Conservatives, please: How has Keynesian economics been debunked?

Great Debates
1

The Republican Party line is that Obama is trying to institute a New Deal policy on America, when Roosevelt did it in '33 after 8 years it failed to get us out of the Great Depression (many Democrats would disagree but lets say for argument sake The New Deal did not recover the American economy). Four years of war followed in which America out produced all her allies put together on a scale never before achieved, all this paid for by the US government.

No Conservative will argue that US soldiers came home to The Great Depression so what happened in those four years that turned the economy around? Killing Germans?

Keynesian economists argue that Roosevelts problem was that he didn’t spend enough fast enough on stuff we could use, after WWII our economy was booming and all we had to show for it were outdated tanks, ships, planes and ammo. What if during those 4 years we built stuff that would have improved America as a whole without killing it’s best and brightest?

2

I’ll let others get into debunking Keysesian economics (I don’t actually think it’s been debunked, per se, just superseded), and just discuss some of the perhiperal issues.

No, the economy turned around due to the increase to the economy due to ramping up for a major war. I don’t think anyone disputes that the economic stimulation due to ramping up for the war is what finally got the economy moving again.

That’s not all we had to show for it. What we DID have to show for it was the pre-eminent industrial capacity at the time. Ours was one of the few untouched and booming industrial systems in the world after WWII…which gave us a huge advantage for a decade or so after the war. That’s why our economy really boomed post WWII…we had the capacity, we had the work force and there was a huge demand after the war from just about every other country on earth for what we could manufacture and sell to them.

Then we probably wouldn’t have had the economic boom we did have post WWII…in fact, we probably would have remained mired in economic doldrums while the rest of the world went to hell in a hand cart. Even assuming someone eventually won, who would have bought from us? Europe would have been a war torn mess (without the US to help rebuild afterward) with either a broken up Germany or a battered USSR in charge…or worse case some kind of stalemate. The UK would have been pretty much on the cusp if not completely gone. Japan probably wouldn’t have been a market for us, since they were hostile toward the US due to our embargo.

-XT

3

Actually, the economy didn’t really recover until late 1949. The salient features were a renewed possibility of trading with other nations and wartime price controls and restrictions finally being ended in full.

Keynes was a brilliant man, but like many economists, he had one flaw: he though of the economy as a machine. machines are controllable. But the economy is something more akin to an ecosystem, which are vastly more difficult to manage. In fact, you don’t really manage an ecosystem so much as try to keep it from doing one or two things you really don’t want.

Simply put, though, Keynesianism never worked. And it never worked because it fundamentally didn’t understand the role of money or people in the economy.

4

Anyone who wants to argue against Keynes cannot concede that ramping up for the war got the economy moving. “Ramping up for the war” = government spending.

5

I suspect that the Republicans felt it was debunked the moment the Democrats wanted to use it.

6

I certainly agree that being the most powerful industrialized nation on earth NOT bombed to shit coasted us into a century of preeminence, but that was after the fact. Our economy was fantastic BEFORE the war was over, before the world started trading again, before we created a financial hegemony. We could afford to blow the shit out Japan and Germany and then two years later rebuild them from scratch. They paid us back eventually, but present cases make it pretty clear how expensive nation building is in total.

7

Let’s remember that I am no kind of economist. But even with that I can recognize that the man has been dead for sixty-three years. An awful lot of work in economics has been done since 1946, and much of that has radically altered Keynesian thought. Even economists sympathetic to Keynes describe themselves as neo-Keynesians or some other variant.

And they should, because pure Keynesian economics does not work - it is insufficiently grounded in real-world behavior and has prescriptions that will not work in certain crises - such as the simultaneous inflation and unemployment of the 1970s. Keynes would have been flabbergasted by this - his theories denied such a thing even was possible.

So let’s just accept that Keynes provided some useful insights into the economy, but that he didn’t have all of the answers. Besides, it isn’t at all clear to me that Keynesian solutions are warranted now - at least not on a grand scale. Reasonable people ought to be able to debate this. Broad posts asking how Keynes has been debunked (and just assuming he hasn’t been) probably isn’t the way to go here.

8

Eh? No way. The U.S. economy, though it had lots and lots of material capacity, was virtually nonexistant during the war and in the run-up to the war. I say “non-existant” because the wartime economy, for all intents and purposes, did not exist. There was no economy, just a desperate push to produce war material and nothing but, and no one was going to complain about the poverty that accompanied that. But it was definitely running down our human resources as well as factories, and we were left the poorer for it afterward. The whole thing was kept going largely because people were willing to come together for the war.

Edit: resposne to Sitnam.

9

No…that would be someone saying that Keynes was completely wrong or had been completely discredited and had nothing worthwhile to say, no helpful insights, etc etc. That person wouldn’t be me, which was why I avoided that part of the discussion. I’m a network engineer, not an economist and that discussion is best left to the experts IMHO.

-XT

10

I’m not sure what you are arguing here. Certainly we had a powerful economy and industrial system prior to WWII…perhaps the top economy and industrial system, though there were other powerful nations prior to hostilities. However, the war pretty much turned things around and got us back on track…and post war we had all that PLUS the fact that we were one of the few industrial nations on earth that hadn’t been directly attacked. Before the war our industry still wasn’t firing on all cylinders…after the war our industries were in hyper drive mode.

I don’t think that this proves Keynes was right (or wrong)…it just is how things played out.

-XT

11

The answer your looking for is monetary policy. Most economists agree that the Great Depression was caused by deflation. Romer had a paper which argued that all of the recovery was caused by an inflationary monetary policy. The article is summarized here: http://macromarketmusings.blogspot.com/2008/11/monetary-policy-ended-great-depression.html

12

Is it significant that WW2 temporarily removed large numbers of excess men from the labor market? That’s a factor of the economic equation that no possible peacetime work program could duplicate.

(I remember an old WW2-era Daffy Duck cartoon which opened with the narration “Once there was a labor shortage so severe that anyone- or anyTHING- could get a job”.)

13

Maybe this was just a throwaway statement but what makes you think our best and brightest were killed during the second World War?

14

You said you didn’t think that anyone disputed the fact that war spending restarted the economy. So I pointed out that a great many people do, in fact, deny that because it is necessary for them to do so in order to argue against the ability for fiscal policy to end a depression.

15

Sorry…I wasn’t aware that people disputed that. My bad.

-XT

16

OK, I am speaking as an economist.

Keynesianism hasn’t been debunked. Or even superseded. It was debunked by the Chicago School in the '70s, but rapidly became undebunked in the late '80s and early '90s when the failings of Thatcherism and Reaganomics were becoming clear.

What has happened to it is that it’s rightly recognised as a key tool and technique, but it’s only one in the box. It’s not a panacea.

(And if we’re saying that the New Deal didn’t revive the American economy for the sake of argument, we’ll also say that the sky is pink and that I want to be at work today - we can happily say all of them but all of them are so patently untrue that they render an argument constructed on them as ludicrous).

Fiscal stimulus and contraction work. The problem is that only one of them is politically popular and its continued application is like driving a car and never taking your foot off the accelerator. You not only run out of petrol surprisingly quickly, but you can cause some serious damage to the engine while you’re doing it.

The key problem with Keynesian techniques is that it assumes that decision making is going to be rational and done in posession of perfect information. It’s then implemented by shoveling cash to a bunch of irrational individuals and entities who then let the side down. The New Deal certainly worked, but it took World War II for the people and companies in the US to start using the cash that they had where it would do the most good (i.e. in building a massive manufacturing base).

In order for neo-Keynesianism to work most effectively, it requires an entity with the best possible information (inevitably a government) to sit down and determine where stimulus should go - typically this will be in the form of development of national infrastructure and the development of human capital (i.e. building skills and education), with the expectation that the benefits would circulate through the economy and trickle out (i.e. not up or down, but radiating outwards), but sometimes it’ll be targetted elsewhere such as propping up a temporarily failing but fundamentally sound sector of the market.

You can dump on this from an ideological perspective - it’s an unashamedly technosocialist view - and it isn’t sufficiently accepting of political considerations to work on a regular basis, but it’s far more effective than throwing stimulus cheques at everyone in the country.

And I’m not saying this because I’m bitter that I’m the only person in the country not in line for the cash and prize distribution that the government announced yesterday. I am bitter, but I can kinda accept that I’m not getting money because I’d use it to pay off my mortgage and that’s not what’s going to be useful at a macro level right now.

17

Quoth xtisme:

I think the assumption behind that hypothetical was that WWII didn’t happen, not that it happened but we stayed out of it. The comparison with the present is that right now, we’re facing hard economic times, but without the looming threat of a war that would destroy all of what we know as civilization. So, what would happen right now if the government spent on the same scale as during a war, but without the death and destruction?

18

Normally, it is not possible, because you can’t predict inflation. Except when the government attempts to drive inflation higher because high inflation is correlated with high employment. Then everyone knows what’s up, no one is fooled by the extra ten spot in their wallet, etc.

19

Wow. That’s one hell of a statement. The ‘New Deal didn’t revive the American economy’ is ‘patently untrue’ and ‘render[s] an argument constructed on them as ludicrous’?

Am I understanding this correctly?

20

I don’t think so.

BigNik took a hypothetical dismissal of an argument from my OP and stated that the argument is so important we cannot dismiss it.

As in, ‘if we accept that Keynesian economics didn’t help in the recovery we have nothing useful to talk about’.