Jamesian Philosophy Refreshed

  As I mentioned a couple of weeks ago now, in the course of "Money Week," one of Keynes' signature ideas is the liquidity trap: business slows to a crawl when everyone becomes a hoarder. No one wants to lend, or keep their money in the care of institutions that lend, and the interest rates cannot get low enough to correct this situation in supply/demand terms.  Do we believe in this idea, dear reader?  The standard free-marketer's response to talk of a liquidity trap is that it is nonsense. It is based on the idea that there can be a sharp increase in demand for money that is NOT an increase in the demand for goods. Everybody becomes a hoarder. But why? Because everybody becomes attached to the medium of exchange, at the expense of the actual exchange? That sounds like a personal pathology, unlikely to be common enough to have macroeconomic effects. Most people realize that money is a medium of exchange. It is valuable BECAUSE it buys goods and services. It is not v...

If you had to name ONE defining characteristic of the revolution in economics scholarship known as Keynesianism: what would it be?  Probably this: Keynes offered a distinctive explanation of sharp economic downturns within capitalist systems -- call them crises, depressions, recessions, or whathaveyous. Keynes explained them in a way that suggested a toolbox of remedies. His book, The General Theory, was published in 1936, so you would expect it to have something to say about that subject.   What is distinctive about his theory is that although it involves the price of borrowing money (i.e. interest rates) it does NOT directly entail monetary policy. His tool box does not include things like "mint silver." Indeed, this may be considered odd because his is the first significant book in the history of economics to appear AFTER the overthrow of the long dominant role of gold either as money or as a backer of money.  Yet he put that issue on the shelf. Instead, Keynes p...