The Plank

We Aren't All Keynesians Now


In case you get tired of reading election coverage, yesterday
Edmund Phelps had a fascinating (if dense, to a lay reader) piece
on the legacy of John Maynard Keynes
in the Financial Times. After rolling out a compelling critique of the
British economist, though, Phelps warns of efforts to revive Keynesianism in
the wake of the financial crisis:

Yet it must be asked whether a massive
shift from private to state investment would not damp the conception,
development and adoption of new commercial ideas for innovation. Capitalism
theory stresses diversity in sources of new commercial ideas, in the pool of
entrepreneurs available for their development, in sources of finance--angel
investors, venture capitalists and the rest--and in the array of end users. It
also stresses how important it is that owners of financial and business
enterprises be accountable to no one (except their own consciences)--thus free
to use their intuition--in contrast to the strict accountability rightly
required of state employees. Thus a greatly increased presence of the central
government in a country’s investment sector could constrict innovation and
lower the quality of the innovations that are made. We would be left still in a


Who are these neo-Keynesians? Phelps is presumably referring to the economists and
policymakers, among them Larry
, who have called for injecting public funds into infrastructure,
R&D, and other innovation- and productivity-friendly areas. But, as Gene
Sperling and others have noted, infrastructure and R&D spending has
declined precipitously in the last 20 years, undermining the prospects of
future innovation. Between 1950 and 1970, the United States spent more than 3
percent of its GDP on public infrastructure; in the last 30 years, it’s been
below 2 percent. The case being made today isn’t for a “massive shift” to state
investment. It’s for getting back to where we started. Moreover, Sperling and Summers
aren’t Keynesians: They want infrastructure spending to boost innovation, not
consumer spending. While that doesn’t necessarily preclude the “crowding out”
effect Phelps fears, it does recommend a public spending strategy of
selectively “crowding in” the private sector--much in the way that government
funding for IT research led to the Internet, which in turn spurred trillions of
dollars in private global growth.


--Clay Risen

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