Keynes In A Box:
Posted on:
18
Feb
2012
by James Farmer
Flummoxed by Friedman? Bluffing about Buffett? Just guessing at Galbraith? Relax, you’re among friends. IFA Magazine’s monthly crib-sheet on all the great economic theorists starts here.
John Maynard Keynes Born 1883 in Cambridge, died 1946 in East Sussex.
First big idea? Keynes was one of the first non-Marxist economists to insist that the free market had not always been an unqualified success, and that it was prone to cyclical disasters which could often be successfully rectified – or even avoided altogether – with well-targeted government policies. This was a revolutionary idea, because few others had properly considered interventionist fiscal policies before him.
Career path? Keynes spent the First World War at the Treasury, and was then sent to the Versailles conference, where he was appalled by the heavy war reparations being levied on Germany. He was sure these would stifle growth, create instability and encourage extremism. Sadly, he was right.
Germany’s 1923 hyperinflation, the 1929 Wall Street crash and the Great Depression all convinced Keynes that benevolent interventionist policies could have produced rather better outcomes. His greatest work, the General Theory of Employment, Interest and Money (1936), caught President Roosevelt’s eye and gave him his first break on the international stage. Sadly, a heart attack kept his profile down until the mid-1940s, when he returned to lead Britain’s delegation to the Bretton Woods conference that eventually created the International Monetary Fund and the World Bank. But Keynes was unable to get agreement on an international system for preventing huge trade surpluses or deficits.
Keynesianism, to give it its popular name, is generally understood to mean spending borrowed government money on investment projects or other incentives during times of economic hardship. The idea is that the increased activity it creates will create jobs, which will then stimulate demand, and that the benefits will trickle down through all layers of society and kick-start a faster resumption of growth. (The “multiplier effect”.)
Is that all? Hardly. Most importantly, Keynesianism insists that it is demand, not supply, that drives growth. This was an entirely new way of looking at things in the 1930s, because it implied that unemployed workers who couldn’t consume would never manage a contribution to the economy. But that a government that put money and spending power into their pockets would do better than one that simply relied on the free market to force wages down until they eventually became employable.
So who disagrees? Keynesianism’s chief enemies are the so-called monetarists, who believe, along with Milton Friedman and Friedrich Hayek, that free-market economies work better than state interventionism. For Britons, Margaret Thatcher’s monetarist brand (1979-1990) was probably the most familiar example.
The darling of the left? Again, hardly. In Britain we’ve tended to associate Keynesian ideas with left-of-centre politics. But that would come as a surprise to Americans like Ronald Reagan or George W Bush, both of whom splurged vast amounts on business growth. And to continental Europeans in the 1980s, nearly all of whom were running Keynesian budgets while Thatcher’s Britain was tightening its belt.
So today’s quantitative easing is a Keynesian idea, then? Well, if you insist. Although Keynes would probably have been horrified to see governments bailing out bankers on million-dollar salaries. He intended the money to go to the ordinary man and his employer instead. Still, times change.
Favourite quotes
- “Markets can remain irrational longer than you can remain solvent.”
- “When the facts change, I change my mind. What do you do, sir?” (Upon being challenged about an apparent volte-face during the Great Depression)
- “It’s better to be roughly right than precisely wrong.”
- “The long run is a misleading guide to current affairs. In the long run we are all dead.”
- “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”
Tags: keynes
