[Welcome Paul Davidson, and Host Stirling Newberry - bev]
The Keynes Solution: The Path to Global Economic Prosperity
Some books are written for their moment. When John Maynard Keynes published his General Theory the world was, in fact, more than ready. Key ideas had already been put forward in papers and letters, and political figures were already looking for a means to implement truths the felt to be correct. Keynes advised, prophesized, synthesized, and proselytized. But to some extent he was a victim of the breath of his ideas and the range of his converts. As with many other epoch making ideas, it was in redaction and reduction that Keynes came to the world.
At the same time economics began to suffer from a kind of physics envy, taking equations and a search for mathematical complexity as well as a formality, which translated into equations of the economy with dizzying numbers of variables and parameters. Keynes, whose mathematical formulation was elegantly open, became known through more complex ideas meant to join the classical “economic” formalism of the marginal revolution, filled with a sometimes illusory clarity. The result was often like sorting grains of sand with a pair of tweezers. The result is that many of Keynes most radical ideas were implemented in bastardized form. It was a result that he saw coming, in that policy, he knew, was not made by great intellects.
Other books are written before their time. Paul Davidson‘s compact book on Keynesian solutions is such a book. It should be clear by now that the present generation in power is looking to save Friedman, Barro and Lucas. Keynes is the shadow that hangs over present policy makers, more because they understand that if they fail to deal with this crisis, a true Keynesian moment will arrive, and with it a radical restructuring of power.
Which is precisely why people should be reading, and reading carefully, what Prof. Davidson has to say. Reviews so far have been inordinately condescending, talking about Davidson’s place as an interpreter of Keynes, or the place of theories in the village discourse. Davidson, however, is not writing about film or fashion, or television, or any other subject which is about divining the zeitgeist. Instead, he goes back to the roots of Keynes’ theory, and looks carefully at what he finds. It is the ideas, and their applicability, that matter.
First he finds the market mechanism wanting as a sole arbiter of human fate, because it is, as even it’s defenders admit, filled with metaphysical entities that have no real existence, and run by people who are anything but rational, but instead infected with fear and greed. Instead, Davidson argues that Keynes has a better grip on reality, and that economics is about real things. From there he launches an almost point by point assault on the various symptoms of unreality in economic thinking: views on deficits as being about numbers, views on toxic assets, global trade, and income distribution.
Davidson’s early books patiently elaborated on how the total supply, and total demand, in an economy only tend to balance at the point of what Keynes called “effective demand.” Too little demand sets off a spiral of stagnation, and leads to the “paradox of thrift.” The neo-classical solutions of the last 30 years have been on the assumption that demand was robust, and that prices could be raised, and wages lowered, virtually indefinitely, if done slowly enough. In fact, in the UK right now, Labor and the Tories are arguing over exactly how fast they can boil the public’s frog.
This crucial idea inverts the importance of supply and demand in policy.
The last generation has seen a focus on the suppliers as being the special class, and the public being a kind of infantile gob, that sucks in, but produces only a lump of labor. Supplier policies have a very clear boom and bust pattern. Let the boom run, and then, when the bust occurs, find a way to spread the pain out over a large enough number of smaller people, that there is no place for the electorate to run to. In the United States, this has lead to Japanification. It is also not a market theory, in the end, since it is about small groups of elites making large decisions based on large concentrations of power and capital. Instead, the demand side view is that people know what they want, and, on aggregate, they will make better decisions than 8, now 20, finance ministers who all have Goldman Sach’s upper executive suit on speed dial. Hence instead of a constant spiral down of real wages, a wage policy that undercuts attempt to externalize cost, and profit from it.
From here he goes on to financial regulation. Because in Keynes’ theory, future required investment is too uncertain to always match future savings, and therefore, it is not assured that production will be here when it is needed. This creates a built in instability in a market economy: investment and savings are not always equal, because it is planned, not present savings, that finances planned, not present, investing, but any project requires planned investment. The swings above and below this point of equality, are enough to create permanent instability. Government then steps in, and makes sure that savings is stable enough, by, for example, having a public pension system, and that planned investment will be relatively constant, by, for example, borrowing when investors are panicking and banks are not lending. The last decade, again, attempted to end run this, by creating investments which were safer than safe, out of loans that were too risky to make.
Think on this the next time a radical libertarian pretends to have some deep connection to reality that liberals lack.
Prof. Davidson is not expansive in his explanations, he neither he spares complication, nor does he shy away from making proposals which will shock the conscience of a freshwater economic thinker. The average reader is going to have to pick up the book, read, set it down, and think. Because Davidson is thinking more like an economist than most economists. Instead of arguing that because we have not had a great depression, all is well, he argues that we have to compare what we have, to what we could have. Yes, the Great Recession is not the Great Depression, but it is far less than a path to global prosperity and development. This, in the jargon of the field, is known as the opportunity cost, and the opportunity cost of current policies figures prominently in Davidson’s description of how deficit spending works.
Can these ideas work? They have more actual rigor than those being proposed, a longer track record of success, and empirically better results. They also mean a radical reduction in the demand for private jets, and governments that no longer act as if their job is to sell financial policies to the public in return for campaign contributions. Can these ideas be implemented? They are in fact simpler and more streamlined than the ones being pursued. One could drop the entire book in the current version of the health care bill, and only raise a medium sized ripple. Can these ideas be understood? We clearly didn’t understand Guassian copulas and structured finance. Are these ideas good politics? Better politics than high unemployment, flagging industrial production, and a world unable to raise capital for vital projects.
While policy makers present are busy ignoring the contents of this book, policy makers future would be wise to read every word of it, and agree or disagree, understand the thrust of the argument: that ultimately that demand drives policy and politics. This lesson was forgotten in the 1930′s, to the world’s peril. Once the system could not supply the aspirations of a wide swathe of people, they turned to totalitarian states. As Keynes argued then, there was a precedent for what was happening in his day and age, it was called “The Dark Ages.”



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Paul, Welcome to the Lake.
Stirling, Thank you for Hosting today’s Book Salon.
Glad to be here and looking forward to some excellent questions
Paul, have you heard if the Nobel for Economics been announced yet?
No. It should be announced on Monday october 12.
The Economics in memorial of Alfred Nobel is due to be announced Monday October 12th.
Welcome Paul, and thanks for the intro, Stirling. How do you bring this down to the layman’s level? Can we start with what we’re doing wrong in macro-policy — fiscal or monetary, public vs private investment — start anywhere, and ask, what should we be doing instead?
Good afternoon Paul and welcome to FDL.
I have not had a chance to read your book and am far from being an economist, but noticed one thing early in Stirling’s write-up.
Has there ever been any economic theory of any sort that hasn’t been implemented in a “bastardized” form? It seems that Keynes at least recognized the human element as the biggest variable. It seems that way too many econ theories get proposed as if life is some pristine environment where things fit perfectly.
Or I might be an idiot.
The interesting thing about this prize is tha it wass not part of the original Nobel prize– but was started by the Central bank. And even more interesting is that more Nobel prize winners have come from the Chicago School– and have had some hand in the developing the “efficient market” theory of financial markets.
I guess since Nobel invented dynamite — these Nobel Laurates invented a theory to blow up financial markets!!
Stirling notes current policy makers are “busy ignoring” the contents — can you be more specific? What’s the most important lesson they’re missing, why, and where does that lead?
We start by nidiating that in the last three decades, government has been removing regulations that were developed in the Roosevelt Administration to prevent another Great Depression — and the efficient market theorists provided he rational for doing these things— and this occurred under both Republcan and Democratic (Clinton) Administrations.
So if they give the award to E. Fama, should he decline it on grounds the school didn’t anticipate and/or had no solution for the financial collapse? The Krugman response might be worth it.
No you are not an idiot — you are quite perceptive — but mainstream economic theory has presumed that humans were “rational” economic decision makers who could accurately “know” the future — and therefore would never make any critical mistakes.
So, since real wages stagnated at the end of the 1960s, households have increased consumption by sending more people out to work/household, and more importantly borrowing, borrowing, borrowing. Is that at an end, or will household borrowing cement the nascient recovery?
Can you explain what “Japanification” means?
Welcome to the Lake, Prof Davidson.
Reading your book took me on a little adventure right off the bat. In Chap 2 you quote a letter Keynes wrote to G B Shaw where he states, “…in particular the Ricardian Foundations of Marxism will be knocked away.” That led me to Keynes’ General Theory, which I’ve started, which in turn led me to Gesell’s Preface to The Natural Economic Order.
Even after the economic failures of the Bolsheviks did Keynes and other economists still regard “Marxism” as a viable political economy and, if so, why?
Hi I have this idea the Right meaning Newt disses Keynes for the economic problems of the 70′s the Failed Great Society.
However taxes were not raised enough to cover the costs of Viet Nam which led to higher interest rates and a dropping dollar a dollar which dropped so much we had to leave the Gold Standard under Nixon because other countries wanted Gold rather than dollars.
Also and please correct me if I’m wrong there was no big jobs program to get consumers working and spending again.
I don’t know who was doing economic policy then but it was not Keynes.
Anyway am I missing something in my theory?
I need to sharpen my arguments because I think Newt will run for President and I know he will attack the 70′s and blame Keynes.
Sorry my computer konked out as I reesponding to scarecrow
The 70s economic problems were created by Nixon’s wage & price controls (which kept prices from moderating shortages), by Arthur Burns continual underwriting higher inflation thru monetary policy, and two oil price shocks. Nothing about Keynes in there.
Don/t worry, Fama will say it was the poor regulators who created the problem by interfering with the free market
The magic of complex math used not to predict but to justify Ponzai schemes but in the future how do we combat economic ideas that by design are to complex to be understood oh and of course they won’t reveal their secret formula’s for fear other fools will copy them.
Nobody listens to Buffet if you can’t understand an investment don’t buy. (not exact quote)
Re: Japanification
Sure. In the late 1980′s Japan had a massive stock market run up, with an intra day high of 38957.44 on December 29, 1989. This bubble collapsed. The Japanese ministry of finance and central bank protected the large share holders and banks, and engineered a real estate bubble. At the peak of this, the widely quoted factoid was that the imperial palace was worth more than all the land in California.
This secondary bubble collapsed, leaving banks holding huge amounts of bad debt and bad instruments. Their solution was to again protect the banks, and loan money at 0%. The banks then loaned at much higher rates of interest to gradually retire the bad debt.
The result was “The Bright Depression” or “Lost Decade” in Japan. It was very hard to get capital, and everyone slowly drifted into Tokyo, because much of the rest of the country was completely stagnant.
This form – a secondary real estate bubble, followed by a period of banks borrowing at subsidized rates and lending at high rates, because they had almost no real money, is what we see now in the United States. Sadly many great economists did not see this clearly… thinking “we are too smart to let what happened to Japan happen to us.”
And those were the liberals…
depends who is borrowing. Remeber mr. McCawber’s philosophy in Oliver Twist. FFr households that is true!
You always blow my mind, with your historic and personal experience with the economic history.
Me? That’s a whole other pickle jar.
Thanks, eCAHN.
I’m here to learn.
Thanks eCHAN still
How did he do that my Econ history is a little hazy.
“The magic of complex math used not to predict but to justify Ponzai schemes but in the future how do we combat economic ideas that by design are to complex to be understood oh and of course they won’t reveal their secret formula’s for fear other fools will copy them.”
Almost every financial innovation, currency, paper money, stock, bonds, options, was first used to create a financial bubble. Human beings are very good at inventing ways of convince other human beings to believe that a promise is as solid as land, as good as gold, and that a flock of birds singing in the bush is worth at least the one in your hand.
Sterling used that phrase not I. I guess he means tha Japan lost a whole decade (the 1990s) economically
He was chair of the Fed, and consistently either ran rates lower than he should have, or injected more money into the system than he should have.
No. The State owned means of production is not a good economic system. When I was in
Hungary –when it was still behind the Iron Curtain — the economists ther4e told me a joke. We pretend to hire all wo9rkers so there is no unempoyment – -and the workers pretend to work and produce things but there is nothing in the shops!
Well Helicopter Ben Summers and Geithner sure but what about regular economists or even WallStreet they got burned by those guys and lost billions if they still follow Friedman I think were headed for trouble in the stock market.
I’m going to ask what may seem to be an overly symplistic question, and I KNOW there are many many problems with regard to Wall Street deregualtion and the way the traditional secondary mortgage market has been turned into some sort of frankenstien monster, and other types of
gambling, er specualtion that do not belong in stable economy.My question is this: Out of all the factors that contributed to the economic collapse, if you had to pick one combination that drawfed all the others, what would it be?
For me: it would be the ridiculous spending onthe wars coupled with simultaneous tax cuts that caused a deficit bubble to grown seemingly overnight.
What’s yours?
At that time, the FRB had targets for the growth of money supply. Every 6 months at the Humphrey-Hawkins testimony, Burns would report that money supply growth had exceeded the target, but they would surely meet the next targets, set to start at the actual level of money supply, not at the lower point where the money supply would have been, had they met the target.
Thanks I assume he did this for short term political purpose.
Reply Keyynes devbeloped an inflation analysis that identified ytwo types of inflation– Commodity Inflation and Incomes In flation.. When inflation occurs, it is always one or the other or both– The solution to each is in my book.. An by the way the solution to the first type of infloation was, as I show, introduced by the Pharoh’s economic advisor, Joseph and it was a tremendous success!!
Several questions:
1) Is it not true that Adam Smith’s theory of a perfect market is inapplicable to a market in which one or more players is able to exert monopoly-type pricing power?
2) How can government spending today have long-lasting payback unless it’s in the area of renewable energy?
3) Do Keynes’s ideas apply to an economy where consumer demand is credit-financed rather than wage-financed?
Thanks.
Where do the mega investment banks fit along the “path”? It seems the largest have emerged bigger than ever, too big to fail, too powerful to break up or regulate, to corrupt to keep from watering down any attempt to hold them or their executives in check. Is there a plausible path underwhich these creatures are brought under control, or made less of a predatory menace?
My bold Has he seen the business channels they admit nothing.
I have a distant relative in Poland, whom I visited in 2000. In their 40s, his wife was an economist educated during the communist era, so I asked (thru their kids, who spoke English & Polish) how she coped. She pointed a finger in one ear and a finger on the other hand out the other ear; being sign language, no translator was required. However, she went on to explain that the words for “memorize, pass, forget” all begin with the letter “Z” in Polish, so she practiced the 3-Zs.
Again we had a Security and Exchange Comission and a Cmmodities Future Trading Commision to regulate financial markets and avoid Ponzi schemes ,bubbles, etc. Both these were defanged in the last three decades some by specific legislation and some by Presidents putting in Administrators who could not, or would not, do their job– Remeber “good job, B rownie”?
Of all the 6 post-WWII decades, there was only one when inflation was a problem. Don’t know why people are still so bent out of shape by inflation.
In the modern economy, there is another source of “inflation,” which is what I call the mafia of the intelligentsia, i.e., medical, legal, and higher education. Those might be referred to as relative price changes, if it weren’t for the fact that medical inflation is a macroeconomic threat. BTW, intelligentsia refers to the knowledge gap between buyer & seller, which gives the seller economic power, and mafia instead of cartel, because the customers of those industries are vulnerable, and the seller takes advantage of that.
There is a quote in my book from Jerome Ravetz, an excellent mathematican from Oxford who notes that math that was used — assumed away the possibility of un certainty about the future.
Let me note that all these Wall Street risk models were built on the Arrow-Debreu general equilibrium system (Both Arrow and Debreu won Nbels) where each decision maker “knows” his current and future income and b udget constaints for all periods in the future. Hence in such a mathematical system no rational decision maker would enter into a contract for future repayment (e.g., mortgages) which he /she knew he/she ould not pay! Defaukts are impossible in such a system.
Is there a possibility that banks et al will discontinue the use of a computer model that pretends to know the future? I’ve read recently that these models are still in use.
Great question I would like to add that a monopoly of information also influences the market in a non rational manner Cronies like Darth can get Halibutron all the government contracts they want even though as time has shown they are a lousy company that over charges.
Regular investors can’t know which Cronies are favored with research so they either guess, stay away or buy after the news Hal got a contract is announced.
The more cronies get deals the more distorted the market.
Maybe they should start drug testing WallStreet?
Ya flummoxed me on that one! McCawber was in David Copperfield, not Oliver Twist, and if you humm a few bars, I’ll pick up what his philospophy re borrowing was. It’s been about a hundred years since I read DC.
To fill in what Prof. Davidson alludes to. Commodity inflation is price inflation, Income inflation is costs of production. The business cycle is driven by the balance between the two. Cheap credit causes price inflation to rise faster than income inflation. Result, investment outpaces savings and there are windfall profits. Then animal spirits rise, and businesses chase these profits. Result, income inflation rises, and profits fade. “Sooner or later, goods coming to market will not be able to be sold at the previously prevailing price” and the downward part of the cycle begins.
From this he draws the conclusion that price stability is not always the best objective for a central bank, that instead “maintaining effective demand” will require periods of inflation of one kind or another, since it is safer and easier to adjust by having one rise more slowly than the other, than to have commodity prices fall, against loans that do not fall.
Reminds me in part of the housing price adjustment idea that Prof. Davidson had earlier this year, as a way of adjusting mortgages to be more in sync with present income realities.
The one most serious thing tjat kead to the current financvial crisis was the looseninmg of the Glass Steagall Act )starting in the 1970s -under Carter– and accelorating un der Reagan when Greenspan become Fed Chair [Interestingly as I point out in my book, Volker when he was chair voted against further loosening — and the ultimate repeal of the Glass-
Steagall act under Clinton — and spearheaded b y Republican Senator Phil Gramm of Texas.
If this had not happened, the sub prime and financial derivate craze could not have legally occurred.
If a Banker Wallstreeter said this stuff to a psychologist who understood economics would that Doctor have reason to commit against his will the patient?
Defaults are impossible?
Wall St makes sure to get rid of anyone who knows anything about business cycles, because such folks try to impede profit making on the upside & Wall St. knows it’ll be bailed out on the downside, so why should they take any precautions to protect themselves.
Therre are many things tha government could finance . Keynes was for government to spend in co-operation with private iniatives to make investments. Keynes was not for government to control most of the means of production. Again there is a list of things that could be dione in my book.
Sorry about that — you are right but I am an economics professor not an english literature professor.
Abslutely and they are going to get more mathmatically complex. The National Bureau of Economic Research is sponsoring a symposium in November on better waysw to measure systemic risk in financial markets. You ain’t seen nothing yet!
Conservatives claim to love the past because ideas that worked in the past are proven. However when it comes to Keynes and FDR they have a blind spot they just can’t think of these ideas without dismissing them its Cognitive Dissonance.
Thanks for exposing a blind spot politically now we know where to hit. Must remember to identify other blind spots.
Agreed but why I’m thinking Thantos the Death Instinct maybe? But I am open to other ideas.
Have you read the Difference by Scott Page? Any chance Wallstreet will build models as he suggests?
Your Q is above my pay grade.
Yes, Adam smith was supposedly applicable to a competitive economy — but as the argument about health insurance in Washington shows, most policy makers see the insurance industry as competitive (and no need of a public option) even with players as big as Humana and Aetna, etc.
As far as paybakc — how about repairing watyer and sewer systems that have been left top crumble– not to mention briddges and highways– the repairs and improvements should be done by private firms (not necessary to have a WPA). Also how about providing funds for state and locval governments to keep their educational system going and im[proving– as well as community collegesw, state universities, and government Pell grants, etc to sub sidize students from middle and lower incomes to get a great education. What better investment?
We need Hobbits with Rings of Power to take down the Dark Tower of Academia that is the Chicago School of Economics:)
The infrastructure isn’t crumbling where the top 1% live, and if the U.S. educated its workers properly, it wouldn’t be able to get away with paying them so little.
Your ideas on stuff are always helpful.
Krugman’s column yesterday speaks to the educational issue. It’s a disgrace here in Florida.
If the Glass Steagall act had not been repealed th invrestment banks could never have botten as big as they are– Citi bank could either be a commercial bank and make loans to customers and keep the resulting debts on their b alance sheets– citi could not also be an investment banker as well.
that would at least cut them down to a smaller size– but Citi bank as a commercial bank would still be big — bjut the FDIC would have dealt with it if the Citi commercial bak (only) failed instead of a TARP bailout.
Great Point we need to harp on this more.
What would Keynes do to fix our economy? And if we started now how much would it cost and how soon until we see it start to work?
Remeber a cost is always someone’s income. If cost of crudeoil goes up, the income of oil producers goes up,. If the cost of perscription drugs goes up, guess whose incomes goesw up. So we need to have a handle on cost production controls.
“If the Glass Steagall act had not been repealed…”
One of the worst policy blunders ever.
I don’t understand your point. The higher prices that the medical industry can charge owing to its greater knowledge and the customers’ vulnerability go into higher profits for the industry and waste and inefficiency. IOW, not related to the actual cost of production.
I have not read Scott Page. But I do have a quote from David Shipley of the Underwriting Agency of Lloyd’s of Lomdon, n which he and coauthor Peter Taylor comment on the current crisis by stating that we shopuld learn from this crisis “As investors never ytrust a manger who says he has a superior mathematical model”
Except didn’t Gramm-Leach-Bliley actually legalize the merger Citi undertook the previous year, with Travelers Insurance? Sanford Weill, in announcing the merger and describing the intended divestment of prohibited assets under Glass Steagal, said he expected legislation would come soon that would make divestment unnecessary.
And it did.
(Thanks for chatting today, Professor, and thank you Spencer for the intro)
This could be a Diary its interesting.
Good idea, but too much work, and too old. I wrote it up in 1991, so the whole topic is tiresome to me. And it requires charts and tables to do it properly, and html is retarded.
Its not math it says a diverse group of people can find solutions often better than a group of Experts can. I’m sorry I’m sure I’m over simplifying.
“IOW, not related to the actual cost of production.”
More exactly, the good that the consumers would otherwise have, becomes good that the insurance industry has.
Think of money and goods like water. One man’s expenditure is another man’s income. One man’s inflation is another man’s pricing power.
(And Arrow wrote a classic paper on why medical costs are not suitable for an unregulated market in the 1960′s.)
Maybe you need an intern who knows computers God knows I do…and I need an editor:)
heh Staughton Lynd could fix ya right up with that. The Wobbly way of doing things.
Distractions. Distractions.
Adam Smith’s ideas worked extremely well on the 18th and 19th Century American continent.
Free resources. Free effluent.
Today is about barons.
Do you have a ref to the Arrow paper? I have yet to see the phalanx of economists who study the medical industry focus on its structural flaws. It’s all a bunch of pieces.
This separation worked better for consumers, too. Nowadays, even folks who have been with a bank forever are not valued, only the huge business accounts matter. I think we need to get back to the former state of affairs for that reason, too.
Keynes wrote a letter to Roosevelt which was published in the New York Times early in the Roosevelt Administration in which he noted there were two problems (1) getting back to a full employment prosperity and (2) economic and social reforms. He recommended all attention be placed on the first — and AFTER prosperity is restored then we can work on the second.
So I would argue (as I did even before the Obama inaug) that spending in excess of trillion was essential! I think it is disgraceful that people in washington can talk about “green shoots” when unemployment is still expected to increase and not get restored to 5-6 per cent for years to come.
Just think what that does to people who lose their job– and even if they collect unemployment compensation so they don’t starve– they begin to lose their skills. Just think what it does to collge graduate — in 2009 and 2010 who will not get jobs! Also high school graduates who do not go on to college.
Actually, I don’t think laissez faire banking worked well in the 19th Century. There were at least three “panics”, or depressions, in the latter half of that century that were due to stupid behavior by banks or other financial institutions.
We might have made some lemonade out of higher unemployment if Congress had made it easier to go back to college or to a trade school. That’s another thing that wasn’t a priority, though.
Doctors pay, costs of drugs, CAT scans, hospital bed costs, profits necessary to keep producers of MRI machines in operation, etc are all part of the production costs of medical care.
Gee! With all the ECONOMISTS in the world you would think things would be better. Ours failed to see every problem this Country has, happeneing. Some like Greenspan everybody thought was God, blew it big time, but also helped to create the problems. Now we have Summers telling Obama how to fix things. Could that be why things are not getting better.
I think WE should pack up all our Economists and send them to China, then maybe we would have a chance of getting back to being a graet Country. What better way to defeat the Chinese than that.
That’s because the banks could do what they want — exert monopoly power.
Would spending on National Healthcare be included in the Job Stimulus or be a separate cost?
I distinguish between the costs necessary to elicit the supply and the excess costs extracted by the medical industry owing to its economic power.
right1 and in my book I quote the WaLL Street Journal who claims that Senator Gram told the lobbyist from Citi to getSandy Weil on the phone to the White House to get them to get enough votes for the repeal of the Glass Steagall Act. And the White House, a few days later, supported, repeal. Who did Sandy call? I prtovide some circumstantial evidence to answer that in my book.
What kinds of Job Stimulus have the best return on investment to our society and what kinds can employ uneducated/skilled millions quick?
Using MRI machines as an example, since the manufacturers must sell x amount of machines each year there’s bound to be a market saturation point. Then we start the cycle of “new and improved” which perpetuates the spending of imaging centers. Those things ain’t cheap. How do we control those costs?
But do those costs result in better health out comes and why does Japan which does more high tech testing pay less than us?
“Keynes is the shadow that hangs over present policy makers, more because they understand that if they fail to deal with this crisis, a true Keynesian moment will arrive, and with it a radical restructuring of power.”
Seems to me that the present crop of policy makers see the inevitability of the shadow falling upon their klepto capitalist system with the backing of some seriously annoyed populist finality, so they have decided to pillage and burn before that moment comes to pass. The second slide in a VV recession might just serve as the catalyst to make us look more kindly upon a ‘Scandinavian’ model of socio-economic organization.
And supply creates its own demand in the medical mafia. The doc whose friend just started a MRI clinic will be happy to refer patients to his pal.
Absolutely we need a 21 centry version of the Glass Steagall Act. The problem, however, is that with the ease of transfering funds globally via the computer, people will bypass US firms that obey the new Glass Steagall act and transact with foreign bankers who do not instead. That will merely cause a lose of jobs, and incomes in the US financial industries [FIRE].
So we have to also do something about the international payments system — again I develop a 21century version of the 1944 KEYNES PLAN for international payments in my book. The Keynes Plan, if it had been instituted at Bretton Woods, instead of the US plan for the IMF and World Bank, would not only allowed the US government to assure Americans did not transact with foreign banks that did not follow US laws, but it would also have prevented the huge trade deficits between the US and China,
Or we could follow Germany’s example during the Great Depression the Tea Baggers seem to want the *Cough* Galt Revolution to happen.
Outdone only by the consensus cold-shoulder given to the 1994 GAO report on the systemic risk of OTC derivatives.
Sounds Great!
Got a clue what stopped “bank runs”? Federal deposit insurance — since all bank depositors expect our deposits to be fully liquid assets that we can use at any time to pay our contractual obligations.
When a bank goes bad, without insurance, our deposit at the bank becomes an illiquid asset tha we can not readily use to pay our contractual commitments i.e., to pay our bills.
By the way the problem of thinking an asset is liquid (i;e;, can always be converted into cash) was an important principle behind why people were so willing to hold their wealth in these exotic financial derivatives. And when the sub prime crisis broke — all those people holding financial derivatives suddenly found them to be illiquid — i.e, they could not be cashed at almost any price. [Again all this is dicussed in my THE KEYNES SOUTION book — and the policies to prevent this from happening again are suggested
When do we try and fix the budget after we save the economy when unemployment is 5%, 3% or is there another measure?
Like Churchill’s comment on the imperfection of democracy — but it is the best system of government humans can devise; Keynes believed the capitalist system was imperfect but the best system humans had devised for the pedople in the system.
Keynes pointed out that the two main problems of a laissez-faire economic system was (1) it inability to maintain full employment and prosperity and (2) its arbitrary and inequitable distrbiution of income and wealth. His theory was primary aimed at the first problem — which during the Great Deptression was the more important one– but it has ramifications for solving the second problem as well — again see my book on how to make the capitalist system a civiized society
So any chance you can get on some tv shows to talk about the economy?
You are indirectly asking about the problem of the federal governments debt! Again, as I point out in my book, except for a short period inm the 1830s, the US government has always had an outstanding debt since George Washngton.
After World War II the national debt was approximately 120 per cent of the national income. How many of you who, like myself, grew up after that war have felt encumbered to pay off the national debt?
When the private4 sector buys (out of after tax income)all that can be produced by american employers and a fully employed labor force than the federal government can start reducing the national debt. But it must be careful. In the 1920s prosperity was everywhere, and the government took in more in taxes than it spent and therefore retired some of the government’s debt — until the Great depression followed. In the 1990s Clinton reduced the national debt as taxes exceed government expenditures– but
Hoov
you bet it is great!
As we come tho the end of this Book Salon,
Paul, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book and the economic situation.
Stirling, Thank you very much for Hosting this great Book Salon.
Everyone, if you haven’t bought Professor Davidson’s book yet, here is a link.
Thanks all.
Nobody invites me. I would ber glad to appear– but can’t even make it on Jon Stewart, much less Oprah.
If you got any pull with Tv people, tell them I am ready and willing.
Perhaps if my book would be reviewed more that might help. So far only the ECONOMIST magazine October 3 issue has seen fit to review it.
Hoover refused to spend as consumer demand dried up which is my fear about where we are headed now.
Certainly the FDIC helps me sleep at night these days.
Thanks for stopping by.
absolutey…but the real question is “why”
the answer is clear, it’s the easiest method for aquireing middle class wealthy, labor’s wealth and the producer’s wealth
it’s not only proven wrong in every experiment, it was proven wrong before the philosophy was even adopted and I cannot believe if freidman was indeed an intelect he himself believefd it
a market cannot possibly “regulate itself”, the very concept of money is a set of regulations, of owenrship, of contracts, of law and posession, all are a set of regulations and there is nobody with even an ounce of intelectual honesty that would claim a market can regulate itself
maintaing those people who make that claim are either morons or theives
wiki;
translation>we found a principle that makes it easy redistributing wealth from those who create it to us, let’s go with it
Thank you for coming, Prof Davidson.
The Keynes Solution will get a second reading in the coming weeks. Habit.
In my book I quote Hoover as noting tht everytime he wanted to spend his Treasury Sec. Andrew Mellon told him not to there is a wonderful quote where Mellon says “liquidate labor, liquidate capital, etc. Then we will purge the rottenous out of the system and people will work harder
How about Amy Goodman on Democracy Now!? I imagine she’ll read it and have you on.
imho
there’s nothing wrong with creating debt so long as you have a product for your investment, and aqcuiring debt must be an investment of some kind after all, you can’t have one without the other, it then needs to be weighed if you recieve value for your investment
roads, bridges, water works, electricity works, clean envirnment works, science and research products
however when all you have for your debt is wealthy among a few percent of populace, you have not invested you have stolen
No pull but if you point me to tv producers who need to be convinced a large Mexican in a full length wool trench coat from the Chicago area can be very convincing without ever even implying anything untoward.
Openly that is:)
Thats Rahm’s problem he is to Obvious to be a real Chicago Pol.
Lets hope so! but she has not read it yet.
Great Talk Paul please stop by anytime and update us on your thoughts about the current economy. I have a feeling we will need your help to shoot down Newts Presidential run later! He will run and he will attack us on the economy he will also call Helicopter Ben and Geithner examples of Keynesian failure.
We must prepare the SMACKDOWN!
Ruth Calvo’s diary is upstairs!
Shibboleth: the Hate Crime Amendment
demand drives policy
but demand can be artificially created
if Keynesian principals abd policies are so great why were they abandoned?
sounds like something’s missing from the equation.
what are the most outstanding weaknesses of the Keynesian economic model?
the way the WalMart outlets prefer to sell in bulk seems like the ideal of Keynesian economic theory–leading to massive waste and over-consumption.
demand doesn’t drive policy, this statment takes a falsehood and states it as if it’s a fact
sking a question based on the false claim is “circular” adn then “begs it’s question
power drives policy…sometimes demand out powers the powerful
keynesian policies weren’t “abandoned” they were exiled by the powerful because it’s that much easier to steal without them
Thank you for a very interesting salon. I do hope to get this book.
In the 1970s, the so called “keynesians”, i.e., Paul Samuelson and Bob Solow of MIT thought that a past empirical relationship between unemloyment and inflation rate would hold — They argued that based on this past history (called the Phillips curve) at a lttle over 5% unemployment , there would be no unemployment — but in 1974 both unemployment and inflation rates went up simultaneously past 5% . Why?
As I explain in my book THE KEYHES SOLUTION, Samuelson has admitted (in his own words I quote him) that he never understood Keynes’s theory– and in fact got it all wrong! Keynes would never have used the “phillips curve” explanation of inlfation but since Samuelson claimed he was a “Keynesian” he gave Keynes’s analysis a bad name– and permitted Milton Friedman to push Samuelson’s “keynesianism” into the dustbin of history and open the path to politicans and policy makers to acccept the only available alternative that mainstrea economists knew — free market solves all problems.
Unfortunately people like Professor Sidney Weintraub of the University of Pennsylvania had the correct Keynes solution for the inflationj of the 1970s — but no one, except Henry Wallich a member of the Federal Re4serve Board of Governors — took Weintraub seriously. The Weintraub-Wallich solution was never taken seriously
Yo, Keith, Rachel, Max, Dylan, Jon, Stephen, are you listening?
Thanks, Stirling, for the clear and insightful explanation, and welcome, Prof. Davidson. It is a great honor to have you here.
A few thoughts. The neoliberal meme that the “free market solves all problems” is fallacious because free market is an oxymoron other than in a barter economy or perhaps a bazaar. In a complex economy based on capitalism, such as ours, prosperity is equated with growth regardless of the the GINI coefficient and capital accumulation is considered paramount. Under such a system markets tend toward monopoly unless they are restrained. Of course, capital seeks to avoid such restraints. As the influence of wealth concentration increases, the political system gets subverted by influence buying, and this becomes a self-augmenting parasitic system that eventually captures the apparatus of the state and bends the policy to the interests of capital over labor (that’s everybody who works for a living).
Then, “free market,” “free trade,” and “free capital flow” become propaganda memes employed to obscure what is happening behind the curtain, and the dominant principle becomes privatize gains and socialize losses. This propaganda is used to get working people to vote against their own interests, in addition to obscuring the three card monte. This is where the US finds itself now.
While I applaud the action of the government and Fed in adopting a stim to stem the decline in aggregate demand, let’s not kid ourselves about the rest of the story. Instead of addressing the problems at their source, the authorities are using taxpayer funds and guarantees to prop up an insolvent financial system while driving a debt deflation that is sinking the middle class, exacerbating unemployment, preventing the restructuring of toxic debt, and shying from the necessary reforms, including accountability.
It is clear that the output gap is not the top priority of this administration, even though unemployment is the most pressing social problem. Rather, it is rescuing influential parties who were imprudent in risk-taking and financiers who violated their fiduciary trust, not only at the cost of putting taxpayers on the hook and allocating funds to the top instead of the bottom where they are most needed from a humanitarian point of view, but also undermining confidence in both the government and the financial system.
This is as much a forensic problem as an economic one. It is also a political problem in that in shows that an oligarchy has captured the levers of government and is operating policy chiefly for its benefit in the name of “free market capitalism.” This unfortunate situation will continue until the people force legislators to get the money out of politics by instituting public funding of campaigns and outlawing legalized bribery in the form of lobbying.
While some economists (like MIT’s Simon Johnson publicly) are addressing this, I would like to see more economists, especially heterodox economists, showing how neoliberal ideology is being sold as the best policy solution based on bogus claims that rest on models that bear little relation to reality and are not substantiated empirically, if they are not actually falsified, as many have been. (See Steve Keen’s Debunking Economics, for example.) Unfortunately, their work is not getting the attention it deserves.
On this, you and I agree completely
Good statement tjfxh. The question I always have is why are politicians and voters so much more susceptible to false media propoganda, and administrators of government policies so less trustworthy.
Many years ago, I asked Ken Galbraith why politicians and government officials in the Roosevelt administration seem to be so much more ethical and relatively honest– Remember Ken was head of the OPA [Office of Price Administration] during world war II.
Ken thought it had something to do with the ethics of the people Roosevelt appointed as far as the government administrators were concerned — and the depth of the problem so that voters were not as easily fooled.
We certainly cannot say that about George W’s appointments or his voters (Supreme Court and otherwise). Can we say that about Obama’s?
regarding the status of the economics profession — I see very little change in their views about what is “good” and “scientific” economics derserving yenure at our most prestigous universities and space in mainstream economic journals. The mainstream still believes in the efficient market theory as the thoeretical organizing system and the non-validity of “heterodox” approaches to economic analysis. Even what some mainstream economists think is a radical departure from orthodoxy– namely “behavioral economics” is nothing more tha orthodox theory where empirical results provide (on the micro-level but not the macroeconomic level) some deviations from what would be rational behavior in an efficient market theoretical world.
Nevertheless, the organizing principle aganst which these empirical behavioral irrationalities are placed in the rational mainstream economic theory world where decision makers “know” the future.
for example, if people know the future during their working days they will save enough to live in the style they are acustomed to in their retirement years. [ An example of this is Franco Modigliai’s life cycle hypothesis –where people save more out of income during their earnng years and less when they retire and age closer to the grave. Despite my publishing in the Journal of Post Keynesian Economics in the early 1980s a study by the Institute of Poverty showing people over 65 saved more out income than those under 65, and people over 75 saved more out of income than those between 66 and 74, no one in the mainstream — including Franco took this empirical result seriously! Maybe they thought it just showed how senile our senior citizens are!
Now if behavioral economists show that many working people are not putting enough savings away for their retirement years,their response is to force “opting out” of 401k schemes when employed, instead of opting in as is the case today..
The behavioral economists still can’t explain why the propensity to save increases after 65 during retirement -so they just ignore that empirical behavior!
But Keynes’s analysis can.
This is a response to the review of my book THE KEYNES SOLUTION (“The Keynes Comeback” in the October 2, 2009 issue of THE ECONOMIST.
Today’s economic problems involves the largest global downturn since the Great Depression. Ultimately, however, the reviewer declares that the policies I developed for the 21 century global economy from Keynes’s ideas and philosophy for ending the Great Depression and creating a full employment global economy after the second world war are “to most others[ mainstream economists? politicians? powerful interest groups?] …. solutions that are outmoded and unworkable”.
Aren’t these “most others” the same people who for the past three decades have advocated government de-regulation of financial markets, no constraints on international capital flows (which led to the contagion of a U.S. sub-prime market collapse to threaten the global banking community), free trade with flexible exchange rates, and perfectly flexible prices and wages so that any unemployment problem can always be eliminated by removing any social safety net that protects the unemployed and thereby force unemployed workers to choose to accept lower wages or see their family starve to death? These classical policies are ultimately based on the ideas espoused by 18th century Adam Smith and 19th century classical economists such as David Ricardo and Leon Walras.
The reviewer argues that “the world economy may have changed beyond recognition since 1944 but to a true disciple of Keynes…[his] policies make sense” while most mainstream economists think them “outmoded”. Since the world economy has changed much more since the 18th and 19th century of classical economists, does the reviewer really believe these ideas of 18th and 19th century economists are not “outmoded” and unfounded or worse merely because “most ” mainstream economists and policymakers”, still cling to such failed ideas and policies rather than face the reality of Keynes’s analysis of how modern market oriented, money using economies actual operate?
Finally I am reminded of the advice an elder devil gives to a younger devil in one of C. S. Lewis’s books–namely do not argue over whether something is true or not but whether it is outmoded since this is practical propaganda that is more