Posted by: Dirk | June 26, 2009

Axel Leijonhufvud: What can we learn from Keynes?

Axel Leijonhufvud has published a new paper named Out of the corridor: Keynes and the crisis. He concludes:

I began by arguing that there are three things we should learn from Keynes. The first was to take our social responsibilities seriously and focus on the macroproblems of our own day. Today’s problem is the ongoing credit crisis and its gradually unfolding consequences. The second was to try to understand what can be done about it. Here I have argued that standard Keynesian policies are not the answer. Neither is the central banking doctrine that has dominated in recent years. The third was to ask whether events proved that existing theory needed to be revised. On that issue, I conclude that dynamic stochastic general equilibrium theory as an intellectually enterprise has been bankrupted by the crisis. However, like a zombie bank too-big-to-fail it will no doubt be with us for many years. This conclusion does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes, instead, are these three lessons about how to view our responsibilities and how to approach our subject.

I completely agree with this. In the article, Leijonhufvud mentions the term balance sheet recession. The role of debt in our economy has been misrepresented by the mainstream. It has not been understood that credit buys property and that therefore credit is power. This is the complete opposite of the statement money is neutral. Credit expansion then gives more power to those that take on more debt. This is exactly what created the asset price bubbles in the recent past. So, how will we decide about credit expansion in the future? Finding this out should be the task of macro-economists today.


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