Who Was JM Keynes, and Does He Offer Answers to the Economic Crisis?
Bland, Archie, The Independent (London, England)
Why are we asking this now?
For decades, undiluted Keynesian economic policies have been dismissed as irrelevant: right for their time, perhaps, but outdated by subsequent changes in the economy. But it looks as if things are changing. In the face of the current financial crisis, government after government has moved towards more Keynesian solutions to economic problems. The UK is among them. Alistair Darling recently declared that "much of what Keynes wrote still makes a lot of sense"; yesterday, in a speech on economic policy, Gordon Brown declared that it was responsible to boost spending with the aim of speeding up economic activity, even if borrowing had to increase to do so. John Maynard Keynes once said that "in the long run, we are all dead"; more than 60 years after his own passing, though, his ideas seem to have come back to life.
So who was John Maynard Keynes?
Keynes was among the most important economists of the 20th century. Even his most vociferous contemporary critic, Friedrich Hayek, said that he was "the one really great man I ever knew, and for whom I had unbounded admiration". Born in 1888, he was educated at Eton and Cambridge, where he studied economics. His influence steadily grew after he graduated in 1905; he warned of the disastrous consequences against the reparations that Germany was forced to pay after the First World War, and his views were borne out by the country's hyperinflationary problems and the subsequent Great Depression. The work that really cemented his place in economic history, though, was 1936's snappily titled General Theory of Employment, Interest and Money.
What was his big idea?
Most contemporary economists subscribed to the neoclassical theory that held that the problems of unemployment were best dealt with by leaving it to the market to reduce wage levels to a point at which employers would start to take people on again. Keynes disputed the idea that recessions were self-correcting. He made the argument that it was quite possible for an economy to be in equilibrium with less than full employment, and that high unemployment would depress demand, thus making an escape from recession difficult and slow. In his view, it was up to the government to stimulate demand by enacting public spending projects that would increase employment and by reducing taxation to encourage people to spend more.
Did it catch on?
In the 1930s, Roosevelt did enact Keynesian ideas in America, and their influence can be felt to an extent in Hitler's Germany around the same time. But the Second World War was the major boost for Keynes's ideas around the world, demonstrating as it did that large public spending - 'deficit financing' - could create something close to full employment, something conventional politicians in the thirties claimed was impossible.
Did those ideas survive the war?
They did. After Keynes's ideas were developed by economists like Paul Samuelson and James Tobin, they became the economic orthodoxy that guided most western governments for the next two decades. In the UK, expanding public spending and cutting taxes successfully kept unemployment below one million for thirty years. Even Richard Nixon declared himself a Keynesian. But in the 1970s, that orthodoxy was challenged.
Why did Keynes's ideas go out of fashion?
Keynes's approach began to appear limited in relatively uncompetitive economies, like the UK's. A labour shortage and an excess of demand triggered stagflation - the combination of inflation with economic stagnation - and traditional Keynesian remedies seemed unable to control it. When James Callaghan publicly repudiated Keynesian policies in 1976, it seemed like the death knell of his approach. "We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending," Callaghan said. …