“Keynes, The Rise, Fall and Return of the 20th Century’s Most Influential Economist” by Peter Clarke
Clarke explains very clearly, in about 200 pages, the shifts in John Maynard Keynes’ reputation from 1920 to the present.
He covers Keynes’:
Biographical highlights.
Economic policy ideas.
The core elements of his economic theory.
Clarke is a former professor of modern British history at Cambridge. He has written extensively about Keynes’ contribution to macroeconomics. Macroeconomics deals with the performance, structure, behavior and decision-making of the overall economy.
After approximately 30 years in the doghouse of economic theory, Keynes is back. His reputation faded when much of the developed world embraced free markets. In 2008, however, laissez faire capitalism sputtered badly. In order to stop Depression 2.0, key policymakers followed Keynes’ prescription. Specifically, countries around the globe infused trillions of dollars into their banking system and took an active role over traditionally private enterprises.
In 1936, Keynes made the novel argument in his book “The General Theory of Employment, Interest and Money” that the public sector must compensate for insufficient demand for goods and services through liberal monetary policies and stimulating fiscal actions.
Keynes argued that capitalism by itself lacks an automatic mechanism to cure its ills. His conclusions conflicted with traditional thinking (as expressed in Say’s Law) that capitalism would cure itself without government intervention. Say’s Law assumed that supply creates its own demand, making a “general glut” impossible.
Keynes said the government should stimulate the economy by lowering interest rates and going into debt spending on the infrastructure. Both of these policies would increase economic activity, reduce unemployment and prevent deflation. During World War II, America incurred massive deficits in order to employ millions of people and purchase billions of dollars worth of armaments. The dramatic upsurge in spending following World War II proved Keynes’ theories and catapulted him into celebrity.
Why did Keynes’ ideas become unpopular, starting in the late 1970s? The stagflation that persisted in that decade.
Both the Austrian school of economics, led by Frederick Hayek, and the monetary school, led by Milton Friedman, felt that Keynesians encouraged government intervention in the economy and high taxes to support such programs. Before the New Deal, government spending represented about 4 percent of Gross National Product. Today it is about 24 percent.
The Austrian economist Hayek criticized Keynesian economic policies for what he called their encouragement of centralized planning that would stifle economic growth. Hayek said that what start as temporary government fixes usually become permanent.
Friedman extolled freedom, individualism and the markets rather than fiscal policy. Friedman wanted the money supply to grow at a rate comparable to a country’s expected real growth rate, which is about 3 percent. Friedman argued that tight money contributed to two depressions during the 1930s.
Our current recession has hurt Friedman’s and Hayek’s reputations. Former Treasury Secretary Henry Paulson had to change his faith in the marketplace, realizing that only massive government intervention could prevent a depression.
In his epilogue, Clarke argues that Keynes deserves to be ranked as one of history’s greatest economists, along with John Locke, Adam Smith and Alfred Marshall. They all believed in a free society; Keynes’ ideas just tweaked the system, rather than promoting a command economy. Keynes, who once said that “in the long run, we are all dead,” did not anticipate that his ideas would last so long.
Originally published in the Sarasota Herald-Tribune
