Streetwise Professor

March 12, 2009

Why I Am Not a Keynesian

Filed under: Economics,Politics — The Professor @ 11:42 am

Brad DeLong’s remarks in the opening round of his debate with Luigi Zingales are amazingly persuasive.   In my case, he has succeeded in making me more adamant in my disbelief in Keynesianism.   Problem is, though, that DeLong was attempting to convince people that they should all be Keynesians.

Here’s the paragraph that clinched it for me:

Anyone who uses his or her eyes can determine that Say’s law is in general false. Recall 2003-06, when capital inflows from Asia, easy money provided by the Federal Reserve and promises that financial engineering would cheaply diversify risk spurred homebuilders to spend money building houses. The American unemployment rate fell from 6.0% to 4.8%. Recall 1996-2000, when the assembled investors of America discovered the internet and in response businesses spent money like water on computers and telephones. The American unemployment rate fell 5.6% to 4.3%. In general, spending works to spur the economy, and the government’s money when spent is as good as anybody else’s. [Emphasis mine.]

This is as succinct a statement that captures perfectly the reductionist, mechanical (or hydraulic) Keynesian mindset.   Economics boils down to aggregate demand, and all aggregate demand is all the same. And, what’s more, everything in the economy is interpreted in terms of its effect on aggregate demand.   Moreover, aggregate demand is something that can be manipulated like a mechanical or hydraulic system.   Indeed, it can be created ex nihilo by creating IOUs.

The glib equation of deficit (i.e., future tax) financed government expenditure with (a) a massive technological shock that transformed virtually every aspect of commerce (and life) for billions around the world, and (b) the epochal development of teeming nations in Asia which created substantial new wealth and vast new opportunities to trade (contemporaneously and across time), is bizarre. Just how, exactly, does borrowing today to pay for who-cares-what (and remember for the Keynesian its just the aggregate amount of spending that counts, not what you spend it on), and paying back the borrowing by imposing taxes in the future, compare to a massive technological shock?   To the economic liberation of hundreds of millions of people, and their economic integration with billions of others around the world?   These are clearly quite distinct economic phenomena.   But to DeLong and his fellows, they’re all the same: it’s just spending money, and everybody’s money is all the same.

Like I said a couple of days ago, when all you have is a hammer, everything looks like a nail.   Aggregate demand is the Keynesian’s hammer.   Or, to mix metaphors, Cracker Jack Keynesians force every economic phenomenon to fit the Procrustean bed of the aggregate demand concept.   (Actually, the metaphor is not that mixed, for Procrustes means “the one who hammers out.”)

I must correct myself.   This is not merely reductionist.   This is reductio ad absurdum.   It trivializes vastly complex economies and economic processes–and economics as a science.

So, I say Brad DeLong has performed an extremely important public service.   By equating completely distinct economic processes he makes abundantly (and painfully) clear the intellectual void at the heart of Keynesianism.

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    Is that our ticking time bomb professor?

    Comment by Surya` — March 13, 2009 @ 2:22 pm

  2. I hope Boy Wonder is taking seriously the Chinese comments. The Chinese aren’t stupid or frivolous. It’s a warning on his monsterous deficit spending. If they pull the plug on lending I would assume interest rates will sky rocket. Pretty pathetic isn’t it for a communist country to instruct us on good capitalistic economic governance.

    Comment by penny — March 13, 2009 @ 6:33 pm

  3. Surya & Penny–it is the most pointed warning about this ticking bomb. The Obama administration’s budget projections are a joke. I mean, all budget projections have a substantial element of fantasy, but this one is off the charts even by the standards of prior administrations. It is also very difficult to reconcile Obama’s dire warnings of impending doom with the growth projections for 2010 and beyond. Even Summers came out today and said the timing of a turnaround is uncertain. But if you push the recovery down the road, that means deficits in coming years will be far larger than projected.

    It’s not just the Chinese. The Europeans are also pushing back on the idea of stimulus.

    The medium term consequences of this spending binge could be quite dire.

    The ProfessorComment by The Professor — March 13, 2009 @ 7:04 pm

  4. I don’t know what to make of Summers, it appears he is endorsing Obama’s recovery plans. In my opinion he folded like a cheap suit when the rabid women studies hacks challenged him at Harvard when he made the observation that what was in fact based on sound science that girls aren’t as wired as boys for math and science. They aren’t.

    Whatever, the Chinese shot across the bow will have consequences if it’s ignored.

    Comment by penny — March 14, 2009 @ 12:18 am

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