Remember history when thinking of Keynesian economics

Over at Think Markets Mario Rizzo follows the advice of Paul Krugman and discusses what Keynes has actually said about infrastructure spending (ht Greg Mankiw):

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle

So infrastructural investment is good when we are in some sort of reinforcing hole where effective demand is deficient and “will not” go back to our primary equilibrium. However, Keynes appears to be deriding infrastructural investment as a way to smooth the “economic cycle”.

I see this quote as justification for the idea that, if we have multiple pareto ranked equilibrium and a large shock government can help – but if we have a temporary shock to demand infrastructural investment is not the way (furthermore it says nothing about structural shocks, which is part of the current story). I don’t actually think this conclusion leads to an ability to dismiss either the view of Krugman, or the views of Mankiw – given that they ultimately have different beliefs on what is the proper description of the current events we are facing …

  • Laura Harrison

    As has been pointed out, context is hugely important. There can be no doubt that Keynes continued throughout his life to believe that public works and other fiscal stimulus could be enormously important in overcoming, or preventing, recessions. This quote does not in any way support skepticism about public works. Indeed, Keynes explicitly says – “organised public works, at home and abroad, may be the right cure…”

    Keynes was arguing in 1942 for a system of buffer stocks, or “Commodity Control”, in addition to such an approach. The sentences quoted are immediately followed by this:

    “Buffer stick controls to deal with the epidemic of intermittent effective demand are therefore the perfect complement of development organisations (or international T.V.A.) to offset a deficiency of effective demand which seems to be endemic.”

    Keynes wanted “international T.V.A.” – to do internationally what President Roosevelt had done with the Tennessee Valley Authority. So much for skepticism about public works!

    The context of all this may be seen by reading Keynes’s Collected Writings, or the chapter of Markwell’s “Keynes and International Relations” dealing with Keynes’s vision for the post-war world. The latter makes it clear that it was Keynes being persuaded (e.g. by Alvin Hansen and Luther Gulick) that the United States was sufficiently committed to ideas like “international T.V.A.” that led him to think it safe to advocate an open trading order post-war.

    No one reading in context what Keynes actually wrote could, with intellectual integriy, imagine that he was a skeptic about the value of public works to alleviate deficient demand.

    Professors of economics (and others) who, implicitly or explicitly, quote out of context are liable to bring themselves into disrepute and contempt. The present crisis is too serious for this.

  • In this recession, i would think that if indeed consumer spending has halted then the government must intervene to prevent a systemic collapse. However it must choose fields that would create long term growth. Merely giving people money would only have a short term effect.

    Money should be invested in green industries, technology, etc.
    However the government must create infrastructure to prevent the problems identified by keynes.

  • Mario Rizza? Rizza? (shudder)

  • “Mario Rizza? Rizza? (shudder)”

    Opppps, sorry. What can I say – I’m blind and illiterate 😛

  • “No one reading in context what Keynes actually wrote could, with intellectual integriy, imagine that he was a skeptic about the value of public works to alleviate deficient demand.”

    Indeed – in the quote Keynes blatantly states as much. However, as I say in the post, Keynes is stating that the policy only makes sense when effective demand is deficient – not in the case of the standard business cycle. Furthermore, his quote does not even mention structural shocks – which is another scenario when higher infrastructure spending is not an optimal response to lower output.

  • “However the government must create infrastructure to prevent the problems identified by keynes.”

    We still need to justify that we are, infact, facing a sustained collapse in effective demand. The good thing about this quote from Keynes is that he makes this argument tranparently.