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Thursday, January 18, 2007

The Other Samuelson on Keynesian Economics

Every time I see an article on an economic topic by Robert Samuelson the columnist, I think of Paul Samuelson the economist. Today when this happened, on a whim I did a quick search to see if Paul Samuelson the economist was also a columnist. This is what turned up, an interesting discussion of Keynes and Keynesian economics:

The House That Keynes Built, by Paul A. Samuelson, Commentary, NY Times, May 29, 1983: When I was asked some years ago whether Keynes was dead, I had to reply: ''Yes, Keynes is dead. And so are Newton and Darwin.'' My point was that John Maynard Keynes had become part of history. ...

But by coupling the name of Keynes with two great men who altered the course of human thought, I was emphasizing the fact that Keynes was ... in the top class along with Adam Smith. Economics remains permanently different because of Keynes's innovations in the big-picture analysis of government fiscal and monetary policy now known as macroeconomics.

My colorful teacher, Joseph A. Schumpeter, who taught me ... at Harvard, ... was a great scholar. He formulated a theory of the business cycle and of economic development based on the crucial role of the innovating entrepreneur. ... But it is in no sense demeaning to Schumpeter's high achievements to place him outside the class that contains Newton, Darwin and Keynes.

Keynes is associated in the popular mind with free and easy government spending. And, during the Great Depression of the 1930's, he did in fact advocate unbalanced budgets as a device to create jobs and get the capitalist machine running again. Young economists by the hundreds rallied to his banner. I know, I was one of them.

But Lord Keynes was not the first, nor the last, to advocate public works in times of slump. ... The history of science shows that being an important influence in politics is not a way of holding lasting fame in the annals of scholarship. Adam Smith is remembered in our modern universities because he laid the foundations for the mainstream microeconomics which we still teach - the economics of prices, profits and the corporation - and not because he preached the gospel of laissez faire, for which today's politicians love to remember him.

John Maynard Keynes likewise enjoys within the academic profession of economics a scientific reputation that is quite distinct from his celebrity as an adviser to British and American heads of state on the use of stimulative fiscal policy.

Inventing Macroeconomics

A simple prescription for the Government to lower tax rates and increase spending actually did make good sense in the early 1930's when grass grew on main street and one bank failure led to another. By wartime 1942 and peacetime 1952, however, such simple Keynesianism was dead, as dead as the view that the mountains are 5,000 years old and that all matter is water, air, fire and stone.

What remains alive, however, is the apparatus of thought born with Keynes which recognizes that the supply of jobs and the supply of workers who want jobs are not automatically brought into balance in the short run by economic forces - and that governments need not stand idly by and let workers suffer long bouts of high unemployment.

Before Keynes, when I was learning my microeconomics as an undergraduate at the University of Chicago in the early 1930's, we had no handle on this problem. We had to attribute the persistent unemployment to uppity workers who insisted on wages that were just too high. But that was not a satisfactory explanation.

What perplexed us, and should have perplexed us more than it did, was how to explain why the crestfallen workers seen in the Chicago breadlines had been less uppity in the palmy days of 1928. We mistakenly tried to blame the high American tariffs for the huge unemployment of the Great Depression or blame Federal Reserve policy for feeding the great stock market boom that preceded the Depression.

What made Keynes different from the village print-some-money cranks whom we have always with us, was the fact that his 1936 volume, ''The General Theory of Employment, Interest and Money,'' did not take a narrow look at one or two isolated parts of the economy. He tackled the whole thing in one brilliant analytic formulation and provided economists with new ways of looking at how the entire gross national product is determined and how wages and prices and the rate of unemployment are determined along with it.

This was the advent of ''macroeconomics,'' a study that is now so commonplace in the profession. ...

Science is a Darwinian jungle -the survival of the fittest. New theories kill off old. Measurements test expectations, refuting most pet notions and corroborating a few survivors.

By 1939, Keynes himself was shedding his depression skins, shifting away from viewing unemployment as the primary problem, to focusing attention on the rising problems of inflation. His pamphlet on how Britain should pay for World War II to avoid inflation developed a new theory of ''demand inflation'' - whereby prices rise endlessly as labor and capital between them try to enjoy more than 100 percent of the output producible at full employment.

And as Keynes's own thinking underwent changes, so American scholars who call themselves Keynesians - or, more accurately, post-Keynesians - have gone far beyond 1936 Keynesianism. ...

Keynesian thinking was obviously not always well received, especially in the early days. At the same time, a scientific theory benefits not only from its friends, but also from its enemies. And the adversary process of scholarship that has produced the monetarist theories of Milton Friedman and others has helped to sharpen the modern application of Keynes's thoughts rather than to destroy them.

Monetarism emphasizes the critical importance of the money supply in determining the level of total output of goods and services in a nation's economy. This sharply contradicts the Great Depression version of Keynesian economics, which had downplayed the role of money and put its major emphasis on fiscal policy and the flows of income. Monetarism demonstrated the importance of the money supply both on the basis of historical evidence and plausible economic analysis.

I applaud this emphasis. Like Tobin, Modigliani and other American eclectic post-Keynesians, I was sharply critical of the Neanderthal Keynesianism that still dominated British economics as recently as 20 years ago.

I am not a monetarist, however. My reason and my reading of experience will not permit me to believe in a one-factor theory of causation. ... At the same time, I seriously doubt that freezing the growth rate of the money supply for all time is the best way to run an economy. ...

The Legacy of Keynes

One must not forget the birthday child at the centennial party, concentrating only on his partisans and enemies. ...

Keynes himself was, in a word, brilliant. Son of a learned Cambridge don and an activist mother (the Mayor of the town of Cambridge), he ran away with all the honors at Eton College (a prestigious boys school near London) and Cambridge University. With Virginia Woolf, Vanessa Bell and Lytton Strachey, he founded the precious Bloomsbury Set. As a youngster he virtually ran the British Treasury in World War I.

Wider fame came to him when he resigned from the Versailles peace delegation and warned that the punitive Versailles Treaty would only end in another rising within Germany. Hitler proved him right 15 years later.

In 1925, Keynes also warned Winston Churchill, then Chancellor of the Exchequer, against the folly of England's going back onto the gold standard at the punitive prewar exchange rate of $4.87 for the pound. Churchill, with misgivings that did him credit, was forced by the banking establishment to disregard Keynes's advice. The rest, alas, is history - a subsequent decade of mass unemployment and the eventual eclipse of Britain as a leading economic power.

Keynes was a canny speculator. He ran a successful insurance company, endowed the ballet and enriched King's College, his alma mater. Despite himself, he became respectable, masterminded World War II British finances, and set up the 1944 Bretton Woods system of fixed exchange rates, which lasted until 1971... He died a peer, Lord Keynes of Tilton.

For 20 years, American conservative opinion considered Keynes a radical. Herbert Hoover, who often attacked Roosevelt's deficit spending -invented the pejorative term ''Marxist-Keynesian.''

Actually, Keynes was an elitist exponent of the middle classes. Like Bertrand Russell, he recognized even before Stalin's hegemony the totalitarian inefficiencies of a system run in the name of the working class.

An optimist who lived at a time when the world economy was running so badly that clever gimmicks could still work wonders, Keynes's object was to save capitalism from itself. In the end, his prescription in its most simple form self-destructed, as the obligation to run a full-employment humanitarian state caused modern economies to succumb to the new disease of stagflation - high inflation along with joblessness and excess capacity.

Economists of the most diverse views are constantly asking themselves: What would Keynes advise if he were now alive. And usually - whether the economist is a free-marketeer like Friederick von Hayek or one with strong interventionist leanings like John Kenneth Galbraith - they pay Keynes the supreme compliment of believing that if brought back to earth, Maynard would be favoring just what each of them happens to favor. ...

For whatever good or ill Keynes may have wrought in economic ideology, when asked late in life what he would do differently if given a chance to live his life over again, his only reply was, ''I'd have drunk more champagne.''

On his hundredth birthday which takes place on June 5, (it also happens to be Adam Smith's 260th birthday) we can all join in a symbolic toast for a life well fulfilled.

    Posted by on Thursday, January 18, 2007 at 12:15 AM in Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (2)


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