Keynesians now face the final curtain
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For those too young to remember, the mid-1970s witnessed the first demise of Keynesian economics as the much-worshipped Phillips Curve turned positive in depicting the relationship between the rate of unemployment and the rate of price inflation, and as economic growth collapsed in response to government spending. As the spectre of stagflation stalked the land, political leader after political leader thrice denied his Saviour and turned to other economic deities for ultimate salvation. In the United Kingdom, Labour prime minister James Callaghan summarised the new consensus in a candid 1976 denunciation:
“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting public spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
In 1981, confronted by a serious economic recession in the United Kingdom, Margaret Thatcher responded by raising taxes and cutting public expenditure in order to protect the budget. In an infamous letter to The Times, 364 economists denounced her government’s actions and demanded increased spending. I was one of a small number of free-market economists worldwide (no more than 50) who signed a counter-letter to The Times supporting the government’s actions. Events proved us right and the large majority wrong, as the British economy quickly recovered and as a vibrant United Kingdom shed its former mantle as the sick man of Europe.
In 1981, President Reagan responded to the Volcker recession with permanent cuts in corporate and personal marginal tax rates and with cuts in non-defence spending. By 1983, the US economy moved into a sustainable recovery that would bless the United States for the following 16 years of the Great Moderation.
Presidents Bush and Obama and Prime Minister Gordon Brown turned their backs on this accumulated knowledge, over the period 2007-2010, with the disastrous debt and stagnation consequences that now confront the United States and the United Kingdom. A new British government once again acknowledges the irrelevance of Keynesian economics and is returning governance of the public finances to orthodox classical principles. The recent meeting of the G20 countries has endorsed this judgment, with the singular exception of the United States.
President Obama is an economics illiterate who has surrounded himself with deadbeat hydraulic Keynesian economic advisers. Like FDR before him, he wreaks havoc on the economy of the country that he is supposed to preserve and protect. Unlike FDR, however, the public is now awakened to the failure of so-called stimulus policies. Retribution will be served upon his socialist government in November 2010; and his own final political curtain will close in November 2012.
For Keynesian economists worldwide, the second curtain is about to close. Let us hope that it proves to be the final curtain.
Visit Charles Rowley’s blog to read the original version of this article.
12 thoughts on “Keynesians now face the final curtain”
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I hope so – but the many-headed hydra of Keynesianism keeps re-emerging, albeit with differnt labels and different ways of denying reality (although sometimes they are exactly the same labels despite having been repeatedly disproven by theory and practice. We never learn, it seems, otherwise how else does one explain the continued existence of Marxism say, or creationists?). Most people are still convinced, and taught in school, that FDR’s policies worked, whereas Thatcher is reviled (but she didn’t reduce the size of the state)!! It’s a bit hopeful to see the last UK budget as a genuine return to fiscal orthodoxy (let alone monetary) given state spending will continue to increase…
You make some good points but I don’t know if I fully agree with you. First of all any introduction or retraction of money into an economy will have different effects depending on variable factors that change. In addition depending on the mechanism that introduced or retracted the money the outcome can be different. The inflationary pressure is only as a result of peoples decision to spend more at that time remember inflation is the rise in the basket of goods not the relative increase in the monetary base. In short it is possible to increase the ability to spend money by paying more but the decision to spend has to be made.
Further, to the above, you have to appreciate an increase in demand does not always mean a rise in prices. For example greater demand can lead to greater efficiency and lower prices. It indicates that the ability to produce is limited when the increase in demand creates inflation. If there is a finite availability of goods the price will rise. However if the production can be made more efficient or the materials that made it can be purchased in a larger scale the price can rise.
In my opinion the price rises in the seventies did not show the effect of increasing demand but the limitations of the economy to react to this demand. The fault was the structure of the economy.
Sorry I made an error the above top paragraph should read as this,
Further, to the above, you have to appreciate an increase in demand does not always mean a rise in prices. For example greater demand can lead to greater efficiency and lower prices. It indicates that the ability to produce is limited when the increase in demand creates inflation. If there is a finite availability of goods the price will rise. However if the production can be made more efficient or the materials that made it can be purchased in a larger scale the price can fall.
Revisionist history will not prevail this time. History, I’m afraid, will not be so kind on the current US administration.
Much like Roosevelt, Obama has looked reform capitalism in an attempt to save the economy by keeping prices artificially high and rerouting capital to finance unproductive projects. Obama, like Roosevelt has not allowed the much needed economic correction to occur.
Have you read Professor Ormerod’s account of the Phillips Curve in his book “The Death of Economics”? He took the scatter diagram and joined the dots in chronological order. After he had done so, he found that the earlier co-ordinates oscillated around one attractor point, while the later ones oscillated around another.
Orthodox classical principles? Has anyone briefed the Government on the Arrow-Debreu formalisation and impressed on them the impossibility of reproducing the orthodox classical assumptions in the real-world?. (PS.I presume by these you mean neo-classical).
Harvard economist Jeffrey Miron gives a short critique of Keynesian aggregate spending here.
There are lots of things I could say here:
Conservative cuts are minimal and look nothing like what a good classical economist (Bastiat, Say, Cantillon) would prescribe;
neo-classical economics is very different from classical economics;
among governments classical principles were hardly orthodox, this seems misinformation propagated by Keynesians and New Dealers;
Reagan is hardly someone we want to look to to exemplify free markets;
and Dr. Rowley’s approach, while refreshingly optimistic, seems slightly misleading — while the approach of the Tory government is undoubtedly different to that of Labour, it is not so strikingly different as to commend such hopeful comments, AFAICS
The reasoning you present is somewhat to simple as the history of economics display that neither Keynes nor Milton or any other economic theorist has been able to present a sustainable solution to the problem with economic fluctuations in the world. Not least since economy is no science, even though economists try to convince us that it is. The main problem with world economy is that we let market econonomists take charge of it. What the world need is philosophers, able to reflect on this question on a deeper level and from different angles, it’s a much more complexed issue than whether or not cut or increase taxes or public expenditures. Economists are to limited intellectually.
There’s probably no single explanation for economic fluctuations. Beinhocker discusses inventory effect and time delays in order fulfilment as one possibility.
As my text was written hastily during a pause, I only wrote Milton, meaning Milton Friedman but I guess you all understood that.
What I meant when saying that we need philosophers is that it’s high time that we start asking ourselves, not only what will bring us instantaneous wealth but what kind of products that should be produced, sold and consumed. The arms industry generates economic growth but the suffering it creates, can this suffering be justified by this very economic development? This is a very obvious example but we should always try to apply this kind of reasoning when talking about economic policies.
Lawrence Kudlow, CEO of an economic and investment research firm in New York City, writes: ‘In a watershed study, former [U.S.] Treasury economists Gary and Aldona Robbins argued a few years ago that tax cuts aimed at capital and business produced the biggest economic benefits.
‘For example, for every tax-cut dollar on capital gains, $10.61 of new GDP is created. For every dollar of accelerated business-investment tax write-offs, $9 of new GDP is created. And for every dollar of corporate tax cuts, $2.76 of new GDP is created.’
More here.