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.
November 1, 2008