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"We are all Keynesians now"
Keynes offers us the best way to think about the financial crisis
Martin Wolf, Financial Times, December 23 2008
The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us.
With it has come that of his most interesting disciple, Hyman Minsky
We all now know of the “Minsky moment” – the point at which a financial mania turns into panic.
Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war.
But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman, either
The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously.
“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.”
Not for him, then, was the notion of “efficient markets”.
The second lesson is that the economy cannot be analysed in the same way as an individual business.
For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand.
An individual may not spend all his income. But the world must do so.
The third and most important lesson is that one should not treat the economy as a morality tale.
In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist.
The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required.
Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.
This same moralistic debate is with us, once again.
Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy.
Their leftwing opponents argue that the era of markets is over.
The urgent task is to return the world economy to health.
The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended.
The longer-term challenge is to force a rebalancing of global demand.
Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much.
As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple.
That is, for me, the biggest lesson of this crisis.
More by Martin Wolf at IntCom
The truth is rarely pure and never simple.
Oscar Wilde, The Importance of Being Earnest, 1895, Act I