“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
- John Maynard Keynes Few academics become historical figures, but John Maynard Keynes is a notable exception. Although he eventually worked in the upper echelons of the British government, Keynes was first and foremost a scholar and theorist of the highest order. His mathematical prowess equaled his ability to articulate complex economic concepts in readable prose, which allowed him to not only understand and solve intricate economic problems, but explain them to a broad audience. This latter skill was perhaps most important to his impact on policy, because Keynes could publicly engage in his era’s epic policy debates. In virtually all important economic policy debates from World War I to the end of World War II Keynes’ voice was critical. He defines a “public intellectual.”
Keynes questioned traditional economic assumptions, and directly challenged those parroting conventional wisdom. He was often ahead of the curve in predicting various policy outcomes. Yet, it was Keynes ideas on the role of the government in the economy that are perhaps his most lasting legacy. He advocated for a much more interventionist State than most classical economists. Keynes wanted to transform the role of the State in the economy, and thought the government should work towards a goal of “full employment.”
During the Great Depression Keynes followed the situation in the United States closely, and he argued for relatively massive government spending in order to put people back to work. President Roosevelt had already increased spending, however, in an open letter to Roosevelt published on New Year’s Ever 1933, Keynes challenged him to do more. Keynes dramatically stated, “You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.” Thus, Keynes injected himself into U.S. history at a crucial time, and added another voice to the discourse on the role of the State in the American economy.
Yet, Roosevelt seemed unpersuaded by Keynes advice to stimulate job growth through more deficit spending. Throughout the 1930’s, unemployment averaged over 17 percent in the United States. Yet total government spending as a share of the economy stayed just under 20 percent for the entire decade. Things seem to turn around a bit in 1935, however, following the creation of the Works Progress Administration (WPA), the Wagner Act, and the Social Security Act. The WPA is often portrayed as an example of “Keynesian” economics, and many attribute much of the subsequent rise in employment to this and other similar ideas and institutions.
By 1942 total government spending as a share of the economy rose to 52 percent, and peaked at almost 70 percent in 1944 – when unemployment fell to 1 percent. For many, this not only vindicated “Keynesian economics,” but also a more active role for the State in capitalist economies.
For decades following World War II, Keynes ideas heavily influenced US economic policy. President Nixon even declared in the early 1970’s that, “we are all Keynesians now.” Most Americans accepted government intervention in the economy, at least up to a point. Yet, things changed as a new voice began to have a tremendous impact on economic policy debates – Milton Friedman. Friedman blamed Keynesian policies as major reason for the stagflation of the 1970’s. He argued for a return to more laissez-faire approach, and argued monetary policy was the key to a healthy economy. For one reason or another, Friedman ascended and Keynes descended.
Following the most recent economic collapse, however, Keynes is making something of a comeback. The recent recession is leading to a rediscovery of Keynes, and especially his ideas about government spending during an economic crisis. Paul Krugman, and others are bringing Keynes’ voice back into the critical economic policy debates of today. In fact,
what Krugman is advising the new President virtually echoes what Keynes wrote Roosevelt.
Keynes argues for a series of policies that shed light on his thinking about the role of the State in the economy. According to Keynes,
“In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of loan expenditure under government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as, for example, the rehabilitation of the physical condition of the railroads. The object is to start the ball rolling.” Keynes thought large-scale public infrastructure projects would be the best use of the government money, and he became forever linked with his advocacy for “public works.” This recommendation sounds eerily familiar. Keynes advice to Roosevelt mirrors Krugman’s advice to President Obama regarding the recent government stimulus package.
Keynes, however, also suggested creating “the maintenance of cheap and abundant credit,” by reducing the rate of interest on long-term government bonds to 2.5 percent or less. He argued this would have “favorable repercussions on the whole bond market, if only the Federal Reserve System would replace its present holdings of short-dated Treasury issues by purchasing long-dated issues in exchange.” Thus Keynes also advised monetary policies that many historians seem to overlook. Although his emphasis on public works projects receives most of the attention, Keynes also saw the value in the State regulation of the flow of credit.
Keynes als openly challenged Roosevelt to not only improve the economy, but to transform the modern State. Keynes suggested, “With these adaptations or enlargements of your existing policies, I should expect a successful outcome with great confidence. How much that would mean, not only to the material prosperity of the United States and the whole world, but in comfort to men’s minds through a restoration of their faith in the wisdom and the power of government!” For the most part, however, this call to action seemed to go unheeded.
Thus, Keynes seems to end at a sort of middle position. Keynes seemed to envision a State that governs somewhere between laissez faire and communism. Not completely planned, but not unregulated. Perhaps, a State that keeps full employment as its core economic goal, however, it does not nationalize all industries to meet that goal. Certain jobs should be created by the government, but not all jobs. More importantly, the State should view itself as the investor of last resort. If business’ lose too much of their confidence in investing, then the State should try to raise confidence by providing definitive investments in public infrastructure. The multiplier effect of the jobs created by this spending, can eventually offset debts incurred through deficit spending. This seems to be the general idea proposed by Keynes, and as mentioned above, these principles seemed to guide US policy for decades.
Keynes wrote:
“I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” Surely the ideas presented by Keynes are some of the most consequential in American history. Once again, the phrase “we are all Keynsians” is heard repeated. The sales of General Theory are increasing, and policy makers seem to be parroting Keynesian principles. The rediscovery of problem solving ideas often proves their worth. Further, institutions are built upon ideas, and they structure the evolution of civilization. Today, there are many institutions founded on Keynesian principles, and more will be constructed tomorrow.