Keynes and the Neo-Keynsians
I had a reason for putting down as today's quote the line from John Maynard Kenyes, "When the facts change, I change my mind."
Later today I will be putting up a post about this in relation to Energy policy but first I want to address two extreme ironies about Keynes' life and writings.
1) Keynes and the "General Theory"
John Maynard Keynes believed that the rules for sensible economic policy put forward by the "classical" economists worked in a special set of circumstances which do not always apply.
He was almost certainly right about this, and about the fact that much of the period of time during which he did the majority of his most famous work - the first forty years of the twentieth century - was one of the periods when those circumstances did not apply.
So, regarding "classical economics" as a limited theory which works some of the time, Keynes set out to produce a "General Theory" which would work all the time. Hence the title of his most famous book, "The General Theory of Employment, Interest, and Money."
He produced a set of policy prescriptions which were very appropriate in the 1930's and helped those economies which followed them.
The first irony, however, is that what he had really produced was not a general theory of economics, but an alternative limited theory which works in some circumstances, different to those when classical economic theory will work.
What neo-classical economists such as myself would argue, is that the economic history of the past sixty years shows that neither set of theories works all the time, but the circumstances in which classical economic policies work are more common than those in which the policies most often associated with Keynes and advocated by neo-Keynsians will be successful. In other words, classical economic ideas may be more "General" that those of the "General Theory."
When Time magazine ran a front cover quoting Milton Friedman as saying that all economists are Keynesians now, Friedman wrote back to them as follows:
Sir: You quote me as saying: “We are all Keynesians now.” The quotation is correct, but taken out of context. As best I can recall it, the context was: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” The second half is at least as important as the first."
Since both classical and Keynsian policy prescriptions may be appropriate in particular circumstances, the challenge for those running an economy is to have evidence-based rules to assess what the economy is actually doing, preferably monitored by professionals who publish their findings in a transparent way so they cannot be slanted by the government of the day, and make sure that the appropriate policy prescriptions are followed.
And hence to ensure policies like "Quantitative Easing" or negative real interest rates, which are likely to be harmful in the long term if continued for too long, are neither over-used and applied when damaging, nor ignored when the rare circumstances in which they may be useful actually apply.
2) Keynes and adherence to outdated ideas.
There are many quotes for which Keynes is remembered, one of which is the one I used as today's quote of the day. The best saying he is known for is probably
"In the long run we are all dead"
and he also wrote that
"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."
He also, as was quoted on this blog a few months ago, criticised those governments who recklessly or deliberately allow prolonged inflation, recognising the harm it does, and writing in "The economic consequences of the Peace" that
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Being very aware of the genius of his own intellect, and not a great admirer of anyone else's, Keynes also produced a coruscating set of quotes demolishing the intellectual positions of rival economic thinkers, politicians, and just about every part of the political spectrum from Nazis through Conservatives, his fellow liberals, to Stalinists.
But he was particularly aware of the way that ideas which we do not even realise we have adopted may skew our thinking, particularly in favour of outdated ideas, and that this influence may be all the more pernicious because, being unconscious, it is unchallenged. As he put it in the General Theory
"The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."
The full context of the quote about practical men, from the same book, reads as follows:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.
Of course, the extreme irony of this point is that precisely that fate has now overtaken Keynes' own ideas and policy prescriptions.
The "practical men" (and women) of our own generation might often be BBC or Guardian journalists who are constantly asking why governments do not spend more on this, that and the other. And who may not even realise that the extent of their bias in the direction of solving every problem by spending more public money derives ultimately from suggestions which Keynes made to deal with the situation in the 1930's and which he would never have put forward today.
Similarly those in the Labour treasury team, who if not madmen are certainly innumerate, are distilling some of their frenzy from the academic scribblings of Keynes himself.
One line from the General Theory which is almost never quoted today is a phrase about money illusion, which reads as follows:
" ... but since no trade union would dream of striking because of a rise in the cost of living ..."
If Keynes had written that today, it would have proved him completely out of touch with reality and made him a laughing stock. But in the 1935 you could drop that line into an argument and nobody would challenge it, because it was then true. Just as today everyone would regard it as nonsense, because the world has changed.
In a world where trade unions and voters are painfully aware of how inflation can destroy the value of salaries and pensions alike and place them in a false position, economic policies which might have worked in a world where people did not understand the impact of inflation will no longer have the same effect. If Keynes were still alive he would certainly recognise that and adjust his policies accordingly.
This is why Keynes deserves better than to be blamed for the foolish policies often put forward today by neo-Keynsians, who are guilty of failing to challenge their unconscious assumptions in exactly the way he described, and have not recognised that changing circumstances mean a need for different policies.
Later today I will be putting up a post about this in relation to Energy policy but first I want to address two extreme ironies about Keynes' life and writings.
1) Keynes and the "General Theory"
John Maynard Keynes believed that the rules for sensible economic policy put forward by the "classical" economists worked in a special set of circumstances which do not always apply.
He was almost certainly right about this, and about the fact that much of the period of time during which he did the majority of his most famous work - the first forty years of the twentieth century - was one of the periods when those circumstances did not apply.
So, regarding "classical economics" as a limited theory which works some of the time, Keynes set out to produce a "General Theory" which would work all the time. Hence the title of his most famous book, "The General Theory of Employment, Interest, and Money."
He produced a set of policy prescriptions which were very appropriate in the 1930's and helped those economies which followed them.
The first irony, however, is that what he had really produced was not a general theory of economics, but an alternative limited theory which works in some circumstances, different to those when classical economic theory will work.
What neo-classical economists such as myself would argue, is that the economic history of the past sixty years shows that neither set of theories works all the time, but the circumstances in which classical economic policies work are more common than those in which the policies most often associated with Keynes and advocated by neo-Keynsians will be successful. In other words, classical economic ideas may be more "General" that those of the "General Theory."
When Time magazine ran a front cover quoting Milton Friedman as saying that all economists are Keynesians now, Friedman wrote back to them as follows:
Sir: You quote me as saying: “We are all Keynesians now.” The quotation is correct, but taken out of context. As best I can recall it, the context was: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” The second half is at least as important as the first."
Since both classical and Keynsian policy prescriptions may be appropriate in particular circumstances, the challenge for those running an economy is to have evidence-based rules to assess what the economy is actually doing, preferably monitored by professionals who publish their findings in a transparent way so they cannot be slanted by the government of the day, and make sure that the appropriate policy prescriptions are followed.
And hence to ensure policies like "Quantitative Easing" or negative real interest rates, which are likely to be harmful in the long term if continued for too long, are neither over-used and applied when damaging, nor ignored when the rare circumstances in which they may be useful actually apply.
2) Keynes and adherence to outdated ideas.
There are many quotes for which Keynes is remembered, one of which is the one I used as today's quote of the day. The best saying he is known for is probably
"In the long run we are all dead"
and he also wrote that
"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Being very aware of the genius of his own intellect, and not a great admirer of anyone else's, Keynes also produced a coruscating set of quotes demolishing the intellectual positions of rival economic thinkers, politicians, and just about every part of the political spectrum from Nazis through Conservatives, his fellow liberals, to Stalinists.
But he was particularly aware of the way that ideas which we do not even realise we have adopted may skew our thinking, particularly in favour of outdated ideas, and that this influence may be all the more pernicious because, being unconscious, it is unchallenged. As he put it in the General Theory
"The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."
The full context of the quote about practical men, from the same book, reads as follows:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.
Of course, the extreme irony of this point is that precisely that fate has now overtaken Keynes' own ideas and policy prescriptions.
The "practical men" (and women) of our own generation might often be BBC or Guardian journalists who are constantly asking why governments do not spend more on this, that and the other. And who may not even realise that the extent of their bias in the direction of solving every problem by spending more public money derives ultimately from suggestions which Keynes made to deal with the situation in the 1930's and which he would never have put forward today.
Similarly those in the Labour treasury team, who if not madmen are certainly innumerate, are distilling some of their frenzy from the academic scribblings of Keynes himself.
One line from the General Theory which is almost never quoted today is a phrase about money illusion, which reads as follows:
" ... but since no trade union would dream of striking because of a rise in the cost of living ..."
If Keynes had written that today, it would have proved him completely out of touch with reality and made him a laughing stock. But in the 1935 you could drop that line into an argument and nobody would challenge it, because it was then true. Just as today everyone would regard it as nonsense, because the world has changed.
In a world where trade unions and voters are painfully aware of how inflation can destroy the value of salaries and pensions alike and place them in a false position, economic policies which might have worked in a world where people did not understand the impact of inflation will no longer have the same effect. If Keynes were still alive he would certainly recognise that and adjust his policies accordingly.
This is why Keynes deserves better than to be blamed for the foolish policies often put forward today by neo-Keynsians, who are guilty of failing to challenge their unconscious assumptions in exactly the way he described, and have not recognised that changing circumstances mean a need for different policies.
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