Summers quotes Keynes on the subject of learning from experience

After a speech last week at the Economic Club, President Obama's chief economic advisor Lawrence Summers was asked about the mistakes he made as President Clinton's Secretary of the Treasury which have since turned into economic disasters. He replied partly by quoting Keynes:

"When new information arrives I change my mind," Keynes told the questioner, according to Summers. "And you?"

John Maynard Keynes is indeed a worthy economist to quote. He was the greatest economist of the 20th Century and he did indeed change his beliefs over time. For example, as a youth he held the juvenile belief, still held by most American economists, that unilateral free trade is always the best policy, even when trading with mercantilist trading partners (countries that maximize exports and minimize imports). Here's how Keynes described his early belief in Chapter 23 of his magnum opus, The General Theory of Employment Interest and Money:

So lately as 1923, as a faithful pupil of the classical school [of economics] who did not at that time doubt what he had been taught..., I wrote: "If there is one thing that Protection can not do, it is to cure Unemployment . . . . There are some arguments for Protection, based upon its securing possible but improbable advantages, to which there is no simple answer. But the claim to cure Unemployment involves the Protectionist fallacy in its grossest and crudest form." As for earlier mercantilist theory, no intelligible account was available; and we were brought up to believe that it was little better than nonsense. So absolutely and overwhelming and complete has been the domination of the classical school. (pp. 334-335)

Keynes goes on to make the case that mercantilism can indeed help the country practicing it, although it may hurt the overall world economy. Mercantilism results in the mercantilist country getting more fixed investment, while its trade-deficit victims get less. Keynes' discussion doesn't figure on the modern version of mercantilism in which the mercantilists loan the money earned from trade to the trade deficit country. His analysis is still accurate, though the loans from the mercantilist country do postpone the financial crisis in the trade deficit country.

Keynes even predicts the disaster that eventually occurs in a trade-deficit country that ignores its trade deficits, as the United States has been doing while following Summers advice during the Clinton and Obama administrations (and the advice of President Bush's incompetent advisors):

(A) favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Keynes solution for a trade deficit country is to subsidize exports and restrict imports in order to balance trade. But such a policy would violate Summers' juvenile belief in unilateral free trade.

Perhaps after President Obama's administration, Summers will realize the folly of ignoring trade deficits. He might then show the maturity to change his mind. Too bad the United States will have had to suffer through an unnecessary four year long depression in the meantime.