Monday, April 9, 2012

What would Keynes Say?

Mainstream economists continue to parrot the single equation naive "Keynesian" model of macroeconomics. This model says that increasing "G" will increase aggregate demand and lead to a higher GDP.

This "naive" model was developed by Richard Kahn, not Keynes, and was brought forward in a world where government spending was, by modern standards, relatively modest.

Today, in a world where government activity consumes nearly half of all resources in the US and close to two-thirds of the resources of the typical European economy, it is highly unlikely that more government spending would have any "Keynesian-like" effects. Why would giving public employees a ten percent pay raise improve the GDP? Keynes would turn over in his grave to see his work interpreted in this fashion.

Most economists don't read Keynes. What they read is the simplest mathematical versions of Keynes devised by other economists who also never read Keynes. But the name, "Keynes," is tacked onto these models to invoke the spirit of this great economist.

But, it was Keynes who first came up with the expression of "animal spirits." What are "animal spirits?" According to Keynes, capitalism is driven by the "animal spirits" of entrepreneurs. These animal spirits have nothing to do with increased government spending. Indeed, increased government spending may serve to reduce the animal spirits, so essential to economic prosperity.

But mainstream economists seem to have no interest in the animal spirits of entrepreneurs that Keynes found so important in his actual writings, as opposed to the modern caricatures of his work that appear so often in media and elementary economics courses offered in major American Universities.

If the actual writings of Keynes were assigned reading for students, they would learn that Keynes himself never subscribed to the simple-minded models that pass for modern Keynesianism. A simple perusal of "A Treatise on Money" written in the 1920s and "The General Theory of Employment, Interest and Prices" published in the mid 1930s" would be enough to convince the modern reader that Keynes would never support modern "Keynesian" policies.

Even on things like the European debt crisis, you will find Keynes useful reading. Try his first major work: "The Economic Consequences of the Treaty of Versailles." Keynes makes it clear in "Versailles" that huge debts facing weak economies will cause those countries trying to collect such debts more economic pain than if the debts were reduced dramatically. Keynes would clearly not support the Geithner-Merkel-Sarcozy program for Greece, Spain, Italy, Portugal and Ireland.

It should be obvious that capitalism works best when the environment values capitalists. If the environment is unfriendly to capitalists, then capitalism is not going to fare well. If capitalism doesn't fare well, then middle and lower income classes have no real chance for economic progress. Most observers, regardless of their training in Economics, understand this.

Keynes understood this better than his contemporaries. That's why it was Keynes and not someone else who surfaced the idea of entrepreneurial animal spirits. Keynes would not be supporting the current war on capitalists being waged by Washington policy makers if he were here today. He would be looking for ways to stoke animal spirits not dampen them.

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