Pater Familias

DON’T REJECT KEYNES. Kids, you will be reading claims in the future that Keynes should be ignored because his ideas were unsuccessful in dealing with this great recession. I know you will be reading that because many people are saying that now. My opinion is that Keynesian thinking has not been tried. I say Keynesian thinking advisedly, for the reasons I gave in the last posts. (Remember that I am a Keynesian.) I have looked at macroeconomic developments through Keynesian glasses since 1961, and the Keynesian explanations of those developments always seemed plausible. I think that I have lived through two successful applications of Keynesian policies during those 50 years: Kennedy’s and Reagan’s. (Reagan did not say his policy was Keynesian, but there was a combination of fiscal easing and monetary tightening.) Both Kennedy and Reagan included measures to encourage increased investment. Kennedy had an investment tax credit and Reagan had accelerated depreciation. There has been little discussion of encouraging investment in the last couple years. I think that the uncertainties about future health care regulations, financial regulations and tax rates for 2011 and beyond have had a discouraging effect on new investment and new hiring. Of course, I can’t prove it, but I don’t think that the case against Keynes has been proved or can be proved either. The next time there is a recession, look at Keynes to help you understand what’s happening.

A KEYNESIAN ANALYSIS OF DEFICITS. I think that in analyzing a policy to deal with a recession, Keynes would include an analysis of the policy’s effect on aggregate investment. A letter in the Financial Times (July 22, 2010) by Sheila Dow, Professor Emeritus of Economics, University of Stirling, Scotland, analyzes the current debate about deficits in terms of the effect of deficits on investment. She points out that Keynes “argued that policymakers must seek to boost business confidence, to change conventional judgments and to stir up their animal spirits (the urge to action in spite of uncertainty).” She then restates the deficit debate in Keynesian terms: “The debate now is about whether fiscal stimulus or austerity would in fact encourage reasonable producers to invest.”

GOING BACK TO KEYNES—THE IMPORTANCE OF INVESTMENT. Professor Glaeser observed that “For decades, the economics profession had been moving away from Keynes….” One indication that economists have moved away from Keynes is that while the name of Keynes has been often invoked during the past two years, much of the discussion has reduced Keynes’s thinking to the simplified issue of whether larger government deficits can stimulate the economy and by how much. The effect of government policy on the amount of private investment has rarely mentioned in the last two years, and, despite the great importance of aggregate private investment for Keynes, private investment is almost never mentioned in discussions of Keynesian thinking. Keynes wrote a great book, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, which can be found (in its entirety!) here. Note that “Book IV” (one of six “Books”) is entitled “The Inducement to Invest.” In his discussion of the determinants of investment, Keynes stresses the importance of expectations of investors. Keynes says in Chapter 11 of his discussion of “The Inducement to Invest” that “Two types of risk affect the volume of investment….The first is the entrepreneur’s or borrower’s risk and arises out of doubts in his own mind as to the probability of his actually earning the prospective yield for which he hopes.” Another chapter in Keynes’s discussion of the “Inducement to Invest” (Chapter 12) is devoted to “The State of Long-Term Expectation.” In it points out that: “The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.” Thus, for Keynes, aggregate private investment is very important and subject to great volatility because the people who make investments can know so little about the future.

“WHAT ECONOMISTS DON’T KNOW AND PERHAPS CAN’T.” The caption for this post is taken from the title of this article by Professor Edward Glaeser. I posted here about the pessimism that I learned in the sixties about what economists can find out (because nature doesn’t run very good experiments.) Professor Glaeser is relatively optimistic about what economists know and can learn about microeconomic issues, pointing out that “Our knowledge of microeconomic policies comes from repetition and randomization.” The randomization studies are relatively new. (He mentions Professor Esther Duflo’s randomization work that I posted on here.) In contrast, Professor Glaeser is pessimistic about what we can learn about macroeconomics, concluding: “It is a great tragedy that the most important area of economic decision-making is also the area where we will always know the least.” His reasons (which are similar to the ones I gave here) are that “Recessions aren’t that common, and there are too many moving parts. Times change….”

THE AESTHETICS OF INDUSTRIALIZATION—LANDSCAPES. I seized on de Botton’s views on the possibility of admiring gas tankers and of finding pylons beautiful because I agree with them. I have always preferred landscapes that reflect human activity—think of Constable and Brueghel. I was pleased to read Richard Woodward’s comment in the Wall street Journal article that Rackford Downes’s “choice of subjects reveals a preference for inhabited sites over wilderness….” Woodward thinks that Downes is criticizing what Americans have done to the environment, referring to his “fixation on America’s careless treatment of waterfront and desert” and to how his paintings can provide an “undogmatic assessment of what Americans (indeed, people all over the planet) have done to the earth.” I prefer to focus on a quotation from Downes in Richard Woodward’s article: “I’m interested in evanescence, the uncaptureable quality, the quality of the form.” I think of his paintings as showing the beauty that can be found in landscapes that have been shaped by humans.