[LINK] "Actually, Keynes Cared a Lot About the Long Run"

[rfmcdonald]

My first reaction to Niall Ferguson's statement that John Maynard Keynes' theory of economics was motivated by the fact that, as a gay man, he was inherently not oriented towards considerations of the future, was confusion that Ferguson got the facts so badly wrong. Keynes was not completely gay but rather bisexual, married to a woman he loved, and disappointed that they didn't have children (his wife is known to have miscarried at least once). Ferguson's impressively thorough apology has been undermined by Ferguson's long history of saying this about Keynes, something that makes it unlikely that Ferguson misspoke. As described by Slate's Matthew Yglesias, Ferguson doesn't understand Keynes' economics any better than he does Keynes' biography. Keynesianism, Yglesias argues, is inherently future-oriented.

The assumption that Keynes only cared about the short run stems from Keynes’ too-often quoted line that “in the long-term we are all dead.” This is, obviously, true. But while it’s often taken to be something like a 1930s version of YOLO, that kind of carpe diem economics has nothing to do with what Keynes was actually writing about.

The line appears not in the General Theory of Employment, Interest, and Money but in 1923’s Tract on Monetary Reform. Most countries, including Great Britain, had abandoned the gold standard during World War I. After the war, the major powers sought to return to gold and the British authorities wanted to return their currency to its pre-war peg, a step Keynes thought would be disastrous. The question of the long run arose in response to the claim that overvaluing a currency relative to the currencies of its trade partners can’t make a difference since in the long-run domestic prices will adjust to any exchange rate.

Keynes says that this is true. If after the conclusion of the American Civil War “the American dollar had been stabilized and defined by law at 10 percent below its present value” that would have had no implications for the world economy of the 1920s, 60 years later. Nominal prices would have adjusted. “But this long run is a misleading guide to current affairs,” he wrote, “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

To extend the metaphor, Keynes’ point wasn’t that the long-term is unimportant—it’s crucial that a ship eventually arrive at the correct port. But in the middle of the storm an expert sailor needs to be able to say something useful about how to weather what’s actually happening. Economics will not be a useful or interesting discipline if all it can say about exchange rates is that eventually things will work themselves out. In the short run, it makes quite a bit of difference what happens to exchange rates: It can make the difference between prosperity and recession. Policymakers and the public should demand that economists have something to say about it.