Do We Need More of Keynes Now?

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Now
that governments and central banks are subjecting their economies
to aggressive monetary and fiscal-stimulus policies, many people
say that the ideas of Keynes are back in fashion. We heard that
Keynesian remedies can save world economies from plunging into a
severe economic slump. In the United States, for instance, Republicans
and Democrats are competing against each other to subject the American
economy to various stimulus packages. On this the Financial Times
recently
wrote
,

The lapses
into Keynesianism take different forms. For Republicans, it is
a time to propose new tax cuts for small businesses, including
a waiver of the capital gains tax, which many believe would help
stimulate economic activity. For Democrats, the preferences are
for an extension of unemployment insurance, food stamps and assistance
to struggling homeowners.

Despite trillions
of dollars that central banks worldwide have pumped, some prominent
commentators still maintain that it is not enough. For example,
Martin Wolf writes,

Yet, in current
conditions, monetary policy will be insufficient. This is a Keynesian
situation that requires Keynesian remedies. Budget deficits will
end up at levels previously considered unimaginable. So be it.

It is extraordinary
to suggest that Keynes’s ideas are now coming back to save the world.
Keynesian ideas have never left the rooms of government and central-bank
decision makers. The essence of the thinking of the most influential
economists was and still is Keynesian. So various stimulus packages
that are now introduced are a continuation of the same Keynesian
policies we have been subjected to for many decades. The present
economic crisis is the outcome of the large dose of Keynesianism
we have been given over many decades.

In a nutshell,
John Maynard Keynes held that one cannot have complete trust in
a market economy, which is inherently unstable. If left free, the
market economy could lead to self-destruction. Hence there is the
need for governments and central banks to manage the economy.

Successful
management in the Keynesian framework is done by influencing the
overall spending in an economy. It is spending that generates income.
Spending by one individual becomes income for another individual,
according to Keynes. The more that is spent, the better it is going
to be. What drives the economy then is spending.

Read
the rest of the article

November
1, 2008

Frank
Shostak is an adjunct scholar of the Mises Institute and a frequent
contributor to Mises.org. He is chief
economist of M.F. Global.

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