Scott Sumner says

Keynes was fully aware of the fiscal tightening by this time.  And he was fully aware that a steep recession would cause a sharp sell-off on Wall Street.

So which is it?  Is the Keynesian theory wrong?  Or did Keynes not believe his own theory?

I say the Keynesian theory is wrong.  There was no reason for Keynes not to own stocks in 1937.  The events that caused the severe recession also caused the stock market crash–and those occurred in the last half of 1937.  EMH + market monetarism >>>>>> Keynesian theory.

The differences between my view of the world and Scott’s view are pretty technical. Yet, I consider myself a card-carrying New Keynesian.

I think I view the banking sector, collateral and the time path of capital demand as more fundamental than many New Keynesians, but these are add-on features. It helps explain why financial panics are such a big deal and why investment in structures is such a big deal, but it doesn’t change the basic dynamics.

When we write posts like Scott’s it gives the impression that there is more fundamental disagreement than there really is. This is great for sport and perhaps fun for the readers but I don’t think its healthy overall.

There is some fact-of-the-matter about how markets will respond to policy. This is going to make a big difference in the lives of actual human beings. I think it would be nice if we focused on coming to consensus about those facts and what should be done.

Getting the wrong answer means that real people will suffer and manufacturing disagreement pushes into camps where it is more difficult to see our biases and more difficult to come to a common understanding that is likely to be correct.

This is not good.

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