Can We Blame Keynes for Keynesianism? [Good Life series]

In our era of Keynesian economics on steroids, we should ask: How close is current Keyesnian practice to original Keynesian theory?

John Maynard Keynes‘s main claim to fame is his advocacy of deficit spending as a tool of economic recovery. In a depressed economy, the argument runs, the government should spend money it doesn’t have. That will stimulate demand, which in term will stimulate supply. Once the economy is back on track, tax revenues will increase, which the government can use to offset its deficits. Thus, in the medium-term its books will happily balance.

Before Keynes some economists had urged the occasional use of deficit spending to counter downturns. Keynes’s originality was placing that particular political policy tool within the context of a more general economic theory.

But since Keynes’s 1936 General Theory,[1] we’ve experienced decades of deficits and accelerating government debt. So what went wrong?

I’ve been re-reading James Buchanan and Richard Wagner’s seminal Democracy in Deficit: The Political Legacy of Lord Keynes.[2] Buchanan won the Nobel Prize in 1986 for pioneering Public Choice theory or “politics without romance,” as he called it.

Democracy in Deficit is essential reading for all political thinkers, and two of its points about assessing Keynes’s responsibility strike me as important.

First, Keynes was a political elitist, not a democrat. Buchanan and Wagner quote biographer R. F. Harrod on Keynes’s ongoing assumption “that the government of Britain was and could continue to be in the hands of an intellectual aristocracy using the methods of persuasion.”[3] So perhaps Keynes thought his prescriptions should not be applied in a democracy. Only an aristocracy of intelligent and disciplined politicians could be trusted with Keynesian policies.

After all, what kind of politician typically gets democratically elected? Don’t they tend to be more cunning than intelligent, more pandering and less disciplined? So Keynesianism in a democratic context will lead to mis-directed and out-of-control spending — and here we are today. But we can’t blame aristocratic Keynes for democratic Keynesianism, so we must shift the blame to his followers who abused his system and mis-applied it.

Second, Keynes’s General Theory was published in 1936 and was in part responsive to the Great Depression. Emergency government measures were needed, the argument ran. But those emergency measures would and should be suspended once the emergency had passed. So a decade later — after the Depression and World War II — Keynes’s theory says to stop the deficit spending. But Keynes died in 1946, and if his disciples continued to apply his methods that is not Keynes’s fault.

So is Lord Keynes off the hook?

Keynes’s theory is subject to three types of criticism. One type is moral: A great achievement of the modern world had been an expansion in human freedom — getting the governments out of religion, eliminating much censorship, ending slavery, expanding the range of women’s liberties, and freeing up markets. The economy should be a network of voluntary trades. But the government is an agency of coercion, as everything it does is backed up by the police, the military, and the prison system. Yet Keynes is for reintroducing government compulsion into the economy. This criticism is made strongly by Ayn Rand, for example.

Another criticism is cognitive: Keynes’s theory asks politicians and other central planners to have an accurate God’s-eye view of the economy. But that’s impossible. Another achievement of the modern world has been its social-scientific understanding of how prices work to coordinate the knowledge and actions of millions of individuals, each of whom knows his or her own values and circumstances best. Distant economic planners, however intelligent, can only make crudely macro estimations. This criticism is made strongly by Friedrich Hayek, for example.

The Public Choice criticism of Buchanan, by contrast, focuses on incentives: Keynes’s great mistake was to ignore or downplay the role of incentives in a political context. Keynes’s advice was in part for nations like Great Britain and the United States, and each of them, Keynes knew, had significant democratic elements, so he should have taken that into account.

(Interestingly, the first two translations of the General Theory were published in Germany and Japan, and in his 1936 prefaces to those editions Keynes noted that his ideas would likely meet more receptivity in those nations than in the United States.)

For example, Franklin D. Roosevelt may have been the sort of semi-aristocratic “economic statesman” that Keynes had in mind. And in 1932 candidate Roosevelt strove for the high ground: “Let us have the courage to stop borrowing to meet continuing deficits … I know a continuation of that habit means the poorhouse.”[4] But once elected, president Roosevelt realized more pointedly that spending programs were enormously popular politically and that taxes and spending cuts were frighteningly unpopular.

So Keynes was at least naïve. He should have been able to foresee what politicians will do. “We can pay for it later, somehow” is seductive for many people, even when it’s their own money. But it’s irresistible to politicians, especially when they are spending other people’s money.

Also, there is always some “emergency” that can be seen as needing spending to fix it — and there are always economists who enjoy being close to the seats of power and who will tell the politicians what they want to hear. Ongoing spending can always be rationalized.

Those criticisms of Keynes are strong.

But the most important point is that Keynes was not merely recommending a few surgical interventions to smooth out cycles or to jump-start moribund economies. Keynes’s economics are part of a comprehensive interventionist philosophy of morality and politics.

Long before the Depression — and long before the new theoretical elements of the General Theory — Keynes was already a strong opponent of free-market capitalism.

In 1926, for example, he published The End of Laissez-Faire,[5] in which he criticized free-market capitalism harshly and pushed for substantial socialization of the economy. Socialism, he argued, had moral merit because it “departs from laissez-faire”: socialism “takes away from man’s natural liberty to make a million” and opposes “unlimited private profit.” As Keynes said forthrightly, “All these things I applaud.”

He also agreed with socialists that the government should provide “the deliberate control of the currency and of credit by a central institution.”

But Keynes was not a socialist, and he criticizes the authoritarianism necessarily built into socialism. His goal was to make attractive a principled middle way between the extremes of capitalist freedom and socialist control.

Individuals should be allowed their own private savings, Keynes agrees. The government should only control and direct savings at the macro level: “a coordinated act of intelligent judgement is required as to the scale on which it is desirable that the community as a whole should save.” Additionally, it should be the government’s decision about how much of those “savings should go abroad in the form of foreign investments.”

Keynes also allows that many businesses can and should remain private. But “many big undertakings, particularly public utility enterprises and other business requiring a large fixed capital, still need to be semi-socialised” (italics added).

As for sex and family life, the government should stay out of people’s bedrooms. Nonetheless, Keynes urges, “each country needs a considered national policy about what size of population, whether larger or smaller than at present or the same, is most expedient.” Not only that — in a nod to eugenic theory — Keynes argues that “the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.”

All of this and more is Keynes in the 1920s. By the time the General Theory is published a decade later, Keynes has not changed his fundamental political philosophy but rather has advanced in the sophistication of the economic tools that he makes available for realizing it.

Keynes may have called for very nuanced uses of this or that policy. He likely would have had ongoing arguments with his followers’ judgments about precisely when and how to implement those policies. And he may have under-estimated significantly the difficulty of translating clean economic theory into messy political practice.

But he did advocate a robustly interventionist economic system in principle. He did provide a sophisticated set of tools for policymakers to use when intervening. And he did give a bright green go-ahead light for politicians to apply his theories to real human beings in the real economy.

The huge influence that Keynes has enjoyed for precisely those points is the most any theorist can hope for. Keynes owns the results.

Sources:

[1] John Maynard Keynes, The General Theory of Employment, Interest and Money (1936).

[2] James M. Buchanan and Richard E. Wagner, Democracy in Deficit (Indianapolis: Liberty Fund, 2000).

[3] R. F. Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951), p. 193. Quoted in Buchanan and Wagner, p. 80.

[4] Quoted in Buchanan and Wagner, p. 39.

[5] John Maynard Keynes, The End of Laissez-Faire (1926).

[This article was originally published in English at EveryJoe.com and in Portuguese at Libertarianismo.org.]