Krugman is faking it
Krugman tells us today that “One dead giveaway that someone pretending to be an authority on economics is in fact faking it is misuse of the famous Keynes line about the long run”. He often likes to use this particular quote but I wonder if it’s perhaps the only one he’s ever read of Keynes given that so much of his economics violates the spirit and very words of Keynes. He then goes on to provide an excellent example of this Keynesian fakery by asserting that we must recognize “that the boom, not the slump, is the time for austerity”. What!? Just a cursory look at the entire history of capitalism’s unending boom / bust cycles should dispel the myth that there’s ever an appropriate time for austerity. Keynes saw this very clearly and the very idea of instituting austerity in boom times violates many of Keynes’s famous lines as we can see:
Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.
Furthermore, even if we were to suppose that contemporary booms are apt to be associated with a momentary condition of full investment or over-investment in the strict sense, it would still be absurd to regard a higher rate of interest as the appropriate remedy. For in this event the case of those who attribute the disease to under-consumption would be wholly established. The remedy would lie in various measures designed to increase the propensity to consume by the redistribution of incomes or otherwise; so that a given level of employment would require a smaller volume of current investment to support it.
I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.
Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.
See any Krugman in these words? Of course not. While we can agree with some of his moral points regarding social policy, we must recognize they aren’t grounded in anything like a sane or progressive view of economics. I don’t think it’s possible to have a socially useful economic theory that’s to the right of Keynes.
I liked yesterday’s post along these lines, by the way, by economist Matias Vernengo on his blog Naked Keynesianism.