The Economic Benefits of Addressing Climate Change

Great news for us old Keynesians

The Associated Press reported (on Friday June 6, 2008) that the International Energy Agency claims a serious effort to combat global warming will cost $45 trillion. I happen to think this is an underestimate. But the idea is very good. And if we run the global economy with sound economic policy, such a project could lead to the greatest prosperity in human history.

Economics: A Matter of Life or Death

There has been a lot of invented terminology to describe the change in fortunes of the Keynesians and the Friedmanites. But the MOST descriptive was that it marked the change from Industrial to Finance Capitalism. If River Rouge was the defining symbol of Industrial Capitalism, then the archetypical example of Finance Capitalism was Enron.

Enron embodied the major flaws of Finance Capitalism--it was only possible because of economic deregulation, it relied on a willing suspension of disbelief in all reasonable measures of prudence, it sold cotton-candy products like weather futures, and it relied on industrial sabotage to make its fantasy profit targets.

The Greatest Generation—Economics Division

Keynesianism was a collection of ideas that grew up as a response to the fundamental dilemma of the industrial age. Simply put, if you want to build something very difficult (like the automobile) you can only justify the expense of the tools if you have a LOT of customers. Industrialization could produce virtually unlimited and very sophisticated goods if the economists could arrange for unlimited customers. So the Keynesians spent most of their time working on ways to increase the purchasing power of the greatest possible number of consumers. (There were other variations of these principles in other parts of the world but in the English-speaking countries, they came to be associated with John Maynard Keynes largely because he wrote about them so clearly and effectively. Ironically, of all the industrialized nations, Keynesianism was probably least successful in England for a host of interesting reasons.)

Keynes staked out a centrist economic position. The laissez faire economists taught that all economic activity should be private and unregulated and that all useful information came from the markets. The Marxists taught that everything should be regulated, centrally planned, and collectively owned. There was an amazing amount of intellectual space between these two extreme positions. And so Keynesianism became this sprawling doctrine the believed that markets were important but had to be regulated to keep them from destroying themselves, that there was plenty of room for private initiative AND central planning, and there must be public AND private investment and ownership.