THE RISE AND FALL OF “KEYNESIAN” ECONOMICS

These are the notes distributed by Dr Jerry Jones on 5 March at our second class on economics.

1. Reason for quote marks: various economists, notably John Hicks, re-worked Keynes theory and developed mathematical models to fit in with neo-classical equilibrium economic theory, ending up not Keynesian economics at all; policies of governments in the 1950s and 60s, though described as ‘Keynesian’, often were not.

2. Powerful political lobbies: story of textbook, Elements of Economics by Lori Tarshis (1947), based on notes while attending Keynes’s lectures in the 1930s – and why Paul Samuelson, Economics (1948) [plus many editions since], and his ‘neo-classical synthesis’, came to the fore (he wrote the book ‘carefully and lawyer like’).

3. Keynes’s refutation of ‘Say’s Law’, that ‘supply creates its own demand’.

4. Causes of unemployment – insufficient ‘effective demand’ (what I call economic demand); fallacy of composition of workers ‘pricing themselves into jobs’. ‘In the long run we are all dead’. Founding of macroeconomics and the development of national accounts: governments are not like households….

5. The myth that there needs to be savings before there can be investment – the folly of thrift….

6. Low interest rates to stimulate investment and economic demand – dependence on capital controls.

7. Economic priority: full employment. Workers in stronger bargaining position to push up wages, creates economic demand, which should stimulate investment…. Britain versus Germany and Japan. ‘It might not be British to sell pounds, but it makes sense’….. versus MITI (the powerful Japanese Ministry of International Trade and Industry). To maintain profits: a choice between investment and squeezing wages.

8. Smoothing out ‘business cycles’ government investment (not merely spending) when economic growth sluggish, but withdrawing when economy booming, enabling funds to accumulate to spend when economy slows – the short-termism of governments and their susceptibility to lobbying from vested interests.

9. Causes of inflation, and ‘stagflation’: ‘Excessive’ wage increases? Insufficient investment? Increased money supply? The undermining of credit controls? Britain versus Germany, Japan… Why ‘incomes policies’ are not a solution.

  • Bretton Woods and the Keynes Plan (1944). Proposal for an International Clearing Bank (ICB), issuing an international currency for the purposes of international trade (which Keynes called the ‘Banco’); and a Fund to rebuild the war-torn economies and invest in underdeveloped countries. Balance of payments: proposal for ICB to support countries in deficit and fine or tax those in surplus (which in effect export unemployment). In the event, Keynes was defeated by US Treasury Secretary White. The bank became a fund (the IMF), and the Fund became a bank (the International and Bank for Reconstruction and Development, now known as the World Bank). (Keynes died soon after).

    10. Fixed exchange rates to the US dollar, and the US dollar to gold, instead of ‘Banco’; not sustainable. Need for capital controls to minimise speculation; undermined by offshore financial centres, aka tax havens – with Britain leading the way – which also undermined credit controls and low interest rates.

    11. In spite of distortions, ‘Keynesian’-type policies still achieved the fastest rate of economic growth the world has seen either before or since, peaking in 1973. But, of course, never addressed the fundamental contradiction of capitalism – too much surplus labour appropriated at the expense of economic demand.

    12. Some discussion points:

    Is The Alternative Economic and Political Strategy and the BRS agenda essentially Keynesian?

    Is Chinese policy Keynesian?

    Can Keynesian economics have a role in a socialist economy?

    Jerry Jones
    5 March 2013

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