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Another Perspective
It's Best Keynes Remain Forgotten
Out of crisis comes opportunity. Unfortunately, neo-Keynesians are trying to seize this chance to rewrite both economic history and theory. As case in point is the Washington Post's October 19 piece by Robert Skidelsky entitled "We Forgot Everything Keynes Taught Us." Attempting to rehabilitate Keynesian economics and denigrate the more successful monetarist approach, the neo-Keynesians achieve neither. However allowing the attempt to go unchallenged would, in Skidelsky's own words, risk basing "economics on assumptions that [have been] so often discredited by events."
Skidelsky's neo-Keynesian thesis is "the New Economics, as Keynesian economics was known in the United States….[It] held that governments should vary taxes and spending to offset any tendency for inflation to rise or output to fall." He states such manipulation was beneficial, effective, and would have prevented the current financial crisis. That it did not is because of the ascendancy of the monetarist school's counter-argument that "inflation was due to governments' printing too much money" and that "asset bubbles can [not] coexist with a stable price level."
The fatal flaw in this simplistic explanation, that economic downturns could be governmentally fine-tuned away, are its empirical and theoretical inaccuracies. First, Keynesian economics was neither beneficial nor effective and has been rightfully superseded as a result. Second, nowhere in the monetarist approach exists the "theory" that stable prices equal stable markets; nor are there grounds for assuming a Keynesian-regulated economy equates to regulated markets.
Despite conceding the Keynesian failure -- it "generated its own problems, causing it to collapse into stagflation in the 1970s" -- Skidelsky states that "the years from 1950 to 1975 were a golden age." Ignoring the author's arbitrary date selection, an examination of post-WWII until monetarism's successful implementation by Federal Reserve chairman Paul Volcker in the 1980s shows the U.S. experienced eight recessions during 1947-1982. During this 36-year period, CPI-U inflation (year-over-year) was above four percent in 19 years. Hardly "golden" results.
THESE RESULTS are intolerable today precisely because of the monetarist school's success. Correctly attributing its rise to Milton Friedman (though incorrectly dating it to the 1970s -- Friedman's classic work, A Monetary History of the United States, 1867-1960, was published in 1963), Friedman definitively showed monetary policy's primacy over Keynes's fiscal policy. Its brilliance was basic: control monetary growth and you control inflation.
Monetarism's success has caused us to forget inflation's devastating effects. However, Keynes himself did not: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Friedman was that one man in a million and, interestingly, he included Keynes's quotation in his last major economic work.
Adherence to monetarism has almost eliminated U.S. inflation. During 1983-2007, inflation has been above four percent only five times. Similarly, only two recessions have occurred, one of which was the technical recession following 9/11/01.
Skidelsky is grudgingly forced to acknowledge this success (the "formula seemed to work") but then tries to shift focus to say stable prices did not equate to stable markets. Yet there is no reason or monetarist claim the two should equate. Removing inflation certainly takes away a major source of instability, but hardly all.
Nothing prevents money from flowing into a sector and driving up prices -- as occurred in the housing sector. The neo-Keynesians continue to hold the common misconception that rising prices equal inflation; when in fact, the relationship runs in reverse: a growing money supply (inflation) equals rising prices.
The neo-Keynesians also make another basic theoretical error by assuming their prescribed manipulation of fiscal policy -- regulating the economy -- necessarily equates to regulating markets. It does not, as eight recessions in 36 years attests.
THEIR FINAL ERROR is to attempt to use economic uncertainty (a point Skidelsky uses seven times in the last half of his article) to undercut monetarism. Again, just the opposite is true. The Keynesian approach, with its emphasis on constant fiscal tinkering on the economy, relies far more on certainty and "knowability" than monetarism. Friedman promoted monetarism precisely because of economic uncertainty: controlling money supply is much easier than controlling the entire economy as Keynesians attempt. Reliance on certainty indicts Keynes, not Friedman.
Aside from his empirical and theoretical errors, the author's worst failing is the implicit "philosophization" of the current crisis. Keynes and Friedman produced economic theories, not political ones. Certainly both have been seized by politicians for their purposes, but this is not economics' role or its failing. If we are going to discern the problems causing the current financial crisis, far better that we pursue it economically rather than politically. And far more likely that we will solve it that way as well. If we do so, we will stay on the current and correct monetarist course and resist Keynesian attempts to turn back the clock on the economy.
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Scott| 10.29.08 @ 12:59PM
This Financial Crisis began a long time before America was “discovered”, long before the British Isles were settled, in fact so long ago that many of us have forgotten. It was when humanity first made the decision that Land could be considered personal property and belonged in the marketplace as a commodity when in fact Land is a necessary component of Life and therefore a Birthright. Food and materials for clothing and shelter all originate from Land. In fact Land is where the majority of wealth producing goods originate. Along with Oxygen and Water, Land is a necessary component of Life and therefore a Birthright of every human being. All “great” societies have met their demise due to the neglect of this simple fact. We can point our fingers at peripheral problems and solutions all we want but until we learn to honor the contract of Life and build our social structure upon that Sacred Foundation we will always reap dire consequences in the long run. Land is a Universal Birthright!
There is a principle called Ockham's razor which is attributed to the 14th-century English logician and Franciscan friar, William of Ockham. It basically states that – "All other things being equal, the simplest solution is the best."
The following are two simple ideas that effectively create the ideal social construct.
Simple Idea #1
1. Socialize ALL Land (True Socialism defined as the vesting of ownership of Land back in the community as a whole)
2. Charge leases on ALL Land based on current market prices.
3. Return 100% of the resulting revenue equally to every man, woman and child (no matter their financial status) in the form of a yearly Land Dividend check.
4. Make the Universal Birthright of Land an Everlasting Standard in the education/understanding of every human being.
This effectively makes the average piece of Land Free for every Living Soul and restores our Natural Birthright as well as coupling our social construct to the Principles of Life.
Simple Idea #2
1. Remove ALL FORMS of taxation
2. Implement a Tax on ALL NEW goods based on the resources they contain and the resources they use in production and delivery (this can easily be implemented with the current barcode system used at the checkout)
3. Use this system to encourage/discourage various resource usages (High tax on non-renewable/ecosystem damaging products and low/no tax on renewable/ecosystem enhancing products) and to encourage purchasing of local products.
4. Use the resulting revenue to fund infrastructure expenses and the restoration of ecosystems.
This effectively encourages the creation/use of longer lasting, high quality products as well as encouraging recycling and reuse of existing products while also establishing a compatible relationship with the ecosystem.
Idea #2 effectively constrains the ravaging appetite of the capitalistic consumer society within the Boundaries of Sustainability while Idea #1 effectively encloses both Sustainability and capitalism within the Principles of Life.
That's it! The path to True Democracy (rule by the people) – True Liberty (Freedom of expression) – True Socialism (Universal Birthright of Life). Simple and Effective
Scott
Austin| 10.29.08 @ 3:57PM
Ok Scott. Your simple solution isn't so simple. Market prices change. The "market" is what someone is willing to pay. If someone suddenly offers more money to use "your home" which is really the home you are leasing under your program do you have to move?
History has also shown that property that belongs to everyone, belongs to no one. People will no longer take care of things and will allow them to fall into disrepair because it is not theirs to take care of. So will you have to use resources to make sure people take care of the public's property? This most effective way to do this is to give ownership of the property to those who are using it. Only if somebody owns it will they properly care for it. If you don't understand this then take a stroll down your local streets and see the trash that gets left on "public property".
We already have a good method of controlling the use of limited resources and that is price. If something is limited in quantity, but highly in demand it has a high cost. The world today isn't as polluted as you think it is. It is much cleaner than it has been in the past. A couple hundred years ago cities were disgusting places to be with human waste and garbage piling up. Nations and the people in them only care about the enviroment when they have enough relative affluence to care about it. That is why in our country we care about the enviroment, despite what you may think while in quasi socialist countries like China they do not.
Jim| 10.29.08 @ 4:35PM
Scott, you crazy man. My haid is abuzz.
To implement your solution, it must be preceded by dropping the "Big One" soze we can start again from the stone ages.
Even then it wouldn't work. If I pay a lease on "my" piece of land then effectivley it is "mine" as long as I'm making the payments. And believe me THAT IS personal. Who would have the "right" to move me off of it. Oh, I know, the community as a whole. Do I have no protection as an individual from a potentially corrupt community? fuhgetitaboutit DUDE!
Dov Henis| 11.11.08 @ 4:39AM
Life Monetized Energy, that Fuels Culture, That Drives Evolution.
Evolution Of All Matter Is Fueled By Energy.
What About Keynesian Notes In Economy?
A. At the serendipitous genesis of Earth life
The serendipitous genesis of Earth life, the up-phase of RNA-conformation oligomers into self- replicating genes - constrained energy polymers - was driven and effected by the sun's radiation.
This is evidenced by the Circadian rhythm, an innate genes characteristic, inborn due to the energetic conditions during their genesis, when direct sunlight was their only source of energy, available at different times of day in accordance with their location on Earth...
B. Life monetized energy
Genesis was a set-up of a matrix-field of energy with a potential extended between its source, the sun radiation, and the precipitated organisms. Thus started the ongoing formation and maintenance of Earth's biosphere.
And since the genes were thus born they could evolve only along more favorable energetic directions, towards ever higher constrained energy capacitance and stabler components. Survival was the direction, and survival is propagation. After all, Life's genesis was the start of Darwin's evolution. An ever more favorable energetic direction have included, most probably, energetic advantage of homochirality. And chiral homogeneity furnished, most probably, stable self-replication of biopolymers.
Thus Life monetized energy since life's day one.
C. Energy, capacity of acting or being active, fuels culture
Culture is a basic biological entity. It is the ubiquitous elaboration-extension of the sensing of and reactions, by genes-genome, to the goings-on in and beyond the outermost membrane of their housing, the cell, and of multicelled organisms, to the totality of their outer and inner environments.
These sensings and reactions are enabled by energy, the capacity of acting or being active.
D. Culture drives evolution of all constrained energy items
By plain common sense it is culture, the ubiqitous biological entity, that imprints genetics and drives evolution of Earth life.
And it is culture, the ubiqitous cosmic entity, that imprints the constitution of all matter in the universe.
E. Life, culture, matter and evolution are fueled by energy
And energy, the capacity of acting or being active, is REAL. It is not a virtual reality, an artificial image-environment experienced through human sensory stimuli.
F. What about Keynesian notes in economy?
In the present return to Keynesian steering out of the catastrophic world economy crisis the government is called to stimulate demand through fiscal measures, to effect a balancing act, 'creating' just enough money to cover a 'natural' amount of economic activity, without gliding either towards inflation or unemployment.
This is, in effect, assigning to money and credit in the economy the functional attributes of energy in life's evolution.
However whereas energy, the capacity of acting or being active, is real, money and credit are virtual reality. Their functionality depends on the image-environment experienced through human sensory-imagination stimuli. This smacks of psychology or faith-religion.
So what are the odds that a Keynesian course will steady the rocking boat? The odds are like odds of other things that depend on human reactions-attitudes. This steadying course will be as effective as the conformation of the 'people' with the 'hopeful' reactions-attitudes on which the
Keynesian assumption is based...
Dov Henis
(A DH Comment From The 22nd Century)
http://blog.360.yahoo.com/blog-P81pQcU1dLBbHgtjQjxG_Q--?cq=1