Posts Tagged ‘Keynes’

Friedrich Hayek and John Maynard Keynes

Saturday, December 17th, 2016

I just finished reading Nicholas Wapshott’s Keynes Hayek: The Clash that Defined Modern Economics (Norton, 2011). Herbert Gintis and Greg Ransom, two American economists whom I admire, wrote scathing reviews of the book at In contrast, I enjoyed the book, especially the parts dealing with the life and personality of Hayek. The book is an easy, quick read (Gintis wrote that it is akin to reading an article in People magazine!), but that is all the more reason to read it. Don’t purchase it for reference, however. Borrow a copy from a public library.

Nicholas Wapshott (born 1952) is a British journalist and writer who has a degree in politics from the University of York. Cardiff Garcia recently interviewed him for an Alphaville podcast.

What to me was most valuable is the attention that Wapshott pays to differences in the personalities of Hayek and Keynes. The differences are, indeed, quite striking. Here are a few passages from the book that caught my attention. I am more familiar with Keynes than with Hayek so, for this reason, ignore Wapshott’s many comments on the personality of Keynes. (more…)

Keynes vs Hayek podcast

Sunday, December 4th, 2016

I enjoy very much listening to weekly podcasts from FT Alphachat. The host is Cardiff Garcia, and the hour-long talk is almost always entertaining. This week’s podcast is particularly good. You can download it at the link below, or at iTunes. Notes and links for this episode will be posted at ftalphaville within a few days.

All FT blogs and podcasts can be downloaded without charge. (Free registration may be required.)

Cardiff Garcia sits down with Nicholas Wapshott, author of Keynes Hayek: The Clash that Defined Modern Economics [Norton, 2011], to discuss which economist’s ideas are ascendant in the post-crisis cycle, and why both will matter during the Trump administration.

Cardiff Garcia, “Keynes vs Hayek: NOW who is winning?“, FT Alphchat, 2 December 2016.

Nicholas Wapshott (born 1952) is a British journalist and author of numerous books, including Ronald Reagan and Margaret Thatcher: A Political Marriage (Sentinel, 2007). His latest publication is The Sphinx: Franklin Roosevelt, The Isolationists, and the Road to World War II (Norton, 2014).

I have added “Keynes Hayek” to my reading list.

Keynes was wrong!

Monday, November 3rd, 2014

No reader responded, but I found, in today’s Financial Times, an intelligent argument debunking yesterday’s post “Keynes was right!“.

Does monetary policy become ineffective once interest rates reach zero? With negative interest rates, monetary policy can continue to work, regardless of how low interest rates go. Real negative rates are certainly possible, and often observed, when the rate of inflation is greater than the interest rate. But the relevant question is: Are negative nominal interest rates possible? Martin Sandbu, writing in the Financial Times, thinks so.

In liquidity trap models of the economy, the central bank is impotent. Although it can create money at will, this power no longer provides influence over interest rates or the ability to give the economy a boost.

The reason this is said to happen is a supposed “zero lower bound” on interest rates. Central banks stimulate spending and investment by increasing the money supply. With more liquidity in the economy than people want to hold, they try to buy profitable assets for their cash. This drives market interest rates down. But when nominal rates are (near) zero, investors can hold all the liquidity the central bank throws at them without missing out on returns elsewhere, so money printing loses its power to pull market rates further down – even if that is what the economy needs fully to employ its resources. ….

But it is wrong to think interest rates cannot fall below zero. The rate most immediately under central banks’ control – the deposit rate on reserves – can be made as negative as one wishes. There are technical questions involving incentives to hoard physical cash, but these are solvable. And with the rate on reserves sufficiently negative, the rate on other assets can be made negative as well. The only zero lower bound is one central banks impose on themselves. (Emphasis added.)

Martin Sandbu, “Central bankers are caught in their own trap“, Financial Times, 3 November 2014 (metered paywall).

Mr Sandbu is the economics editorial writer at the Financial Times. For details on how to prevent savers from hoarding cash to avoid negative interest charges, Mr Sandu links to a five-year-old blog post of Willem Buiter. Mr Buiter describes three ways a central bank can set negative, short-term interest rates without encouraging savers to hoard currency:

(1) Abolish currency

(2) Tax currency holdings

(3) De-couple the numéraire/unit of account from the currency/medium of exchange/means of payment by introducing a new currency (the rallod) and abolishing the dollar currency.  The dollar would remain the numéraire.  The authorities would set the exchange rate between the dollar and the rallod.  There would no longer be a zero lower bound on dollar nominal interest rates because there is no longer any dollar currency.


As regards proposal (1) – the abolition of government-issued currency – other private means of payment (cheques drawn on bank accounts, credit cards, debit cards, cash-on-a-chip and other forms of e-money) could perform most of the legitimate/legal transactions role of currency. ….

As regards proposal (2), taxing the holding of money balances, the key issue is, if the desired interest rate on currency is negative, to get the holder (bearer) to come forward to pay the interest due (the tax) to the central bank.  If currency notes have an issue date on them, as most do, it would be very easy to announce an expiry date for currency as legal tender.  The holder of the currency note would have to come forward to pay the interest due to the central bank before the expiry date.  The currency would be stamped or marked in some way, to show it is current on interest due. ….

Under none of the proposals would people switch into currency if the nominal rate of interest were negative.  Under proposal 1, there is no currency.  Under proposal 2, currency has a negative nominal interest rate; under proposal 3, rallod currency has a zero interest rate but is not a better store of value than negative interest dollar bonds because the dollar appreciates vis-a-vis the rallod.  There is no dollar currency. …. (Emphasis added.)

Banks could still make money – that depends not on the level of interest rates but on the spreads between their borrowing and lending rates.  If a bank borrows from the central bank at minus five percent and lends at minus two percent, it will make the same amount of profit on a loan of a give size as it would if it borrowed at 5 percent and lent at 8 percent.

How would people living off their savings manage with negative nominal interest rates?  First check what real interest rates are.  If deflation were strong enough, savers could still be making out like bandits, even with negative nominal rates.  If real rates are negative, you live by consuming your capital.  If that means poverty for some and creates social problems, go to the Treasury or the Ministry of Social Affairs.  Don’t bother the central bank.

Willem Buiter, “The Wonderful World of Negative Nominal Interest Rates, Again“, maverecon, 19 May 2009 (free access).

Willem Hendrik Buiter (born 1949, in The Netherlands) is a US economist who is currently the Chief Economist at Citigroup. His FT maverecon blog has been archived, though it is no longer active. Access to FT blogs (unlike op-eds and articles!) is unlimited, subject to free registration.

Who is right, Kaletsky or Sandbu (and Buiter)? All this is puzzling, but fascinating. I am a microeconomist, and confess that I never understood macroeconomics. As soon as I find the time, I will visit Nick Rowe’s posts at WCI to search for a clear explanation.

Keynes was right!

Sunday, November 2nd, 2014

This ‘must-read’ column is not gated. Click on the link below to download all 11 paragraphs. The language is clear, concise, easy to understand. IMHO, the analysis is spot on. If you disagree, please post a comment.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance. The one major exception has been Germany, where budgetary consolidation has managed to coexist with decent growth, largely because of a boom in machinery exports to Russia and China that is now over, pushing Germany back into the recession its stringent fiscal policy suggested all along.

Thus the six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession. In a sense, it is odd that the power of fiscal policy has come as a surprise – or that it continues to be categorically denied by the German government and the U.S. Tea Party. The underlying reason why fiscal policy is so important in recessions, and has now come to dominate over monetary policy, is a matter of simple arithmetic that should not be open to debate. [Emphasis added.]


As monetary policy has lost traction, fiscal policy has automatically gained power. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes unambiguously deflationary, which is why the French and Italian governments were right to resist enforcement of the German-inspired fiscal compact in the euro-zone. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly in the next year or two – and perhaps not until the end of the decade. In short, the world has returned to a period of fiscal dominance, as in the 1950s and 1960s.

Anatole Kaletsky, “The takeaway from six years of economic troubles? Keynes was right.“, Reuters, 31 October 2014.

Anatole Kaletsky (born 1952 in Moscow, USSR) is a journalist and financial economist based in the United Kingdom. He joined Reuters and The International Herald Tribune in 2012. He previously wrote for The Economist, the Financial Times and The Times of London. Mr Kaletsky is also chief economist of GaveKal Dragonomics, a Hong Kong-based group that provides investment analysis to financial institutions around the world. His book Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis (Perseus/Public Affairs, 2010) has been translated into Chinese, German, Korean and Portuguese.

HT Mark Thoma

wise words from a great economist

Sunday, February 2nd, 2014

[E]conomics is essentially a moral science and not a natural science. That is to say, it employs introspection and judgments of value.

John Maynard Keynes: Letter to Roy Harrod, July 4, 1938

So true, but so often forgotten!

DeLong remembers Friedman

Wednesday, August 14th, 2013

Berkeley economist Brad DeLong (born 1960) recalls conversations with Chicago economist Milton Friedman (1912-2006), a giant of 20th century economics.

In my rare coffees and phone calls with Milton Friedman, I found I could distract him whenever I was losing an argument by saying: “Why is it that the government needs to intervene and keep the flow of liquidity services provided to the economy growing along a smooth path? Why must there be a quantitative target achieved by government for the path of the liquidity services industry–commercial banking–when there must not be a quantitative target for kilowatt hours or freight-car loadings?”

He would chuckle and say it was a hard problem, but that he was confident that someday he or somebody else–maybe even me–would find a good, concise, convincing way of proving the point that a modern economy needed very heavy-handed government intervention in regulating the commercial banking industry but nowhere else. It was, he thought, something about the social waste of unnecessary bankruptcy, the catastrophic consequences of bank failures, debt deflation, and the fact that the price of liquidity services was intimately tied up with the units of account that we used to denominate our web of debt.

Brad DeLong, “Why Did Milton Friedman Think a Modern Economy Needed Heavy-Handed Government Regulation in the Liquidity Services Industry and Nowhere Else?” Brad DeLong’s Semi-Daily Journal, 12 August 2013.

DeLong’s post was prompted by the following comment of Princeton economist Paul Krugman in his newspaper column:

One way to think about [Milton] Friedman is that he was the man who tried to save free-market ideology from itself, by offering an answer to the obvious question: “If free markets are so great, how come we have depressions?” Until he came along, the answer of most conservative economists was basically that depressions served a necessary function and should simply be endured…. Such dismal answers drove many economists into the arms of John Maynard Keynes.

Friedman, however… was willing to… admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve. In particular, he argued that the Fed could have prevented the Great Depression — with no need for new government programs — if only it had acted to save failing banks and pumped enough reserves into the banking system to prevent a sharp decline in the money supply.

Paul Krugman, “Milton Friedman, Unperson“, New York Times, 12 August 2013.

It is a sign of our times that conservative economist Milton Friedman is regarded as too interventionist by today’s austerians, who oppose fiscal and monetary stimulus.

debunking public sector myths

Monday, August 5th, 2013

Martin Wolf reviews The Entrepreneurial State: Debunking Public vs Private Sector Myths, a new book by Mariana Mazzucato (Anthem Press, 2013).

Growth of output per head determines living standards. Innovation determines the growth of output per head. But what determines innovation?

Conventional economics offers abstract models; conventional wisdom insists the answer lies with private entrepreneurship. In this brilliant book, Mariana Mazzucato, a Sussex university professor of economics who specialises in science and technology, argues that the former is useless and the latter incomplete. Yes, innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state. ….

This book has a controversial thesis. But it is basically right. The failure to recognise the role of the government in driving innovation may well be the greatest threat to rising prosperity.

Martin Wolf, “A much-maligned engine of innovation“, Financial Times, 5 August 2013.

That is the beginning and end of the review. Copyright restrictions prevent me from copying and pasting the middle paragraphs. Read the entire review. Non-FT subscribers, this is an excellent use for one of your ten monthly downloads.

You can view the table of contents and introduction to the book at

I enjoyed the following quotation, which appears (with three others) at the beginning of the book, just before the table of contents.

The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.

John Maynard Keynes, (“The end of laissez-faire“, Hogarth Press, 1926)

Krugman and Sumner on fiscal stimulus

Sunday, March 31st, 2013

Via Mark Thoma (EconomistsView), here is Paul Krugman espousing the Keynesian view that fiscal stimulus is necessary to stimulate an economy caught in a liquidity trap, with low interest rates and low expected inflation.

As I see it, the whole structural/classical/Austrian/supply-side/whatever side of this debate basically believes that the problem lies in the labor market. …. For some reason, they would argue, wages are too high….

As regular readers know, I find this prima facie absurd ….

So what’s the alternative view? It’s basically the notion that the interest rate is wrong — that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates can’t go that negative because expected inflation is low and nominal rates can’t go below zero: we’re in a liquidity trap. ….

There are strong policy implications of these two views. If you think the problem is that wages are too high, your solution is that we need to meaner to workers — cut off their unemployment insurance, make them hungry by cutting off food stamps, so they have no alternative to do whatever it takes to get jobs, and wages fall. If you think the problem is the zero lower bound on interest rates, you think that this kind of solution wouldn’t just be cruel, it would make the economy worse, both because cutting workers’ incomes would reduce demand and because deflation would increase the burden of debt.

What my side of the debate would call for, instead, is a reduction in the real interest rate, if possible, by raising expected inflation; and failing that, more government spending to increase demand and put idle resources to work. …. [emphasis added]

Paul Krugman, “The Price Is Wrong“, The Conscience of a Liberal, New York Times blog, 30 March 2013.

This was standard textbook economics decades ago when I studied macroeconomics. If I had read this yesterday – instead of today – I would have agreed completely with Krugman. Now, I have to confess that I was never a good student of macroeconomics. The theory never made much sense to me. But last night I listened to a podcast of Bentley University economist Scott Sumner, which opened my eyes. This shows that it is never too late for an old economist to learn new tricks. I now realize that, unless a central bank is totally incompetent, Krugman is wrong.

Note that Krugman states that it is optimal to use monetary policy when interest rates are at or near the zero lower bound, because increasing inflationary expectations will cause the real – inflation adjusted – interest rate to fall. Only “failing that”, does he call for “more government spending to increase demand and put idle resources to work”.

Now, suppose the central bank is not incompetent, but only targets inflation, and wants to keep it low. This implies that the central bank will tighten monetary policy to offset any fiscal stimulus. Only if the Central Bank does not know how to change inflationary expectations (and that is not difficult to do!), will fiscal stimulus work.

For a clearer explanation, listen to the Sumner podcast. Here is a portion of the podcast highlights, beginning after minute 49:36:

Guest: [D]uring normal times, when interest rates are positive, almost all mainstream macroeconomists agree that monetary policy is the proper tool for stabilizing the economy, not fiscal policy. …. [T]hat part is not controversial. Here’s where it gets controversial: When interest rates fall to zero, is there once again an argument for using fiscal stimulus? Paul Krugman and others say yes. Now, at zero interest rates there’s a powerful argument for using fiscal stimulus because monetary policy is ineffective. However, Paul Krugman and others also say: Well, monetary policy actually could do a lot more if the Fed were really willing to be more aggressive; but they are just too conservative to do the things they really need to do. Therefore we need fiscal stimulus. And my response to the Keynesians is: Then you are sort of arguing for fiscal stimulus on the basis of incompetent monetary policy. Which is defensible. But if you look more closely at the Fed and ask in what way are they incompetent, they are not incompetent in the right way in my view to make fiscal stimulus work. Let me explain that.

Russ: Fiscal or monetary?

Guest: Fiscal. In other words, what I talk about is what’s called a ‘monetary offset.’ The easiest way to see this is if fiscal stimulus really did boost aggregate demand, it would raise inflation. At least a little bit. Now, if the Fed is targeting inflation it will just tighten monetary policy to offset that. It will prevent inflation from rising and it will thwart the intentions of the fiscal stimulus. So, in order to make fiscal stimulus work, you need an incompetent central bank [emphasis added]. You need one that isn’t effectively targeting inflation. …. And instead just sort of passively lets fiscal stimulus move inflation up and down according to the whim of Congress. But I would argue that this vision the Keynesians have of monetary policy becoming passive at a zero interest rate is simply flat out wrong. Yes, the Fed has been too cautious; they’ve been too conservative to promote recovery that both Krugman and I would have liked to see. But they’ve been passive in a very specific way. …. [T]his year a lot of Keynesians said: Now we’ve had these tax increases; now the economy is really going to slow, because our models say that’s a fiscal austerity. And at the beginning of the year I said no, probably GDP is going to grow just as fast in 2013 as in 2012, even though they’ve raised the payroll tax and they’ve raised taxes on the rich and they’ve cut some spending recently.

Russ: Sort of.

Guest: The spending is debatable. But there’s no question at the end of 2012 they did enough fiscal tightening, according to the Keynesian models, to knock about 1.5 points off GDP. That was at least what I’d been seeing in the Keynesian articles. Now, we’ll see how it plays out. But it wouldn’t surprise me at all if GDP is just as strong this year as last year, because the Fed’s actions, which were taken partly to offset this Fiscal Cliff, will essentially neutralize the effect of it. …. In fact, recently I’ve seen some articles suggesting growth is even picking up a little bit in the last few months. Which is exactly the opposite of what should have happened if the fiscal austerity model was correct. So, no, I don’t think fiscal policy has an effect because I think the Fed neutralizes it. They have their own target.

Sumner on Money, Business Cycles, and Monetary Policy“, hosted by Russ Roberts, EconTalk, 25 March 2013.

The full podcast is about 70 minutes in length. Listen to all of it, and become enlightened.

austerity vs stimulus

Wednesday, June 13th, 2012

An FT reader writes that it is much too early to conclude that “the UK government’s austerity measures have failed”. Keynesian stimulus, he believes, failed in the 1930s and would similarly fail today, so we must be patient and allow austerity to work its magic.

[I]t is a Keynesian conceit that Roosevelt’s New Deal pulled the US out of its 1930s recession. It did not and US recovery at that time can be credited almost entirely to rearmament ahead of and during the second world war. It is doubtful that any of us would relish a solution of this kind, so perhaps we should give … [the UK government’s austerity measures] a while longer ….

Gregory Shenkman, “Much longer than two years is needed to judge Osborne’s success or failure“, letter to the editor, Financial Times, 13 June 2012.

If the New Deal failed to pull the US out of recession, could it be because the stimulus was too small? After all, rearmament was a stimulus, and by the writer’s own admission generated economic recovery. Surely government spending on things other than arms could also produce a recovery, provided the spending is large enough.

inequality and the politics of austerity

Tuesday, May 15th, 2012

Paul Krugman and Robin Wells, in a recent essay, expand on their thesis that rising income inequality can explain why governments in general – and the US government in particular – chose to respond to the current financial crisis with policies of austerity rather than stimulus.

In 2008 we suddenly found ourselves living in a Keynesian world …. By that we mean that we found ourselves in a world in which lack of sufficient demand had become the key economic problem, and in which narrow technocratic solutions, like cuts in the Federal Reserve’s interest rate target, were not adequate to that situation. To deal effectively with the crisis, we needed more activist government policies, in the form both of temporary spending to support employment and efforts to reduce the overhang of mortgage debt.

One might think that these solutions could still be considered technocratic …. Keynes himself described his theory as “moderately conservative in its implications,” consistent with an economy run on the principles of private enterprise. From the beginning, however, political conservatives — and especially those most concerned with defending the position of the wealthy — have fiercely opposed Keynesian ideas. ….

Why such animus against … a “moderately conservative” message? Part of the answer seems to be that even though the government intervention called for by Keynesian economics is modest and targeted, conservatives have always seen it as the thin edge of the wedge: concede that the government can play a useful role in fighting slumps, and the next thing you know we’ll be living under socialism. ….

What seems very clear to us … is that rising inequality played a central role in causing an ineffective response once crisis hit. Inequality bred a polarized political system, in which the right went all out to block any and all efforts by a modestly liberal president to do something about job creation.

Paul Krugman and Robin Wells, “Economy killers: Inequality and GOP ignorance“, Salon, 15 April 2012.

Excerpted from The Occupy Handbook edited by Janet Byrne (Little, Brown and Co., 2012).

Daron Acemoglu and James Robinson, co-authors of Why Nations Fail (2012), find this to be a ‘curious thesis’.

Krugman and Wells … [argue] that the “right” (the GOP) opposes any government intervention, and Keynesian fiscal policies and work programs that would have increased employment and combatted the recession are opposed by the right because, with increased inequality, they have become more beholden to the very wealthy.

Though intriguing, this idea is not backed up with direct evidence by Krugman and Wells. It may well be true, but it is also a curious thesis. Here are some of the things we find less than fully clear about this thesis.

First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians. ….

Second, … in most societies, even in the supposedly laissez-faire 19th century Britain, elites work very hard to make the government intervene in the economy — of course, in a very specific way, to support them. ….

Third, … it is not clear why the wealthiest Americans should be opposed to Keynesian policies. After all, wealthy Americans are … strongly vested in the US corporate sector, which would also be one of the main beneficiaries of expanded aggregate demand. ….

Having said all of that, Krugman and Wells are probably right to some degree. Republicans prevented more aggressive Keynesian measures, and this has likely contributed to the persistence of very high unemployment …. All the same, the reasons for this hostility to Keynesian economics are still mysterious.

Daron Acemoglu and James Robinson, “Inequality and Keynesian Economics“, Why Nations Fail Blog, 18 April 2012.

I doubt that Krugman and Wells would disagree. Krugman and Wells, after all, never claim that conservatives are pursuing short-term self-interest when they oppose Keynesian ideas. In fact, they hint that conservative opposition might be ideological, an unjustified fear that Keynesian policies could lead to socialism and redistribution of wealth.