Category Archives: Business Cycles

Keynes – The General Theory of Employment, Interest, and Money

Keynes – The General Theory of Employment, Interest, and Money

My undergrad macroeconomics teacher was an avowed Keynesian. Most of what he taught was in this book, except in the forms of Marshallian geometric analysis and Samuelsonian algebra. I could have saved 19-year old me a great deal of time and anguish by simply reading Keynes’ original, mostly verbal explanations of his ideas. In fact, that pedagogical experience was one reason I switched my undergrad major from economics to history, despite my much greater enthusiasm for economics. Depending on who teaches intro classes, economic ideas are sometimes taught more clearly outside of economics departments.

People often forget that Keynes worked from the same quantity theory of money framework his rivals Friedman and Hayek relied on—an insight I was never taught in undergrad, thanks in part to poor standard pedagogical practices.

Nearly all economists, regardless of ideology, agree that tinkering with the money supply can induce temporary booms and busts. Where they differ is that for monetarists and other free-market types, the fact that policymakers can mess with the price system does not imply that they should. There are tradeoffs a boom now comes at the price of a bust later. Picking up one part of the economy comes at the cost of dragging down other parts. Moreover, unintended consequences can be unpredictable, and harder to manage than the original problems.

Keynes and many of the economists he has influenced instead work with idealized models of economics and government. Economists, using increasingly sophisticated techniques, are increasingly able to foresee and adapt to changing circumstances and unintended consequences to maintain economic stability. Fiscal and monetary policies will never be perfect, but with careful management they can outperform unmanaged markets. Also in this model, politicians actually listen to economists. Even more fantastically, politicians use their boom-and-bust power in the public interest. They do not use it to influence their electoral prospects, or give favors to rent-seekers.

On the positive side, Keynes’ remarks about animal spirits remain insightful, though underappreciated. Here Keynes shared important common ground with economists from Adam Smith on down to his rough contemporaries such as Philip Wicksteed, Frank Knight, and F.A. Hayek, who all emphasized human psychology in their works over formal modeling.

Keynes’ followers pursued a different path after Paul Samuelson, preferring instead to confine themselves to quantifiable models, and to study Homo economicus rather than Homo sapiens. The old joke about Keynesians being more Keynesian than Keynes ever was is often true. Fortunately, the behavioral economics movement has done much to revive animal spirits in the wake of MIT-Harvard-Princeton’s sterilizing the profession, though many of them forget that human frailties also apply to policymakers and the policies they make.

This is not Keynes’ fault. But his unintentional legacy has harmed economics as a discipline, which has missed out on important insights and discoveries by largely walling itself off from other, less quantitative disciplines for several decades. Keynesian models have also acted as enablers for policymakers eager to hear justifications for things they want to do anyway, and for excuses to forget that can does not always imply ought.


October Brought 250,000 New Jobs, Despite Bad Trade Restrictions

This press statement is cross-posted from See the original here.

The American economy added 250,000 jobs in October, the U.S. Labor Department announced today. The unemployment rate was meanwhile unchanged from last month, at 3.7 percent – a 50-year low. That’s good news for the economy – it shows that even President Trump’s costly trade tariffs aren’t eclipsing growth, says Ryan Young, CEI fellow:

“Politicians don’t actually run the economy, and hence don’t have that much influence over employment rates or the business cycle. The fundamentals of the U.S. economy are strong, and it is showing in the 250,000 new jobs created in October. In a further show of strength, even with President Trump’s trade policies slowing economic growth by as much as 1.8 percentage points, the economy still grew by 3.5 percent last quarter.  The President’s supporters and critics alike should be delighted at today’s jobs report, and should work together on a range of beneficial policies, from lowering trade barriers to stronger central bank independence to reining in executive branch regulatory excesses.”

Young co-authored a recent report making the case for free trade, Traders of the Lost Ark

Rediscovering a Moral and Economic Case for Free Trade.


Questions for Janet Yellen

janet yellen
The Federal Reserve is arguably the government’s most important agency, even if it is (nominally) independent. It has control over the price system, the most fundamental part of any economy. It also exercises significant power over the banking sector, and in recent years has taken to doing large favors for Wall Street. These are all reasons why Janet Yellen’s nomination for Fed Chair needs to be carefully vetted. To that end, my CEI colleagues John Berlau and Iain Murray and I put together some questions about several facets of the Fed’s mission we would like to Yellen answer, whether during her confirmation hearing or elsewhere. You can read the short WebMemo here. Here is one of our questions about inflation:

Many observers expect you to pursue an inflationary stimulus, and believe this is likely a reason for your nomination. If your actions are already expected, will markets not take these expected price level changes into account in advance? If so, do you believe this would blunt the employment impact of any monetary expansion? Would you respond to these pre-existing expectations with an unexpectedly high inflationary policy?

As John, Iain, and I write, Yellen’s credentials are not in question. But the policies she might pursue as Fed Chair are. Read more here.

CEI Podcast for May 3, 2012: Paving the Way for Innovation and Job Creation

Have a listen here.

Unemployment remains stubbornly high, more than three years after the financial crisis hit. Congress has tried a number of measures, from fiscal stimulus to stricter financial regulations. None of them have worked. That’s because they get in the way of the key driver of economic growth – innovation. And as any entrepreneur will tell you, innovation requires investment. John Berlau, CEI’s Senior Fellow for Finance and Access to Capital, suggests a number of reforms to make innovation, investment, and job creation easier.

Economic Optimism

Mark Mills and Julio Ottino argue that despite current troubles, our economic future is a bright one:

In January 1912, the United States emerged from a two-year recession. Nineteen more followed—along with a century of phenomenal economic growth. Americans in real terms are 700% wealthier today.

In hindsight it seems obvious that emerging technologies circa 1912—electrification, telephony, the dawn of the automobile age, the invention of stainless steel and the radio amplifier—would foster such growth. Yet even knowledgeable contemporary observers failed to grasp their transformational power.

In January 2012, we sit again on the cusp of three grand technological transformations with the potential to rival that of the past century. All find their epicenters in America: big data, smart manufacturing and the wireless revolution.

Read the whole thing.

What Decline and Fall?

Roger Cohen’s column in today’s New York Times is titled “Decline and Fall.” Channeling Gibbon, he compares America in 2011 to Rome in 475 A.D., says “the West is shot,” commits the broken window fallacy, and generally paints a picture of doom and gloom.

Classical references aside, Cohen seems to be innocent of historical knowledge. The graph below shows real GDP since 1929 (source). The wee little dip at the end is the cause of Cohen’s histrionics.

Yes, economic growth is weak. Far, far too many people are out of work. And it will probably be a few years before boom times return. But context, please.

Yes, Regulation Does Keep Unemployment High

Over at RealClearMarkets, my colleague Wayne Crews and I argue that the law of demand holds. Hard to believe that’s actually controversial, but that’s Washington for you. Here’s our conclusion:

Eberly was put in an uncomfortable position when she came to Washington. Just as a lawyer’s job is to vigorously defend clients even if she knows they are guilty, Eberly’s job is to vigorously defend policies that are obviously harmful to the economy. Try as she might, she cannot argue against the law of demand.

Regulations make hiring costlier and thus make jobs scarcer. And regulatory uncertainty makes companies reluctant to hire employees they might not be able to afford down the road. Case closed.

Read the whole thing.