Keynesian Policies in Multilateral Organizations

As the increase in food prices becomes an escalating problem, multilateral agencies like the IMF and the World Bank have decided that it is time to intervene.

In the 1930s John Maynard Keynes critiqued what he deemed 'classical' postulates that basically stated that markets and the price system were the best tools at our disposal for the allocation of scarce resources, and thus the economy was always in equilibrium at its full-employment level. Instead, he posited that the government was an even better tool, since full-employment equilibrium was just a particular case, and not the general case, and hence it could play a determining role in market outcomes. A government, by spending, despite whether this was funded by becoming indebted or by printing money (through seigniorage, which was actually preferred by Keynes), could affect the composition of aggregate demand and thus help an economy out of recession, thus accelerating the economy's path to equilibrium.

This Keynesian way of thinking inspired policies such as the American 'New Deal' under Roosevelt in the 1930s, which eventually helped economies climb out of the depression. During the Bretton Woods conference in 1944, both the IMF and the World Bank were created, and Keynes was there to help figure out there roles. Therefore, intervention in market outcomes was part of their initial role. However, the neoclassical synthesis, which took Keynesian views as correct in the short run, and 'classical' views as appropriate in the long run (money is neutral, and equilibrium in real variables is reached at its full-employment level), started to dissolve in the 1960s, basically by new insights by thinkers like Friedman, Phelps (implying that there was no direct trade-off between inflation and unemployment since expectations had to be accounted for), and Lucas (who also mentioned the importance of expectations, and how supply can adjust to demand based on these expectations). This opened up the doors for New-Classical theorizing, and brought new-found importance to the market mechanism: they were once again the answer to allocation.

This would affect the IMF and World Bank's inner workings. In the 1980s, markets became the answer to the world's problems, and the heads of large economies (i.e. Reagan in the US and Thatcher in the UK) were great supporters of these ideas. Therefore, The IMF and World Bank started to incorporate this in their policies. Countries had to adopt free market schemes in order to receive aid. This became known as the Washington consensus. Many authors, like Joseph Stiglitz in Globalization and its Discontents (Mostly the IMF here), have criticized this, saying that these organizations took free markets as a magical prescription for development.

Today, both the IMF and the World Bank are trying to help out, giving more aid to poor countries (like doubling aid to Haiti), and urging rich countries to supply the aid that has been promised but still not delivered. Apparently the multilateral organizations are returning to their original inner workings. The new plans and extra aid to help out are being called 'new deal' policies, thus looking back at those policies with the same name in the '30s.

It can't be said, though, that Keynesian policies were abandoned completely by the organizations throughout the twentieth century, because they were still intervening. Under 'classical' policies, neither institution would have existed, since there would be no need for any intervention whatsoever. Nonetheless, the policies they push for seem to be once again more aligned to Keynes's original ideas.

Oh, and don't get me wrong. I may sound critical, but I am a huge fan of free markets and I do believe that they are the best allocating mechanism. But I also believe that some markets allocate resources in a way that may not be the best socially acceptable outcome. In these (not-so-common) cases, the government must do something about it. What would happen if the FED did not lend money to JP Morgan to buy-out (bail-out???) Bear Sterns, or other such situations? I agree with Keynes's idea that the government can make a difference (if its goals are sound, that is!).