Assignment

Perhaps the most famous quotation of Keynes is his comment that "In the long run we are all dead." One might interpret this comment as meaning that there is no validity to the use of the "long run" as an analytical device. I think you will see from the two quotations below that Keynes probably meant something much different.

In the Long Run:

"...there has always seemed to me to be a confusion in the Marshallian distinction between long and short periods. Sometimes he (Professor Marshall) means by a long period something where time is the essence of the matter, as for example the wearing out of a durable instrument or the length of period of production. In other cases he merely means by the long period what happens when everyone correctly foresees the situation, and by the short period what happens when mistakes of forecasting have been made..."

"Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this **long run** is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

What do you think Keynes meant by the sentences: "In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

[Hint: Thinking about the performance of our economy over the last six years (and assuming that Keynes were still alive), what would Keynes say to an economic advisor who claimed that the Fed, the Treasury, and the Congress were gravely mistaken to intervene in the economy as they have done. The non-intervention argument being based on the notion that while short-run financial problems do occur within the capitalist system from time to time, the market will always right itself if given a bit of time.]

As it happens, Mankiw had a piece in The New York Times about six years ago (11-30-08) What Would Keynes Have Done that addresses this general question. http://www.nytimes.com/2008/11/30/business/economy/30view.html?ref=business

[BTW, "Marshallian" is a reference to Alfred Marshall (1842-1924). Marshall, Keynes's teacher at Cambridge, was the dominant figure in British economics from about 1890 until his death in 1924. Marshall invented the short-run, long-run analytical scheme that all economists use today.]