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Business Week Tries to Resurrect the Corpse of John Maynard Keynes

October 31, 2014 in Economics

By William Anderson


Just when the current “discussion” on economics by public intellectuals like Paul Krugman hits bottom, Business Week decides to dig the hole even deeper by lionizing John Maynard Keynes. Keynes, according to BW, had the theories that can “fix” the currently moribund world economy.

There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.

The secret to understanding the vast wisdom of Keynes, writes Peter Coy, is found here:

An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment. (emphasis mine)

Yes, the economy has fallen on hard times because individual households have saved “too much” money. That the latest downturn occurred when the rate of personal savings in this country was at historical lows apparently was lost on Coy, who is too eager to promote the “your spending is my income and my spending is your income” fallacy that has been pushed very hard in recent months by Paul Krugman.

That so-called respected economists and writers can fall for this fallacy does not speak well of economic discourse these days. First, the whole argument is circular in nature, presenting a picture of an economy in which any cutback in spending by even just one person can morph into horrific consequences. (Think of the Butterfly effect, economically speaking.) This is not a description of an economy at all, but …read more


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