Saturday, February 07, 2009

Keynes and the Triumph of Hope over Economics

Benn Steil writing in the Financial Times has an interesting comment on the current exuberance for Keynsian solutions to the economic crisis.

This is a glorious moment to be an economist. In good times, we are mostly marginalised by the cheerful churnings of the market. But in those rare times when it all goes to hell, we are truly in our element. Now the politicians really need us. Who else can tell them how to reverse a recession by borrowing a trillion dollars? Henry Kissinger? Madeleine Albright? Yeah, right. What were their theses on?

And indeed, we as a profession are making our voices heard in a way we never get the chance to do when the credit is flowing, businesses are investing and consumers buying what business wants to sell. Then, we make arguments based on data, otherwise known as “facts”, processed through regression analysis and logical rigour, which few humans read. (I know, I am an economics journal editor.) Now, on the other hand, we call for trillion dollar stimulus plans on the basis of little more than citing John Maynard Keynes – and politicians revere us.

Citing Keynes gives us special licence to talk economics without using any. To paraphrase the lawyers’ dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes – and to great effect......

When markets fail us, we turn to Keynes. His famous quip that "in the long run we are all dead" is a profoundly satisfying justification for borrowing a trillion dollars right now, never mind that it contradicts an essential insight of our discipline: in the words of Frederic Bastitat from 1848: “The bad economist confines himself to the visible effect: the good economist takes into account both the effect that can be seen and those effects that must be foreseen” – in other words, the long run.

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