Do not miss Salon.com’s interview of Paul Krugman. A quick comment:
Krugman is good at clarifying for the general public what I regard as Keynes’ main insight in the General Theory, namely that specific disproportions in the economy, e.g. sectoral bubbles, dislocations in particular markets caused by unexpected shocks in technology or policy, etc., can turn into nasty economy-wide crises only because, as a result of widespread, self-reinforcing fears about future business conditions, there’s a sudden, generalized flight to liquidity.
This is a massive coordination problem. Coordination problems are common to capitalist markets, not only — as in this case — to financial markets. They are a manifestation of the inherent conflict at the root of every capitalist society between an increasingly interdependent economy and private ownership. Keynes’ genius was to realize that, like other coordination problems facing the capitalists, the Gordian knot could be cut by the decisive action of the government.
In this interview, Krugman paraphrases Keynes’ “magneto” metaphor in the Great Slump — “If you’ve got electrical problems with your engine, that doesn’t mean you should junk the whole car” (I think Keynes referred to a ‘wagon’). And then he throws this one-two punch:
It’s true that classical economics says that we should let market forces do the work; but classical economics also says that severe recessions can’t happen. This idea that we must not intervene is based on a worldview that is refuted by the very fact that the economy is in the mess it’s in.
Insisting on this point is called for, not only because regular people have for long been bombarded with the Austrian view that recessions (and depressions) are necessary to purge or clear the dead wood that has cluttered the system, but also because some people in the left apparently buy into the argument.