Bob Cropf

Posts Tagged ‘John Kenneth Galbraith’

Why Keynesianism will (or will not) work

In Free-market, Keynesianism on February 26, 2009 at 1:20 PM

This article is a neo-classical take on Keynes. It presents the rationale behind why Keynes’ theory is supposed to work, which is the multiplier effect. In other words, federal spending for infrastructure and other things will result in additional GDP (an increase in the aggregate demand).

The article’s author does not believe this. He articulates a neo-classical response when he says that

Of course, if GDP is adjusted for quality, the multipler is most likely negative, as resource allocation is directed by government officials, not consumer demands.

I am not sure what he means by “quality” and, maybe if you read the article more closely than I, then something will immediately leap out at you. However, I believe it has to do with “consumer demands.” Again, we are faced with the issue that Galbraith raises, that is, can government produce wealth? Skeptics, such as classical economists, doubt this and so argue that only consumer demand can result in “quality” GDP. Presumably, this increase in aggregate demand would not come as the result of more bridges, roads and other public goods rather than increasing output of televisions and cars (i.e., what consumers want). Hence the author’s logic is that only private consumer goods will produce a true multiplier effect on the economy.

The social power of “stuff”

In class stuff, economics, stimulus on February 7, 2009 at 1:37 PM

The recent posts have been on the stimulus plan (on its way to passage in the Senate, see WSJ article here) or corporate executive pay. However, as the NY Times Magazine article from last Sunday suggests, the roots of the problem actually go much deeper than the recent economic downturn and poor corporate judgment. David Leonhardt talks about the importance of social norms and how they are frequently (always?) ignored by economists and policymakers in general. Perhaps the biggest social norm regarding the economy is growth and what fuels it, namely consumer spending. This idea is so firmly entrenched that neither Republicans and Democrats are willing to challenge it. So both sides are arguing over what is the best way to accomplish the same thing: Get consumers spending again to drive up aggregate demand, which in turn will lead to producers producing and creating new jobs, etc. The downside to all this is the overemphasis on consumerism as the engine of economic growth. That leads to the type of rumination found in this essay by the famed computer programmer, Paul Graham (inventor of anti-spam software). The idea that we don’t own stuff, stuff owns us is as old as Thoreau’s Walden and probably goes back to the New Testament. But, in light of our current economic crisis and long-term sustainability, it is useful to reflect on the wisdom of consumerism as the only way to keep our economy humming. The other alternative, as suggested by Galbraith and Krugman, is shifting capital into social investments such as improving our education and health care systems and rebuilding our nation’s infrastructure.