Is it Really that Broken?
Over at Facts and Other Stubborn Things, Daniel Kuehn put up a post linking to a number of Post-Keynesian blogs, most of which I am familiar with (with the exception of Econospeak). The ones that I am familiar with are all great, especially Social Democracy for the 21st Century, which I read daily. John Harvey’s blog, Post-Keynesian Observations, is also excellent (although he doesn’t post nearly enough).
Anyway, John Harvey introduced himself in the comments section of Daniel’s post and also spelled out a few Post-Keynesian themes. One thing he said was this:
From the PK perspective, the existence of uncertainty means that there is no tendency for capitalist economies to automatically move toward expansion and full employment.
This is a theme I hear constantly from those with PK inclinations. I ran across the same sort of outlook in one of Robert Skidelsky’s latest articles where he writes that
Keynes’s perspective on global imbalances was formed not just by the disturbances of the interwar years but by his reading of monetary history. He thought that throughout history the desire to hoard savings had been stronger than the desire to invest them, because at all times vague panic fears lie below the surface, denting our optimism and creating a permanent bias towards preserving existing value rather than creating new value. This was his explanation of why the world had stayed poor for so long…But normally people preferred to hoard rather than invest their money, that is to say there was a permanently high level of liquidity preference, which exerted a permanent upward pressure on interest rates.
What I take from this is that because people are uncertain about the future, they have a strong, and erratic, tendency to increase their demand to hold money which puts upward pressure on interest rates and ensures the economy could fall precipitously into a downturn at any given moment. Okay, that’s all fine and good. That certainly sounds plausible.
And then you look at history.
Looking at all the gains we have made from the industrial revolution to the present (the technology, the increase in living standards and real wages, etc), is one’s initial reaction that we’ve had an investment problem? Does it really look like we live in a world where it is normal for savings to run ahead of investment? A world where the economy doesn’t “move toward expansion”?
Granted, we’ve had episodes of downturns and those clearly haven’t been good for economic growth, but the gains we’ve made during the “normal” or “boom” periods have been phenomenal, to say the least. Even prior to the 1900s, when Keynesian policies were virtually nonexistent, it wasn’t as though we were all starving in the streets. The increase in real wages and the growth in output from the 1800s to the 1900s were staggering. The gains made during normal periods clearly outweighed the losses during downturns.
That is what I don’t get about Post-Keynesianism. They criticize the neoclassical synthesis and the Keynesian camps it has gone on to produce for relegating Keynes’ General Theory to a theory applicable only during specific times and under specific conditions (sticky wages, etc). Yet, that view of Keynesianism is the one that seems to make the most sense historically. It just doesn’t seem obvious to me (no expert on any of this, of course) that the economy is fundamentally broken. Perhaps the tendency to move towards equilibrium breaks during downturns, but things seem to get coordinated pretty well the rest of the time. People don’t seem to have a natural inclination to hoard, other than during specific circumstances like recessions.
The whole PK outlook seems pretty doom and gloom, really. If one was intimately familiar with the PK literature but knew nothing of the success of market economies in the west, one could be forgiven for imaging we could have never left grinding poverty without constant government intervention. Yet, market economies received little government help until the Great Depression and we saw living standards increase faster than in any period in history prior to that. In other words, the market functioned quite well (in most of the ways the classical economists said it would) except during downturns. That seems to me a pretty good argument against the PK notion that classical rules never apply (as though they were Euclidean rules in a non-Euclidean world, to echo Keynes). It seems that a stronger argument can be made that Keynes’ theory applies during downturns, and that’s about it.
I suspect I may be missing something here. I hope some PK comes along and shows me where I went wrong, if they can even discern what I’m trying to articulate in the first place. In the meantime I shall continue to contemplate this.