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The Fairies Have It

Here’s a letter to the New York Times:

Paul Krugman’s frequently made case for more government spending rests unapologetically on Keynesian economics.  So what are we to make of Mr. Krugman’s advice – offered to counter those who insist that the regulatory, fiscal, and monetary policies of the past few years are diminishing investors’ confidence in the economy – to “Pay no attention to those who invoke the confidence fairy” (“The President Surrenders,” Aug. 1)?

A key component of Keynesian theory is what Lord Keynes himself famously called “animal spirits” – mysterious phantoms that, although invisible and non-quantifiable, dramatically affect the level of economic activity by messing with investors’ minds.

By advocating a theory that relies heavily on disembodied imps called “animal spirits,” Mr. Krugman has no business denying the existence of “the confidence fairy.”

Donald J. Boudreaux

In fact, I do believe that animal spirits play some role – just as I believe in the “confidence fairy.”  (If anything, the “confidence fairy” is a tad more plausible given that she/he/it is alleged to cause responses in predictable and rational ways to regime uncertainty, while animal spirits are just plain irrational.)