What Can Be Done?

Paul Davidson argues that the Obama Administration and its allies in Congress have not actually followed the prescriptions laid out by the British economist Lord Keynes in making economic policy – and that this is a principal reason for their failure to deliver.

After the shellacking the Democrats and Obama took in this November election, it is clear that the old time religion of classical economics will be coming back into fashion. The result is likely to be further economic disaster.

I am not surprised by the failure of the Obama Administration to win over the American people to a progressive economic program.     On pages13 to 18 of my book The Keynes Solution: The Path to Global Economic Prosperity – ( written in January  2009) — I compared what I expected of Obama vis-à-vis what Roosevelt did in the first few years of his administration.

I cited a  letter written by Keynes and published in December 1933 in the New York Times where Keynes warned the president that there were two goals — Recovery and overdue social reforms.  But Keynes warned if one goes for the social reforms before full economic recovery (full employment) was achieved, then any reforms "will upset the confidence of business…And it will confuse thought ". Instead Keynes recommended just concentrate on recovery. Once the president succeeds at achieving that goal, then reforms will come much more easily!

I suggested that if Obama followed the “jump start” advice of his economic advisors for a small “stimulus” program just to get the private economy turned around , then the nation would not get the full recovery we needed and all reform as well as full recovery will be jeopardized.

Given the politics of austerity,  we face maybe a decade of economic disaster. Progressive heterodox economists must get out in front with a Keynes-style of economic thinking – for Keynes’s analytical framework is the only complete available one that is not just a variant of classical theory.  Keynes theory of liquidity  can deal with full employment recovery, international trade imbalances, policies to prevent inflation and deflation, and an understanding of the role of financial markets in a money using entrepreneurial economy. – what Soros calls a reflexivity economy.

It is necessary to immediately put forth a consistent plan for not only the domestic economy but also for the international payments system to end the huge trade imbalances that have occurred –Mr. Geithner’s call for devaluing the dollar relative to the Chinese yuan will not do it.

Nor will relying on some Old or New Keynesian  variants  of classical economics such as Stiglitz’s asymmetric information or some other MIT or Harvard New Keynesianism –since all these models assume that the economic system is a classical system except for some ad hoc restraint on the flexibility of prices or  constraint on obtaining complete information about a future predetermined by today’s market fundamental.  In the long run all these mainstream "Keynesian" models will provide a full employment solution when fixities are removed and full information perceived. It is only these ad hoc constraints that prevent short run optimal results — therefore the implication of these mainstream models is get government out of the way and the market, in the long run, will prove to be optimal!

My book "The Keynes Solution" provides a complete alternative program to the various classical models that is going to dominate Washington in the next few years – as Obama tries to compromise with the conservatives such as Paul Ryan  and Tea Party people like Rand Paul.

The American people are being interpreted as saying no more deficits—but what they really want back is prosperity and jobs for all who are willing to work. And if we can show them why these goals require government deficits to get to prosperity , they will accept that. We have to get into the public forum the kind of progressive program that is in the Roosevelt tradition and currently can an economic foundation to provide  a good economic future for years to come.

Until we can provide a single consistent program for economic prosperity, all the other goals of progressive thinkers will remain in the dustbin!! The conservatives and their classical theory will dominate, even though they are wrong – because, as they say in politics, “You can not beat Somebody with Nobody”.

The only body of economic thinking available to take on, and beat, classical thinking, is Keynes’s original analytical foundation – and not the Keynesianism of Samuelson,or the New Keynesianism of Stiglitz and other MIT and Harvard graduates.

And remember that the original Keynes analysis implied a non-ergodic stochastic process (Keynes called “uncertainty”) is fully compatible with the reflexivity analysis put forth by George Soros. It is when people fear uncertainty that they demand liquidity  rather than goods and services.  And given all the cash bankers and businesses are sitting on, can anyone doubt the problem is one of too much uncertainty and private demands for liquidity  -with the resulting lack of aggregate demand for goods and services?



Paul Davidson is the Editor of Journal of Post Keynesian Economics affiliated with the University of Tennessee-Knoxville.

  1. Ralph Musgrave says

    Paul, I suggest it is not just Obama who has not “actually followed the prescriptions laid out by the British economist Lord Keynes”. Most of the world since WWII has made the same or a similar mistake.

    That is, the popular view seems to be that Keynes advocated that governments should borrow and spend in a recession. What he actually advocated (towards the end of his life certainly) was that the government / central bank machine should “print money and spend it” rather than “borrow money and spend it”. Put another way, monetary and fiscal policy should work in tandem.

    At least Robert Skidelsky, who wrote a biography of Keyes, attributes the latter idea to K. (See para starting “And you say this in the article you wrote….” at: https://www.skidelskyr.com/site/article/what-would-keynes-say-a-dialogue-with-tim-congdon/

    Of course “borrow and spend” followed by quantitatively easing government bonds equals “print and spend”. But it’s mainly COMMERCIAL bonds that have been quantitatively eased in the US, in contrast to the UK where it’s been exclusively GOVERNMENT bonds. Possibly that helps explain the recent quite respectable growth figures in the UK.

  2. ds says

    Thank you very much Prof Davidson for your commentary. I wonder how high “menu costs” in the NK models must be now to get the kind of output gap we are witnessing today. Did the price of menus shoot up considerably in 2008?

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