March 11, 1999

May not be redistributed commercially without the author's permission.
Index

Many economists, including Shapiro and Varian in "Information Rules," have pointed out that there are parallels between the current wave of innovation and the wave of innovation that occurred about one hundred years ago, with the advent of electricity, the telephone, and the automobile.

One phenomenon from the earlier period of which I see no sign today is that of the intellectual giant. Among those born in the late 19th century and having a major impact on the 20th were George Bernard Shaw, Winston Churchill, and John Maynard Keynes. I could choose these Englishmen as my "first team" of all-star thinkers, and I would still hold in reserve Sigmund Freud and Albert Einstein, among others.

Shaw, Churchill, and Keynes were famous in both the political and the literary arenas. They contributed many phrases to our language. "Those who can, do. Those who can't, teach." "Iron curtain." "In the long run, we are all dead."

Each produced mammoth written works, and at the same time they contributed heavily to periodicals, including high-brow magazines and daily newspapers. Their correspondence alone rises to a mountain of literary legacy. For biographers such as Michael Holroyd, William Manchester, and Robert Skidelsky, it was a challenge just to read the voluminous letters of these men. It is mind-boggling to consider that their correspondence alone, even after deducting what has been lost, takes years to digest. Take away the published works, and just their letters would have constituted a body of work that few contemporary intellectuals can match.

Of the three, it is the economist, Keynes, who is of most interest here. Skidelsky's biography of Keynes is a tour de force. The second volume, "The Economist as Saviour," provides a clearer exposition of Keynes' thinking than can be found in any textbook I have read or course I have taken.

Keynes is known as an advocate of enlarged government. What Curt Flood did for baseball salaries Keynes did for deficit spending. What was once unthinkable is commonplace today. The level of government spending and the prevalence of deficits is so extensive in the world's major economies that if Keynes were alive at the moment, it is not certain that he would be advocating higher spending and more deficits. It is as questionable as whether Flood would consider Kevin Brown underpaid.

Keynes also challenged what I call the Fundamental False Theorem (FFT) of economics. The FFT states that there can be no involuntary unemployment. It is easy to show that if markets are well behaved, there will never be instances of large and persistent excess supply. This rules out excess supply of labor, that is, involuntary unemployment.

Keynes developed a theory in which high unemployment could be the norm, rather than an impossibility. In a complex economy, where the deployers of capital have to form expectations far in advance of an uncertain future, Keynes argued that it is entirely possible to have an economy-wide failure to provide enough demand to keep resources at full employment.

When I was in graduate school, the FFT was enjoying an unfortunate and unjustified resurgence among the young leaders of the profession. This resurgence prompted several of my professors, who were defenders of Keynes, to lash out in frustration.

Lester Thurow: Why is there unemployment? That is two questions. (1) Why? That is a question that has puzzled philosophy for ages. (2) Is there unemployment? Yes.

Franco Modigliani: Are we to believe that what we saw in the 1930's was a spontaneous outbreak of laziness?

Robert Solow: A biologist might not be able to explain how a giraffe could pump blood from its heart to its head. But you would not conclude from this that it is impossible for giraffes to have long necks, at least if you have been to the zoo.

In spite of these sallies, it became fashionable to declare that Keynes is discredited. Nonetheless, I intend to use Keynes as the starting point for the macroeconomic set of these essays. The question that I have is whether the contemporary information economy is likely to be more or less fragile than the capitalist economy that recently preceded it. My plan is to start with the Keynesian ideas as articulated by Skidelsky, and then to assess whether they continue to apply.