Definite cracks are beginning to appear in the hitherto seemingly unshakable Keynesian foundation of modern monetary and fiscal policy. In the "Weekend Journal" section of the Wall Street Journal of December 20-21, 2008 (W1), James Grant's essay on "Is the Medicine Worse Than the Illness?" suggested that the traditional Keynesian "print and spend" solution might not be what the situation calls for. This was followed on Monday in the Washington Post with Robert Samuelson's column, "Bankers in the Crucible" (12/22/08, A21), which at first seemed to speak glowingly of the "aggressive" response of the world's central banks to the current crisis, but then closed with the daunting comment, "These responses seem plausible but prompt [the] troubling question: What if this downturn is following a different script and defeats central banks' aggressiveness?"
Unfortunately, while these signs of discomfort are "comforting" in that they suggest that thoughtful people might be open to new ideas, Grant does little more than claim that interest rates should be kept high to prevent unwise investment. Samuelson for his part doesn't really do anything more than hint that he is a little uneasy about applying remedies that, while they may have worked in the past (we disagree on that), may not be quite right for the present crisis.
Proponents of binary economics and the Just Third Way have been saying the same thing for decades. You can't pretend to have a free market when the cost of financial capital is centrally controlled, nor can you continue to mortgage the future to pay for the present — or (ultimately) at all, for that matter. Parallels between Madoff's Ponzi scheme and Keynesian economics occurred to us last week, but it is an apt comparison, and bears repeating.
Instead of trying to fix Keynesian economics, policymakers and politicians should be taking a look at truly innovative and revolutionary approaches to restructuring an economy along more just and common sense lines. Programs such as Capital Homesteading should be receiving far more attention than they are at present.