|by Jerry O’Driscoll
J. M. Keynes was well-aware of the problems of conducting counter-cyclical policy to stabilize employment. The problem is when to add stimulus, when to withdraw it, and not to overdo it.
In Keynes’ Treatise on Money (1930), Keynes analogizes it to a family taking care of a sick child with doses of castor oil, a laxative. “It is as though different members of the family were to give successive doses to the child, each in ignorance of the doses given by the others. The child will be very ill. Bismuth [an antidiarrheal] will then be administered on the same principle.Scientists will announce that children are subject a diarrhoea-constipation cycle, due, they will add, to the weather, or failing that, to alternations of optimism and pessimism amongst members of the family.”
“If the time taken by the first dose to act is constant, they will discover that the cycle is a true one with a constant period. Perhaps they will suggest that the remedy is to be found in giving the child bismuth when it is constipated and castor-oil at the other extreme. But more probably the parents will divide into bismuth and castor-oil parties, one of which, impressed by the horrors of diarrhoea, will renounce castor-oil, and the other, moved by the depression of constipation, will abjure bismuth.”
Today the U.S. economy has been pronounced to be very ill, and we must all take our medicine. If the first dose doesn’t work, take more. When the inevitable consequences of oversdosing on spending become evident, scientists will administer the antidote of taxation. When that sends the patient back to bed, stimulus will be re-administered. And so on.
Keynesians, please meet Mr. Keynes.