In two previous blogs I have discussed some of the propositions of Adam Smith and Karl Marx that continue to dominate economic policy today. Now it is time to take up John Maynard Keynes (1883-1946) who, along with Milton Friedman, was one of the most influential economists of the past several decades.
The son of an economist, Keynes was a Cambridge don, a prolific and fluent writer, a financial market speculator, chairman of a life insurance company, and a leading light in the fashionable Bloomsbury set.
One reason for his lasting influence was his powerful pen in the service of a powerful intellect. For example, in 1925 he described accurately and fully, the central problem in political economy as it was then and as it is today:
The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty.
Surely, it is the differing weights, seldom revealed, given to these three considerations that shape the debates amongst analysts, policymakers and the chattering classes over, for example, tax rates, unemployment insurance, EPA regulations, and menus for school lunch programs.
A knowledgeable speculator. At times Keynes’ powerful pen gives a thoughtful proposition a sprightly twist, particularly where financial markets are concerned. Consider his dim view of short-term speculation in the stock market:
This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; it can be played by professionals among themselves.
No doubt it was his experience as an aggressive speculator in 1920, who was nearly wiped out but for being able to borrow £7,000 to meet margin calls, that led him to write, “Markets can remain irrational longer than you can remain solvent.” Perhaps if the Nobel Prize economists who advised hedge fund Long Term Capital Management in 1998 had taken this to heart, their client would have avoided a multi-billion dollar bailout orchestrated by the Federal Reserve.
Savings and Investment. Throughout the 1920s and ‘30s, Keynes was in favor of active intervention in the economy. The hubris of a middle-age, talented economist led him to place faith in “wisely managed” capitalism. Thus, in 1920s he wrote,
We must find new policies and new instruments to adapt and control the working of economic forces so that they do not intolerably interfere with contemporary ideas as to what is fit and proper in the interests of social stability and social justice. (“Am I a Liberal?” 1925).
But it was Keynes’ analysis and proposed remedies for the business cycle that have been most controversial. His core proposition as stated in The General Theory (1936) was that
The vulnerability of our fate to the interplay of savings and investment is . . . the price we pay for economic freedom.
Consequently, to reduce "the price" (chiefly unemployment) of the capitalist system, Keynes’ recommended target for economic policymakers was to dampen the economy’s de-stabilizing swings in savings and investment. This was to be accomplished through “wise management” by, presumably, economic mandarins following his text. Tools for the wise managers were to be found in the central bank’s manipulation of interest rates and the government’s deficit spending programs
Convincing evidence that such a policy is usually successful is hard to cite, unless you assume Keynes had World War II in mind. However, deficit spending programs as a cure for business downturns have remained the mantra of Keynesian-influenced policymakers to the present day. The Obama Administration “stimulus” programs and current Federal Reserve interest rate and “quantitative easing” policies are Keynes’ grandchildren.
Perhaps more useful accomplishments were his efforts as a government official, whether it was reforming India’s currency, helping to manage the United Kingdom’s wartime financing issues, or helping to create the IMF and the World Bank at Bretton Woods in 1944.
Old Age Regrets? I am not sure that the older Keynes would endorse all the programs today’s “Keynesians” have produced. In his later years, Keynes seems to have realized that human nature, animal spirits, and the hard-to-predict impact of government policies on them play a much larger role than they were given in his theoretical models and musings. He faulted mathematical models of the economy for being unable to encompass “the complexities and interdependencies of the real world.”
And, as I suggested in an earlier blog, Keynes, mused to a friend, Henry Clay, towards the end of his life when the Labour Party was busy nationalizing much of the United Kingdom’s economy to disastrous effect,
I find myself more and more relying for a solution to our problems on the invisible hand [Adam Smith] which I tried to eject from economic thinking twenty years ago. (1945)
Maybe the wisdom of years eventually brought Keynes to agree with Smith that we should leave “the administration of the universe” to higher powers (or the multitude at large) instead of talented, energetic, and well-meaning economists.