Friday, July 1, 2011

Krugman And Time Horizons

Paul Krugman was over at Cambridge giving a speech on Keynes and almost as if to prove FLG's Time Horizons theory begins (jump to the 7 min mark or so) by discussing Chapter 12 of The General Theory of Employment, Interest and Money, which is entitled "The State of Long Run Expectations." Krugman describes the fundamental theme as "Nobody knows anything about the long run future, but they adopt conventions to convince themselves that they know something and every once and while those conventions collapse and wild things happens."

And then, dear readers, Mr. Krugman says, at around the 10 minute mark, Keynes himself argued that the book is all about the instability of long run expectations. HOWEVER, Krugman then says it doesn't matter. What matters to him is Part I.

This leads to the question -- what's in Part I? Basically, part I is concerned with how classical economics' assumptions, which FLG would argue reflect a long run interpretation, can be wrong and that this justifies intervention:
The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a Society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.

See, but the most fascinating thing for FLG is how Krugman dismisses Keynes' argument that we shouldn't concern ourselves with the long run because we our ability to predict it is nil, and instead says that Keynes' tools for analyzing the economy in the short run is the more important. This is where Krugman really proves FLG's Theory that conservatives are more concerned with the long run and liberals the short. For Krugman, the argument about the short versus long run is pretty much self-evident. In the long run, we are all dead. Why are we even having this argument. Let's get to the important stuff, like how to manage the short run economy.


The Ancient said...

It's remarkable, isn't it, that someone who writes so clearly is simultaneously one of the worst public speakers alive today. He's always been that way. That's part of the reason he lost out on the CEA job in the Clinton Administration. No one could envision sending him on television to explain anything. (There were also other reasons, as in "works poorly with others.")

The Ancient said...

BTW, anyone who would like to "see" the speech without the miserable delivery can read it here:

Creative Commons License
This work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.