March 9, 2009
Robert Shiller had an excellent piece in the Financial Times on animal spirits and the current slump.I commented on it on the FT site as follows.
Robert Shiller and George Akerlof are correct to argue that a liberal centrist moderation is at the heart of Keynes' insights. Keynes had visited Russia shortly after marrying Lopokova and his essay A Short View of Russia first published in 1925 is an important part of his 1932 collection Essays in Persuasion. In these essays Keynes predicts quite accurately that Soviet Russia had little to teach the west with respect to peaceful social change that would result in greater economic efficiency. Rather it would for a time he thought have a broad "religious" appeal particularly for the common man who felt disappointed by the failures of the capitalist system.
"For modern capitalism is absolutely irreligious without internal union without much public spirit often, though not always, a mere congeries of possesers and pursuers. " For Keynes "such a system has to be immensely, not merely moderately successful to survive...If irreligious capitalism is ultimately to defeat religious Communism, it is not enough that it should be economically more efficient- but it must be many times as efficient."
This was certainly true during the great depression and it might well become once again so if the current slump is prolonged particularly in the developing countries.
Keynes theorized about animal spirits because of his strong interest in Freudian psychology and the power of the subconscious in motivating personal behaviour. His friend and Gordon square neighbour James Strachey was the translator of Freud's works into English and Keynes liked to explore these questions. Toward the end of the General Theory Keynes points out that it is probably socially functional for people to canalize otherwise dangerous proclivities into comparatively harmless channels like money making and the accumulation of wealth rather than the more harmful and often cruel behaviour involved in the "reckless pursuit of power and authority, and other forms of self aggrandizement."
As he puts it " It is better that a man should tyrannise over his bank balance than over his fellow citizens."
But as Shiller rightly points out according to Keynes these animal spirits could on occasion lead the society into manias and foolish stock market activities that were better played out in casinos than in the real world of investment.
The fundamental problem that Keynes identifies in the General Theory is the strong tendency for interest rates to be too high for the underlying marginal efficiency of capital and the satiated animal spirits that accompany the growth of wealth and the failure of the classical economics model to understand that unemployment in a slump is involuntary and cannot be cured by wage cutting. Instead, one needs to find a way to stimulate aggregate demand sufficiently to clear the labour markets of involuntarily unemployed workers. To do this one needs both accomodating monetary policy that lowers real rates of interest and deficit spending to stimulate both investment and consumption. A certain measure of reregulation of stock exchanges and financial markets is also essential.
The last thirty years that led us to the new classical macroeconomics that insisted that unemployment was largely voluntary due to inadequate job search , trade union interference in the wage setting market and excessive social welfare ,which emphasized privatization , rational markets and deregulation and which used central banks to tighten interest rates to create a "natural rate " of unemployment that was far above full employment is at the centre of the current slump.
Our post slump policies will need to move us back to centre and the balanced approach which Keynes and his colleagues sketched for us . Unemployment counts as much as inflation and policy should be balanced with respect to treating both of these maladies. Inflation is not always just a monetary matter but is also the outcome of cartels, oligopolies and even occasionally excessively powerful trade unions, interest rate and tax increases.A different world is possible and desirable. But there is a lot of theoretical reconstruction that is necessary.
Posted by: Harold Chorney | March 9 04:33am
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