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 

Leave a Reply