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catallaxy in technical exile

Keynes, Philosopher Kings and Central Bankers

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I’ve noticed one thing in the various posts and comments put up recently to mark the 70th anniversary of Keynes’ The General Theory. There’s much play of Keynes as some kind of Utopian political Platonist – someone whose political project involved an elite class of well intentioned bureaucrats. Jason Soon’s presentation of passages from Friedman and Marquand was the one that got me thinking.

Friedman rounded on this as the flaw in Keynes’ thinking in what was otherwise a very generous summary of Keynes. Friedman quoted Keynes letter to Hayek. Here is the relevant quote from the letter.

Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think and feel wrongly.

Now I don’t particularly want to defend Keynes putting it this way. It has a certain preciousness about it which is typical of Keynes that I don’t fancy particularly. But Friedman’s decision to highlight this as his decisive disagreement with Keynes seems to have carried the day. This criticism of Keynes rolls off the tongue all too easily. It fits so neatly with the general (and frequently justified) backlash against regulation that we’ve seen in the last 20 odd years around the world.

Here’s an extract from Jason quoting from David Marquand.

Keynes was defeated … because he did not (perhaps could not) take adequate account of the realities of power and of the pursuit of power. In that he was typical of the tradition of economic liberalism which had formed him. Like many economic liberals, Keynes clearly disliked politics. The rough and tumble of Westminster-and the even less decorous rough and tumble of Capitol Hill-seemed to him crude, ugly and, worst of all, stupid. The point of the Keynesian Revolution was not to subordinate economics to politics, far from it. In the crucial macro-economic sphere, a disinterested and impersonal technocracy was to take the place of the self-regulating and impersonal free market of old days …

It couldn’t be done, of course. The notion of an apolitical and disinterested technocracy is a myth, a Platonic Noble Lie. The technocrats were bound to have their own political values, and these values were not always identical.

Marquand is making his point in the context of the international financial architecture, but Friedman wasn’t and the charge against Keynes tends to be lifted out of Marquand’s more specific context.

As I thought about all this I thought ‘hang on’. Hang on a minute!

Though Keynes did make some rather Delphic comments about socialising investment, he was a defender of Adam Smith’s ‘invisible hand’ in micro-economics through and through. (Of course it’s possible to point to occasional Keynes plans that involve tariffs – but Keynes proposed tariffs very reluctantly and because his judgement was that macro-economic considerations outweighed micro-economic considerations. In the same way one might generally support free capital movements but believe that they could be a sensible part of some macro-economic plan for Malaysia after the Asian Financial crisis.)

Keynes platonic elite were to help run the macro-economy. Now it might be easy to ridicule, but another way of putting Keynes would be to say that Keynes was engaged on a macro-economic project which fits nicely with Hayek and the Austrians’ microeconomic project. The Austrians were first out the blocks developing the argument for defence of property rights (so long as Adam Smith is accepted – as I’m sure Hayek would insist – as the first Austrian!). Now who defends property rights but an elite? And it has to be a well motivated public spirited elite – or at least one that is not routinely petty, venal, self seeking and corrupt. So we deliberately build institutions to maximise our chances of getting something like we want as judges – or at least of avoiding what we most fear. We give judges independence from the party politics of the day.

Of course the Austrians realised that macro-economic integrity (and particularly the integrity of Government budgets and the money supply) was important. But that took them towards distrust of fiat money, and a preference for the gold standard, private currencies and all that. Is this a solution? Well, a bit of commonsense tells you that the macro-economy is going to be full of positive feedback, and in such a situation, private competitive solutions will always have their problems – perhaps very large ones like those encountered in the depressions of the 1890s and 1830s. I must admit I’ve not read anything much contemporary that proposes alternatives to fiat money that didn’t smack of crankery (my spellchecker wants to spell this ‘cranberry’ which may capture the flavour even better).

Still fiat money is no picnic – ask the Germans in the 1920s or the Bolivians more recently – so the case for removing some central authority from running the macro-economy may not be all bad. Be that as it may, Keynes’ experience, his intuition and the macro-economic theory he built from it led him to believe that economic systems are not ideally self regulating. The extent to which he feared that they were incapable of regulating themselves looks overdrawn today. Then again if we didn’t have strong institutional protections against bank runs – part of learning the lessons of the depression many of which Keynes taught us, maybe it wouldn’t be quite so clear. Our recent experience suggests that improving the micro-economy does improve macro-economic stability. But the basic idea that it’s possible to improve economies’ functioning with the government ‘leaning against the wind’ of the cycle is commonsense once one accepts the obvious – that the economy is rife with positive feedback.

Of course there can be arguments about what technocrats can achieve – whether they can ever possess enough knowledge to intervene for the better, and the extent to which we can ever rely on them to really act disinterestedly for the general good. So should we laugh at Keynes’ dream of philosopher kings? It sure seems an easy target, particularly in the precious way in which Keynes puts it as quoted by Friedman. Then again it would be easier to laugh if we hadn’t just built the central banks of the Western world into precisely the kind of institutions called for in Keynes’ vision.

Thus, after lengthy debate about the importance of monetary policy credibility we have continued to build the institutions of fiat money by asserting the independence of central banks. And the reform is widely regarded as one of the great successes of recent times. More and less explicitly and more and less energetically, all of the West’s central banks lean against the wind. Keynes’ enthusiasm for what he proposed was partly because he saw that what he was proposing was very limited.

Some folks (Pdf warning) have even suggested that the next stop is to refashion the institutions of fiscal policy in the image of monetary policy. If those arguing for balanced budget amendments and other fiscal responsibility regulation could see that this is the best way to deliver fiscal responsibility, we can complete the second half of Keynes’ project. Perhaps we might one day move towards a situation in which we admit that we’ve added an additional arm of government to Montesquieu’s three. We’d have the executive, the legislature, the judiciary and the guardians of macro-economic stability and integrity.

That doesn’t sound too Utopian or Platonic unless you think the independence of judges is Utopian or Platonic. It sounds like building the macro-economic institutions of prosperity, freedom and the mixed economy to me.

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Written by Admin

February 12, 2006 at 12:35 am

Posted in Uncategorized

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