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How Keynes became cool again

But can the ‘foul-mouthed elitist’ save the world from economic catastrophe 60 years after his death?


 

This American Life, a popular show on National Public Radio, recently described John Maynard Keynes, rather cheekily, as “a foul-mouthed, slutty British elitist.” Keynes did, after all, have a reputation for being disagreeable and less than charming. Regardless, he is the man whose theories are now being trusted by presidents and prime ministers around the world to save us from economic catastrophe.

Until recently, talk of Keynes was relegated to university lecture halls—an important guy if you cared about economics, not so much if you didn’t. Even to many economists, his theories had been falling out of fashion in recent times. But suddenly, Keynes and his ideas are back in a big way. Never mind that he died in 1946 and his great work was published a decade before that, in 1936.  Nowadays, in the midst of a deep recession, Keynes is one of the most much-debated figures around. And what happens in the coming months as governments struggle to right the global economy could cement his place as, arguably, the most important and interesting economic thinker of all time.

Keynes’s big idea (or at least a crude summary of it) was that economies, when left to the devices of supply and demand, are not necessarily self-correcting. Economies that are shrinking, or in recession, risk slipping into a vicious downward cycle as people and businesses stop spending. Sometimes, he argued, a government must step in to boost the economy. At the time, Keynes’s idea, born out of the Great Depression, was revolutionary. And it soon became immensely popular. It launched an entire school of economics that developed into mainstream thinking.

By the 1960s, governments everywhere had embraced the idea that they could guide economies, and protect against protracted downturns by spending money. “First the U.S. economists embraced Keynesianism, then the public accepted its tenets. Now even businessmen, traditionally hostile to government’s role in the economy, have been won over,” wrote Time magazine in 1965. A short decade later, however, his popularity was ebbing as western governments, facing problems like stagflation, looked to smaller government and less intervention as the answer. Reaganomics in the 1980s seemed to mark the death of Keynesian theory.

But now, 30 years later, with tax cuts and the slashing of interest rates failing to revive the economy, Keynes has become more relevant than ever. The stimulus packages being proposed in the U.S., Canada, and elsewhere are Keynesian to the core. “Only government can provide the short-term boost necessary to lift us from a recession this deep and severe,” said U.S. President Barack Obama recently, echoing Keynes. But whether the stimulus will work is the trillion-dollar question. This will be, many argue, the first true test of Keynes’ theories. Can a massive government investment really save an economy from itself, as he first proposed? A question that was never really answered by the limited (and late) spending after the Great Depression, argue some economists.

The economic debate has also put renewed focus on the man himself. Often forgotten amid all the talk of his theories, was that Keynes wasn’t a typical university economist. Early in his career, he worked as a lecturer at Cambridge University and was a member of what became known as the Bloomsbury Group, a collection of thinkers that included writers E. M. Forster and Virginia Woolf. Woolf once described the group as “the society of buggers”–—Keynes, along with other members, was known to be a homosexual who rebelled against traditional Christian beliefs. And yet, he later became a devoted husband to Lydia Lopokova, a ballerina.

During the First World War Keynes went to work for the British Treasury and was its representative at the Versailles Conference (he eventually quit in protest with the outcome, and wrote a book on the subject). He later moved back to teach at Cambridge. But only during the Great Depression did he truly make his mark, publishing his most famous work, The General Theory of Employment, Interest and Money.

His sometimes curious life and meteoric rise is fodder for a Hollywood epic. But for the time being, it’s still his ideas—and whether they actually work—that people are focused on. In the 1960’s Richard Nixon declared, “We’re all Keynesians now.” We’re hearing that refrain once again. Soon enough, we’ll find out if following his theories was a wise decision. As Keynes presciently concluded in his 1936 piece: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”


 

How Keynes became cool again

  1. “But can the ‘foul-mouthed elitist’ save the world from economic catastrophe 60 years after his death?”

    No, Keynes policies are going to make recession worse, and last longer, than if you just let people get on with it.

    I am curious to know why New Deal, Japan during the ’90s or Rae/Ontario don’t count for examples of what happens when governments try to spend their way out of a recession. My biggest problem with increased spending during recession is that it totally ignores peoples state of mind. If everyone is worried about losing their jobs, hiring more public employees is not really going to help them or change their circumstances all that much.

    I think people are attracted to Keynes ideas because they are convinced we living in an era of little regulation and low spending and they want something different. Which is crazy because we have much larger government budgets, and way more regulations, now compared to Keynes’ era.

  2. Part of the problem is that the other half of Keyne’s equation– governments should stop deficit spending and pay down debt when the economy is going well– is usually ignored by governments who then run into worse trouble when the cycle tanks next time round.

    • Hmmm…Keynes was a disciplined man, govts not so.

  3. So we should follow Milton Friedman’s theory of laissez-faire economics jwl?

    That didnt work out at all during the Great Depression early on either.

  4. Actually, Milton Friedman harshly criticised US monetary policy during the 1930’s.

    Keynes’ model was custom-built for what we’re seeing now: a recession in which interest rates are essentially zero. The model broke down when it was applied to other circumstances (i.e., 1945-2008), but now that we’re back in the world that resembles the one in which Keynes worked, his ideas are relevant again.

    • Actually, this point can be substantiated by comparing the cut of Keynes’ suits – pre 1945 – he appeared in fashion. 1945 onward, he looked more sluggish – potbellyed – or if you really need to know “ill-suited”. :)

      • Exactly. And in 1946, Friedman was a hot.

        It was ever thus that our understanding of public policy has progressed.

  5. No matter how great the current plans are people will need to shift their thinking. Green energy in combination with North American resources need to fuel our power needs. Mass transit needs to be embraced in mid sized American cities the way it is in New York City, Toronto and London.
    And investing in education can not be debated, it needs to be the norm. The recent stimulus bill only passed after the 3 Republican Senators ordered cuts to the education money. For example, the amount of education dollars that Sarasota county will receive is now 1/2 the original amount ($35 million instead of $70 million.) It’s still a lot of money, but teachers, reading specialists and others important to the education system are losing their jobs.

    • Without equality of eduction there will never be equality of opportunity. Our children NEED to be educated well. It should be considered a necessity.

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