The Great Long Run Blog Debate #2: Keynesian Economics
Keynes has been a popular topic lately. By Keynes I mean both John Maynard and his economic theory of government intervention into the free market. To quote wiki:
Keynesian economics is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936; the interpretations of Keynes are contentious, and several schools of thought claim his legacy.
Keynesian economics advocates a mixed economy—predominantly private sector, but with a large role of government and public sector—and served as the economic model during the latter part of the Great Depression, World War II, and the post-war Golden Age of Capitalism, 1945–1970, though it lost some influence following the stagflation of the 1970s. As a middle way between laissez-faire capitalism and socialism, it has been and continues to be attacked from both the right and the left.
I believe that translates to “the private sector is generally okay but sometimes they can seriously paint themselves into a corner and then it falls to the government to paint them out.” The idea frequently expressed is in bad times the government can prime the economic pump. For those who have always lived with indoor plumbing, let me do my best to explain this expression. There were once these things called pumps outside your cabin. You got your water out of a ground well by a hand operated pump. And to get water from the pump, you had to pour some water into the pump to add pressure.
Keynesian economics generally flies in the face of free market types who believe government should have little role in the economy other than enforcing property rights and contract. Governments have, historically, proven remarkably inept at running economies after seizing the commanding heights (the USSR and India are two often cited examples). Incentives that motivate consumers and business owners rarely match up with the incentives that cause politicians to act.
The problem with proving a macro economic model correct is its very hard to put an economy in a lab, control for all the variables save for the one you’re trying to test. Much was made recently about the vast accomplishments of the late Eunice Kennedy Shriver. It was noted she managed to change a lot about American and yet was never elected to office. A facebook friend quipped “well, imagine how much more she could have accomplished if she were President of the USA!”
So, people will point to Keynesian economics policies implemented during the Great Depression and maybe things like the Marshall Plan in Europe. This seems like proof the model is sound and effective. Critics might say “well, imagine how much quicker the recovery would have been if we just let the free market solve the problem.”
Keynesians might argue that the current economic crisis is a classic example of the free market mis-allocating resources and painting themselves into a wall and we need Keynesian policies to get us out of the problem. Free market types might counter argue that it was bad government interventionist policies that were the real problem and if government had just kept their lousy stinkin’ nose out of the markets, we’d not have been in this mess.
Okay, now that I’ve probably muddled it further, over the next two days Long Run bloggers Brett and Julio will debate the pros and cons of Keynesian economics. Julio will be taking the anti side. Brett will be arguing the pro side. Keep in mind in these debates (like our minimum wage debate), sides are allotted by a flip of the coin. They do not necessarily reflect the true view of the debater. So if Brett comes across as Nazi lovin’ socialist who thinks Keynes is his foot in the door for government seizing control of the economy or Julio comes across as a cold hearted top hat wearing capitalist who won’t be happy until everyone earning less than 50K a year (in after tax income) has starved to death, understand your perceptions are probably 100% accurate. I mean, incorrect.
Gentleman, start your economic engines.
– Karl Mamer
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