a book brings back to life the principles of Keynesian economics and interprets them in today’s environment of global economic crises
‘The objective of economic policy is to defend dark forces of time and ignorance which envelop our future.’ This statement of Keynes is quite profound, especially when viewed in the context of the economic crises in the global sphere since 2007. Hirai, Marcuzzo and Mehrling in their book, Keynesian Reflections, bring back to life the principles of Keynesian economics and interpret them in today’s environment. This collection of essays is vintage debate, which, though targeted at the esoteric reader, drives home the point that Keynes is very much relevant and the demand side of the story cannot be ignored. The authors get into the classic discussion of the superiority of Keynes over his opponents, more notably, the protagonists and followers of New Classical Economics and Monetarism. To argue that markets do automatically clear is questionable as they cannot be in a general equilibrium all the time. Besides, the crisis of 2007, which affected all nations, was a crisis of the financial sector and the new classical theory cannot address this issue as the mathematical models do not include this element. The message is that one cannot separate these two sectors and assume equilibrium even of the dynamic stochastic variety. There are essentially four issues that are discussed through a collection of 14 articles that are Keynesian in spirit. The first issue relates to effective demand in a crisis. The problem is one of demand that has to be addressed by higher government spending and provision of liquidity, which is being done partly by governments today and is clearly a pursuance of Keynesian economics. The problem, according to the authors, is not one of debt and deficit, but demand. Growth theories say investment is dependent on the marginal efficiency of capital and the only way out is public investment, especially when the math does not work out in the private sector realm. In its absence, income will fall, which, in turn, will drive down demand and, in turn, again income. Therefore, public spending on investment and not consumption is the answer because this will create forces to move the economy to fuller employment levels. The higher investment and growth thus generated will compensate for the cost of debt and deficits. The authors give examples of the US, Japan, Germany, Spain and UK to show how higher wages led to higher demand and output in both the short and long runs. Higher government expenditure financed through higher taxation helped to speed up the process, which was aided by favourable credit conditions. The second set of issues is centred on economic theory during a recession. Which is the right one? Is it Keynes, or new classical or monetarism or business cycle hypothesis? The authors look to Keynesian principles for a solution. Here, they look at Japan and the euro crisis. Japan was a victim of exchange rate misalignment wherein the weaker dollar eased out Japanese exports even while it pursued market principles. This, combined with fiscal austerity, thwarted domestic demand, lowering the marginal efficiency of capital. In case of the euro crisis, which started with Greece, the solution was aid through the IMF, ECB and European Commission, which have put strict conditionality for the assistance provided. This, in turn, has led to deflationary forces. More fiscal action is really required under these conditions that cannot be done on account of the conditionality package, which is hindering the recovery process. They also give examples of how the Washington Consensus, which espoused reforms and less government and austerity, led to the collapse of Argentina. The same principles after the east Asian crisis fared no better as high current account deficits were passed on by nations thus aggrandising the crisis. The third issue relates to the state of money and liquidity. Keynes had always argued that the monetary side has to be related to the real sector. Going by what was propagated in the Treatise on Money, way back in the 1930s, we are actually doing exactly as Keynes had suggested—quantitative easing and low interest rates close to zero. The crux lies with the concept of ‘liquidity preference’, which was at the core of his theory. The easing through buyback of securities has helped banks but, unfortunately, they, in turn, have not gotten into the lending mould and have been substituting one kind of non-performing loans with another. Fourth, the authors talk of finance and economic disorder. Here, there is an interesting observation made in terms of 'financialisation' of the global economy in three ways. The first is of commodities wherein speculation through futures trading has led to a disproportionate increase in prices of commodities. This has been the first causality as Keynes would have argued. Second, money market capitalism has got the otherwise staid funds such as provident funds, money managers, etc, create an asset boom that led to a bust subsequently. This is what has been termed as layering and leveraging of the existing levels of production and income. Third is the ultimate ‘financialisation of globalisation’ where the financial crisis was funded in the global market through cross-border banking, which is now going through a phase of reform. Keynes had warned earlier that we need to have shared responsibility of debtors and creditors. Therefore, collective action should be placed before self-interest and pursuance of individual liberty should be subject to stated norms. There had to be a balance between extreme liberalism and pervasive government action. More importantly, the quality of income distribution was important and institutions such as trade unions, minimum wages, employee rights, social protection and unemployment protection were fundamental to stability. Dismantling these institutions in the pursuit of higher flexibility and efficiency of free markets often engenders the onset of a crisis. Finally, would Keynes have supported the euro? He was for a European Payments Union which would endorse free trade between them. But he was against a system where the country had no control over monetary policy and exchange rate, which is the problem with the euro today. This book is a delight for the academic, but could be challenging for the common reader. The authors assume a basic knowledge of economics and Keynes that may not always be the case. Notwithstanding this lacuna, this is an exciting book and our own policy makers should read this carefully as a lot of these principles are pertinent for us today. We may have to, after all, become Keynesians now. Keynesian Reflections: Effective Demand, Money, Finance and Policies in the Crisis Toshiaki Hirai, Maria Cristina Marcuzzo and Perry Mehrling Oxford University Press Rs850 Pp 317
‘The objective of economic policy is to defend dark forces of time and ignorance which envelop our future.’ This statement of Keynes is quite profound, especially when viewed in the context of the economic crises in the global sphere since 2007. Hirai, Marcuzzo and Mehrling in their book, Keynesian Reflections, bring back to life the principles of Keynesian economics and interpret them in today’s environment. This collection of essays is vintage debate, which, though targeted at the esoteric reader, drives home the point that Keynes is very much relevant and the demand side of the story cannot be ignored. The authors get into the classic discussion of the superiority of Keynes over his opponents, more notably, the protagonists and followers of New Classical Economics and Monetarism. To argue that markets do automatically clear is questionable as they cannot be in a general equilibrium all the time. Besides, the crisis of 2007, which affected all nations, was a crisis of the financial sector and the new classical theory cannot address this issue as the mathematical models do not include this element. The message is that one cannot separate these two sectors and assume equilibrium even of the dynamic stochastic variety. There are essentially four issues that are discussed through a collection of 14 articles that are Keynesian in spirit. The first issue relates to effective demand in a crisis. The problem is one of demand that has to be addressed by higher government spending and provision of liquidity, which is being done partly by governments today and is clearly a pursuance of Keynesian economics. The problem, according to the authors, is not one of debt and deficit, but demand. Growth theories say investment is dependent on the marginal efficiency of capital and the only way out is public investment, especially when the math does not work out in the private sector realm. In its absence, income will fall, which, in turn, will drive down demand and, in turn, again income. Therefore, public spending on investment and not consumption is the answer because this will create forces to move the economy to fuller employment levels. The higher investment and growth thus generated will compensate for the cost of debt and deficits. The authors give examples of the US, Japan, Germany, Spain and UK to show how higher wages led to higher demand and output in both the short and long runs. Higher government expenditure financed through higher taxation helped to speed up the process, which was aided by favourable credit conditions. The second set of issues is centred on economic theory during a recession. Which is the right one? Is it Keynes, or new classical or monetarism or business cycle hypothesis? The authors look to Keynesian principles for a solution. Here, they look at Japan and the euro crisis. Japan was a victim of exchange rate misalignment wherein the weaker dollar eased out Japanese exports even while it pursued market principles. This, combined with fiscal austerity, thwarted domestic demand, lowering the marginal efficiency of capital. In case of the euro crisis, which started with Greece, the solution was aid through the IMF, ECB and European Commission, which have put strict conditionality for the assistance provided. This, in turn, has led to deflationary forces. More fiscal action is really required under these conditions that cannot be done on account of the conditionality package, which is hindering the recovery process. They also give examples of how the Washington Consensus, which espoused reforms and less government and austerity, led to the collapse of Argentina. The same principles after the east Asian crisis fared no better as high current account deficits were passed on by nations thus aggrandising the crisis. The third issue relates to the state of money and liquidity. Keynes had always argued that the monetary side has to be related to the real sector. Going by what was propagated in the Treatise on Money, way back in the 1930s, we are actually doing exactly as Keynes had suggested—quantitative easing and low interest rates close to zero. The crux lies with the concept of ‘liquidity preference’, which was at the core of his theory. The easing through buyback of securities has helped banks but, unfortunately, they, in turn, have not gotten into the lending mould and have been substituting one kind of non-performing loans with another. Fourth, the authors talk of finance and economic disorder. Here, there is an interesting observation made in terms of 'financialisation' of the global economy in three ways. The first is of commodities wherein speculation through futures trading has led to a disproportionate increase in prices of commodities. This has been the first causality as Keynes would have argued. Second, money market capitalism has got the otherwise staid funds such as provident funds, money managers, etc, create an asset boom that led to a bust subsequently. This is what has been termed as layering and leveraging of the existing levels of production and income. Third is the ultimate ‘financialisation of globalisation’ where the financial crisis was funded in the global market through cross-border banking, which is now going through a phase of reform. Keynes had warned earlier that we need to have shared responsibility of debtors and creditors. Therefore, collective action should be placed before self-interest and pursuance of individual liberty should be subject to stated norms. There had to be a balance between extreme liberalism and pervasive government action. More importantly, the quality of income distribution was important and institutions such as trade unions, minimum wages, employee rights, social protection and unemployment protection were fundamental to stability. Dismantling these institutions in the pursuit of higher flexibility and efficiency of free markets often engenders the onset of a crisis. Finally, would Keynes have supported the euro? He was for a European Payments Union which would endorse free trade between them. But he was against a system where the country had no control over monetary policy and exchange rate, which is the problem with the euro today. This book is a delight for the academic, but could be challenging for the common reader. The authors assume a basic knowledge of economics and Keynes that may not always be the case. Notwithstanding this lacuna, this is an exciting book and our own policy makers should read this carefully as a lot of these principles are pertinent for us today. We may have to, after all, become Keynesians now. Keynesian Reflections: Effective Demand, Money, Finance and Policies in the Crisis Toshiaki Hirai, Maria Cristina Marcuzzo and Perry Mehrling Oxford University Press Rs850 Pp 317
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