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Tag Archives: keynesian

Is Another Economics Possible–This article attracted my attention because I have been thinking, for a couple of years now, that another economics is necessary.

Disappointment followed as I read through the article. The views described are those of the World Social Forum, “based on more cooperative, sustainable, egalitarian and democratic institutions than those favored at (the World Economic Forum in) Davos, Switzerland.”

Textbook economics treats individuals as selfish optimizers, unconcerned about the welfare of others. Only recently have economists begun to explore the importance of fairness, reciprocity and altruism, and to consider the possibility that incentives to behave selfishly can undermine both moral norms and altruistic preferences.

Textbook economics also largely ignores worker-owned businesses and consumer cooperatives, although these are geographically widespread in the United States. Recent research suggests that many workers would like to play a larger role in the management of their companies and that “shared capitalism” works remarkably well.

Of course these views are only valid for a superficial sort of economics. In real economics, being a “selfish optimizer” includes our desires to help our friends and communities.

While I like the idea of encouraging cooperative enterprise and egalitarianism, those are not new ideas and there is not a new economics being introduced. only old ideals reborn.

A new economics needs to explain how the world’s markets are working, and how government policy can help or hurt social welfare. My opinion? We need to get away from the Keynesian measures of growth and employment. They are not the best measures of welfare and happiness and satisfaction with our lives. Ultimately, those are much more important than how much money and stuff we have.

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Robert Kuttner has a new article, Austerity Does Not Produce Prosperity. It is a strong statement that current thinking on the need to limit government debt is likely to extend the recession in Europe and the US. Kuttner makes it clear that he believes in Keynesian policy, and does not want to see the west succumb to concerns over debt.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, “The patient does not need rest. He needs exercise.”

Kuttner goes on to review the recovery of the Great Depression, when the US experienced a debt/GDP ratio of 120%. Of course, they went on to pay-off debt with rapidly expanding incomes through the 1950’s and 60’s.  Kuttner claims the situation today is different because the spending came in the 40’s because of the war, and common folk were helping finance the debt buying war bonds.

I am not so sure the US debt has not been helped along with spending in the military activity in Afghanistan and Iraq. Rather, the difference might be that these wars are not creating new industry and new training for workers.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls. Surtaxes on high incomes were over 90 percent. Interest rates were administered through a deal between the Treasury and the Fed, and the war debt was financed with cheap money.

It seems to me that Kuttner is pointing out enough differences that there may be room to disagree with his main point, that we should follow history’s example.

This article claims that Ben Bernanke has probably been reappointed chairman of the Federal Reserve. However, the article’s real topic–the real argument–is that Bernanke and the Fed. are the most likely source of meaningful help for the economic downturn.

As my students will recognize, this is a very monetarist argument, dependent finally on the Quantity Theory of Money, where money supplies are the final determinant of production.

Another perspective (Keynesian) might argue that monetary policy is ineffective if people are unwilling to borrow even at low interest rates.  The following bit suggests that the Fed. recognizes this as a problem, but not much of an argument that these problems can be overcome.

He has ordered the Fed’s bank examiners to muscle banks into boosting their lending. This often requires an examiner to tell a bank that it should value a property used as collateral higher than it may want to. The Fed is also reviving the market for the bundling of loans for small businesses. And it is bending the arms of potential investors to put more capital into banks to increase credit.

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crowdingoutStock markets slid slightly lower on Wednesday, undoing early gains as investors worried that rising interest rates on government bonds and home mortgages could impair the broader economy.

Investors shied away from Treasury debt, pushing interest rates higher, amid more worries that the government’s fund-raising needs would overwhelm demand in the bond markets.

Overwhelm demand? Yeah, I think they just mean there will be a shortage of saved money and interest rates will continue moving up. The bad part comes when investors start considering funding a new project, see that it is too expensive and walk away from the project–the classic monetarist critique of Keynesian economic policy.