Wednesday, March 23, 2011

Thoughts on Keynes

Regarding NDDs' piece below a general debate that has occurred in the Economic Blogsphere over the last week or so (see this post from DeLong and this from Krugman) that centers around Keynes and the success of the New Deal during the Great Depression. Personally, I find these debates stupid and tiresome for several reasons.

First, they are usually derived from a persons political beliefs rather than economic data. There is a group of people on the far right who are against any government action regardless of, well, anything (be it fact, theory or whatever). Data and facts are meaningless. They debate entirely from a political perspective and their ideas are derived from a set of beliefs regarding the proper role of government in society. This is a great debate to have -- but it's not an economic debate.

Second, here's the basic fact about the New Deal: it worked. The country experienced tremendous growth rates in terms of both GDP growth and job creation. As NDD has demonstrated below, GDP growth was some of the strongest on record and the unemployment rate dropped sharply. NDD and I wrote a series of articles on the topic which are located at the following links (Part I, Part II, Part III, Part IV). In other words, Keynes' basic theories -- which formed the basis of the policy response in the Great Depression -- were validated by objectively observable facts.

Third, they assume an all or nothing approach to economics that I find, well, really stupid. By all or nothing, I mean there is an inherent belief that Keynes is 100% right or wrong or Friedman (who is usually heralded as the leader of the anti-Keynes movement) is 100% right or wrong, etc... What these arguments completely miss is the idea that maybe both are right and both are wrong in their own way all at the same time. Both and IS/LM model and AS/AD concepts make sense at certain times and in certain ways. Neither has a 100% hold of reality. To assume that one school of thought is so certain that it completely overshadows other work is pure hubris.

Here's the basic facts: Keynes was right about some very important things. For example, the fact that prices are sticky provides a big problem for classical economic theory. Government intervention (leaning against the wind) works when done properly (often lost in this debate is that governments are suppose to decrease their spending during expansions). Demand is a very important element of the national economy; without it, well, there isn't a whole lot of purpose in producing anything. I could go on, but you get the idea.

My .02 cents (inflation adjusted).