Wednesday, January 27, 2010

Robert Lucas on Keynes (fg)

Keynote Address to the 2003 HOPE Conference: My Keynesian Education

Nobel Laureate Robert E. Lucas:

[...] Most of the post–WorldWar II fluctuations of GDP about trend can be accounted for in real terms. But that’s not because money doesn’t matter. That’s because monetary policy in the postwar United States has been so good. So that’s I think where Keynes’s real contribution is. It’s not Einsteinlevel theory, new paradigm, all this.
I think that in writing the General Theory, Keynes was viewing himself as a spokesman for a discredited profession. That’s why he doesn’t cite anyone but crazies like Hobson. He knows about Wicksell and all the “classics,” but he is at pains to disassociate his views from theirs, to overemphasize the differences. He’s writing in a situation where people are ready to throw in the
towel on capitalism and liberal democracy and go with fascism or corporatism, protectionism, socialist planning.
Keynes’s first objective is to say, “Look, there’s got to be a way to respond to depressions that’s consistent with capitalist democracy.” What he hits on is that the government should take some new responsibilities, but the responsibilities are for stabilizing overall spending flows. You don’t have to plan the economy in detail in order to meet this objective. And in that sense, I think for everybody in the postwar period—I’m talking about Keynesians and monetarists both—that’s the agreed-upon view:We should stabilize spending flows, and the question is really one of the details about how best to do it. Friedman’s approach involved slightly less government involvement than a Keynesian approach, but I say slightly.

(HT Prof. Spahn)