Often we hear that Keynes is passe, that today's world economy with it's frenetic globalization and free trade is beyond any Keynesian solution. Nowadays all we ever hear about are the "need for tough choices" which basically means austerity for the 99%, tax cuts for the rich.
We are told that no Keynesian policy can stand in the globalized international world of free capital movements and floating currency. Be it a high minimum wage, a redistributionist tax structure, a strong social safety net, strong unions, or environmental protections, we have to forget all of that-or we will anger the god of Global Competitiveness. The irony is those who claim that today's global economy has eclipsed Keynes are surely wrong.
One thing that the Keynes haters are always telling us is that he either didn't understand monetary policy or underestimated it's efficacy, that he was too focused on interest rates. Indeed reading someone like Scott Sumner, the urban legends proliferate. Monetarists in general always misconstrue him. For example there was that piece from Clark Johnson that claimed that Keynes didn't get how important US devaluation and FDR's gold buying scheme was.
Those Monetarists who admire Hawtrey and Cassel-more than Friedman-like David Glasner seem to think that while Keynes in the 1920s showed some understanding of the problems with the international gold standard is hs Tract for Monetary Reform had basically forgotten what he knew in the 30s. Here is Clark Johnson:
"Moving to then contemporary events, Keynes’ discussion of the “slump of 1930,” also in the Treatise, builds on similar themes.[6] Gustav Cassel and Ralph Hawtrey had argued a few years earlier that the undervaluation of gold following restoration of gold standards at prewar gold prices would force world-wide monetary contraction, especially as former belligerents Britain, France, Germany, and Italy restored their gold standards. Keynes, in contrast, told the Royal Commission on Indian Currency in 1926 that central banks would adjust their currency reserve cover ratios if their gold stocks became inadequate – which allowed him to dismiss the danger. Keynes underestimated what we might call the mystique of gold money."
"Keynes listed factors driving interest rates higher during the 1920s: corporate borrowing for new industries; governments borrowing to pay reparations and war debts; central banks borrowing to add reserves; and speculators borrowing to buy shares of stock. He identified but was less able to explain the collapse internationally in anticipated returns in investment – what he would later call the marginal efficiency of capital — that occurred in the mid-1920s. As in considering the early 1890s, he did not connect the fall-off in real yields on new investment with systemic monetary constraint. Parallel to what happened in the 1890s, the middle and late 1920s saw a commodity deflation as key countries adopted or returned to gold standards. He thought monetary expansion worked through lowering interest rates, without directly affecting demand for goods and services. He wrote that the only ways to boost demand were by lowering interest rates, especially long rates, further – or by government fiscal activism. He did not understand that the world required a higher gold price to restore gold-to-currency reserve ratios, or perhaps needed a departure from gold money altogether."
http://marketmonetarist.com/2012/06/25/guest-post-keynes-evidence-for-monetary-policy-ineffectiveness-part-1-by-clark-johnson/
Keynes however was no gold bug. Indeed Krugman has this great old video of Keynes' lauding the British government in 1932 for getting of the gold standard. He never thought that monetary policy was sufficient in itself is why the Monetarists knock him. Notice they don't spend time knocking Friedman who at one time was critical of leaving the gold standard. His original criticism of the Fed during the Depression was just about the growth in the money supply.
The claim that Keynes was ignorant of monetary matters doesn't fit well with the fact that it was he who was key in designing the first organized international monetary framework-namely Bretton
Woods.
"Never before had international monetary cooperation been attempted on a permanent institutional basis."
http://en.wikipedia.org/wiki/Bretton_Woods_system
Indeed what strikes me in looking back on BW and Keynes' designs for it-that of course were not alas fully followed-we could really use such a framework today, but this goes doubly and triply so for Europe. So much of today's problems in Europe is because as Krugman puts it we are indeed in the Dark Age of Macroeconomics-the Dark Age not the Bronze Age before truths were learnt but the second Bronze Age where we forget what we had already learnt.
Everything that the EU but especially Germany is doing is what Keynes had shown long ago to be wholly wrongheaded and counterproductive-putting all the pain of readjustment onto the debtor countries and those with trade deficits.
Indeed it can be argued that there are two schools of thought on international monetary economics-Bretton Woods and today's Washington Consensus-this has been the school followed since the eclipse of Bretton Woods in the early 70s-the nadir being the Nixon Surprise and the closing of the gold window.
At the Bretton Woods conference these two views were on display back in 1944:
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As you can see White's was what has become the Washington Consensus.
"Keynes' proposals would have established a world reserve currency (which he thought might be called "bancor") administered by a central bank vested with the possibility of creating money and with the authority to take actions on a much larger scale."
"In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary."
"But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country."
"Indeed, while I list the two schools as Bretton Woods and the Washington Consensus, in reality the original BW already had a good bit of the WC in it-after all the US was the most powerful and wealthy country and we had saved Europe. Still had Keynes had more control of it would have been preferrable."
"Although compromise was reached on some points, because of the overwhelming economic and military power of the United States the participants at Bretton Woods largely agreed on White's plan."
Even so there was a lot that was sound in BW and it did reflect an agreement that was meant to give national governments the scope for intervention at home without beggar thy neighbor trade policies. This was the point of BW-to facilitate trade while also leaving countries able to execute Keynesians fiscal policies at home without beggar thy neighbor abroad.
"To ensure economic stability and political peace, states agreed to cooperate to closely regulate the production of their individual currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade.[citation needed] This was the foundation of the U.S. vision of postwar world free trade, which also involved lowering tariffs and among other things maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system."
The initial structure of the IMF was meant to mitigate the need for countries with trade deficits to deflate their economies like they did during the days of British dominance in the 19th century:
"The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant a member state would not have to induce a depression to cut its national income down to such a low level that its imports would finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits. Before the Second World War, European nations—particularly Britain—often resorted to this."
"In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary."
Yet here we are today with all the lectures that Greece needs to get serious about austerity. No one suggests that Germany too should get serious and that it's both unfair and counterproductive to put it all on Greece. Clearly by the attitude of the US in 1944 this attitude is typical to imagine 'it's your problem not mine.' Ironically the US today now is urging Germany to lighten up.
While clearly BW had some structural flaws that proved to be it's undoing it's hard to argue that it isn't superior to the WC we've been under since. What's ironic while Sumner and company are very interested to argue against the efficacy of fiscal policy whereas BW was meant to facilitate both fiscal policy and free trade he himself has said that BW was the better system. He certainly didn't mean to say that international Keynesianism is superior to his neoliberalism that he's so fond of-he says that before the crisis he had planned a manuscript all about "Neoliberalism and Values" that's what he's in reality inferring without appreciating it.
On the other hand Sumner is right about the gold bugs who actually try to hold up BW as a model for the gold standard:
"I don’t object to people noting that Bretton Woods had some characteristics of the gold standard; I’ve made that argument myself. But I wish the gold bugs would get the story straight. Half of them seem to think the US monetary system of the 1920s wasn’t really a gold standard, and half seem to think Bretton Woods was. Which is it?"
http://www.themoneyillusion.com/?p=14840
It had "some characteristics" of the gold standard in the sense that it was a remnant. Almost all the characteristics of the gold standard were gone. All countries but the US no longer had their currencies pegged to gold. The US gave out gold from the window linking the dollar to gold at $35 dollars an ounce.
Incidentally Keynes wanted to get out of the gold standard entirely in BW, it remained some gold remnants due to more conservative elements at the conference.
We see shades of Keynes in the demand coming from most notably Francois Hollande among others for more growth centered policies rather than solely on price stability. The US under Obama and Geithner are also taking the side of needing more growth. Even Germany at least rhetorically has had to come around to this view-the best they can do is claim that the desire for growth and price stability is the same thing.
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