John Maynard Keynes (right) met with US Treasury official Harry Dexter White in 1946. (AFP/Getty/Newscom)
Raising Keynes: An old economist finds new rock-star status
Keynesian economics is being hailed as key to ending the collapse.
By Ben Quinn | Correspondent of The Christian Science Monitor/ January 13, 2009 edition
London
If economics were about boxing, the classic bout of modern times would have Milton Friedman in one corner and John Maynard Keynes in the other.
Recent rounds have been dominated by Mr. Friedman, the New York-born champion of free markets, but his opponent, an English university don with a penchant for the arts, has recently staged a dramatic comeback.
Few seem to be cheering anymore for unregulated capitalism. From the forthcoming Obama administration to the British government, “Keynesian” economics is now widely invoked as key to saving the world from a new great depression.
For admirers of Mr. Keynes, whose radical idea was that governments could avoid recessions by running deficits, the economist’s resurgence is a vindication after decades in the shadow of Friedman’s followers, including Ronald Reagan and Margaret Thatcher.
More than 60 years after Keynes’s death, his nephew smiles at the revival of his uncle’s ideas.
“He was never altogether out of fashion,” says Stephen Keynes, an octogenarian scion of one of Britain’s most famous families and, like his uncle, a direct descendant of Charles Darwin. “It’s just that certain people have associated his name with inflation, which was not what he advocated.”
This isn’t the first time an American president struggling to regain control of a spiraling economy has sought guidance from Keynes. In 1938, his ideas were embraced, albeit reluctantly, by Franklin D. Roosevelt, with the president announcing it was up to government to “create an economic upturn” by making “additions to the purchasing power of the nation.”
The notion was promoted by Keynes (pronounced “Cains”) in his 1936 magnum opus, “The General Theory of Employment, Interest, and Money,” which stated that government should borrow when the economy slows to keep people employed, because private sector investment won’t be enough. Another major legacy of Keynes was leading the British delegation to the Bretton Woods conference of 1944, where he played a key role in creating the World Bank and the International Monetary Fund.
In today’s Britain, as a debate rages over how to kick-start the faltering economy, few days pass without the economist’s name invoked in newspapers.
At Cambridge itself, a “Keynes Society” is now being established to promote new ideas from around the world on economics, the arts, science, and climate change. Nick Butler, chairman of the Cambridge Centre for Energy Studies, told fellow scholars that the society would not just pay tribute to Keynes, but “revive his sense of pragmatic creativity, which seems so lacking, and so necessary at the moment.”
Sales of books based on his theories have risen in recent months. An acclaimed three-volume biography of Keynes himself is regarded as recommended reading for a new generation of policymakers.
“John Maynard Keynes has been restored to life,” wrote its author, Robert Skidelsky, last month in the British center-left journal, The New Statesman. “Rusty Keynesian tools – larger budget deficits, tax cuts, accelerated spending programmes and other ‘economic stimuli’ – have been brought back into use the world over to cut off the slide into depression.”
But there has been no greater testament to the faith placed in Keynesianism than the course charted by Britain’s prime minister, Gordon Brown. Last week, Mr. Brown unveiled plans for public works spending meant to ease recessionary pain by creating up to 100,000 jobs. Drawing a direct comparison with the public works projects undertaken by FDR, Brown also wants to tackle climate change by investing in rail, electric cars, wind power, and wave power.
Despite his reemergence as a policy rock star, voices arguing against a Keynesian response to the financial crisis remain unsilenced.
“I am surprised at how many Keynesians were in the woodwork on both sides of the Atlantic,” says Chris Edwards, an economist at the Cato Institute, a US free-market think tank. Mr. Edwards, who talks of a resurgence of “kindergarten Keynesianism,” expresses amazement at the number of PhD economists who, he says, are now reversing previous pronouncements.
“I think Friedman’s biggest concern right now would be how central bankers are putting so much money into the system,” he adds, warning that younger Americans will be saddled with debt from boosting the economy. “Keynes was a brilliant guy, but his main policy thrust was to respond to the short-term crisis. Obama’s advisers are buying into the idea that the short term is the only thing that matters.”
Elsewhere, even admirers of Keynes question whether attempts to stave off a new recession are truly Keynesian. Vincent Cable, a member of parliament and the economics spokesperson for Britain’s third largest party, the Liberal Democrats, suggests the Keynesian tag is being misused to describe British government measures.
“What Obama is proposing to do is far more ambitious than what is being done in the UK, and Keynes would recognize that,” says Mr. Cable, who studied economics at Cambridge in the 1960s under the “disciples” of Keynes, including Richard Kahn, Joan Robinson, and Nicholas Kaldor.
Cable concedes, however, that Keynes’s work is far from bedtime reading: “His writing is pretty impenetrable…. Adam Smith and ‘The Wealth of Nations’ is a good read. Keynes is not easy.”
Keynes’s nephew, Stephen, says his uncle would approve of the economic policies being pursued by US President-elect Obama, describing them as “very clearly Keynesian.”
Stephen Keynes adds, “It does give me pleasure that the ridiculous Thatcher years now seem so absurd…. The whole world admires Obama’s steadfastness and self-confidence.”
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Comments
2. Larry | 01.14.09
Our problem today is that during the last 8 years we have run up hugh deficts to fight a war of choice and give tax cuts for our wealthiest citizens. I doubt that Keynes would have approved the spending of the last 8 years. That leaves us with a lot of risk no matter what we do. Too bad we can’t claw back some of the money from the favored few. It’s like a car that has been in a severe wreck. Fixing it could cost more than replacing it. Too big to fail means too big to exist. We have allowed to much economic consolidation.
Let’s hope that we get the radical change that we need.
3. Janet J | 01.14.09
Truly, you are mistaken if you think Keynesian economics is the solution to the economic downturn. It is my belief and the belief of the followers of the Austrian economic theory that Keynesian economics is the CAUSE of the economic downturn. We got into this mess by the central banks creating money out of thin air. So to fix the problem they continue to create money. It is my belief that all this creation of money in the US will eventually lead to severe inflation, perhaps hyperinflation. The dollar is being debased and quite possibly made totally worthless. We have Mr. Keynes to thank for this.
4. gili4 | 01.14.09
How is it that Keysian socialist economics is just now tauted since it’s been used in this country for at least 50 years?! And Keynes isn’t so smart as many would have us believe. All he did was take microeconomics and blow it up to represent a country instead of the firm. Plus he socialized it so that it would promote Marxism into every government adopting the measures. His advocacy to use a central government to control economic growth through fiscal and monetary policy manipulations that directly effect the private sector is pure socialism. England has suffered from mainly Fabian socialism now for about 100 years, and they still don’t understand their economic problems stem from this econometric model.
You watch! This method will not do a thing but hold down recovery and economic growth as all social programs do.
5. benbarr | 01.14.09
economics are the most unexact science. you cannot sting the people the way it has been done and expect them to go that route again. some of us are born at night, but not last night.
6. Ed Roberts | 01.14.09
A basic problem in the USA is GREED!Witness the salaries of CEO’s of large corporations like the auto industry. They complain about high labor costs, but never mention the top end: “too many chiefs and not enough indians”. The U.S. auto industry is so bogged down, it will never keep up with the imports.
And yet, we the average joes are being expected to bail out these “dinasaurs” of industries. The stock market and the traders are responsible for escalating prices: buying low, selling high. It never ends.
7. David Fredericks | 01.14.09
Conservatives — especially since Ronald Reagan — while railing against debt and deficit spending have dangerously buried America in unpayable debt. Part of the strategy was to run up so much dept on behalf of the rich that it would squeze out any money targeted by liberals for the needy.
The resulting wealth inequity puts on a par with Brazil and Argentina. And the imbalance of top-heavy structures evenually must collapse. Which brings us to the present.
The question is whether the reckless spending of conservatives, along with subsidies for the rich, leaves enough room for Keynesian economics to have any effect.
8. Sue | 01.16.09
My father, a businessman, spoke decidedly against Keynesian economics in the 50’s. Deficit spending and government bailouts lead to inflation and loss of purchasing power. Free markets and capitalism are not the problem, but greed and laziness.
Anyone who believes that morals have some relationship to one’s goals and philosophy, might want to check out John Maynard Keynes’ social life and see what kind of man he was.
9. H. D. Schmidt | 01.16.09
While most so called Conservatives adore Milton Friedman as sort of God when it comes to free markets, while as for myself I declared him to be not total lilly white on such. A man that sets out in creating a new bureaucracy called: Parental Right/School Vouchers, etc., very directly declares that the Federal Government has the right and obligation to tax every citizen whatever amount it chooses at anyone time, whether a one benefits from it or not, Soviet style, to run public education, which in principle and system is called: Socialism/Communism. I have personally challenged his organiztion as to this issue; however never ever a response from that organization trying to refute my contention. There is only reason and it is this: Milton Friedman and now his followers know that somebody, me, has corner them into a corner with no chance to get out.
Maybe somebody else may take me up? Maybe the writer of this article, or the very Editor of the Monitor? In closing, America never ever truly embranced free market economy, as were the wishes of the Founding Fathers. Besides, will somebody come up and say what free market economy is in principle or otherwise? For me, free market economy is such when an employer remunarates its laborers so they can live with their families confortably as good as the employer, with the father the bread winner. Historically that principle never took root in America. Yes, as the labor unions sprung up because, of abusive sweatshops becames almost standard practice, and than in 1860 or so, one man invented the labor unions. Of course now, as the GMC, Ford, Chrysler have proven that Labor Unions are now as greety as the Employers themselves and therefore have basically buried the traditional American car business.
10. Mike Higgins | 01.17.09
Surprised That the Free Lunch is Popular?
Really???? … The United States has been following Keynesian economics ever since it set the dollar free from any backing of gold in the mid-1970s. The national debt has increased every year since 1974, even in the so-called “surplus” years of the late 1990s. Don’t believe me? … Look it up!
The author truly shows his ignorance of the subject by stating only one part of Keynes thesis, that is that governments could cushion recessions by running fiscal deficits. The problem is the government was supposed to repay the debt incurred in hard times with the surpluses generated during the good times. Apparently, government deficits never generated the expected good times because no portion of the debt (repeat, no portion of the debt) incurred by the Keynesian deficits of each of the past 38 years has ever been paid back. That’s how we arrived at our $9+ trillion national debt, half of which is owned by international central banks.
To sing the praises of Keynesian economics is to sing the praises of failure. At what has it succeeded over the past 38 years? … We have exactly what was predicted by real economists at the time — a quadrupling of the price level, otherwise known as inflation. We have a $9 trillion debt and a dollar today which buys less than 25 cents bought in the 1970s. Is that what we are cheering about?
I suggest that the author of this article and the editors of the Monitor step back and give some thought as to how irresponsible it is to be celebrating failure at a time when responsible journalists and truly independent newspapers should be questioning the failed policies of the government that got us into this mess in the first place. May I suggest that you start with the irresponsible creation of the private bank cartel known as the Federal Reserve in 1913 and the monopoly that Congress gave it to create what is now called our money (Federal Reserve Notes - FRNs), which are not even intrinsically worth the paper they are printed on. Hold them long enough and they will be worth nothing.
A single dollar (FRN) today buys no more than a nickel bought when the Federal Reserve was created in 1913, while a dollar of silver is worth more than 12 FRNs today. Which would you rather use as your money?
It’s time to abolish the deceitful laws that prevent us from using the constitutional hard money (gold and silver coin) that was confiscated from the American people by FDR with the Gold Act of 1933. These coins should be available to all U.S. citizens to purchase and use without being subject to state sales tax and federal capital gains tax.
Only hard money can enable free people to preserve the purchasing power of their hard labor and savings. We must eventually eliminate the paper money monetary system of the Federal Reserve, which is owned by international bankers bent on destroying the United States as a free nation. It is not part of our government and never has been.
Learn more about the need for a competing monetary system which offers us a choice between hard money security and the deceitful paper money (FRNs) of the Federal Reserve System by clicking below:
https://secure.downsizedc.org/etp/campaigns/85
11. Tom | 01.22.09
Keynes was correct. In an absence of private spending, government spending will help jump start the economy. What the Austrian economists fail to recognize is that during certain periods, private investment dries up so it really cannot be “displaced.” This may not be true all the time but it is certainly true now and it was certainly true during the 20’s and 30’s.
12. Tom | 01.22.09
To Mike
The debt was under $1 Trillion till Ronald Reagan took over. I would put 30-40 years of keynesian economics from FDR till the 70’s up against the economy we had since Reagan any day.
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1. JR | 01.13.09
It’s interesting how fickle policists are. I don’t believe, as Edward suggests, that Keynesians are “coming out of the woodwork”. I think most were free marketers who have jumped ship and climbed ashore to flop on a new bandwagon. Hurrah! Hurrah! Friedman is wrong! Keynes was right! Proclaiming out with the old and in with the new old, as they did thirty years ago to toss out Keynesian views and embrace a more pure market economics.
I think good policy is somewhere in between the poles. Good government plays a role, but keeps itself in check. The administration in the wings seems to believe government should be a lone, or at least an utterly dominating actor on the stage of this economic play. In representative democracies, the people are largely responsible for the actions of government. Rather than savior, the government is their servant, doing their bidding. For decades the people wanted it all. Scrambling in the rubble of the consequences for such impossible indulgence, they now want it all made all better. New administrations won’t be able to do that with Keynes, or any other economic diety. This will take time and, I’m afraid, some suffering. The longer it takes the people to understand and accept that, rather than assigning culpability, the longer it will take to emerge from the rubble.