THE KEYNES SOLUTION The Path to Global Economic Prosperity Paul Davidson THE KEYNES SOLUTION This page intentionally left blank THE KEYNES SOLUTION The Path to Global Economic Prosperity PAUL DAVIDSON the keynes solution Copyright © Paul Davidson, 2009 All rights reserved First published in 2009 by PALGRAVE MACMILLAN® in the United States—a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Where this book is distributed in the UK, Europe, and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe, and other countries ISBN: 978–0–230–61920–3 Library of Congress Cataloging-in-Publication Data Davidson, Paul, 1930– The Keynes solution / by Paul Davidson p cm Includes bibliographical references and index ISBN 978–0–230–61920–3 Keynesian economics Keynes, John Maynard, 1883–1946 I Title HB99.7.D392 2009 330.1596—dc22 2009009558 A catalogue record of the book is available from the British Library Design by Newgen Imaging Systems, Ltd., Chennai, India First edition: September 2009 10 Printed in the United States of America To my wonderful, always supportive family— Louise, Robert, Fanny, Christopher, Emily, Kai, Diane, Dan, Greg, Tamah, Arik, Gavi, and Zakkai This page intentionally left blank CONTENTS Acknowledgments ix The Power of Ideas to Affect Policy Ideas and Policies that Created the First Global Economic Crisis of the Twenty-first Century Reading Tea Leaves to “Know” the Future: Classical Theory’s Ideas about a Capitalist System 29 A Penny Spent Is a Penny Earned: Keynes’s Ideas on a Capitalist Economy and the Role of Money 45 The Truth about the National Debt and Inflation 61 After Recovery Comes Reform 83 Reforming International Trade 105 Reforming the World’s Money 121 10 Moving toward a Civilized Economic Society that Keynes Would Be Proud Of 143 Who Was John Maynard Keynes? A Brief Biography 153 Appendix: Why Keynes’s Ideas Were Never Taught in American Universities 161 Notes 181 Bibliography 187 Index 191 This page intentionally left blank 182 NOTES H Hoover, The Memoir of Herbert Hoover: The Great Depression, 1929– 1941 (New York: Macmillan, 1952), 257 D Moggridge, ed., The Collected Writings of John Maynard Keynes, vol 13 (London: Macmillan, 1973), 492–93 J M Keynes, A Tract on Monetary Reform (1923), reprinted as The Collected Writings of John Maynard Keynes, vol (London: Macmillan, 1971) Unfortunately, in the 1930s, the official unemployment rate counted as unemployed those workers employed by the government in Works Projects Administration and other government programs Only workers who had jobs in the private sector were counted as employed Thus, the unofficial unemployment rate tries to ensure that people who had full-time jobs in Roosevelt’s “workfare” programs are not counted as unemployed J M Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), Chapter L H Summers and V P Summers, “When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax,” Journal of Financial Services (1989): 166 R E Lucas, “Tobin and Monetarism: A Review Article,” Journal of Economic Literature 19 (1981): 563 Chapter J M Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), 16 R Skidelsky, John Maynard Keynes: The Economist as Saviour, 1920– 1937 (London: Macmillan, 1992), 223 Classical theorists avoid recognizing this depressing effect of savings behavior by assuming that whenever any individual saves a dollar out of income, there is another buyer who simultaneously is borrowing that dollar in order to dissave (i.e., to spend a dollar more than that buyer’s income) Notes 183 Chapter O Blanchard, “Why Does Money Affect Output?” in Handbook of Monetary Economics, vol 2, ed B M Friedman and F H Hahn (New York: North Holland, 1990), 828 J M Keynes, “A Monetary Theory of Production” (1933), reprinted in The Collected Writings of John Maynard Keynes, vol 13, ed D Moggridge (London: Macmillan, 1973), 408–9 J K Galbraith, “On Post Keynesian Economics,” Journal of Post Keynesian Economics (1978): 8–9 H Hoover, The Memoirs of Herbert Hoover: The Great Depression, 1929–1941 (New York: Macmillan, 1952), 30 Chapter An earlier version of the argument that follows was published in Challenge 51, no (May–June 2008): 43–56 Copyright 2008 by M E Shape, Inc Reprinted with permission All rights reserved Not for reproduction If the classical efficient market theory is buttressed by the assumption of rational expectations, then expectations about the long run ensure that short-run market prices not get far out of line with their longrun fundamentals-determined price Wall Street Journal, October 18, 2001, A1 Repos, short for repurchase agreements, are contracts for the sale and future repurchase of a financial asset, most often Treasury securities On the termination date, the seller repurchases the asset at the same price at which he or she sold it, and pays interest for the use of the funds Although legally a sequential pair of sales, in effect a repo is a short-term interest-bearing loan against collateral I emphasized the need for a revived Resolution Trust Corporation to help solve the financial market crisis that was initiated with the subprime mortgage problem in my paper “How to Solve the U.S Housing Mess and Avoid a Recession: A Revised HOLC and RTC,” Policy Note, Schwartz Center for Economic Policy Analysis, The New School, January 2008 184 NOTES Before the day’s auction begins, investment bankers typically provide “price talk” to their clients indicating a range of likely clearing rates for that auction This range is based on a number of factors, including the issuer’s credit rating, the last clearance rate for this and similar issues, and general macroeconomic conditions J Anderson and V Bajaj, “New Trouble in Auction Rate Securities,” New York Times, February 15, 2008, D4 Chapter J M Keynes, “National Self-Sufficiency” (1933), reprinted in The Collected Writings of John Maynard Keynes, vol 21, ed D Moggridge (London: Macmillan, 1982), 238 This assumes that transportation costs not completely offset the lower labor costs per unit Chapter J M Keynes, Post-War Currency Policy (1941), reprinted in The Collected Writings of John Maynard Keynes, vol 25, ed D Moggridge (London: Macmillan, 1980), 27 Ibid., 21–22 P Davidson, Post Keynesian Macroeconomic Theory: A Foundation for Succesful Economic Policies in the 21st Century (Cheltenham, UK: Elgar, 1994) Chapter J M Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), 378 Ibid., 131 S P Dunn, The Uncertain Foundations of Post Keynesian Economics (London: Routledge, 2008), 187 Notes 185 Chapter 10 R Skidelsky, John Maynard Keynes: Hopes Betrayed, 1883–1920 (London: Macmillan, 1983), 175 R F Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951), 203 Skidelsky, John Maynard Keynes: Hopes Betrayed, 374–75 Ibid., 384 Appendix R Skidelsky, John Maynard Keynes: The Economist as Saviour, 1920– 1937 (London: Macmillan, 1992), 512 N G Mankiw, “The Reincarnation of Keynesian Economics,” European Economic Record 36 (1992): 561 D Colander and H Landreth, The Coming of Keynesianism to America (Cheltenham, UK: Elgar, 1996), 159–60 J R Hicks, Value and Capital, 2nd ed (Oxford: Oxford University Press, 1946), 1–4 See Davidson's discussion in The Microfoundations of Macroeconomics, ed G C Harcourt Unfortunately, my prediction involving the progress in macroeconomics has come true J R Hicks, “ISLM: An Explanation,” Journal of Post Keynesian Economics (1980–81): 139 P Davidson, “Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes,” Journal of Post Keynesian Economics (1982–83): 182–97 This letter is available in the collection of my correspondence that is on deposit at the Duke University Library Archives of economists’ correspondence and writings P A Samuelson and R M Solow, “Analytical Aspects of AntiInflation Policy,” American Economic Review Papers and Proceedings 50 (1960): 192–93 10 Colander and Landreth, The Coming of Keynesianism to America, 72 This page intentionally left blank BIBLIOGRAPHY Adelman, I “Long Term Economic Development,” Working Paper No 589, California Agricultural Experiment Station, Berkeley (March 1991) Anderson, J., and Bajaj, V “New Trouble in Auction Rate Securities,” New York Times, February 15, 2008 Arrow, K J., and Hahn, F H General Competitive Equilibrium San Francisco: Holden-Day, 1971 Berle, A A., and Means, G C The Modern Corporation and Private Property New York: Commerce Clearing House, 1932 Bernstein, P L Against the Gods New York: John Wiley & Sons, 1996 Blanchard, O “Why Does Money Affect Output?” in Handbook of Monetary Economics, vol 2, ed B M Friedman and F H Hahn New York: North Holland, 1990 Buckley, W F God and Man at Yale Chicago: Henry Regnery, 1951 Colander, D C., and Landreth, H The Coming of Keynesianism to America Cheltenham, UK: Elgar, 1996 Davidson, P “Discussion of the Paper by Professor Leijonhufvud,” in The Microfoundations of Macroeconomics, ed G C Harcourt London: Macmillan, 1977 Davidson, P “Rational Expectations: A Fallacious Foundation for Studying Crucial Decision-Making Processes,” Journal of Post Keynesian Economics (1982–83) Davidson, P Post Keynesian Macroeconomic Theory Cheltenham, UK: Elgar, 1994 Davidson, P Financial Markets, Money and the Real World Cheltenham, UK: Elgar, 2002 Davidson, P “How to Solve the U.S Housing Problem and Avoid Recession: A Revived HOLC and RTC,” Policy Note, Schwartz Center for Economic Policy Analysis (January 2008) Davidson, P “Securitization, Liquidity and Market Failure,” Challenge 51, no (May–June 2008) 188 BIBLIOGRAPHY Dunn, S P The Uncertain Foundations of Post Keynesian Economics London: Routledge, 2008 Friedman, M “Comments on the Critics,” in Milton Friedman’s Monetary Framework: A Debate with His Critics, ed R J Gordon Chicago: University of Chicago Press, 1974 Friedman, M “Markets to the Rescue,” Wall Street Journal, October 12, 1998 Galbraith, J K The Affluent Society New York: Houghton Mifflin, 1957 Galbraith, J K “On Post Keynesian Economics,” Journal of Post Keynesian Economics (1978) Harrod, R F The Life of John Maynard Keynes London: Macmillan, 1951 Hicks, J R “Mr Keynes and the Classics: A Suggested Interpretation,” Econometrica (1937) Hicks, J R Value and Capital, 2nd ed Oxford: Oxford University Press, 1946 Hicks, J R “Some Questions of Time in Economics,” in Evolution, Welfare and Time in Economics, ed A M Tang et al Lexington, MA: Heath Books, 1976 Hicks, J R Causality in Economics New York: Basic Books, 1979 Hicks, J R “ISLM: An Explanation,” Journal of Post Keynesian Economics (1980–81) Hoover, H The Memoirs of Herbert Hoover: The Great Depression, 1929–1941 New York: Macmillan, 1952 Keynes, J M (1919) The Economic Consequences of the Peace Reprinted as The Collected Writings of John Maynard Keynes, vol 2, ed D Moggridge London: Macmillan, 1971 Keynes, J M (1923) A Tract on Monetary Reform Reprinted as The Collected Writings of John Maynard Keynes, vol 4, ed D Moggridge London: Macmillan, 1971 Keynes, J M (1930) A Treatise on Money Reprinted as The Collected Writings of John Maynard Keynes, vols and 6, ed D Moggridge London: Macmillan, 1971 Keynes, J M (1933) “National Self-Sufficiency.” Reprinted in The Collected Writings of John Maynard Keynes, vol 21, ed D Moggridge London: Macmillan, 1982 Keynes, J M (1935) January 1, 1935, letter to George Bernard Shaw Reprinted in The Collected Writings of John Maynard Keynes, vol 13, ed D Moggridge London: Macmillan, 1971 Keynes, J M (1935) “A Monetary Theory of Production.” Reprinted in The Collected Writings of John Maynard Keynes, vol 13, ed D Moggridge London: Macmillan, 1973 Keynes, J M (1936) The General Theory of Employment, Interest and Money, German language ed Berlin: Dunker and Humboldt Keynes, J M (1936) The General Theory of Employment, Interest and Money Reprinted in The Collected Writings of John Maynard Keynes, vol 7, ed D Moggridge London: Macmillan, 1973 Bibliography 189 Keynes, J M (1941) “Post-War Currency Policy.” Reprinted in The Collected Writings of John Maynard Keynes, vol 25, ed D Moggridge London: Macmillan, 1980 Lucas, R E “Understanding Business Cycles,” in Stabilization of the Domestic and International Economy, ed K Brunner and A H Meltzer, Carnegie Mellon Conference on Public Policy (1977) Lucas, R E “Tobin and Monetarism: A Review Article,” Journal of Economic Literature 19 (1981) Lucas, R E., and Sargent, T J Rational Expectations of Econometric Practices Minneapolis: University of Minnesota Press, 1981 Mankiw, N G “The Reincarnation of Keynesian Economics,” European Economic Record 36 (1992) Moore, G E Principia Ethica Cambridge: Cambridge University Press, 1903 Ricardo, D On the Principles of Political Economy and Taxation London: Macmillan, 1817 Samuelson, P A Economics: An Introductory Analysis New York: McGraw-Hill, 1948 Samuelson, P A Foundations of Economic Analysis Cambridge, MA: Harvard University Press, 1947 Samuelson, P A “Classical and Neoclassical Theory,” in Monetary Theory, ed R W Clower London: Penguin, 1969 Samuelson, P A., and Solow, R M “Analytical Aspects of Anti-Inflation Policy,” American Economic Review Papers and Proceedings 50 (1960) Skidelsky, R John Maynard Keynes: Economist, Philosopher, Statesman, 1883–1946 London: Macmillan, 2003 Skidelsky, R John Maynard Keynes: The Economist as Saviour, 1920–1937 London: Macmillan, 1992 Skidelsky, R John Maynard Keynes Fighting for Britain London: Macmillan, 2000 Skidelsky, R John Maynard Keynes: Hopes Betrayed, 1883–1920 London: Macmillan, 1983 Skidelsky, R Keynes Oxford: Oxford University Press, 1996 Smith, A (1776) An Inquiry into the Wealth of Nations Reprinted as An Inquiry into the Wealth of Nations New York: Modern Library, 1937 Summers, L H., and Summers, V P “When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax,” Journal of Financial Services (1989) Uchitelle, L The Disposable American: Layoffs and Their Consequences New York: Knopf, 2006 Walras, L (1874) Elements of Pure Economics London: Allen and Unwin, 1954 Weintraub, S “An Incomes Policy to Stop Inflation,” Lloyds Bank Review (1971) This page intentionally left blank INDEX A Adelman, Irma, Against the Gods (Bernstein), 43, 52 American International Group (AIG), 95 Arrow, Kenneth, 35 Arrow-Debreu general equilibrium model, 35–36, 178 auction-rate securities markets, 85, 92, 97 Auerback, Marshall, 15 B bailouts, 2, 38 bankruptcy, 16–17, 48, 58, 61, 157 Bear Stearns, 90–91 Bernstein, Peter L., 43, 52 Big Bang theory, 39 “big government”, 2, 3, 22, 63 Blanchard, Oliver, 66, 68 bonds, 34, 53, 64–65, 87, 89–90, 134 Bretton Woods, 127–133 Bryce, Robert, 169–170, 171 Buckley, William F., 168 budget recovery programs, objections to, 58 buffer stocks, 69–71 Bush, George H.W., 101–102 Bush, George W., 61, 107, 165 buyback rules, 90 C capitalism, 5–8, 11–13 classical theory and, 29–43 Keynes’ theories and, 45–59 capitalism, Keynes on, 5–7 CDOs see collateralized debt obligations China, 70, 75, 78, 109, 113, 118, 122–126, 132 Churchill, Winston, 5–6 Civilian Conservation Corps, 15 classical theory Friedman and, 3, 7, 163–164 full employment and, 14, 158, 172 vs Keynes on reality of assumptions, 41–43 taxation and, 34–35 uncertainty of future and, 32–41 unemployment and, 45–46 Clinton, Bill, 4, 23, 93, 134–135 COLA see cost of living adjustment Colander, David, 167, 169, 170–171 collateralized debt obligations (CDOs), 24, 54, 84–85, 93 Coming of Keynesianism to America, The (Colander and Landreth), 167 commodity inflation, 68–71 Commodity Trading Modernization Act of 2000, 92–93, 95 Consumer Price Index, 81, 126, 127 credit default swaps, 93–95 crisis management, 134–135 D Dawes Plan, 129 de Kooning, Willem, 15 Debreu, Gerard, 35 deregulation, 22–25 192 INDEX Desert Storm, 69–70 Disposable American, The (Uchitelle), 106 dot-com bubble, Dow Jones Stock Index, 10–11 Dunn, Stephen P., 150 inflation and, 126 LTCM and, 134 market stability and, 145 post-September 11, 89, 91 printing money and, 48, 64–65 surplus and, 132 Fischer, Stanley, 135 Fisher, Irving, 11 foreign reserves, 123, 129, 138, 141 Foundation of Economic Analysis (Samuelson), 169 Franklin, Benjamin, 54 Friedman, Milton classical theory and, 3, 7, 163–164 deregulation and, 22 inflation and, 145 printing money and, 64 Samuelson and, 169, 172 unemployment and, 176 full employment capitalism’s failure to provide, classical theory and, 14, 158, 172 free markets and, 45 IMCU and, 137, 138 incomes constraint policy and, 74–75 inflation and, 76–77 international trade and, 109, 117–120, 126–128 Keynes on, 147 liquidity theory and, 163–164 spending recovery plans and, 73, 147 wages and, 168, 178 Weintraub and, 80–81 World War II and, 17–20, 64, 144 futures trading, 70–71, 94, 96 E Economic Consequences of the Peace, The (Keynes), 157 economic theory, defined, 30 efficient market theory anticipating future and, 35–37 failure of markets and, 92–93 free markets and, 33 international trade and, 106, 119, 125–126, 134, 151 Keynes and, 5, 7, 30, 155, 162 legislation and, 39–41 liquidity theory and, 52 neutral money assumption and, 65–66 policy and, 96 reality of assumptions and, 41–43 reform and, 85–88 Soros on, 46 subprime mortgage crisis and, 50 Eisenhower, Dwight, 145 Elements of Economics, The (Tarshis), 167–168 ergodicity, 37–38 exchange rates, 105, 107–108, 125–129, 140, 155 F “Faith and Reason in the Mathematics of the Credit Crunch” (Ravitz), 41 FDIC see Federal Deposit Insurance Corporation “Fed Inches toward Plan to Purchase U.S Bonds” (Hilsenrath and Rappaport), 64 Federal Deposit Insurance Corporation (FDIC), 102 Federal Reserve AIG and, 95 deregulation and, 3–4, 22 general equilibrium model and, 35 Glass-Steagall Act and, 21 IMCU and, 137 G G-7 nations, 135 Galbraith, John Kenneth, 74 GDP see Gross Domestic Product General Theory of Employment, Interest, and Money (Keynes), 12–13, 15, 45, 148, 162–172, 174, 178 George, Lloyd, 155 Glass-Steagall Act enforcement, 145 passage of, 21–22 Index reform and, 96–97, 99–100 reinterpretation in 1980s, 22–23 repeal of, 23, 83–84 globalization, 75, 78–82, 106–107, 113–116, 118–120 labor unions and, 74–75, 115 wages and, 112–116, 118–119 God and Man at Yale (Buckley), 168 Goldman Sachs, 90–91 Gramm, Phil, 23, 93–94 Great Depression current economic crisis and, 1, 4, 80, 133 ideas and policies contributing to, 9, 11–13, 14, 16, 18, 20 Keynes and, 6, legislation and, 100 lessons learned from, 27, 74 U.S national debt and, 62–64 Greenspan, Alan, 3–5, 7–8, 22, 34, 38, 43, 84, 87 Gross Domestic Product (GDP), 11, 16–18, 61–63, 65, 81 H Harrod, Roy, 155 Hayek, Frederick, 169 healthcare, 149–150 hedge funds, 10, 100, 134, 181 Hicks, John R., 173–175 Hilsenrath, J., 64 HOLC see Home Owners’ Loan Corporation Home Owners’ Loan Corporation (HOLC), 26–27, 101, 104 Hoover, Herbert, 11–12, 78, 146 housing bubble, 4, 24–27, 101 I IMCU see International Monetary Clearing Union immigration, 114 incomes inflation, 72–73 incomes policy, 73–82 India, 70, 75, 78, 109, 118, 119, 122, 132 inflation 1973, 175–176 commodity, 68–71 193 explained, 67–68 incomes, 72–73 incomes policy and, 73–82 inflation-targeting policy, 77–78, 80 wages and, 72–81 inflation-targeting policy, 77–78, 80 International Monetary Clearing Union (IMCU), 136–139, 141–142 International Monetary Fund (IMF), 66, 130, 135, 140 international payments system, reforming, 134–141 Iraq, 70 ISLM model, 173, 174 J Japan, 122, 132, 133 Johnson, Lyndon, 81 J.P Morgan Chase, 90–91 K Kennedy, John F., 81 Keynes, John Maynard classical theory and, 41–43 efficient market theory and, 5, 7, 30, 155, 162 FDR and, 83, 144 on full employment, 147 Great Depression and, 6, Hicks and, 173–175 impact on economic studies, 166–173 inflation and, 175–177 legacy, 162–166 liquidity theory, 30–31, 33, 88 theories on capitalism, 45–59 on unemployment, 20, 45–46 on wages, 162–166, 168 World War II and, 155–156, 159 Koopmans, Tjalling, 174 Krugman, Paul, 25, 27, 50 L labor costs, 72–73 labor unions COLA and, 177 globalization and, 74–75, 115 inflation and, 77 194 INDEX labor unions—Continued legislation and, 40, 77 market clearing wage and, 19 unemployment and, 19, 166 wages and, 10, 168 laissez-faire ideology, 3, 31, 39, 75, 129, 134, 172 Landreth, Harry, 167, 169, 170–171 legislation efficient market theory and, 39–41 Glass-Steagall Act, 21 Great Depression and, 100 international trade and, 112, 114, 116 labor unions and, 77, 166 minimum wage, 19 regulation and, 83, 97, 99–100 Lehman Brothers, 92–93 liquidity bankruptcy and, 48–53 capitalism and, 30–31, 33 Federal Reserve and, 145 IMCU and, 137, 139, 142 market makers and, 88–93 RTC and, 104 securitization and, 84–88, 95–99 surplus and, 132 unemployment and, 20, 162 liquidity theory, 30–31, 33, 88, 127 liquidity trap, 164–165, 178 Long Term Capital Management (LTCM) hedge fund, 134 Lopokova, Lydia, 158 Lucas, Robert, 2, 7, 36, 41, 172 Merton, Robert, Mexico, 69, 134 Mill, John Stuart, 34 Milton Friedman’s Monetary Framework, 164 money-wage rates COLA and, 177–178 inflation and, 72–75, 81 international trade and, 106, 111–113 Keynes on, 163–165 unemployment and, 168, 175 monopoly pricing, 10, 19, 74 Moore, G.E., 154 mortgage-backed security (MBS), 23 M Mankiw, N Greg, 107, 118, 165, 173 manufacturing, 75, 78, 115, 118 Marshall, Alfred, 34, 153, 155 Marshall Plan, 131–132, 138, 145 Marshall-Lerner conditions, 125 Marx, Karl, 74–75 Marxism, 13, 14, 74–75 McCarthyism, 162, 167, 169, 177 McKenna, Reginald, 155 Medicare, 149 Mellon, Andrew, 12, 40, 78, 146 Merrill Lynch, 92–93 N national debt commodity inflation and, 68–71 incomes inflation and, 72–73 incomes policy and, 73–82 inflation and, 67–68 printing money and, 64–67 size, 61–64 neoclassical economic theory, 30, 166–169, 171–173, 175–176, 178 neutral money axiom, 65–67 New Deal, 3, 13–17 Nixon, Richard, 7, 133 O Obama, Barack, 17, 33, 58, 71, 73, 122, 140 Odets, Clifford, 15 oil, 2, 68–71, 79, 145–146, 148, 161, 175, 177 see also Organization of Petroleum Exporting Countries; strategic petroleum reserve OPEC see Organization of Petroleum Exporting Countries Organization of Petroleum Exporting Countries (OPEC), 2, 115, 145–146, 148, 161, 175, 177 see also oil outsourcing, 75, 78–82, 106–107, 113–116, 118–120 P Paish, George, 155 Paulson, Henry, 2, 38, 102 Pigou, A.C., 155 Index Pollock, Jackson, 15 price talk, 92–93, 183 Principia Ethica (Moore), 154 Principles of Economics (Tarshis), 168 R Rappaport, L., 64 Ravitz, Jerome, 41 Reagan, Ronald, 3, 34 regulation, 90, 93–96, 98, 100–101, 144, 151, 166 deregulation, 1–5, 22–25, 40, 84–85 financial market’s need for, 20–22 hedge funds and, 10 Roosevelt and, 14–15 wages and, 74 Resolution Trust Corporation (RTC), 26, 91, 101, 103, 183 Ricardo, David, 34, 108, 110, 114 Robinson, Austin, 162 Roosevelt, Franklin D free markets and, 26 HOLC and, 22, 62, 101 Keynes and, 83, 144, 170 national debt and, 64 New Deal and, 3, 13–18 unemployment and, 11, 182 Rubin, Robert, 23, 134 S S&L crisis, 101–102 Samuelson, Paul, 37, 39, 41, 46, 163, 166–173, 175–178 Santayana, George, Scholes, Myron, 7, 134 Securities Act of 1933, 96 Securities and Exchange Commission (SEC), 15, 94, 95–96, 142 securitization explained, 24 liquidity and financial market failure, 84–88 policy and, 95–104 why securitized markets failed, 88–95 September 11, 2001 attacks, 89–91 Shaw, George Bernard, 13 Shipley, David, 42 195 SIVs (structured investment vehicles), 24, 84–85, 93 Skidelsky, Lord Robert, 47, 157, 163 Smith, Adam, 34 Social Security, 15, 35, 172 Solow, Robert, 175–177 Soros, George, 46 stagflation, 3, 145, 176 Stiglitz, Joseph, 174 Strachy, Lytton, 154 strategic petroleum reserve, 69–71 subprime mortgage crisis, 1, 23–24, 50, 84, 135 subsidies, 79 Summers, Lawrence, 33–34, 87 T Tarshis, Lorie, 167–168, 171, 178 taxation classical theory and, 34–35 IMCU and, 139–140, 142 international trade and, 105, 122, 137 labor and, 112 laissez-faire ideology and, 3, 34 national debt and, 61–62 recession and, 56–57, 148 RTC and, 102 TIP and, 79–80 Taylor, Peter, 42 Tennessee Valley Authority, 15 Thatcher, Margaret, theory, defined, 30 three Cs (collateral, credit history, character), 21–22, 23–24, 100 TIP (tax-based incomes policy), 79–80 Treatise on Money (Keynes), 68 Treatise on Probability (Keynes), 155 Treaty of Versailles, 156–157 Truman, Harry, 145 U Uchitelle, Louis, 106, 114, 119 unemployment, 162–179 classical theory and, 45–46 efficient market analysis and, 40 Great Depression and, 11, 16, 62, 158 inflation and, 74–78, 80, 126, 145–149 196 INDEX unemployment—Continued Keynes on, 20, 45–46 neutral money assumption and, 66–67 New Deal and, 17–18 outsourcing and, 118–119 post-WWII, 19–20, 131 pre-WWII, 9–10, 12 recession and, 56–57 spending recovery plans and, 2–3 surplus and, 139 minimum wage, 40, 168 outsourcing and, 106–107, 109–110, 112–116, 118 regulation and, 74 rigidity, 170–172 unemployment and, 11–12, 19–20, 46, 162 Walrasian theory, 35, 170–171, 173, 178 Weill, Sandy, 23 Weintraub, Sidney, 79–80 welfare, 157, 166 Welles, Orson, 15 White, Harry Dexter, 130 Woolf, Leonard, 154 World Bank, 130–131, 140 World War I, 10, 11–13, 129, 155–156 World War II Bretton Woods and, 127, 129–130 inflation and, 73–74 Keynes and, 155–156, 159 U.S national debt and, 62–63 world economy in period following, 7, 18–20, 115, 161–164 V Vietnam War, 3, 81 Volker, Paul, 22, 145 W wage-price guideline policy, 81 wages see also money-wage rate increases classical theory and, 11–12 full employment and, 168, 178 globalization and, 112–116, 118–119 inflation and, 72–81, 146, 175 Keynes on, 162–166, 168 .. .THE KEYNES SOLUTION The Path to Global Economic Prosperity Paul Davidson THE KEYNES SOLUTION This page intentionally left blank THE KEYNES SOLUTION The Path to Global Economic Prosperity. .. fall from the bough of a tree to the ground He developed the theory of gravity to explain why apples always fall to the ground Charles Darwin developed the theory of evolution to explain the different... borrowing the rest—thereby leveraging1 their stock position by a ratio of 19 to In other words, they could borrow $19 for every $20 they invested in the stock market.2 By 1929, small individual investors,