The Horror of the Confidence Fairy (part iii)

(From Part ii)

If not Lord Skidelsky, who is the Confidence Fairy's real father?

As it turns out, she has at least one putative father: Robert Higgs (senior fellow at the Ludwig von Mises Institute, adjunct scholar at the Cato Institute). He claims her paternity (and Peter Boettke, a prominent Austrian economist, bears witness of that), says she is older (18) and her real name is Regime Uncertainty:

"The vulgar Keynesian does not understand that extreme policy activism may work against economic prosperity by creating what I call 'regime uncertainty,' a pervasive uncertainty about the very nature of the impending economic order, especially about how the government will treat private-property rights in the future (Higgs 1997). This kind of uncertainty especially discourages investors from putting money into long-term projects." (here, page 471)

Little wonder "vulgar Keynesians" (as Higgs calls them) don't like little Confy/Regina.

Other Austrian economists, too, seem fond of Confy, err, Regina: Donald Boudreaux, and Daniel Kuehn, for instance.

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Given that, it's easy to understand one of the reasons why Paul Krugman's "Unreal Keynesians" (March 23) -- mentioned last time -- is so remarkable.

Although one might suspect Krugman was looking towards Lord Skidelsky after their debate a few days earlier, he is ostensibly answering constant Post Keynesian criticism ("I use equilibrium models and don't emphasize the instability of expectations").

Krugman, with some frustration, returns the ball to his critics:

"One way to answer this is to point out that Keynes said a lot of things, not all consistent with each other. …
Now, what have those who declare themselves the true Keynesians had to offer? Has insisting that expectations are volatile and unpredictable been helpful in this context? Actually, if anything it lends support to believers in the confidence fairy. After all, if it's all animal spirits, who are we to say they're wrong?"

"Say … what???" My feelings exactly, Stewie.

That explains Lord Skidelsky's temporary defection: anti-Keynesianism is actually quite Keynesian!

You see, the Confidence Fairy (or Regime Uncertainty) has a third, 79-year old identity: Animal Spirits. And that third identity has an immaculately "true Keynesian" pedigree.

To my knowledge, this is the first time a prominent Keynesian economist, like Paul Krugman, publicly (1) acknowledges explicitly the connection between Keynes and the opprobrious Confidence Fairy, via Animal Spirits; and (2) declares it inconsistent with Keynesian stabilization policies.

Others, like Lord Skidelsky, made revealing references before, gingerly avoiding any suggestion of inconsistency. Some journalists had also established the Confidence Fairy/Animal Spirits connection, without joining the dots. But this is the first time a leading academic Keynesian spelt those two things out.

Krugman is right and this has important implications, in terms of policy -- as he acknowledges -- and theory.

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You can see how unfair and profoundly misinformed are freshwater economist John Cochrane's views. Worse still, from his own point of view, they are ultimately self-defeating, because they contribute to Keynes' spurious image of patron saint of the Kensian Left, which some of Keynes' followers are desperately trying to manufacture of thin air.

He could learn a thing or two from the Austrians.

Lord Keynes' fate -- it seems -- is to be snubbed by his brethren.

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"I am spellbound. This [Keynes] is the most beautiful creature I have ever listened to. Does he belong to our species? Or is he from some other order? There is something mythic and fabulous about him. I sense in him something massive and sphinx-like, and yet also a hint of wings." (Douglas LePan)

That hint of wings, no doubt, was the baby Confidence Fairy flying around her real dad.

(To be continued)