Cochrane may think he’s anti-Keynes but he doesn’t go far enough

I am happy to find that others see me in the way I see myself, as a centre for anti-Keynesian thought. The article by John H. Cochrane in the Wall Street Journal with the title, An Autopsy for the Keynesians, made its way to me from a number of directions. I am, of course, content to see Keynesian economics being hammered. But the fact remains that so far as I am concerned, Cochrane makes only an averagey sort of anti-Keynesian. I shouldn’t quibble since slagging Keynes is all to the good, but he needs to go farther.

The essence of classical economics, and the core point made by Say’s Law, was that the economy NEVER receives momentum from the demand side. You cannot make an economy grow by buying more, only by producing more. And even that’s not enough. The “more” that is produced will make an economy grow if, and only if, the value of what is produced is greater than the value of what had been used up during production. Demand is created by value-adding supply. Here is the excerpt from Cochrane’s article that leaves me unsatisfied; I don’t think he quite understands it himself.

Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.

It never happened. Zero interest rates and low inflation turn out to be quite a stable state, even in Japan. Yes, Japan is growing more slowly than one might wish, but with 3.5% unemployment and no deflationary spiral, it’s hard to blame slow growth on lack of “demand.”

Keynesian policy has now mutated into a policy of low interest rates, again with the intent of trying to make the economy grow from the demand side. You need to go to the final two chapters of the second edition of my Free Market Economics, where the problems of low interest rates are discussed, to understand the problem. As he says at the end of the article:

Yes, there is plenty wrong and plenty to worry about. Growth is too slow, and not enough people are working.

He doesn’t see that low interest rates are the very essence of the problem, even after all the spending has slowed down. I will think he has finally got it when he starts worrying about quantitative easing, and recognises that rising interest rates are what is needed if recovery is every to take hold.

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