POLITICAL THEORY - John Maynard Keynes

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 wise 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 short-sightedness, 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 then 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 20th 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 well-being as good painting or literature and in a deep sense, not fundamentally different in its search for the wellsprings of fulfillment 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 producing new solutions to this intractable problem of the 1930s and of capitalism more generally. Classical economics gives 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 cause 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 organize workers so that they refuse 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, securing 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, then 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 and 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 online 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 of 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 a 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 simply be 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 otherwise have 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 grander macroeconomic architecture put him in high demand during the Second World War when he went to the treasury to work as an advisor. Raised to 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 this 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, 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 supranational economic planning is both necessary and possible. The strain of the Bretton Woods negotiations was 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 30 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 a smaller state, 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 spiraled 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? 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