Friday, January 16, 2009

Stimulate, stimulate. That's what I've been saying, but then...

...I was trained by Keynesians.

The LSE's Willem Buiter disagrees.

An extract from his thought-provoking argument:

"Too often for comfort I hear variations on the following statements: “The long run is just a sequence of short runs, so if we make sure things always make sense in the short run, the long run will take care of itself.” This fallacy, which I shall, unfairly, label the Keynesian fallacy, compounds three errors.

The first error is the leap from the correct assertion that a long interval of time is the sum of successive short intervals of time to the incorrect impact that the long-run impact of a policy or event is in any sense the sum of its short-run impacts. The second error is the failure to recognise that our models (formal or implicit) of how the economy works are inevitably incomplete. The third error is that, when economic agents, households, firms, portfolio managers and asset market prices are even in part forward-looking,
the long run is now.

HT: Anonymous commenter