The segment of the economic blogosphere that I follow has spent much time lately contemplating the Keynes/Hayek rivalry and each player's appropriate place in the history of macroeconomics. I am relatively new to all this stuff, so I don't feel comfortable trying to opine on the subject. Nevertheless, the following post by David Glasner triggered something, which got me to re-read an article by Nassim Nicholas Taleb and Mark Blyth, which I think well summarizes my general feelings about any recovery strategy that could be described as "Keynesian". With all of that out of the way...
The crux of Glasner's post is that Keynes and Hayek were not nearly as omniscient as Ralph Hawtrey in anticipating the Great Depression, so the back and forth by the disciples of each should be put to bed. Hawtrey, who could be described as a monetarist, identified that a return to the gold standard after World War 1 would result in a painful deflation, as monetary demand for the metal increased (note: Jim Rickards accepts this thesis in his book, but expands on it to suggest that the real problem was not actually the re-monetization of gold, but the decision to try and maintain the pre-WW1 exchange rate). Glasner notes the following:
"The measures agreed upon at the Genoa Conference prevented the monetary demand for gold from increasing faster than the stock of gold was increasing so that the world price level in terms of gold was roughly stable from about 1922 through 1928."
The virtue that Glasner points to, as a by-product of the conference that Hawtrey largely guided, is stability -- the quality often ascribed to the "Great Moderation" that began with Ronald Reagan becoming President. This, in turn, got me thinking about the Taleb article. For those not familiar, much of his work has dealt with how the move towards eliminating all volatility leads to "tail risks" -- low probability, high impact 100-year storm events. As Taleb notes in the article, there is a utility in market/price/asset movement and the goal should not be to remove it entirely, but rather to adopt the attitude "it fluctuates but does not sink". Unfortunately, though, those in a position of power believe they can manage such volatility because of several fatal conceits. He writes:
"But alongside the "catalyst of causes" confusion sit two mental biases: the illusion of control and the action bias (the illusion that doing something is always better than doing nothing). This leads to the desire to impose man-made solutions."
In other words, the human flaw is the desire to explain what is sometimes unexplainable, and to implement ideas based on a faulty knowledge and insight. It is as with the Friedman/Kraus book, in describing the cause of the financial crisis, that the authors could point to a string of regulations, implemented over multiple decades, in response to different concerns at different times, that mixed together to resemble a bad chemistry experiment. The need to do something can have unintended consequences. And so we are here again, with the newest set of policy initiatives meant to overcome the current slump.
My general point is to be wary of more government intervention. Perhaps with the best of intentions, politicians, economists and others try to smooth out life for everyone, but in fact end up doing the opposite. The natural process of letting bad decisions play out to their natural end may increase volatility in the short term, but there is a benefit. As Taleb puts ever so succinctly, the real goal should be to "fail small" and "fail fast" -- sadly, neither outcome is allowed to happen these days.
