Why Keynesianism isn't enough

The only reason I ever identify myself as a Keynesian is that many more people have some notion of who Keynes was while almost no one understands what an Institutionalist (which is a MUCH more accurate description of my views) believes. I am hardly the first "reluctant" Keynesian.  For 1920s and 30s progressives like my grandfather, Keynes represented the extreme right of the range of acceptable beliefs.  Keynes was about as good as a British currency speculator was ever going to get—but let's not get too excited!

The big problem for modern Keynesians is that the world has become a very different place from the one found in the 1930s.  The problems of reduced demand are the same as then, but the 1930s Keynesians had abundant supplies of petroleum and other natural resources to work with, they didn't have to deal with environmental constraints like climate change, and industry had been experiencing an explosion of innovation when the Great Depression hit and only needed a jump start to resume.

The reason I chose Institutionalism over Keynesianism when I was writing Elegant Technology is that by 1980, USA had passed domestic Peak Oil production and de-industrialization had already become apparent.  In fact, the failure to respond to the oil crises of 1973 and 1979 with creative policy prescriptions is probably the #1 factor for the precipitous decline of the Keynesians.  (Remember folks, the Keynesians RAN THINGS in USA as late as 1973.  My university economics department had a fairly wide range of political opinions but they were ALL Keynesians.)  But when I had determined by 1982 that domestic Peak Oil and deindustrialization had become the dominant economic dilemmas of the day, I chose the principles of Institutionalism because these were the ideas of economic development.  Folks who were interested in the problems of how a social grouping transforms fertile soils, water, a handful of plants, some interesting ore, and a supply of fuels, into cities served by jet aircraft, probably had something to offer on the economic problems of phasing out fire and solid wastes, etc.

So enjoy this take by someone probably much younger than me who probably never met a practicing Keynesian in action and has only read about them in obscure texts.  He's got a pretty good handle on the Keynesian flaws.  I have boldfaced those parts I find especially accurate.  About the only part I disagree with is his assessment of the effects of automation.  Good Stuff!

One Wrong Does Not Make Enough Right

I’m So Bored by the Keynesians

by JONATHAN M. FELDMAN   JUNE 05, 2012

[snip]

Let’s start with some basic facts. It’s certainly true that paying off deficits, just circulates money in the hands of financiers, private foreign bond holders or foreign governments where we get no guarantee of a meaningful resulting stimulus. That’s the “not wrong” behind Keynesian logic. At the same time, if you don’t create wealth, you lack the means of paying off substantial amounts of debt. In theory then, one expects a stimulus to create wealth. Yet, we know that this is not sufficiently true, which means that the Keynesians aren’t telling us something.

What is left out of the picture is the following. First, many jobs have been lost to automation. All things being equal automation can add to profit but if you are automated out of a job, you lose. What jobs do you apply for when you have lost in this way? Obviously, if you work in a firm that takes the profits from automation and retains and retrains you, you will do better in the “New Economy.” A Keynesian stimulus does not necessarily address this fundamental problem of downward mobility or economic disposability.

Second, some Keynesians have a naive and totally homogeneous view of the firm, differentiating between small and large businesses, but not between domestically-anchored and transnational firms. We learned from the last stimulus that some portion of the money spent on windmills, mass transit goods and the like leaked out of the United States and went into the hands of foreign corporations supplying such goods. Therefore, the government spending money is not enough to produce the necessary employment gains. Or, there’s an opportunity cost to simply stimulating without creating or extending domestic production platforms. Some Keynesians will say we can’t wait for that magic industrial policy in the sky. Yet, there are more fundamental problems.

Third, some Keynesians believe that demand creates its own supply. They think if the government spends enough money, then businesses will grow organically in response. That’s partially true, but hardly true for many parts of the more upstream and sophisticated parts of the economy. During the Great Depression we had a crisis of insufficient demand. Now, we have a crisis of insufficient demand and insufficient domestic supply. They don’t understand in countries like the US and UK, the domestic supply of hundreds of categories of goods and services have a created comparative disadvantage because of years of under-investment and failed government suppport. Or, if they understand this (and the need for industrial policy), they don’t understand how to pay for it other than borrowing. I’ll return to that later.

Finally, the advantages of a stimulus that simply puts service workers to work rather than reindustrializing is overrated by the Keynesians. It certainly is better to pay for a teacher’s salary rather than having that teacher collect unemployment. The teacher can do something productive, rather than sit at home sending out resumes to jobs where hundreds are chasing the same position. The teacher’s presence in theory guarantees a higher teacher to student ratio, raising the productivity of the future student/worker. Yet, some jobs are more or less productive in providing the ability to produce the wealth and tax revenues which pay for even more teachers’ salaries.

According to various Marxists, there is a distinction made between “productive” and “unproductive” labor. (Yes, but it is not nearly as useful as the distinction between Producers and Predators. JAL)  This distinction can lead to any number of controversies, but we know that taxing all of the salaries in a school yields potentially less revenue than taxing the output of a windfarm, wind mill factory, or other such productive industrial service or goods producer. One reason is that the productive impact of efficient energy (in mitigating pollution costs, in lowering the costs of alternatives in nuclear disasters, in making downstream businesses more effective) might outweigh the contributions of teachers in economic terms. Of course, if a teacher promotes inventors and creative planners, as oppose to churning out Donald Rumsfelds and Dick Cheneys, the economic benefits can be even greater given how such apparatchiks helped waste trillions of tax payer dollars. Yet, all things being equal, the productive gains of manufacturing outweigh services. Moreover, as Jon Rynn, author of Manufacturing Green Prosperity, argues, you can’t easily trade services for services, or expansion of manufacturing is necessary for elimininating trade deficits. If all this seems a bit abstract, consider this. In U.S. states like Michigan suffering from massive deindustrialization, teacher layoffs have reached epidemic levels.

Some Keynesians like Paul Krugman have more nuanced arguments that encompass greater regulation, support for the Occupy movement and various other proposals. Yet, what’s left usually left out of the picture are basic realities. These include: (a) the bloated military spending levels that represent an opportunity cost on a stimulus to civilian firms or the financing of a civilian reindustrialization system; (b) the aforementioned distinction between domestically anchored firms and the transnational corporations; (c) the need for old-fashioned coordination and planning or a development state which promotes industrial modernization and competiveness; and (d) the advantages of a more democratic economy so that we develop firms that are not only domestically-anchored but also begin to act as lobbyists for needed change.

The idea that a large consortia of smaller firms could be turned into a large virtual cooperative firm that then lobbies the state for more structural reforms is beyond the imaginations of many an economist or political scientist for that matter. While Ireland did worse than Iceland because it chose the austerity path, Iceland is hardly South Korea in terms of growth potential. South Korea has a development state that supports manufacturing and industrial competence. It doesn’t only spend more on Green New Deal investments than other states. If fact, it can spend more because it produces more, so here is where supply creates its own demand.

The macroeconomic myopia of many a Keynesian stems from the intellectual legacies of the Cold War, the atomization of the social sciences, post-modernism, and corporate financing of higher education. The Great Depression also apparently discredited more radical institutional economists who could not compete with the logic of simply increasing demand in a depressed economy. Yet, we now live in an economy where institutional realities limit our ability to supply in response to even increased demand. And, where will we get the political capital to even increase demand in the way and extent necessary without building new institutions that multiply citizens’ political capital? more