some more errant scribbles

I have noticed that no matter how many cups of coffee I drink in the morning, I am still sleepy. Hmm, I wonder if this has something to do with my overuse of sleeping pills? I guess eventually they get you if you don’t watch out – look what happened to Evelyn Waugh.

But to return to … the preface. Yesterday I figured out how to tightly describe Silja’s argument. Today I have to assess her argument, first about the continuity of mainstream economics – is it true that equilibrium models are at the center of economic theory, and is it plausible that the elevation of equilibrium models is an expression of the underlying ontological bias towards substantivism in economics? I’m going to point out that the exceptions prove the rule. The great exception is Keynes, of course. Keynesian economics begins with a grand gesture – the kicking over of Say’s law. In a sense, that is what you have to know about Keynes. Say’s law is the notion that production equals demand, or as the neoclassicals like to put it, demand grows out of production. Keynes discovered, or claimed he discovered, that even the classical economists had doubts about this – notably, Malthus. It is because economists adhere to Say’s law – Robert Lucas, who is a much more important economist to economists, by the way, than Milton Friedman, even made the claim that Say’s Law is an intelligibility requirement for economics – that economists make various bizarre claims. For instance, the claim that the unemployed chose unemployment. With Say’s law in hand, the classical economists and the neo-classicals that follow them had a principle that disallowed, or at least obscured, the business cycle. The way this is put in the gobbledygook of theory is: aggregate demand intersects the aggregate supply curve at full employment and aggregate demand will, a priori, not fluctuate save for disturbance by some endogenous factor.

Now, in truth, nobody actually believes Say’s law anymore. That is, no government will operate on the principle that the market is self-regulating. Instead, the state has operated, since the great depression, on the assumption that it is the state’s business how much the citizens of the state save. Reaganism, while founded in appearance on neo-classical economics, operates as a robust Keynesian engine for destroying savings, and creating ever higher levels of demand. This is an easy proposition to prove, actually. Whenever the IMF and investors go into a country that has a strong public sector – like the Latin American countries of the 1970s – the first thing that happens is that the spending of the public sector goes down, but savings also go down – in other words, there is a rush to consume and borrow. Reaganism is simply a sort of half and half Keynesianism – it seeks to restrict government economic policy to the purely fiscal, while at the same time encouraging massive borrowing. That borrowing, even by the private sector, is considered by lenders to be guaranteed by the state. The avatar of Reaganism in Latin America, Chile under Pinochet, experienced this in the early eighties, when foreign lenders forced the state to take on the debts of private corporations. I guess you could call Reaganism a form of moral hazard Keynesianism.

But I am digressing, damn it.