Posts Tagged ‘John Maynard Keynes’

“We are all Keynesians now,” or so said Milton Friedman in 1965. Later, President Nixon said: “I am now a Keynesian in economics”, and popular misconception has thrown up the view that it was Nixon who made the comment about us all being Keynesian.

Political leaders in South America could say it now, too. Leaders across the continent would sound eminently consistent if they too said: “We are all Keynesians now.” It is just that they aren’t and neither was Nixon, and neither was Friedman. Keynes advocated a certain set of policies under certain conditions: namely when monetary policy no longer worked no matter how low interest rates were, and when people still weren’t spending. He called the use of monetary policy in such times pushing on string.

Others call it liquidity trap conditions.

Right now in South America, monetary policy is not pushing on string, and there is no liquidity trap. Ditto the US economy in the 1960s. The policies that were adopted in the 1960s and to a lesser extent in South America today may be called Keynesian by some, but it is doubtful that Keynes would have called them that.

Keynes would have called for the remedies he famously advocated only when interest rates had fallen so low, that they cannot fall any lower. That is to say, about now in the US, the UK, Europe and Japan, but not in South America.

If you are running late and stuck in traffic, hitting the gas won’t help. But if you are running late, and the motorway is empty, and devoid of speed cameras, then upping your speed will help you to complete the journey quicker. Critics of Keynes who said his ideas didn’t work in the 1960s and thus won’t work now, are like someone who concludes, after a day spent in heavy traffic, that there is never any advantage in driving over 30 miles per hour.

© Investment & Business News 2013