And as it turns out, Keynes-as-equilibrium-theorist ... has a lot to teach us to this day. The struggle to liberate ourselves from Say's Law, to refute the "Treasury view" and all that, may have seemed like ancient history not long ago, but now that we're faced with an economic scene reminiscent of the 1930s, it turns out that we're having to fight those intellectual battles all over again. And the distinction between loanable funds and liquidity preference theories of the rate of interest – or, rather, the ability to see how both can be true at once, and the implications of that insight – seem to have been utterly forgotten by a large fraction of economists and those commenting on economics.Say's Law was what Ronald Reagan was taught in college in the 1920s, the theory that supply creates its own demand. It was one reason he found the "supply-side economics" scam so persuasive.
Keynesian economics has it's weaknesses. Not least of which is that it prescribes increasing taxes during economic expansions as a way of keeping overproduction restrained. It's sound macroeconomics, but politically it's nearly impossible.
But the Keynesian idea of expanding domestic government spending and running deficits (and borrowing money) if necessary to so is the best prescription for dealing with recessions.
Also from Krugman, The Triumph of Bad Ideas 06/22/2011:
But can we note just how bizarre our situation is? Keynesian economics has actually come through the crisis with flying colors. The only knock on it is the “Obama tried stimulus and it failed, neener neener” thing — but those of us who took our Keynesianism seriously warned literally from the beginning that the stimulus was far too small.And in the EU that's even more so the case than in the US, which is suffering badly enough from Herbert Hoover economics right now.
And yet in the political domain Keynesianism is seen as discredited, while various forms of crowding out/austerity is expansionary talk, which have in fact totally failed — look at interest rates! — have become orthodoxy.
Tags: keynes, keynesianism, paul krugman