Home > Uncategorized > Who’s Afraid of John Maynard Keynes?

Who’s Afraid of John Maynard Keynes?

from James Galbraith and the Journal of Behavioral and Experimental Economics

Paul Davidson, Who’s Afraid of John Maynard Keynes? Challenging Economic Governance in an Age of Growing Inequality, 2017, Palgrave-MacMillan

Paul Davidson, in his ninth decade, has produced a crisp and clear exegesis of essential Keynesian ideas and the critical failures of so-called mainstream economic thought. The most critical flaw lies in the treatment of time. Rooted in ancient ideas of equilibrium, harmony and social balance, mainstream economics treats the future as an extrapolation of the past, predictable except for random errors, which are called “risk.” This as Davidson insists is incurably incorrect; there is uncertainty and at any time financial markets are prone to collapse in a failed flight to safety, which drains liquidity and deprives both financial and physical assets of their market value.

From this it follows that in the social sphere any model that projects the future from the past will fail from time to time. The models work so long as things do not change! As for change, for turning points, they nevertheless occur. And that those who believe most in the model will prepare the least and be hurt the worst. And yet, for the economy to function, “belief” in the model – at the least, conditional belief sufficient to motivate consumption and investment – appears essential. Without it, the private economy cannot prosper. Living in a house of cards is better than having no house at all. 

When the house collapses, the alternative is the state, an overarching entity. As Davidson writes, the state can always fill the gap, and this is his second big point: money is the creature of the state and it cannot run out. But how well can the state do this work? Skepticism on this point separates Keynesians from communists, giving rise to the glorious political paradox, that Keynes and Davidson deploy revolutionary thought not to destroy but to preserve the social order. More precisely, they seek to rescue the capitalist system from itself. In this way, it becomes the function of Keynes’s followers to show how an unstable system can be rebuilt, time and again.

The desire to save – to forebear consumption, to practice thrift – is the root of mass unemployment. Austerity policies foster private insecurity and saving, and at the same time they block the public sector from offsetting action, from undertaking the spending that the private sector does not wish to do. This as Davidson describes it is “the incomes policy of fear.” Fear spares the business leaders from the distasteful obligation to cooperate with labor to achieve price stability at full employment. And it spares the government the cost and inconvenience of maintaining buffer stocks to stabilize commodity prices. Business can therefore rule, while the larger population labors under insecurity and far more poverty – or anyway, less prosperity – than might otherwise be achieved.

From this point Davidson turns to the Great Financial Crisis of 2007-–2009, and to the lethal fact that the entire corpus of mainstream economists were unable to foresee it and had in fact persuaded themselves of a Great Moderation which, they imagined, might go on forever. According to a session at the annual meetings of the American Economics Association as the crisis was unfolding, the world had “achieved consensus on monetary policy”; the end of economic history was at hand. That consensus believed that deregulated markets spread risk, specifically that financial derivatives were an effective insurance against major loss. In fact, they served as vectors for panic, turning a crisis of the US mortgage markets into a global financial meltdown. Markets collapsed everywhere. And those who had bought the derivatives were illiquid, and so faced ruin, even if the underlying securities might – as they did in many cases – pay off over time.

What is to be done?

Davidson places faith first of all in the state, which must intervene first to regulate the financial sector and second to stabilize the great flows of consumption and investment on which economic activities depend. But states themselves are embedded in a global system, and not every state has the economic independence enjoyed by the large nations at the core of the world’s monetary systems. It therefore follows that the world needs a system of international monetary stabilization and control – a Keynes Plan – that will prevent the most successful trading nations, who run chronic surpluses, from imposing austerity on their deficit-running and indebted trading partners. For this to work, Davidson proposes a new International Monetary Clearing Union and accompanying capital controls to permit national regulation of national financial markets to work.

The Keynes Plan had no chance back in 1945, as the great creditor nation of that era, the United States, had other ideas. Today the great creditor of Europe – Germany – would be no less obdurate, while the US government on these issues is wholly in the hands of Wall Street banks and of hustlers advancing their interests. Still, it is a good thing that Paul Davidson continues to remind us of how far from sanity and civilization we have drifted, in the decades since the death of Keynes.

  1. February 19, 2018 at 1:46 am

    As usual, Jamie Galbraith’s prose is so artful it skewers without appearing to. And it is so concise it speaks volumes. His statement, “More precisely, they seek to rescue the capitalist system from itself” is precisely correct. The following “it becomes the function of Keynes’s followers to show how an unstable system can be rebuilt, time and again” is painfully so. Why anyone would want to rebuild a house of cards is incredibly irrational.

    The book he reviews is excellent and I recommend it to all interested.

  2. February 19, 2018 at 4:21 pm

    The derivatives so loved by Wall Street would have been fine if the mortgages on which they were based had been obtained without fraud.

    There is no guarantee that if the financial system were to be regulated globally it would be any better managed than it is now–corruption can occur both locally and globally as financiers are no more moral (and maybe even less so) than anyone else.

  3. Edward Ross
    February 19, 2018 at 8:10 pm

    Econoclast “Why anyone should want to rebuild a house of cards is incredibly irrational ”
    In my simple mind firstly main stream neoliberal economic rationalism that displaced Keynes has become a total failure from the point of view of the struggling masses.

    Therefore if one applies your house of cards argument to main stream neoliberalism ,”why would anyone want to rebuild it? Thus if we go back to Keynes and take Gurrien’s advise PAE vol 29 p15 and look for the cause of the failure we see that the wealthy elite not only restricted some of Keynes ideas, but were hell bent on heavily influencing economic policy for their own benefit as per Frank Stillwell, Ted Wheelwright and some of the recent blogs.

    Thus from my simple logic there is no logical alternative to rebuilding the Keynesian economic concepts. provided we eliminate vested interests from the conversation. This perception is reinforced by Alicia Puny Mutis p 122 in Piketty’s Capital in th Twenty-First century edit Edward Fullbrook Jamie Morgan where she quotes , “We must expel these interest groups from politics ” (Roosevelt,1901″. Surly this observation describes the need to exclude the wealthy elite from the basic conversation, as well as examining other reasons that might have imoacted on te demise of Keynes.
    TED

    • February 19, 2018 at 9:16 pm

      The “house of cards” metaphor is Galbraith’s, and as I read it he is talking about Davidson’s critique of the New Keynesianism, which is an attempt not only to save capitalism from itself but to save Neoclassical economics from its fatal flaws. My reading of Keynes always has been that he strove to replace the Neoclassical house of cards, not rebuild it. If my reading is incorrect, then I’ll stand corrected. If you disagree with my reading, or with Davidson or with Galbraith, that’s ok.

      I would love to “exclude the wealthy elite from the basic conversation” but I fail to envision a path to do that, given the growing wealthy elite ownership of media and the Internet. And I’m mindful of Galbraith’s last clause, ” how far from sanity and civilization we have drifted, in the decades since the death of Keynes.” And, with manmade climate catastrophe and destruction of the commonweal, we have little time to turn this around.

  4. Stefan Voss
    February 19, 2018 at 11:28 pm

    Davidson´s comments are very worthful for the next generations. We never should forget his great contribution he addresses to whole mankind.

  5. Charlie Thomas
    February 20, 2018 at 4:45 pm

    I am appalled by the credit given our economy by Fox followers. I wonder if there is a place to compare the last year for Europe and the US other economic entities. Is our growth much different than the rest of the world???

  6. Edward Ross
    February 21, 2018 at 11:39 am

    To Econoclast February19, 2018at 9:16 pm

    Now doubt I am a bit slow in trying to figure out what exactly Galbraith was saying or implying what Davidsons stance was. Thank you for clearing that up because from my lived experience observation and reading of Keynes is exactly as you describe it. Furthermore for at least for the last 20 od years I have understood Keynes has constantly challenged the validity of the neoliberal economic and political ideology. Then on your concern for the future I again I agree with you that this problem should not be ignored. However i believe it is imperative that it is understood that firstly climate change is a natural phenomena that is greatly accelerated by humans disregard for mother earth whom we all to often ignore. Thus there is a need to include agriculture because we all need to understand how our food is produced and anthropology to try and understand hoe culture affects peoples thinking. Then last but not least an economic system that fosters equality that as Keynes once said the policies of neoliberalism were more likely to promote war than piece. Once again thank you for your tolerance . TED

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