Stay Informed!

By Bill Schweke on 11/09/2009 @ 10:23 AM

Tags: Ideas in Development

The monetarists thought that he and his school of economic policy and thought were dead, buried by stagflation in the eighties and the emergence of supply side economics during the Reagan and Thatcher administrations. But there seems to be renewed life in the old boy and his disciples.

The financial meltdown of 2008 and 2009 demanded a Keynesian response. Yet, it doesn't stop there. Every month, there is another book about the man's life and ideas. Recent scholarship, regarding Keynes, has documented that his thought was shrunk to fit neoclassical theory. (Joan Robinson called it 'bastard Keynesianism.") Furthermore, the past ways that even most Keynesians have characterized his classic book, The General Theory of Employment, Interest, and Money (1936), was wrong. The following list is just a few of the most popular misconceptions.

• Keynes was soft on inflation.
• He was a socialist.
• He never changed his mind.
• He was an ideologue.
• He wished to end capitalism.
• His theory was not really "general" but instead fitted to the particulars of the Great Depression.
• The ideas proposed in his major treatise did not seek to replace classical and neoclassical economics but account for what to do when wages and prices were sticky and deflation is underway.
• You could "fine-tune" an economy.

Instead, Keynes hoped to save capitalism from its enemies on the left and its friends on the right. He wanted to end the terror that unemployment represented to the average person. And he advanced a new model of the workings of capitalism - one that put savings, credit, spending, investment, interest rates, risk management and securitization at center stage.

Keynes believed that the Efficient Market Hypothesis was false, market participants were far from rational, and that the capitalist economy had a strong built-in tendency to lurch from boom to bust. Most important, his earlier research on the theory of probability made him suspicious of views that most market risks are manageable by viewing past trends. Rather, he felt, to quote Donald Rumsfeld: "There are the unknown unknowns." Very few of the opportunities and threats faced by investors are predictable. Uncertainty, instead, characterizes markets as well as "planned" economies.

The uncertainties of technological change, wars, weather, new financial products, elections, coups, and so forth create lags, defaults, inflation, business shutdowns, uneven development, and joblessness. These cannot be avoided. According to Keynes, any theory and policy about modern capitalism must address this fundamental uncertainty: very little of the future can be predicted.

A new economic 'world view" is in the wings. Let's hope that a true Keynesian revolution occurs this time.

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