What Would Keynes Have Done?

The New York Times 28 November, carried this opinion piece by Greg Mankiw that stands out for its reasonably accessible economic analysis and his reason for wondering whether all the hullabaloo over John Maynard Keynes and his economic theory may be misplaced in the current economic turmoil.

Writes Mankiw, a professor of economics at Harvard and erstwhile economic adviser to President Bush and, who had advised Mitt Romney in his campaign for the Republican presidential nomination, According to Keynes, the root cause of economic downturns is insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.

The situation reverses, Keynesian theory says, only when some event or policy increases aggregate demand. 

The problem right now is that it is hard to see where that demand might come from.

Mankiw has an interesting line that Keynesian economists tend to dismiss long run concerns when the economy has short run problems. He quoted the quip from Keynes that In the long run we are all dead. I had thought that it was my old lecturer that said that. The mind plays tricks on us over time, I guess. 

He ends the piece this way, In 1936, Keynes wrote, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slave of some defunct economist.” In 2008, no defunct economist is more prominent than Keynes himself.

I must thank etheorist for having drawn my attention to Greg Mankiw's blog which is apparently designed to impart knowledge of economics by small spoonfuls as if the reader is in Econs 101 class. These days, all honest Malaysians who are not suffering from The Nile disease must accept that we need to go back to Econs 101 class.

Read Mankiw's piece in full here. It's akin attending a special lecture by the cool academic himself except instead of Harvard, you're sitting in the comfort of your home or wherever. He has a style and clarity that makes for a good read.