30th July 2012
Meghnad Desai, from the Labour (Fabian Socialist) Party – no less, decries Keynes’s ideas
Meghnad Desai (formerly of the London School of Economics) spoke at the Melbourne University a few years ago. I came out feeling that he was a sensible person, despite being a Fabian Socialist (Labour Party member).
Today he has come out against Keynesian stimuli. Extracts below. The original article is available here.
Jul 30, 2012
The US is barely managing to keep its head above the water despite having freedom to print money and a large fiscal package earlier in the Obama administration. Now, with four months to go before the election, there will not be any further stimulus.
Keynesian economics is a delusion, and hopes of a return to sustained growth a mirage. Keynesian theory is for a closed economy where the government can print money to pay its debts. The creditors are citizens of the same country—rentiers, as they are pejoratively called—and it is assumed that they can be squeezed. Keynes wanted to drive interest rates to zero as he was worried about excess savings.
Keynes also wrote a model in which output did not matter; only expenditure did. Demand will create its own supply, reversing the Classical adage that supply will create its own demand. Employment could be created by hiring workers to dig holes and fill them up. Thus, wages were the key, not output produced by workers. Investment is important more as expenditure; its effect on future output is ignored in the General Theory.
A whole generation grew up thinking all one had to do was to keep spending up and growth would follow.
Even the Monetarists—New Classical economists—did not demur from this. New Classicals operate on full employment assumptions; productivity is a ‘shock’ and beyond policy. So, they too don’t care about output.
Western economies went on for a while thanks to new innovations, baby boom and unfulfilled demand for goods after the War.
There was a switch to services, which sparked another boom in the 1990s. This was based on excess spending, negative savings and large borrowings from Asia. Output growth was mainly in services; trade deficits could be financed by capital inflows. But these creditors are foreign ones.
That credit-fuelled boom having now collapsed, there is no way out for western economies except a hard slog. Policies like QE, which lower interest rates, are exactly the wrong policies. Any attempt to ease the pain will prolong the agony.