Rehabilitating Keynes

The American right is fond of spitting the word keynesian as an epithet, just as those on the left hold Keynes up to be some sort of savior, rescuing the masses from the tyranny of the wealthy. Today’s economic policies that the left promotes and the right attempts to thwart rely heavily on the keynesian idea that when a nation’s economy is stalling, the government should increase spending even if that means going into debt. Further it’s said that it really doesn’t matter what the government spends the money on, that the important thing is to get the money flowing.

There are two very amusing videos that put forth Lord John Maynard Keynes’s ideas and the ideas of his rival colleague F A Hayek, whose economic theories are part of what’s now called the «Austrian School» of Economics, directly opposed to keynesian economics. These videos are highly recommended:

Keynes and Hayek were appropriate subjects for these videos not only because their economic ideas were at odds with one another, but because they were contemporaries and colleagues. Though they disagreed they held one another in high esteem and spoke highly of one another both publicly and privately.

That’s the first thing that seems odd about the vitriol from the libertarian-leaning followers of the Austrian School toward the keynesians. Though it’s easy to understand that tension is high between these groups, it leads one to wonder: how did these men get along when their followers have such little regard for one another?

The first hints of the answer are in an interview with Hayek where he was asked about Keynes. Hayek claims that Keynes would not have approved of modern keynesian policies, and that Keynes told him that should inflation become a bigger problem than recession, he would steer policy away from his earlier recommendations. The implications are staggering; when shown this video, Jason McClain actually shed tears because many have used Keynes’s name and writings to take us down such a dangerous road. At the time, Jason seemed to take it as a sign that Keynes had recanted, but looking at the policies that Keynes himself promoted, it seems clear that Keynes never meant for his ideas to be used in the way that they have now.1

In that interview, Hayek discusses some of the fundamental disagreements he had with Keynes, but it also appears that Keynes himself made many of his recommendations as solutions to specific situations rather than as general policy. Keynes’s own words indicate that he was not unaware of the dangers of taking his suggestions too far. Keynes suggested that governments increase spending and even borrow in times of economic slowdown, but he also instructed governments to repay that debt immediately when the economy improved so as not to incur ever-increasing interest on the nation’s debt.

The only way that the United States, under keynesian influence, repays its debts is to devalue the currency. So long as inflation continues, the dollars the government owes become increasingly less valuable, while the new dollars it receives as revenue are more plentiful (in numbers anyway, even if not in value.) Thus administration after administration points to the debt-to-GDP ratio falling to show that our debt is being «repaid» all the while the real dollar value of the government’s debt continues to rise. With a small number of exceptions, the Federal Government’s debt hasn’t ever decreased in real dollars in the past hundred years.2

Keynes knew about this and described it as a problem:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.3

This is the sort of talk that today only happens among those in the right wing who are perceived as the most extreme—those who are most opposed to keynesian policy.

It’s also telling that he refers to the erosion of confidence in the equity of the existing distribution of wealth. That suggests that while class inequity may be a real problem, the lack of confidence which leads to class envy is an even larger problem. The guy was definitely not talking like a modern liberal.

In this light, Keynes’s ideas—his actual ideas—don’t seem so crazy. An analogy: Keynes said that if you wake up and find that your car won’t start because the battery died, and you need to get to your job, it might not be a bad idea to put a set of jumper cables on your credit card even if there’s nothing in your bank account. This is spending on something that’s necessary that one couldn’t do without debt. Modern keynesians have discarded the parts about the spending being moderate, what is bought being necessary, and the importance of paying the debt afterward. Instead all we hear about is the so-called «multiplier effect» that comes automatically from government spending. Modern keynesians say that in the same situation described above, you should quit your job and buy a new car.

This is not to say that Keynes was right. The particulars of economic theory are beyond the scope of this post. Between Keynes and the Austrian school, I suspect that the Austrians are at least generally the smarter lead to follow. But following Keynes’s lead would be a refreshing return to sanity from the madness modern keynesians are pushing as gospel in his name.

To start, perhaps it wouldn’t be a bad idea to start calling so-called keynesian economics something else. Associating the kind of policy that modern macroeconomists promote with Keynes simultaneously legitimizes that policy and marginalizes an undeniably important economist who certainly made valuable contributions to the field of economic thought despite whatever he may have gotten wrong. In the absence of a replacement term let us at least refrain from capitalizing the word keynesian unless referring to beliefs Keynes promoted himself.

  1. Nevertheless his thinking clearly did evolve over time. From a letter to Henry Clay (no, not that Henry Clay): «I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.» ↩︎

  2. Seven times since 1900. In 1921 the debt decreased from $34.36 billion to $33.19B. In 1922 the debt decreased from $33.19B to $33.07B. In 1924 the debt decreased from $33.27B to $33.04B. In 1927 the debt decreased from $33.41B to $33.39B. In 1928 the debt decreased from $33.39B to $33.26B. In 1947 the debt decreased from $287.01B to $274.49B. In 1948 the debt decreased from $274.49B to $270.69B. Note that none of these were very significant decreases. Source: ↩︎

  3. The Economic Consequences of the Peace, 1919 ↩︎