Dr Madsen Pirie, at the Adam Smith Institute, has written an article exploring the automatic stabilizers within an economy, and government policy to manipulate them. Called ''How the Politicians have Priivatized Keynesianism", he starts with a very Austrian view of the business cycle.
"Keynesian policies sought to smooth the economic cycle by increased government spending into the downturn. The extra public spending would boost demand, stimulate investment and create jobs at a time when private demand was falling, thus making the trough of the economic cycle less severe.Such policies worked initially, but the government demand was not a real one, It sent false signals and caused industry to over-invest, especially in producer goods. When the government coffers closed, industry found itself with surplus capacity, and headed for painful contraction and attendant job losses."
From Wikipedia:
The Austrian School rejects the suggestion that the business cycle is an inevitable fact of capitalist economies. Instead, they blame the government and/or the central bank for interfering with free markets, which causes recessions as an unintended consequence. They point to the role of interest rates in setting investment decisions (as a price on investment capital). Governmental control of money supply through central banks means that interest rates are artificially set, and so the price of investment capital does not reflect the real demand for it. This means that capital is misallocated and the business cycle is a periodic correction of this misallocation.
Pirie continues...
Governments seem to have stumbled upon a modern version which seeks similar results to those planned by Keynes, but in which private spending rather than just government spending is encouraged to smooth the economic cycle. Prompted largely by government policies in both the UK and USA, private consumption did not dry up as the most recent cycle turned down. Instead it increased, largely at the expense of saving and by increasing levels of indebtedness. It remains to be seen if the new model Keynesianism can escape the consequences of the old.
Krupnik's Critique I'm not sure this a post-Keynesian phenomena, rather than an example of old Austrian theory. It's commonly felt interest rates have been set too low, and we'd expect this to distort the market signals. Much focus is on central bank policies at changing the rate, and this should be a worry. As we face an explosion of debt, this could readily turn into a prime case of how the unintended consequences of macro-planners zeal to control the economy can cause misallocations. Dr Pirie alludes to Austrian theory, without acknowledging it. I believe it permeates his article deeply, and must be resuscitated during these worrying times.
Correction (10th August) In the original article I referred to Dr Pirie as 'Dr Price'. Sorry.
By the way... because of all that political pressure generated by all of you overly incredulous types the U.S. gave in and revealed the names of the sources which seriously pissed off the Pakistanis and undermined intelligence efforts. I told you there was more to it. But I also fault the administration heavily for placing political concerns over national security and leaking the names...
Posted by: The Butter | August 13, 2004 at 08:41 PM