ON a veritable online blog site, Dustin Mineau, an economics blog editor writes: “It is a fun fact that both the “founder” of economics, Adam Smith, and “founder” of macro-economics, John Maynard Keynes, share the same birthday. It is a not-so-fun fact that both men and their theories are so misunderstood by, not just the general public, but by other economists as well.”
Love him or hate him, John Maynard Keynes changed the world. Last year marked the 80th anniversary of the Keynesian Revolution, spearheaded by the controversial British economist.
The year 1936 was the groundbreaking and momentous period in history when Keynes published his magnum opus, “The General Theory of Employment, Interest and Money” — a book whose theorem and postulates still populates economic textbooks, dominate fiscal discussions and shape macroeconomic policy.
A year before publishing his seminal work, this clairvoyant of the dismal science had written a letter to Irish playwright and controversialist, Bernard Shaw, expressing the following sentiments: “I believe myself to be writing a book on economic theory which will largely revolutionize — not, I suppose, at once but in the course of the next ten years — the way the world thinks about its economic problems.”
Lo and behold, it turned out that he was indeed right about the transformative impact of his theories — and his forecasting wasn’t by any measure an act of sheer hubris.
For as long as macroeconomics has been around, there have been few more hotly-debated topics than what role the State should play in the economy, notwithstanding the fact that prominent economists the world over have provided plenty of examples of market failure (climate change, healthcare and housing, for instance) that seemed to have justified direct government intervention through fiscal and monetary policy, as well as through regulations and conditionalities.
Citing the need to moderate booms and busts, the main plank of Keynes’ economic theory (often misunderstood) is that government intervention through active fiscal policy can stabilize an economy — and that spending by households, businesses and the government is the most important economic driving force — effectively countering the idea that free markets would automatically provide full employment and price stability, as the monetarists and neo-liberals believe.
Considered to be the intellectual founding father of the IMF and the World Bank, Keynes was insistent that the market is a kind of wild animal that needs to be tamed and governments can and should prevent recessions and depressions through demand management — arguing that demand creates its own supply — in direct opposition to Jean Baptiste Say’s Law which posits that supply creates its own demand. Further, Keynes maintained that inadequate overall demand could lead to prolonged periods of high unemployment and that State intervention is necessary to moderate the vicissitudes of the business cycle.
Keynesianism, whose proponents include Nobel Prize-winning economists Paul Samuelson, Joseph Stiglitz and Paul Krugman, came to life in the 1930s in response to the debilitating depression which ravaged the American economy and subjected many to a life of misery and destitution. By historical account, President Franklin D. Roosevelt’s New Deal (a relief, recovery and reform plan to rescue the United States from the Great Depression) was flavoured by Keynesian ideas, although the true extent of its impact is still being debated today.
The Great Recession of 2007-2009, triggered by the financial dysfunctions and infelicities of American capitalism, saw the return of Keynesian policies by way of large stimulus packages (increased government spending and subsidies, and reduced taxes) which brought some of the world’s traumatized economies back to life.
The Columbia University Professor Joseph Stiglitz, who has consistently called for fiscal expansion during hard economic times, especially when monetary policy is constrained, argues in a trenchant piece for the British Guardian entitled, “After The Financial Crisis We Were All Keynesians”: “A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it. Financial deregulation – together with easy money – had contributed to excessive risk-taking.
“Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system’s total collapse. Thus, greater reliance on fiscal policy – increased government spending – would be necessary. Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned…Yes, we were all Keynesians – but all too briefly. Fiscal stimulus was replaced by austerity, with predictable – and predicted – adverse effects on economic performance.”
“John Cassidy, economist and author of the book, “How Markets Fail: The Logic of Economic Calamities”, shared a similar view when he wrote in The New Yorker: “In the real world that rarely intrudes upon conservative economists and voters, both parties (and all Presidents) are Keynesians. Whenever the economy falters and private sector spending declines, they use the tax-and-spending system to inject more demand into the economy.
“In 1981, Ronald Reagan did precisely this, slashing taxes and increasing defense spending. Between 2001 and 2003, George W. Bush followed the same script, introducing three sets of tax cuts and starting two wars. In February, 2009, Barack Obama introduced his stimulus. The real policy debate isn’t about Keynesianism versus the free market; it is about magnitudes and techniques: How much stimulus is necessary? And how should it be divided between government spending and tax cuts?”
Not surprisingly, some of Keynes’ policies have been labelled “left wing” and there are even suggestions that his main work be rewritten, as some mainstream economists and policymakers have cited theories that have been discredited, and ideas that have allegedly strangulated the free market. But, I ask in earnest, have we ever truly lived in a free market economy?
Isn’t it a misconception to maintain that “provided the government doesn’t interfere, in the long-run the economy is an equilibrium which will eventually return to a point of balance?” Of course, Keynes’ reply to this policy monstrosity was: “The long-run is a misleading guide to current affairs. In the long-run we are all dead.”
Meanwhile, despite the many misconceptions and misrepresentations, many of the economic ideas of Keynes have survived the test of time and have become immortalized in the lecture halls of universities as well as in the finance ministries of governments around the world. Paul Samuelson is quoted to have said, “Funeral by funeral, theory advances” — and so have the works of Keynes.
For comments, write to ClementSoulage@hotmail.de — Clement Wulf-Soulage is a Management Economist, Published Author and Former University Lecturer.