One of this year’s most fascinating intellectual developments has been the dawning realisation that much of contemporary academic macro-economics is simply wrong. Wrong in the quite literal sense that it just doesn’t accord with reality – which, as it turns out, should not surprise us, because much of it is based on assumptions that turn out to be flawed.
In the US, this point has been made with devastating effect by Paul Krugman. In Australia, the forthcoming book by John Quiggin looks set to be the best explanation of the “zombie ideas” that continue to haunt the profession.
But one set of ideas – associated with the British thinker, policy-maker and economist John Maynard Keynes – are back with a vengeance. There have been many who have written about the return to prominence of Keynesianism, including the undisputed expert on the man himself, Robert Skidelsky.
But, so far, the best short discussion of the renewed importance of Keynes’ economic ideas is by eminent US legal scholar Richard Posner:
We have learned since September that the present generation of economists has not figured out how the economy works. The vast majority of them were blindsided by the housing bubble and the ensuing banking crisis; and misjudged the gravity of the economic downturn that resulted; and were perplexed by the inability of orthodox monetary policy administered by the Federal Reserve to prevent such a steep downturn; and could not agree on what, if anything, the government should do to halt it and put the economy on the road to recovery. By now a majority of economists are in general agreement with the Obama administration’s exceedingly Keynesian strategy for digging the economy out of its deep hole. Some say the government is not doing enough and is too cozy with the bankers, and others say that it is doing too much, heedless of long-term consequences. There is no professional consensus on the details of what should be done to arrest the downturn, speed recovery, and prevent (so far as possible) a recurrence. Not having believed that what has happened could happen, the profession had not thought carefully about what should be done if it did happen.
Baffled by the profession’s disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis.
Read the rest here.