Sunday, November 30, 2008

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.

7 comments:

Hasbullah Pit said...

Keynesian economy focus too much on "growth".

All we look now is "what percent increas each year" for everthing.

GDP how many % this year.
that X fund how many % profit this year.
loan how many % interest
bla bla bla how many percent.

What was happened is the money supply was increased to meet the "growth" demand. Than the "growth" is become meaningless.

do we really need the "growth"

de minimis said...

Hasbullah

I am in 100% agreement with your question. What is growth? Why do we need growth? This is why we in Asia need to question all the assumptions and values used to create the modern economy which is modelled from the West.

But in order to question this, we need to understand how the Western model came about. Since 1930, it is the Keynesian model that is used by all govts including Malaysia. There is a lot to study and understand.

satd said...

If only he had the same technology as we have........Would Keynes be as how we perceive him to do in a situation......

Everything now is about the right monitoring framework to a particular problem......

Governments requires a Chief Information and Technology Officer...who can coordinate the whole integration projects of the various "islands" of information....to build real time decision making infrastructure..

How many little islands do you think is out there.........

Take care bro de minimis , thank you for droppin by......i'm so honored to be put into your "must read".....thank you again for the support

mekyam said...

ct,

sadly, econs 101 is but a vague memory to me. nonetheless my plebeian gut tells me that economic growth plays on greed, not need. greed, as we know, is insatiable.

i think there should be an optimum point to economic growth. after which countries should just concentrate on economic maintenance and sustainability.

this way, developing economies can also catch up. of course first nations, regardless of their lip-service, don't want to see this level playing field.

the problem we have now is due to economic giants and other countries already ahead economically refusing to set any limit to their growth desire.

it looks like the only thing that can stop them is such natural limitation which comes in the form of system collapse and implosion that we see now. the sad thing is, they don't go down alone.

p.s. omigosh ct, you'd not guess what the word veri is this time... "gatchoo". :D

de minimis said...

satd

You are most welcome.

mekyam

We, in Asia, need to constantly question the assumptions used to build the modern economies and the global economy. Many of these assumptions are Western-oriented values that may need to be changed.

As Hasbullah questioned, this "growth paradigm" is something to be questioned.

The correct value system may lie somewhere between the agrarian idiom "kais pagi makan pagi, kais petang makan petang" and, the Western concept of growth at almost any cost.

The search continues....

Rausyanfikir said...

Please visit mine for al. explanation:


http://sosialiskanan.blogspot.com/2008/07/gdp-kayu-ukur-pencapaian-ekonomi-yang.html

walla said...

http://tinyurl.com/6hf2s3