John Maynard Keynes was a political economist
of extraordinary optimism and vision
who believed that governments have it in their power
to solve some of the greatest ills of capitalism.
Keynes refused either to believe in communism,
or in the utter wisdom of the unfettered free market.
Instead, he occupied a middle course,
believing that governments could,
with a judicious injection of money here
and a rise regulation there, smooth out the peaks
and troughs to which all economies seem fatefully prone.
Keynes believed that what chiefly holds back countries
is corruption, knee-jerk policies, and shortsightedness, but that if these three ills
are corrected, then humanity can look forward to an age of incredible and lasting wealth.
In a charming essay titled, "Economic Possibilities for Our Grandchildren," written in 1930,
at the height of the world economic crisis, Keynes outlined his belief that most severe economic problems
could be overcome, and give way to an age where the chief challenge for human beings would be how to occupy
their leisure time in conditions of mass prosperity. For Keynes, economics was not a dull science. It was the tool
with which to bring about economic security for all.
Keynes' background was well-to-do, and throughout his life, he remained firmly a part of the British establishment.
Educated at Eton and at Cambridge University,
Keynes was unusual for the breadth of his artistic and literary interests.
Throughout his life, he maintained friendships with some of the most brilliant artists and scholars
of the twentieth century, and was an integral part
of the Bloomsbury Group of writers and intellectuals.
Virginia Woolf, for example, was one of his best friends.
As the Bloomsbury Group recognized,
good economics is as fundamental to wellbeing
as good painting or literature, and at a deep sense,
not fundamentally different in its search
for the wellsprings of fulfilment, and its attention to human error and blindness.
Keynes' masterpiece was written in 1936.
The General Theory of Employment, Interest, and Money.
In this work, Keynes set out to rethink the
causes of unemployment, in the hope of reducing new solutions
to this intractable problem of the 1930s,
and of capitalism more generally.
Classical economics give us three reasons why unemployment exists.
Firstly, and most obviously, workers are temporarily unemployed when they move jobs.
Secondly, individuals might simply elect not to work, particularly if they can
support themselves through some form of welfare payment.
But thirdly, and most interestingly,
unemployment arises when wages are higher than what employers can afford.
In the classical model, it's assumed that a free market
will correct this last course automatically,
and that the supply of labor and the demand for labor
will spontaneously come into equilibrium.
ensuring something approaching full employment.
Only, if some outside force were to exert itself
on the market--for example, if governments set a minimum wage
that artificially inflates wages, or
if trade unions organized workers so that they refused to take
lower wages in a declining market,
only under these conditions would equilibrium not be found. But Keynes took issue
with this classical theory. In the 1930s,
there were huge numbers of people out of work, as many as
3 million in Britain and 15 million in the United States
of America. These numbers were just too great
to shrug off as the result of people being between jobs
or simply idle. And to Keynes' way of thinking,
this level of unemployment was also too great to be explained
by the interference of trade unions,
given that, during the years of the Great Depression,
high unemployment had severely curbed union power.
For Keynes, the real problem of unemployment lay in a
lack of demand.
This was not something that economists had ever properly focused on,
but it became the linchpin of Keynes' theories.
Classical economic theory had simply assumed that
demand for goods would return by itself
once wages and labor requirements had equalized.
But Keynes now famously declared,
"In the long run, we are all dead."
In other words, this process might simply take too long.
Keynes argued that it was insufficient for economists and policymakers
simply to advise people to accept suffering in the short and medium term, secure in the knowledge
that at the end of the storm, the sea would return to calm.
What was needed was intervention
in the economy, by government, in order to break
the cycle of economic depression,
and thereby restore prosperity.
Traditionally, in an economic downturn, governments would turn to
matters of supply to provide an economic boost,
encourage growth, and create employment.
For example, if interest rates were reduced, that this should encourage
savers to invest their money, providing cash
either for existing businesses to expand, or else for
entrepreneurs to establish new ventures. However,
Keynes now declared there might exist a persistent belief that
demand was so low
that there was little point in supplying goods. In this case,
traditional tools of promoting economic recovery
would be useless, and something else would be required.
If market mechanisms were unable to stimulate economic recovery, then, Keynes now argued, it was the job of the state
to step in to create demand, by running, if necessary, a very large budget deficit in order to create jobs.
Practically, this could be done by raising loans and using the money to finance vast public works
that could be brought on line relatively quickly.
These might include building roads or railways,
or else investment in other infrastructure that would not only
create work for people, but which would leave a useful legacy
for private enterprise. Governments should, for Keynes, act as the primary shopper in the land,
creating demand until more widespread sources off-demand can return.
Keynes criticized governments for the way they typically respond to downturns.
Their immediate (and understandable) impulse is just to rein in spending. After all, this is what a household would do when money is no longer coming in.
But what is wise at the level of the household is often catastrophic when applied at the level of the nation.
Nations are not households in all kinds of ways,
and Keynes needed to persuade his audiences to act contrary to their simpler, more basic instincts.
Reining in spending when an economy is in decline always worsens the very problem it's meant to solve.
One obvious objection to Keynes' focus on government spending
was the question as to who should pay for the loans.
By creating the debt, would not the problem be simply postponed to another day, rather than solved?
Here, Keynes applied his theory of what became known as the "Multiplier Effect."
In the first instance, by creating jobs through public works,
governments would save some of the money they would've otherwise spent on unemployment benefits.
Secondly, the increase in the number of people in employment would create additional spending power, and therefore boost the economy and tax receipts.
There would be an indirect effect on businesses as opportunities to service public works programs became available.
The result would be increased tax revenue from businesses, as they began to once again prosper.
In turn, these receipts would then pay off the debt created by the initial expenditure.
That was the Multiplier Effect.
Keynes' ability to conceive of grand macroeconomic architecture
put him in a high demand during the Second World War.
When he went to the Treasury to work as an advisor,
raised the peerage in 1942 as Baron Keynes of Tilton in the County of Sussex, Lord Keynes
led the British delegation to the Bretton Woods Conference in the United States,
at which the Allied nations hammered out post-war economic policy.
Not only did Keynes believe that national governments could successfully manage economies,
but Keynes also believed that a global system of economic organization was possible.
He argued that, for the purpose of global trade, countries should subscribe to the creation of a new international standardized unit of account:
the Bancor.
Through a complex system of accounting,
the adoption of the pseudo-currency
would allow an internationally-recognized organization
to impose fines on countries in order to discourage them from running large trade deficits or surpluses.
Such a system would help to smooth out peaks and troughs
in international trade and, not coincidentally, it would also benefit countries like Britain
who had, because of the cost of the War, had low reserves of gold.
It was both a brilliant and self-interested idea in equal measure.
But, ultimately, the Bancor did not come about.
The United States, which was effectively bankrolling global post-war economic reconstruction, ran large trade surpluses
and had no intention of accepting limitations on these.
But several of Keynes' other proposals, such as the establishment of the World Bank, and the International Monetary Fund
to oversee and encourage world trade, were accepted,
and have dramatically changed the world.
Testimony to Keynes' belief that national and super-national economic planning is both necessary and possible.
The strain of the Bretton Woods negotiations were immense upon Keynes. In 1946, aged only 62,
Keynes died of complications from a series of heart attacks.
Yet his legacy lived on.
In the thirty years or so after the Second World War,
Keynesian policies were adopted across the capitalist world.
Economies saw record lows of unemployment, and record high levels of economic growth.
Keynes' ideas became the new orthodoxy, and were particularly attractive to the political left.
By the 1970s, however, critics of Keynes' ideas,
notably, Friedrich Hayek and Milton Friedman
were gaining ground with politicians in countries like the United States and Britain.
They argued for small estate, free markets, and a reduction in regulation of capitalist enterprise.
At the same time, Britain and the United States
began to experience high inflation alongside high unemployment, known as "stagflation."
This phenomenon could not be explained by Keynesian economics,
and Keynes' ideas came to be discredited,
giving way to those of the neoliberals.
Nevertheless, the financial crisis of 2008
jolted policymakers into considering alternatives to neoliberal thinking.
When the global economy spiralled into decline, rather than wait for the market to correct itself,
the G20 nations announced an economic stimulus package of around 2% of gross domestic product to stimulate growth.
As one critic of Keynes wryly conceded,
"I guess everyone is a Keynesian in a foxhole."
To be sure, Keynes' ideas need to be modified to suit the conditions of the contemporary world, but Keynes would approve. His was not a static
or dogmatic understanding of economics. After all,
when asked why, in the 1930s, he had altered some of the positions on economic policy he had previously held,
Keynes famously answered,
"When the facts change, I alter my conclusions. What do you do, sir?"