Will Keynes Be Buried Once and for All?

Instead of burying Keynes, why not explore the question of whether a Keynesian analysis of how economies work can be established on a foundation of the Austrian theory of human action. It would make an interesting research project.

Sadly Keynes will rise repeatedly zombie-like from the dead however many times he is put to rest, because the modern interpretation of his theory is so attractive to governments and vested interests who have spent more than their income and have created budget deficits. If you have two options - cut your spending to fit your income, or borrow more to fund your current spending, Keynes provides a suitable fig leaf of intellectual respectability for the latter easy option. Of course such people conveniently forget the other half of Keynes' theory - the bit about running budget surpluses in the good times. He only gets dragged out of his crypt when the money runs out.

Reducing marginal tax rates is fine, and there's plenty of scope. I would also emphasise the urgent need to overhaul our employment laws which constitute an enormous practical and psychological barrier to employment. We are, of course, now in the 'long run' that Keynes, in his more flippant moments, seemed to imagine we could ignore with impunity.

These last two postings express what most exasperates me about this debate. Keynes is said to be nothing but budget deficits. Please increase the quality of this debate by addressing the point I raised in my posting above.

Michael - this is a good question. The problem is that Keynes is often very confusing in much of his analysis. There are some similarities between Keynesian and Austrian economics in terms of their underlying assumptions (eg the existence of rigidities and in terms of the way individuals process information). For Austrians, herd behaviour might be quite rational (economises on information) - the question is what sort of political economy structures are best able to ensure that the market best uses the available information. One gets the impression that Keynes believes that politicians can correct herd-like behaviour and improve the allocation of resources whereas Austrians would not believe that. With regard to the events of 1929, Keynes would regard the behaviour of investors as endogenous and not caused by monetary excesses. A key Austrian insight is that if the economy is pulled out of shape by monetary policy, it will be pulled further out of shape by government spending to raise demand - indeed, the very rigidities will make it even more difficult for the economy to re-adjust. You certainly have a point but I just don't feel that Keynes approach helps the development of the sort of synthesis that you are hinting at. I don't think that DRM's post should exasperate you - quite the contrary. One thing that proper Keynesians and Austrians would agree about is that reduced marginal tax rates and employment regulations would help remove the rigidities that both schools feel cause such difficulties in recession.

Now we're on the right lines, Philip. I would say that the matter is not that politicians correct herd behaviour, it's that they manage expectations, not as to the allocation of resources, but as to the general level of economic activity.

I am a historian. I have therefore only read the Economic Consequences of the Peace and Keynes's plea for Germany to be given a smaller war reparations bill to pay under the new Young PLan agreement of 1929. However Wikepedia tells me that Keynes's General Theory asserts that a market economy tends naturally to restore itself to full employment after temporary shocks. I suppose that Keynes is referring to an open market economy in his General Theory. In the Great Depression strong Germany had a manipulated economy. In 1930 Chancellor Bruening stated his intention to increase taxes and lower wages in a bid to rid Germany of war reparations and debt. As Germany was so strong all its neighbours were subjected to deflation too, which was only abandoned after reparations bills were abandoned and Hitler came to power ( defrauding all Germany's former trading partners in his rush to full employment.) . No-one seems to know about Germany's deliberate policy of deflation in the Great Depression. This is worrying as Germany's new aim is to balance its budget by 2015. No-one has suggested that Germany has any political motives for its present zeal for saving but as Germany has used deflation for political ends before we are justified in asking: 'Why now?'

I looked at the Wikipedia entry myself a couple of days ago, and I don't remember that comment. What I do remember is that, according to the General Theory, the level of employment depends on effective demand (or, more correctly, expected effective demand) and not on the level of wages. This makes good sense given that capital and labour are complements to one another. They are substitutable only within narrow limits. For example, if you run a bus service you can have one driver per bus, no more and no fewer. Don't be too hard on the Germans, though - thrift is as much a national characteristic as the disposition to hard work.

On the contrary, I feel every sympathy for the German lower middle classes, whose income has till recently been squeezed. In the Great Depression German wages were reduced and taxes hiked while the German Reichsbank was sitting on 40% cover for every bank note in circulation. Outsiders had no means of knowing how rich the Reichsbank’s was so Germany was able to use its citizens misery in its propaganda campaign against paying its dues. There is no modern equivalence for such drastic deflation. However, according to data from destatis.de, Germany had over 12% unemployment in January 2005 and again in April 2006. Many Germans are, therefore, still poor and have scant sympathy with over-borrowed Southern Europe. But that does not mean that Germany as a country is poor. In today’s more open society outsiders may have more of an inkling as to whether the German Bundesbank has enough money to tide over Southern European countries, such as Greece and Portugal - and even Spain and Italy - until they get their spending under control. However, whether it has enough money to bail out the whole of Southern Europe or not, it is still using its deluded citizens in its campaign against payments until Southern Europe meets its requirements. After all if its recalcitrance leads to a another economic crisis (as it did in 1931) the hedge funds, the ratings agencies and the bankers will take the blame!