of what "everyone knows," is no more than a crude caricature of the original.
Such has been the fate of Keynesian economics. John Maynard Keynes himself was a magnificently subtle and innovative thinker. Yet one of his unfortunate if unintentional legacies was a style of thought--call it vulgar Keynesianism--that confuses and befogs economic debate to this day.

[picus9]

12. Krugman?

With Keyenes, and Smith..?


HAHAHAHAHHAHAHAHHHHAAA HAAA HAA HAAAH HA.

Oh Yeah,

HA.

[felonious thunk]

6. No, just dormant

Keynes original ideas have been molded into different policies, but he is generally out of favor right now. First, supply siders have been in charge of the government for much of the past 20 years. Though supply side is generally known in economic circles to be faulty, it has been the MO of the Republicans. But even their rationale is somewhat Keynesian, i.e., put money in the pockets of the wealthy and they will spend it. This is of course the problem, and Keynesian theory is what proves supply side wrong. Putting money in the pockets of the wealthy encourages them to save it, not spend it. It changes tax advantages for them, and it makes less sense for them to spend than save. And thus, no economic expansion occurrs.

A second problem is Alan Greenspan. He has been the Fed Chief for a long long time, and has far too much power and influence. He's a strong believer in monetary policy, instead of fiscal policy. Keynes believed in a solid understanding of how the two can work together, but Greenspan has generally made it such that monetary policy is the main course to "fix" the economy. Changing interest rates and money supplies to tweak various actions has been the course during Greenspan's tenure. Keynes would likely advocate more fiscal policy than monetary, but in today's political reality of immediate impacts, monetary policy works, in theory, much faster than fiscal policy.

So, we've had presidents and Congresses reluctant to increase federal spending for political reasons, and a Fed Chairman with far too much influence that has become a cult of personality. Combine the two, and we're stuck with monetary policy only, and governments doing the exact opposite of what Keynesian fiscal policy dictates. In addition, the huge (and growing) deficit makes it hard to increase government spending during financial crises. The absolute worst thing to do, is cut taxes and increase spending...

[Code_Name_D]

8. Is there a good sorce for Keynesian thiorys?

It seems I learn the fake version, only to have them knocked down some time later. Some times I wish those who are knowalge in the subject would give the room the 101, for the sake of public education.

[Deaner1971]

14. Suggested book

I would read Peddling Prosperity bu the aforementioned Paul Krugman for a nice treatise on the whole gammut of economic thought and how it gets twisted when it becomes a consulting business. Very fair and very even handed.

[Code_Name_D]

16. Amazing what you find when you are not looking.

I found this about Keynsian thiory on Steven Kangas's sight. Along with a difrent defonition for resion and depresion.

-snip-

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. (There are many possible reasons for this, which we'll cover in a moment.) Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there's a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.

The cure for this, Keynes said, was for the central bank to expand the money supply. By putting more bills in people's hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished. Just that simple! Too simple, in fact, for the policy-makers of that time.

If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a "liquidity trap." A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend. In his memorable phrase, Keynes called this "priming the pump" of the economy, a final government effort to reestablish the circular flow of money
-/snip-

You can find a lot more here.
http://www.huppi.com/kangaroo/Keynesianism.htm

So Kaynes would define a resesion as people not spending; and a depresion as people not spending, no mater what.

I did notice that this articel is some what dated. Some new thinking about WWII has many economist questoning the "war is good for the economey" argument. After all, WWII is the only war know to fit into this. All other wars usualy bring about depresions, so what makes WWII the exception?

New thinking is now looking at the long list of intitelment programs from after the war. Soldiers returning home had lots of generuse provision and cheep loans made avaluble to them. The real recovery from the greate depreshion may not have been WWII, but the GI Bill.

Of course, Kangas could not of know than, as he died before this thinking came about.

[durutti]

22. Here are some resources...

Read The ABCs of Political Economy by Robin Hahnel, Introducing Kenyes by Peter Pugh and Chris Garratt, The Death of Economics by Peter Ormerod, and Debunking Economics: The Naked Emperor of the Social Sciences by Steve Keen, and Wall Street by Doug Henwood.

And if you can find them, check out Real World Macro, Real World Micro, Real World Globalization, and Real World Banking, all put out by Dollars and Sense.

Check out these Web sites, too:

http://william-king.www.drexel.edu/top/prin/txt/EcoToC.html

http://www.ufenet.org

http://www.efenet.org

In addition, I recommend the periodicals Left Business Observer and Dollars and Sense.

Oh, and while you're at it, pick up The Marx-Engels Reader. :-)

[many a good man]

26. Political Economy Rocks!

If you want to learn how the world really works, study political economy as well as classical economics. It factors reality into the world of economics. Another name for it is neo-marxism.

You don't have to be a marxist to fall in love with political economy, though. Statist economies will probably never perform as well as those with some sort of a market mechanism because bureaucrat economists just aren't brilliant enough. And because, unfortunately, human nature responds better to self-interest than it does to altruism.

If you can, get yourself into a college that has a few good political economists on staff. It will change your life (tho I don't know if it'll be for the better!). You will get insights that other students will miss entirely. I studied under Hahnel and some other prominent political economists; it was fascinating but probably ruined me for life as far as wanting to get a job on Wall Street or with the State Department. Not because the education was lacking but because it opened my eyes to role our government and corporations play in spreading poverty throughout the world. In fact, I think capitalism would have collapsed long ago if had not been for the critique offered by political economists and other leftists! The ruling elites were forced to confront some of the many "internal contradictions" of capitalism and modify the system so it would have a chance to continue. Good luck!

[TrogL]

9. Keynesianism is alive and well in Canada

It's the mainstay of Canadian fiscal policy on all levels of government.

It's most painfully obvious where I grew up - Niagara Falls, Ontario.

Niagara Falls, Ontario is a boom town, a tourist haven. There's almost uncontrolled economic growth. I phoned my mother the other day and she says when I next visit I won't recognize the place because of all the new construction and businesses.

She also said it's near on impossible to navigate because of all the road construction and repairs.

Compare this to Niagara Falls, N.Y. - a short walk across the Rainbow Bridge.

The roads are undrivable because they haven't been maintained in years. There are thousands of boarded up businesses. The big convention centre and mall, which used to host the Miss USA pageant, has been closed for years.

The difference - economic policy. The Ontario government sunk millions of dollars into a well-maintained, attractive parks, recreation and tourist system. The city fathers went to extraordinary lengths to make sure the road system was as good as could be (my mother calls them the "teaspoon brigade" because they're constantly patching tiny potholes). Hence, the tourists come because it's clean, tidy and attractive, there's something to see and do, somewhere nice to stay and they won't break an axle falling in a pothole.

Niagara Falls, Ontario has the added benefit of a diverse economy - it's not all tourism. There's plenty of manufacturing and other businesses that take advantage of cheap power and proximity to the US border. That begs the question, however, of why those same businesses fail on the US side, which has its own huge power generation site.

[mastein]

10. Niagra Region

The Upstate NY Niagra region is more than just a model of the "Wal-Mart" style cheap as hell gov't model our rivals espouse. It is also a model for why good environmental laws and enfocement are so important.

Love Canal and the problems surrounding it gave that area a black eye. Granted, most of the damage was due to bad engineering and management from the WWII era, but it caused a massive flight, whether by ordered evacuation or by people not wanting to "take a chance" of being exposed to the very toxic contaminants in either the water or the air in the area. If I recall the physical clean up ended some time in the 1980s, but between the lack of investment (see Wal-Mart style gov't) and population in the area, that region is still paying the price.

Other good examples of that sort of flight can be seen in the upper/mid-Mississippi valley and the Cleveland area on the other edge of Lake Erie. Though there is not one sentinel environmental incident in either case (save maybe the Cuyhoga river catching fire), there have been several issues that take away from the quality of life other places offer for the same cost of living.

[TrogL]

28. More on Niagara Falls and Toronto

I went there over the weekend to visit my folks.

Yes, she's right - the place is all torn up.

• A huge new visitor centre (Provincial money)
  
• new city buildings (city)
  
• A huge new casino complex (private money attracted by infrastructure - possibly some Provincial/city funding)
  
• four huge new hotels (private money attracted by infrastructure)
  
• widening city streets
  
• ripping out a narrow street near the falls that didn't accomplish much except be a shortcut for the locals that was in the way of some of the hotel construction
  

They just got over a political firestorm that I don't entirely understand but had something to do with not spending enough money on instratructure.

I had to drive from Toronto to Niagara Falls to get back from the airport. Toronto is torn up near the airport to provide even more access. There's a new commuter toll road going from the QEW/401 to the rapidly expanding industrial base building up around the airport (which used to be in the middle of nowhere). There are signs everywhere displaying the breakdown between local, Provincial, and Federal money to pay for it all.

There's a front-page-worthy controversy over an access road to the municipal airport downtown that may bring down the mayor if it doesn't go through. The city of Edmonton (near where I live) is having a similar pot-boiler because council IS planning on disabling its municipal airport and the mayor (whom I dislike, but to his credit, for once) is trying to revitalize it, so they don't follow Chicago's example of wiping out Meigs.

The drive along the QEW/401/407/whatever is a who's who of Canadian/international businesses with lots of shiny new construction.

In the loonie thread, it was noted that the Federal Opposition (whatever they're called this week) is always upset about the state of the econony. Judging from what I saw just driving down the road, it looks fine to me.

[Dukejr]

13. PBS series

PBS had a terrific series on economics that focused on Keynes. It had both a timeline, complete explanation of Keynes and rival theories, and real world examples of how they were applied.

http://www.pbs.org/wgbh/commandingheights/

[junker]

15. Keynes was an ass

his thinking flawed, and immature. No depth. Proved wrong again and a again in practical reality. Go check out the Austrian School, the work of Mises..

[durutti]

21. I hope you're kidding.

Either that, or you're projecting. It's the ideas of Mises and the Austrian school that have been proved wrong again and again. They aren't taken seriously by mainstream economists.

You can find a long explanation here: http://www.huppi.com/kangaroo/L-ausmain.htm

[schultzee]

17. I have only taken 4 economics courses, but it is rational. If money

does not circulate, it does not create jobs. If people invest in factories in the third world, the money is not creating jobs here.The more money spent, or the more demand for goods and services, the more likely more labor will be needed to fill the demand.
Republicans practice supply side economics and it does notwork unless the beneficiaries of the huge tax cuts invest in property and equipment in the USA.

[many a good man]

18. Is fiscal policy dead?

Keynes theories shook up the economic policy world. Taken in historical context, fiscal policy was not yet seen as tool that can manage the economy. Government spending was minimal and deficits were only run in wartime or crisis. Priming the pump of the economy by spending/tax cuts to increase the velocity of money in the economy was unthought of, or taboo.

Its now true that monetary policy has taken the spotlight. But that's only because politicians don't have the discipline to honestly implement responsible fiscal policy (Clinton may be the only exception). After all, the two main fiscal stimulants, deficit spending and tax cuts, are the centerpiece of *'s economic "policy." Along with rock bottom interest rates, * has the pedal to the floor on all stimulus tools.

That's all really just surface level thinking, though. Keynes' theories have undergone substantial criticism and refinement over the years. Yet his ideas have become conventional wisdom and his influence is still felt.

[Code_Name_D]

23. The problem is that modern economics is not intellectually free.

Creationists argue that intellectual "Freedom" means the right to believe any concept of science we choice. But in fact the opposite is true, intellectual freedom mean settling upon one body of theory, just as biologists believe that evolution is relevant, while creations is erroneous. In other words, the right for the scientific community to accept theory as fact, in laymen's terms any way.

Economics still has yet to undergo this revolution, and is still mired in a creationists like way of thinking.

Priming the pump of the economy by spending/tax cuts to increase the velocity of money in the economy was unthought of, or taboo.

Now, it is considered common knowledge… by supply siders. Though I am not sure you are aware of this, tax cuts and government spending are in fact separate and opposing terms. Tax cuts have in fact been show to reduce money velocity because government spending must inevitably follow the cuts.

Right now, we are watching all 50 states in the union begin to shut down, as the money literally runs out. Mean while, all of the tax cuts if the 80's and 90's have failed to produce the types of growth that the Republicans have been promising.

[many a good man]

25. Tax cuts as short term fiscal stimulus

Ignoring the long term consequences, I think its fair to say that tax cuts can provide a stimulus to the economy in the short term. Certerus paribus, more money in the hands of consumers through a tax cut or rebate will stimulate the economy to some degree for a finite time period.

You're correct that "suppy-side" economics is a theory invented by politicians, not economists. Adherents gear cuts to the wealthy where the effects are supposed to "trickle down" to the rest of us. This is a sham because wealthy people have a lower marginal propensity to consume. It would always be more productive to target cuts to those with the highest propensity to consume if your goal is to stimulate consumption. I would suppose tax cuts for the wealthy might stimulate investment if that were the goal, however, there is rarely a need to do so with P/E ratios in the market as high as they have been recently.

Deficit spending stimulates the economy through the multiplier effect. One extra dollar spent by the government can generate up to four dollars in additional economic activity by creating more jobs and the new goods and services demanded. Long term deficit spending does have its adverse consequences, of course, if adjustments aren't made.

I've seen the statistics that prove that Reagan Era supply side policies did not generate growth beyond the long term norm and resulted only in higher debt. I think the New Deal proved that government spending is an effective tool for stimulating the economy, as long as the debt is eventually dealt with. Clinton raised taxes and it eventually led to a budget surplus. Krugman believes that only the last one or two hundred billion of the additional revenue generated was a result of the dotcom bubble.

In summary, I agree supply side policies have been ruinous to our economy but I just wanted to make the point that cutting taxes can rightfully be considered a fiscal stimulant. Any time you put more money into the hands of spenders there is likely to be an increase in economic activity. The long term consequences need to be dealt with one way or the other. There's no "free lunch" !

[Code_Name_D]

27. I will concead your point, techicly... however.

I do beleive that the stimuless effect of tax cuts, even on the poor, have been over sold. And there influences on the economy has been grossly exagurated. Not just by the Republicans, but by the Democrats as well, whoes campain platform usualy focuses on low end tax cuts.

[durutti]

19. Many economists still subscribe to Kenyesian ideas.

One thing you have to remember about economics, though, is that it often isn't science; it's just a justification for whatever the ruling class wants to do.

I recommend a book called The ABCs of Political Economy by Robin Hahnel.

I also recommend the economics section of this FAQ: www.anarchistfaq.org

[Code_Name_D]

24. You are half right.

One thing you have to remember about economics, though, is that it often isn't science; it's just a justification for whatever the ruling class wants to do.

I would add the following distinction. That "supply side" is a collection of self serving rhetorical policies based less on sound science and more towards enriching the policy makers and those close to them. But you are not far from the mark.

Economics is actually considered to be a "soft science" more related to sociology than mathematics. There are very few "hard" concepts in economics that can be shown.

That said, recently there is a new field of economics called "natural economics" and a related branch called "artificial economics." Both of which include much harder, clearer cut definitions and observable phenomena. But interestingly enough, this new branch has little to do with money. I have seen it used in biology to explain how proteins, nutrients, and calories flow through an echo system. I have seen it used to determine weather Dinosaurs were cold blooded, or warm blooded by determining the needed metabolism or order to support such a large body, and even presented the likely hood that a T-Rex could run as fast as 60 miles per hour. I have seen this used to design power consumption for battery powered objects like lap tops and cell phones. It is even being used to understand human evolution, by trying to understand how recourses were shared in ancient communities.

But it dose have fiscal applications. The bank loan was perhaps the first real application. But it has helped produce fractional/reserve banking and the extended credit circulation systems, helping to expand the capacity of modern economics to handle the larger and more technologically sophisticated ventures that a modern society finds itself engaged in. (Our current problems largely extend from the ramped abuse of these more recent innovations.)

Just some food for thought.

PS: Thanks for the recomended reading. I will be looking into it. Perhaps we should even start up a book club here.

[durutti]

20. The return of the boom-bust cycle supports Keynes.

I'm a Marxist, not a Keynesian, but Keynes was right about many things. The return of the dramatic booms and busts in the U.S. economy since 1973 proves my point.

There were several dramatic boom and bust periods before World War II, the most obvious being the Great Depression.

Everyone acknowledges that it was massive military spending that dug the U.S. out of the Depression. It created low levels of unemployment, which resulted in higher wages in many sectors of the economy.

This massive spending continued for years, but began to fall off in the 1970s. Thus, in 1973, we witnessed the return of dramatic booms and busts.

The United States still spends far more on the military than it should, and far more relative to any other country. However, it will be very difficult to justify returning to former levels.