some thoughts:

1. when keynes’ “animal spirits” get excited and engage in malinvestment, they create distortions in the economy. e.g., more houses are built than might be needed. when economic actors begin to realise there has been malinvestment, that section of the economy might suffer from a reversal in investment and economic activity. i.e., the excess investment turns into underinvestment for as long as necessary to restore equilibrium in that market. this is what mellon was referring to when he advised hoover to let the depression run its course. is this the ideal response? one might say that the moment that the adjustment starts to affect other markets then perhaps the government has a role in stepping in to ameliorate the effects of the adjustment (e.g., through the provision of unemployment benefits or retraining for laid off workers). but does the government have a role in propping up the adjusting market? very debatable.

2. is the job of an economist to repair a technical problem that manifests itself as a ‘troubled’ economy? firstly, is an adjusting market a ‘troubled’ economy? isn’t it in fact a sign of a healthy economy in that it can adjust and restore equilibrium automatically? isn’t the ‘technical problem’ the fact that a distortion occurred in the first place? and isn’t this distortion due to the very human nature of the economic actors? if those actors are ‘depressed’ is it really the economist’s job to make them less so? i think not. i think the economist’s job is to describe what is happening. nothing more. it is the political actors in a society that have to decide what to do about an adjusting market for houses. economists can describe what tools might be used and the effect of their use by political actors in trying to guide economic activity. but no more. they shouldn’t try to ‘repair’ a problem. that is not an economist’s job. it is society’s problem

3. i don’t believe the author is right in saying keynes’ focus on why economies stay in depression and how to get them out was the correct one. perhaps for his time, yes, but not for all time. economists should be describing all elements of an economy, whether depressed or not, in boom or not. economists should be describing the impact on the stock of resources of economic activity (e.g. properly accounting for health consequences of mining techniques, environmental consequences of nuclear power generation, etc). once we fully understand that the economy is simply the manifestation of our attempt to fulfill our material, physical (and others?) wants and desires we can get a better understanding of our ability to fulfill those for ourselves as individuals, societies and as a planet.

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azspot:

How the Case for Austerity Has Crumbled

>Everyone loves a morality play. “For the wages of sin is death” is a much more satisfying message than “Shit happens.” We all want events to have meaning. >When applied to macroeconomics, this urge to find moral meaning creates in all of us a predisposition toward believing stories that attribute the pain of a slump to the excesses of the boom that precedes it—and, perhaps, also makes it natural to see the pain as necessary, part of an inevitable cleansing process. When Andrew Mellon told Herbert Hoover to let the Depression run its course, so as to “purge the rottenness” from the system, he was offering advice that, however bad it was as economics, resonated psychologically with many people (and still does). >By contrast, Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem. Keynes’s masterwork, _The General Theory of Employment, Interest and Money_, is noteworthy—and revolutionary—for saying almost nothing about what happens in economic booms. Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed. >I’d argue that Keynes was overwhelmingly right in his approach, but there’s no question that it’s an approach many people find deeply unsatisfying as an emotional matter. And so we shouldn’t find it surprising that many popular interpretations of our current troubles return, whether the authors know it or not, to the instinctive, pre-Keynesian style of dwelling on the excesses of the boom rather than on the failures of the slump.