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Keynes and the Triumph of Hope Over Economics

Author: Benn Steil, Senior Fellow and Director of International Economics
February 6, 2009
Financial Times


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.

Keynes, not coincidentally, had nothing to say about the proper components of fiscal stimulus. This allows him to be cited with great effect by both paternal progressives (who favour government spending) and caring conservatives (who favour middle-class tax cuts).

To be sure, economists have published peer-reviewed technical analyses of the efficacy of government spending and tax cuts. But when nature fails us we console ourselves with Scripture, not science, and 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 Frédéric Bastiat 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.

One of these good economists was Bastiat's fellow Frenchman Jacques Rueff, who in a 1947 journal article attacking The Fallacies of Lord Keynes's General Theory pointed out that governments "have a choice between only two solutions: to allow the apparatus of production to adapt itself to the structure which, by the movement of prices, the will of the consumers tends to impose upon it, or to adapt the desires of consumers by authoritative regulation to the structure of the productive apparatus which we do not propose to change". And insofar as the government's "investment programme diverts means of production from the areas where they are more desired to less useful employments, it will reduce the standard of living".

But Nobel Prize-winner Paul Krugman, who calls today "The Keynesian Moment", justifies such a trillion dollar investment programme on precisely the Keynesian foundations that Rueff demolished--the claim that money "would otherwise be sitting idle". When Mr Krugman buys his stimulus bonds, I am curious where the "idle" money will come from. Will he sell stocks? Bonds? Withdraw funds from the banking system? If it is not to come from a cash box, it is not idle, and Mr Krugman can only fall back on the hope that the government will use his funds more productively than businesses can.

But hope is precisely the platform on which President Barack Obama ran during his campaign. Hope has enabled the president to raise the estimate for the number of jobs his stimulus plan will create from 2.5m to 3m and then to 4m in the space of just a few short speeches. It is the ultimate faith-based initiative. And in the spirit of unity he promised to bring to Washington, his proposal comprised 60 per cent new spending and 40 per cent tax cuts, the same proportion as that of Democrats to Republicans in Congress. Yes, we can!

"Thanks be to Heaven, we are thus freed from all this terrifying apparatus of economics," to paraphrase Rousseau's fictional Savoyard Vicar. "We have at less cost a more assured guide in this immense labyrinth of human opinions."


This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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