POLITICAL ECONOMCS
Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. The first three describe how the economy works.
1. A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies. Some decades ago, economists heatedly debated the relative strengths of monetary and fiscal policies, with some Keynesians arguing that monetary policy is powerless, and some monetarists arguing that fiscal policy is powerless. Both of these are essentially dead issues today. Nearly all Keynesians and monetarists now believe that both fiscal and monetary policies affect aggregate demand. A few economists, however, believe in debt neutrality—the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below).
2. According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. This idea is portrayed, for example, in phillips curves that show inflation rising only slowly when unemployment falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run. They often quote Keynes’s famous statement, “In the long run, we are all dead,” to make the point.
Monetary policy can produce real effects on output and employment only if some prices are rigid—if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So Keynesian models generally either assume or try to explain rigid prices or wages. Rationalizing rigid prices is a difficult theoretical problem because, according to standard microeconomic theory, real supplies and demands should not change if all nominal prices rise or fall proportionally.
But Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.
3. Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor. Even Milton Friedman acknowledged that “under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.”1 In current parlance, that would certainly be called a Keynesian position.
No policy prescriptions follow from these three beliefs alone. And many economists who do not call themselves Keynesian would nevertheless accept the entire list. What distinguishes Keynesians from other economists is their belief in the following three tenets about economic policy.
4. Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of aggregate demand, and partly because they believe that prices adjust only gradually. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Keynesians also feel certain that periods of recession or depression are economic maladies, not, as in real business cycle theory, efficient market responses to unattractive opportunities.
5. Many, but not all, Keynesians advocate activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems. Here, however, even some conservative Keynesians part company by doubting either the efficacy of stabilization policy or the wisdom of attempting it.
This does not mean that Keynesians advocate what used to be called fine-tuning—adjusting government spending, taxes, and the money supply every few months to keep the economy at full employment. Almost all economists, including most Keynesians, now believe that the government simply cannot know enough soon enough to fine-tune successfully. Three lags make it unlikely that fine-tuning will work. First, there is a lag between the time that a change in policy is required and the time that the government recognizes this. Second, there is a lag between when the government recognizes that a change in policy is required and when it takes action. In the United States, this lag can be very long for fiscal policy because Congress and the administration must first agree on most changes in spending and taxes. The third lag comes between the time that policy is changed and when the changes affect the economy. This, too, can be many months. Yet many Keynesians still believe that more modest goals for stabilization policy—coarse-tuning, if you will—are not only defensible but sensible. For example, an economist need not have detailed quantitative knowledge of lags to prescribe a dose of expansionary monetary policy when the unemployment rate is very high.
6. Finally, and even less unanimously, some Keynesians are more concerned about combating unemployment than about conquering inflation. They have concluded from the evidence that the costs of low inflation are small. However, there are plenty of anti-inflation Keynesians. Most of the world’s current and past central bankers, for example, merit this title whether they like it or not. Needless to say, views on the relative importance of unemployment and inflation heavily influence the policy advice that economists give and that policymakers accept. Keynesians typically advocate more aggressively expansionist policies than non-Keynesians.
Keynesians’ belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being and (b) the government is knowledgeable and capable enough to improve on the free market.
The brief debate between Keynesians and new classical economists in the 1980s was fought primarily over (a) and over the first three tenets of Keynesianism—tenets the monetarists had accepted. New classicals believed that anticipated changes in the money supply do not affect real output; that markets, even the labor market, adjust quickly to eliminate shortages and surpluses; and that business cycles may be efficient. For reasons that will be made clear below, I believe that the “objective” scientific evidence on these matters points strongly in the Keynesian direction. In the 1990s, the new classical schools also came to accept the view that prices are sticky and that, therefore, the labor market does not adjust as quickly as they previously thought (see new classical macroeconomics).
Before leaving the realm of definition, I must underscore several glaring and intentional omissions.
First, I have said nothing about the rational expectations school of thought. Like Keynes himself, many Keynesians doubt that school’s view that people use all available information to form their expectations about economic policy. Other Keynesians accept the view. But when it comes to the large issues with which I have concerned myself, nothing much rides on whether or not expectations are rational. Rational expectations do not, for example, preclude rigid prices; rational expectations models with sticky prices are thoroughly Keynesian by my definition. I should note, though, that some new classicals see rational expectations as much more fundamental to the debate.
The second omission is the hypothesis that there is a “natural rate” of unemployment in the long run. Prior to 1970, Keynesians believed that the long-run level of unemployment depended on government policy, and that the government could achieve a low unemployment rate by accepting a high but steady rate of inflation. In the late 1960s, Milton Friedman, a monetarist, and Columbia’s Edmund Phelps, a Keynesian, rejected the idea of such a long-run trade-off on theoretical grounds. They argued that the only way the government could keep unemployment below what they called the “natural rate” was with macroeconomic policies that would continuously drive inflation higher and higher. In the long run, they argued, the unemployment rate could not be below the natural rate. Shortly thereafter, Keynesians like Northwestern’s Robert Gordon presented empirical evidence for Friedman’s and Phelps’s view. Since about 1972 Keynesians have integrated the “natural rate” of unemployment into their thinking. So the natural rate hypothesis played essentially no role in the intellectual ferment of the 1975–1985 period.
Third, I have ignored the choice between monetary and fiscal policy as the preferred instrument of stabilization policy. Economists differ about this and occasionally change sides. By my definition, however, it is perfectly possible to be a Keynesian and still believe either that responsibility for stabilization policy should, in principle, be ceded to the monetary authority or that it is, in practice, so ceded. In fact, most Keynesians today share one or both of those beliefs.
Keynesian theory was much denigrated in academic circles from the mid-1970s until the mid-1980s. It has staged a strong comeback since then, however. The main reason appears to be that Keynesian economics was better able to explain the economic events of the 1970s and 1980s than its principal intellectual competitor, new classical economics.
True to its classical roots, new classical theory emphasizes the ability of a market economy to cure recessions by downward adjustments in wages and prices. The new classical economists of the mid-1970s attributed economic downturns to people’s misperceptions about what was happening to relative prices (such as real wages). Misperceptions would arise, they argued, if people did not know the current price level or inflation rate. But such misperceptions should be fleeting and surely cannot be large in societies in which price indexes are published monthly and the typical monthly inflation rate is less than 1 percent. Therefore, economic downturns, by the early new classical view, should be mild and brief. Yet, during the 1980s most of the world’s industrial economies endured deep and long recessions. Keynesian economics may be theoretically untidy, but it certainly predicts periods of persistent, involuntary unemployment.
According to the early new classical theorists of the 1970s and 1980s, a correctly perceived decrease in the growth of the money supply should have only small effects, if any, on real output. Yet, when the Federal Reserve and the Bank of England announced that monetary policy would be tightened to fight inflation, and then made good on their promises, severe recessions followed in each country. New classicals might claim that the tightening was unanticipated (because people did not believe what the monetary authorities said). Perhaps it was, in part. But surely the broad contours of the restrictive policies were anticipated, or at least correctly perceived as they unfolded. Old-fashioned Keynesian theory, which says that any monetary restriction is contractionary because firms and individuals are locked into fixed-price contracts, not inflation-adjusted ones, seems more consistent with actual events.
An offshoot of new classical theory formulated by Harvard’s Robert Barro is the idea of debt neutrality (see government debt and deficits). Barro argues that inflation, unemployment, real GNP, and real national saving should not be affected by whether the government finances its spending with high taxes and low deficits or with low taxes and high deficits. Because people are rational, he argues, they will correctly perceive that low taxes and high deficits today must mean higher future taxes for them and their heirs. They will, Barro argues, cut consumption and increase their saving by one dollar for each dollar increase in future tax liabilities. Thus, a rise in private saving should offset any increase in the government’s deficit. Naïve Keynesian analysis, by contrast, sees an increased deficit, with government spending held constant, as an increase in aggregate demand. If, as happened in the United States in the early 1980s, the stimulus to demand is nullified by contractionary monetary policy, real interest rates should rise strongly. There is no reason, in the Keynesian view, to expect the private saving rate to rise.
The massive U.S. tax cuts between 1981 and 1984 provided something approximating a laboratory test of these alternative views. What happened? The private saving rate did not rise. Real interest rates soared. With fiscal stimulus offset by monetary contraction, real GNP growth was approximately unaffected; it grew at about the same rate as it had in the recent past. Again, this all seems more consistent with Keynesian than with new classical theory.
Finally, there was the European depression of the 1980s, the worst since the depression of the 1930s. The Keynesian explanation is straightforward. Governments, led by the British and German central banks, decided to fight inflation with highly restrictive monetary and fiscal policies. The anti-inflation crusade was strengthened by the European monetary system, which, in effect, spread the stern German monetary policy all over Europe. The new classical school has no comparable explanation. New classicals, and conservative economists in general, argue that European governments interfere more heavily in labor markets (with high unemployment benefits, for example, and restrictions on firing workers). But most of these interferences were in place in the early 1970s, when unemployment was extremely low.
AM INTO PUBLISHING
Friday, 19 August 2016
KEYNESIAN SCHOOL OF ECONOMIC
KEYNESIAN SCHOOL OF ECONOMIC
Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. The first three describe how the economy works.
1. A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies. Some decades ago, economists heatedly debated the relative strengths of monetary and fiscal policies, with some Keynesians arguing that monetary policy is powerless, and some monetarists arguing that fiscal policy is powerless. Both of these are essentially dead issues today. Nearly all Keynesians and monetarists now believe that both fiscal and monetary policies affect aggregate demand. A few economists, however, believe in debt neutrality—the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below).
2. According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. This idea is portrayed, for example, in phillips curves that show inflation rising only slowly when unemployment falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run. They often quote Keynes’s famous statement, “In the long run, we are all dead,” to make the point.
Monetary policy can produce real effects on output and employment only if some prices are rigid—if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So Keynesian models generally either assume or try to explain rigid prices or wages. Rationalizing rigid prices is a difficult theoretical problem because, according to standard microeconomic theory, real supplies and demands should not change if all nominal prices rise or fall proportionally.
But Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.
3. Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor. Even Milton Friedman acknowledged that “under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.”1 In current parlance, that would certainly be called a Keynesian position.
No policy prescriptions follow from these three beliefs alone. And many economists who do not call themselves Keynesian would nevertheless accept the entire list. What distinguishes Keynesians from other economists is their belief in the following three tenets about economic policy.
4. Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of aggregate demand, and partly because they believe that prices adjust only gradually. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Keynesians also feel certain that periods of recession or depression are economic maladies, not, as in real business cycle theory, efficient market responses to unattractive opportunities.
5. Many, but not all, Keynesians advocate activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems. Here, however, even some conservative Keynesians part company by doubting either the efficacy of stabilization policy or the wisdom of attempting it.
This does not mean that Keynesians advocate what used to be called fine-tuning—adjusting government spending, taxes, and the money supply every few months to keep the economy at full employment. Almost all economists, including most Keynesians, now believe that the government simply cannot know enough soon enough to fine-tune successfully. Three lags make it unlikely that fine-tuning will work. First, there is a lag between the time that a change in policy is required and the time that the government recognizes this. Second, there is a lag between when the government recognizes that a change in policy is required and when it takes action. In the United States, this lag can be very long for fiscal policy because Congress and the administration must first agree on most changes in spending and taxes. The third lag comes between the time that policy is changed and when the changes affect the economy. This, too, can be many months. Yet many Keynesians still believe that more modest goals for stabilization policy—coarse-tuning, if you will—are not only defensible but sensible. For example, an economist need not have detailed quantitative knowledge of lags to prescribe a dose of expansionary monetary policy when the unemployment rate is very high.
6. Finally, and even less unanimously, some Keynesians are more concerned about combating unemployment than about conquering inflation. They have concluded from the evidence that the costs of low inflation are small. However, there are plenty of anti-inflation Keynesians. Most of the world’s current and past central bankers, for example, merit this title whether they like it or not. Needless to say, views on the relative importance of unemployment and inflation heavily influence the policy advice that economists give and that policymakers accept. Keynesians typically advocate more aggressively expansionist policies than non-Keynesians.
Keynesians’ belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being and (b) the government is knowledgeable and capable enough to improve on the free market.
The brief debate between Keynesians and new classical economists in the 1980s was fought primarily over (a) and over the first three tenets of Keynesianism—tenets the monetarists had accepted. New classicals believed that anticipated changes in the money supply do not affect real output; that markets, even the labor market, adjust quickly to eliminate shortages and surpluses; and that business cycles may be efficient. For reasons that will be made clear below, I believe that the “objective” scientific evidence on these matters points strongly in the Keynesian direction. In the 1990s, the new classical schools also came to accept the view that prices are sticky and that, therefore, the labor market does not adjust as quickly as they previously thought (see new classical macroeconomics).
Before leaving the realm of definition, I must underscore several glaring and intentional omissions.
First, I have said nothing about the rational expectations school of thought. Like Keynes himself, many Keynesians doubt that school’s view that people use all available information to form their expectations about economic policy. Other Keynesians accept the view. But when it comes to the large issues with which I have concerned myself, nothing much rides on whether or not expectations are rational. Rational expectations do not, for example, preclude rigid prices; rational expectations models with sticky prices are thoroughly Keynesian by my definition. I should note, though, that some new classicals see rational expectations as much more fundamental to the debate.
The second omission is the hypothesis that there is a “natural rate” of unemployment in the long run. Prior to 1970, Keynesians believed that the long-run level of unemployment depended on government policy, and that the government could achieve a low unemployment rate by accepting a high but steady rate of inflation. In the late 1960s, Milton Friedman, a monetarist, and Columbia’s Edmund Phelps, a Keynesian, rejected the idea of such a long-run trade-off on theoretical grounds. They argued that the only way the government could keep unemployment below what they called the “natural rate” was with macroeconomic policies that would continuously drive inflation higher and higher. In the long run, they argued, the unemployment rate could not be below the natural rate. Shortly thereafter, Keynesians like Northwestern’s Robert Gordon presented empirical evidence for Friedman’s and Phelps’s view. Since about 1972 Keynesians have integrated the “natural rate” of unemployment into their thinking. So the natural rate hypothesis played essentially no role in the intellectual ferment of the 1975–1985 period.
Third, I have ignored the choice between monetary and fiscal policy as the preferred instrument of stabilization policy. Economists differ about this and occasionally change sides. By my definition, however, it is perfectly possible to be a Keynesian and still believe either that responsibility for stabilization policy should, in principle, be ceded to the monetary authority or that it is, in practice, so ceded. In fact, most Keynesians today share one or both of those beliefs.
Keynesian theory was much denigrated in academic circles from the mid-1970s until the mid-1980s. It has staged a strong comeback since then, however. The main reason appears to be that Keynesian economics was better able to explain the economic events of the 1970s and 1980s than its principal intellectual competitor, new classical economics.
True to its classical roots, new classical theory emphasizes the ability of a market economy to cure recessions by downward adjustments in wages and prices. The new classical economists of the mid-1970s attributed economic downturns to people’s misperceptions about what was happening to relative prices (such as real wages). Misperceptions would arise, they argued, if people did not know the current price level or inflation rate. But such misperceptions should be fleeting and surely cannot be large in societies in which price indexes are published monthly and the typical monthly inflation rate is less than 1 percent. Therefore, economic downturns, by the early new classical view, should be mild and brief. Yet, during the 1980s most of the world’s industrial economies endured deep and long recessions. Keynesian economics may be theoretically untidy, but it certainly predicts periods of persistent, involuntary unemployment.
According to the early new classical theorists of the 1970s and 1980s, a correctly perceived decrease in the growth of the money supply should have only small effects, if any, on real output. Yet, when the Federal Reserve and the Bank of England announced that monetary policy would be tightened to fight inflation, and then made good on their promises, severe recessions followed in each country. New classicals might claim that the tightening was unanticipated (because people did not believe what the monetary authorities said). Perhaps it was, in part. But surely the broad contours of the restrictive policies were anticipated, or at least correctly perceived as they unfolded. Old-fashioned Keynesian theory, which says that any monetary restriction is contractionary because firms and individuals are locked into fixed-price contracts, not inflation-adjusted ones, seems more consistent with actual events.
An offshoot of new classical theory formulated by Harvard’s Robert Barro is the idea of debt neutrality (see government debt and deficits). Barro argues that inflation, unemployment, real GNP, and real national saving should not be affected by whether the government finances its spending with high taxes and low deficits or with low taxes and high deficits. Because people are rational, he argues, they will correctly perceive that low taxes and high deficits today must mean higher future taxes for them and their heirs. They will, Barro argues, cut consumption and increase their saving by one dollar for each dollar increase in future tax liabilities. Thus, a rise in private saving should offset any increase in the government’s deficit. Naïve Keynesian analysis, by contrast, sees an increased deficit, with government spending held constant, as an increase in aggregate demand. If, as happened in the United States in the early 1980s, the stimulus to demand is nullified by contractionary monetary policy, real interest rates should rise strongly. There is no reason, in the Keynesian view, to expect the private saving rate to rise.
The massive U.S. tax cuts between 1981 and 1984 provided something approximating a laboratory test of these alternative views. What happened? The private saving rate did not rise. Real interest rates soared. With fiscal stimulus offset by monetary contraction, real GNP growth was approximately unaffected; it grew at about the same rate as it had in the recent past. Again, this all seems more consistent with Keynesian than with new classical theory.
Finally, there was the European depression of the 1980s, the worst since the depression of the 1930s. The Keynesian explanation is straightforward. Governments, led by the British and German central banks, decided to fight inflation with highly restrictive monetary and fiscal policies. The anti-inflation crusade was strengthened by the European monetary system, which, in effect, spread the stern German monetary policy all over Europe. The new classical school has no comparable explanation. New classicals, and conservative economists in general, argue that European governments interfere more heavily in labor markets (with high unemployment benefits, for example, and restrictions on firing workers). But most of these interferences were in place in the early 1970s, when unemployment was extremely low.
Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. The first three describe how the economy works.
1. A Keynesian believes that aggregate demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies. Some decades ago, economists heatedly debated the relative strengths of monetary and fiscal policies, with some Keynesians arguing that monetary policy is powerless, and some monetarists arguing that fiscal policy is powerless. Both of these are essentially dead issues today. Nearly all Keynesians and monetarists now believe that both fiscal and monetary policies affect aggregate demand. A few economists, however, believe in debt neutrality—the doctrine that substitutions of government borrowing for taxes have no effects on total demand (more on this below).
2. According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. This idea is portrayed, for example, in phillips curves that show inflation rising only slowly when unemployment falls. Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run. They often quote Keynes’s famous statement, “In the long run, we are all dead,” to make the point.
Monetary policy can produce real effects on output and employment only if some prices are rigid—if nominal wages (wages in dollars, not in real purchasing power), for example, do not adjust instantly. Otherwise, an injection of new money would change all prices by the same percentage. So Keynesian models generally either assume or try to explain rigid prices or wages. Rationalizing rigid prices is a difficult theoretical problem because, according to standard microeconomic theory, real supplies and demands should not change if all nominal prices rise or fall proportionally.
But Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to fluctuate. If government spending increases, for example, and all other components of spending remain constant, then output will increase. Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.
3. Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labor. Even Milton Friedman acknowledged that “under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.”1 In current parlance, that would certainly be called a Keynesian position.
No policy prescriptions follow from these three beliefs alone. And many economists who do not call themselves Keynesian would nevertheless accept the entire list. What distinguishes Keynesians from other economists is their belief in the following three tenets about economic policy.
4. Keynesians do not think that the typical level of unemployment is ideal—partly because unemployment is subject to the caprice of aggregate demand, and partly because they believe that prices adjust only gradually. In fact, Keynesians typically see unemployment as both too high on average and too variable, although they know that rigorous theoretical justification for these positions is hard to come by. Keynesians also feel certain that periods of recession or depression are economic maladies, not, as in real business cycle theory, efficient market responses to unattractive opportunities.
5. Many, but not all, Keynesians advocate activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems. Here, however, even some conservative Keynesians part company by doubting either the efficacy of stabilization policy or the wisdom of attempting it.
This does not mean that Keynesians advocate what used to be called fine-tuning—adjusting government spending, taxes, and the money supply every few months to keep the economy at full employment. Almost all economists, including most Keynesians, now believe that the government simply cannot know enough soon enough to fine-tune successfully. Three lags make it unlikely that fine-tuning will work. First, there is a lag between the time that a change in policy is required and the time that the government recognizes this. Second, there is a lag between when the government recognizes that a change in policy is required and when it takes action. In the United States, this lag can be very long for fiscal policy because Congress and the administration must first agree on most changes in spending and taxes. The third lag comes between the time that policy is changed and when the changes affect the economy. This, too, can be many months. Yet many Keynesians still believe that more modest goals for stabilization policy—coarse-tuning, if you will—are not only defensible but sensible. For example, an economist need not have detailed quantitative knowledge of lags to prescribe a dose of expansionary monetary policy when the unemployment rate is very high.
6. Finally, and even less unanimously, some Keynesians are more concerned about combating unemployment than about conquering inflation. They have concluded from the evidence that the costs of low inflation are small. However, there are plenty of anti-inflation Keynesians. Most of the world’s current and past central bankers, for example, merit this title whether they like it or not. Needless to say, views on the relative importance of unemployment and inflation heavily influence the policy advice that economists give and that policymakers accept. Keynesians typically advocate more aggressively expansionist policies than non-Keynesians.
Keynesians’ belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being and (b) the government is knowledgeable and capable enough to improve on the free market.
The brief debate between Keynesians and new classical economists in the 1980s was fought primarily over (a) and over the first three tenets of Keynesianism—tenets the monetarists had accepted. New classicals believed that anticipated changes in the money supply do not affect real output; that markets, even the labor market, adjust quickly to eliminate shortages and surpluses; and that business cycles may be efficient. For reasons that will be made clear below, I believe that the “objective” scientific evidence on these matters points strongly in the Keynesian direction. In the 1990s, the new classical schools also came to accept the view that prices are sticky and that, therefore, the labor market does not adjust as quickly as they previously thought (see new classical macroeconomics).
Before leaving the realm of definition, I must underscore several glaring and intentional omissions.
First, I have said nothing about the rational expectations school of thought. Like Keynes himself, many Keynesians doubt that school’s view that people use all available information to form their expectations about economic policy. Other Keynesians accept the view. But when it comes to the large issues with which I have concerned myself, nothing much rides on whether or not expectations are rational. Rational expectations do not, for example, preclude rigid prices; rational expectations models with sticky prices are thoroughly Keynesian by my definition. I should note, though, that some new classicals see rational expectations as much more fundamental to the debate.
The second omission is the hypothesis that there is a “natural rate” of unemployment in the long run. Prior to 1970, Keynesians believed that the long-run level of unemployment depended on government policy, and that the government could achieve a low unemployment rate by accepting a high but steady rate of inflation. In the late 1960s, Milton Friedman, a monetarist, and Columbia’s Edmund Phelps, a Keynesian, rejected the idea of such a long-run trade-off on theoretical grounds. They argued that the only way the government could keep unemployment below what they called the “natural rate” was with macroeconomic policies that would continuously drive inflation higher and higher. In the long run, they argued, the unemployment rate could not be below the natural rate. Shortly thereafter, Keynesians like Northwestern’s Robert Gordon presented empirical evidence for Friedman’s and Phelps’s view. Since about 1972 Keynesians have integrated the “natural rate” of unemployment into their thinking. So the natural rate hypothesis played essentially no role in the intellectual ferment of the 1975–1985 period.
Third, I have ignored the choice between monetary and fiscal policy as the preferred instrument of stabilization policy. Economists differ about this and occasionally change sides. By my definition, however, it is perfectly possible to be a Keynesian and still believe either that responsibility for stabilization policy should, in principle, be ceded to the monetary authority or that it is, in practice, so ceded. In fact, most Keynesians today share one or both of those beliefs.
Keynesian theory was much denigrated in academic circles from the mid-1970s until the mid-1980s. It has staged a strong comeback since then, however. The main reason appears to be that Keynesian economics was better able to explain the economic events of the 1970s and 1980s than its principal intellectual competitor, new classical economics.
True to its classical roots, new classical theory emphasizes the ability of a market economy to cure recessions by downward adjustments in wages and prices. The new classical economists of the mid-1970s attributed economic downturns to people’s misperceptions about what was happening to relative prices (such as real wages). Misperceptions would arise, they argued, if people did not know the current price level or inflation rate. But such misperceptions should be fleeting and surely cannot be large in societies in which price indexes are published monthly and the typical monthly inflation rate is less than 1 percent. Therefore, economic downturns, by the early new classical view, should be mild and brief. Yet, during the 1980s most of the world’s industrial economies endured deep and long recessions. Keynesian economics may be theoretically untidy, but it certainly predicts periods of persistent, involuntary unemployment.
According to the early new classical theorists of the 1970s and 1980s, a correctly perceived decrease in the growth of the money supply should have only small effects, if any, on real output. Yet, when the Federal Reserve and the Bank of England announced that monetary policy would be tightened to fight inflation, and then made good on their promises, severe recessions followed in each country. New classicals might claim that the tightening was unanticipated (because people did not believe what the monetary authorities said). Perhaps it was, in part. But surely the broad contours of the restrictive policies were anticipated, or at least correctly perceived as they unfolded. Old-fashioned Keynesian theory, which says that any monetary restriction is contractionary because firms and individuals are locked into fixed-price contracts, not inflation-adjusted ones, seems more consistent with actual events.
An offshoot of new classical theory formulated by Harvard’s Robert Barro is the idea of debt neutrality (see government debt and deficits). Barro argues that inflation, unemployment, real GNP, and real national saving should not be affected by whether the government finances its spending with high taxes and low deficits or with low taxes and high deficits. Because people are rational, he argues, they will correctly perceive that low taxes and high deficits today must mean higher future taxes for them and their heirs. They will, Barro argues, cut consumption and increase their saving by one dollar for each dollar increase in future tax liabilities. Thus, a rise in private saving should offset any increase in the government’s deficit. Naïve Keynesian analysis, by contrast, sees an increased deficit, with government spending held constant, as an increase in aggregate demand. If, as happened in the United States in the early 1980s, the stimulus to demand is nullified by contractionary monetary policy, real interest rates should rise strongly. There is no reason, in the Keynesian view, to expect the private saving rate to rise.
The massive U.S. tax cuts between 1981 and 1984 provided something approximating a laboratory test of these alternative views. What happened? The private saving rate did not rise. Real interest rates soared. With fiscal stimulus offset by monetary contraction, real GNP growth was approximately unaffected; it grew at about the same rate as it had in the recent past. Again, this all seems more consistent with Keynesian than with new classical theory.
Finally, there was the European depression of the 1980s, the worst since the depression of the 1930s. The Keynesian explanation is straightforward. Governments, led by the British and German central banks, decided to fight inflation with highly restrictive monetary and fiscal policies. The anti-inflation crusade was strengthened by the European monetary system, which, in effect, spread the stern German monetary policy all over Europe. The new classical school has no comparable explanation. New classicals, and conservative economists in general, argue that European governments interfere more heavily in labor markets (with high unemployment benefits, for example, and restrictions on firing workers). But most of these interferences were in place in the early 1970s, when unemployment was extremely low.
ABA WOMEN RIOT OF 1929
ABA WOMEN RIOT OF 1929
The single road leading to this community that in 1929, produced some heroines
of Nigeria’s anti- colonial struggle, remains unmotorable while the few primary
schools in the place reminds the visitor of the Hobesian state of nature, with their
dirty and busy surroundings and the children who were literately forced to line up
in the hot sun this Thursday afternoon, May 7, to wave to the visitors, wore rags
as uniforms, with many of them on bare foot.
Nchara which shares boundaries with the Ngwa people of Abia state on its North-
West and the Anangs of Akwa Ibom state, on its Southern part,occupies a pride
of place in almost every history book that chronicles the Nigerian political
development, at least between 1914 and 1960.
It is from this community which is described by one of its sons, as having a “fair
topography but a rich soil” which produces more than a quarter of the food stuff,
especially cassava, consumed by Abians, that a group of women, led by the very
courageous IKONNA NWANYIUKWU ENYIA, confronted their Warrant Chief,
OKEUGU, who dared to enforce the obnoxious law then by the colonial masters,
that women should start paying taxes, like their husbands.
That confrontation led to what is there after referred to in Nigerian history cum
political Science books, as the ABA WOMEN RIOT OF 1929.
Though the heroic struggle of Madam Ikonna and her compatriots which led to the
abrogation of that unfair piece of law, not only in Igbo land but in other parts of
colonial Nigeria, is only given a footnote in most books that records it, the effort of
these heroines of the peoples war have never been adequately honored by the
Nigerian state.
More painful too, is the fact that historians or chroniclers of that part of our
National history have never taken time to correct the several distortions that have
been associated with the Nchrara women’s confrontation of the dreaded Warrant
Chief and the District Head (DH).
For instance, that act of valour by Madam Ikonna and her colleagues continues to
wear the wrong tag, “Aba Women Riot” when the scene of action was never in Aba
Again, no effort has been made to record for generations unborn, other struggles
waged by Nchara/Oloko women under the leadership of Ikonna, nor is there any
account of the historical background of the lady warrior and up till now, nothing
has been done either by Ikwuana Council Area, the Abia state or federal
Governments of Nigeria to honuor or immortalize this great women whose patriotic
zeal, courage and acts of valour must have inspired and influenced such other
female Nationalists as Margaret Ekpo, Chief Mrs Funmilayo Ransom Kuti, Hajia
Gambo Sawaba, among others, who came after her, to join the struggle against
socio, political and economic oppressors in Nigeria.
Madam Ikonna, born in 1877, into the family of Mazi Orji Onwuama Onyeukwu
from Oloko Village but got married to the family of Enyia, Ndiokpolu Akanu
Achara, in Oloko Clan of the old Bende Division of what is now known as Abia
state
A very beautiful woman in her youth, Ikonna was said to have been so loved by her
father that he gave her the name, (Ikonna), meaning her father’s heart throb
because she had so much resemblance with him.
Again, her beauty, strength and fearlessness, became for her as a young girl,
sources of disadvantage. Going by the belief then that the Whiteman’s education
was meant for only Lazy male children, coupled with the fact that her no nonsense
attitude could lead her into trouble that may result in her being sold into slavery,
forced her parents not to allow her venture into acquiring what she herself was
later to tag the “White man’s staff” (Western education).
But her educational disadvantage did not prevent her from getting married to Mazi
Enyia Mgbudu of Umu Okengoegbe, Obewon Amahia, to whom she bore four
children, a girl and three boys. As a young woman, Ikonna had both the leadership
qualities and militant disposition to organize the women of Nchara, Oloko clan, for
positive action against societal ills.
So in 1929 when Chief Okeugo, the Warrant Chief of Oloko, in obedience to the
wishes of the colonial masters, broke the sad news that women should start
paying tax, Ikonna mobilized the women folk to confront the authorities.
She went beyond her immediate Nchara community, to Umugo, Ahaba, Usaka
Eleogu, Azuiyi, Obeahia, Amizi and Awomuku, all neighboring communities within
Oloko clan, to mobilize women for a protest match against the tax law and that
protest was said to have taken the women, who were in Unclothedness, except the local
Akori leaf they used in covering their women hood, to the residence of the District
Head whose name was given as Captain Hill.
At Chief Okeugo’s house, Ikonna was said to have personally charged at the man,
pushing him around and removing his cap. Also at the District Head’s house,
Ikonna and her protesting colleagues, also had a brush with the guard (Cotuma)
who they subdued. She was however arrested and detained by the colonial
authorities over the protests and later prosecuted by acommission of enquiry set
up for that purpose by the colonial authorities but that did not deter her from
engaging in further protests years after.
In 1957, that is 28 years after the “Aba Women” riot. Ikonna led yet another
women protest against the Eastern Nigerian Government led by late Dr. Nnamdi
Azikwe. This time it was against the government policy of excessive taxation
against the men.
Ikonna and her colleagues had reasoned then that self rule having been achieved
by the Eastern region, the indigenous government had no business imposing
excessive taxes on the citizens. The government saw reasons with her and
relaxed the tax law, but not before warning her not to lead any women unrest
again, before she left Dr. Azikiwe’s office in Enugu .
Two years later, in 1959, the woman was again, up in arms. The Eastern Nigerian
Government had shared a certain food formula among school children which
claimed the lifes of some of them. Ikonna again, led another delegation of women
to Enugu where they demonstrated against the government policy. She was of
course arrested and detained for a couple of days but released because the
government feared that her continued detention could spark off another women
riot.
For a woman who did all these for humanity, it is expected that she should be
honored and the accounts of her acts of valour be given a pride of place. But this
has not been the case.
Apart from the giant seize statue of the woman recently erected by Ikonna’s
ground children and the May 7 visit by representatives of women from Igbo
speaking parts of Nigeria to her grave side, there is nothing to show that once in
this life time, there was a woman known as Ikonna Nwanyiukwu Enyia.
The single road leading to this community that in 1929, produced some heroines
of Nigeria’s anti- colonial struggle, remains unmotorable while the few primary
schools in the place reminds the visitor of the Hobesian state of nature, with their
dirty and busy surroundings and the children who were literately forced to line up
in the hot sun this Thursday afternoon, May 7, to wave to the visitors, wore rags
as uniforms, with many of them on bare foot.
Nchara which shares boundaries with the Ngwa people of Abia state on its North-
West and the Anangs of Akwa Ibom state, on its Southern part,occupies a pride
of place in almost every history book that chronicles the Nigerian political
development, at least between 1914 and 1960.
It is from this community which is described by one of its sons, as having a “fair
topography but a rich soil” which produces more than a quarter of the food stuff,
especially cassava, consumed by Abians, that a group of women, led by the very
courageous IKONNA NWANYIUKWU ENYIA, confronted their Warrant Chief,
OKEUGU, who dared to enforce the obnoxious law then by the colonial masters,
that women should start paying taxes, like their husbands.
That confrontation led to what is there after referred to in Nigerian history cum
political Science books, as the ABA WOMEN RIOT OF 1929.
Though the heroic struggle of Madam Ikonna and her compatriots which led to the
abrogation of that unfair piece of law, not only in Igbo land but in other parts of
colonial Nigeria, is only given a footnote in most books that records it, the effort of
these heroines of the peoples war have never been adequately honored by the
Nigerian state.
More painful too, is the fact that historians or chroniclers of that part of our
National history have never taken time to correct the several distortions that have
been associated with the Nchrara women’s confrontation of the dreaded Warrant
Chief and the District Head (DH).
For instance, that act of valour by Madam Ikonna and her colleagues continues to
wear the wrong tag, “Aba Women Riot” when the scene of action was never in Aba
Again, no effort has been made to record for generations unborn, other struggles
waged by Nchara/Oloko women under the leadership of Ikonna, nor is there any
account of the historical background of the lady warrior and up till now, nothing
has been done either by Ikwuana Council Area, the Abia state or federal
Governments of Nigeria to honuor or immortalize this great women whose patriotic
zeal, courage and acts of valour must have inspired and influenced such other
female Nationalists as Margaret Ekpo, Chief Mrs Funmilayo Ransom Kuti, Hajia
Gambo Sawaba, among others, who came after her, to join the struggle against
socio, political and economic oppressors in Nigeria.
Madam Ikonna, born in 1877, into the family of Mazi Orji Onwuama Onyeukwu
from Oloko Village but got married to the family of Enyia, Ndiokpolu Akanu
Achara, in Oloko Clan of the old Bende Division of what is now known as Abia
state
A very beautiful woman in her youth, Ikonna was said to have been so loved by her
father that he gave her the name, (Ikonna), meaning her father’s heart throb
because she had so much resemblance with him.
Again, her beauty, strength and fearlessness, became for her as a young girl,
sources of disadvantage. Going by the belief then that the Whiteman’s education
was meant for only Lazy male children, coupled with the fact that her no nonsense
attitude could lead her into trouble that may result in her being sold into slavery,
forced her parents not to allow her venture into acquiring what she herself was
later to tag the “White man’s staff” (Western education).
But her educational disadvantage did not prevent her from getting married to Mazi
Enyia Mgbudu of Umu Okengoegbe, Obewon Amahia, to whom she bore four
children, a girl and three boys. As a young woman, Ikonna had both the leadership
qualities and militant disposition to organize the women of Nchara, Oloko clan, for
positive action against societal ills.
So in 1929 when Chief Okeugo, the Warrant Chief of Oloko, in obedience to the
wishes of the colonial masters, broke the sad news that women should start
paying tax, Ikonna mobilized the women folk to confront the authorities.
She went beyond her immediate Nchara community, to Umugo, Ahaba, Usaka
Eleogu, Azuiyi, Obeahia, Amizi and Awomuku, all neighboring communities within
Oloko clan, to mobilize women for a protest match against the tax law and that
protest was said to have taken the women, who were in Unclothedness, except the local
Akori leaf they used in covering their women hood, to the residence of the District
Head whose name was given as Captain Hill.
At Chief Okeugo’s house, Ikonna was said to have personally charged at the man,
pushing him around and removing his cap. Also at the District Head’s house,
Ikonna and her protesting colleagues, also had a brush with the guard (Cotuma)
who they subdued. She was however arrested and detained by the colonial
authorities over the protests and later prosecuted by acommission of enquiry set
up for that purpose by the colonial authorities but that did not deter her from
engaging in further protests years after.
In 1957, that is 28 years after the “Aba Women” riot. Ikonna led yet another
women protest against the Eastern Nigerian Government led by late Dr. Nnamdi
Azikwe. This time it was against the government policy of excessive taxation
against the men.
Ikonna and her colleagues had reasoned then that self rule having been achieved
by the Eastern region, the indigenous government had no business imposing
excessive taxes on the citizens. The government saw reasons with her and
relaxed the tax law, but not before warning her not to lead any women unrest
again, before she left Dr. Azikiwe’s office in Enugu .
Two years later, in 1959, the woman was again, up in arms. The Eastern Nigerian
Government had shared a certain food formula among school children which
claimed the lifes of some of them. Ikonna again, led another delegation of women
to Enugu where they demonstrated against the government policy. She was of
course arrested and detained for a couple of days but released because the
government feared that her continued detention could spark off another women
riot.
For a woman who did all these for humanity, it is expected that she should be
honored and the accounts of her acts of valour be given a pride of place. But this
has not been the case.
Apart from the giant seize statue of the woman recently erected by Ikonna’s
ground children and the May 7 visit by representatives of women from Igbo
speaking parts of Nigeria to her grave side, there is nothing to show that once in
this life time, there was a woman known as Ikonna Nwanyiukwu Enyia.
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