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Keynesian Economics and Constitutional Government

By Ebeling, Richard M. | Freeman, November 2006 | Go to article overview

Keynesian Economics and Constitutional Government


Ebeling, Richard M., Freeman


Last month 650 economists called for an increase in the federal minimum wage, saying it was the responsibility of the government to "improve the well-being of low-wage workers" by mandating the terms under which people may be employed. Among these economists were five recipients of the Nobel Prize in economics. One of them was Lawrence Klein of the University of Pennsylvania. This should have been no surprise since Klein (b. 1920) has long advocated Keynesian-style policies that threaten the institutions of a free society.

Klein received the Prize in 1980 for what the Nobel committee called his contributions to econometric modeling for purposes of directing economic policy. What is less well known today is that immediately after World War II he was one of the great popularizers of the "new economics" of John Maynard Keynes, especially in his widely read book, The Keynesian Revolution, published in 1947.

In The General Theory of Employment, Interest, and Money (1936) Keynes had argued that the market economy was inherently unstable and susceptible to wide and unpredictable swings in output, employment, and prices. Worse yet, he asserted, the market could get stuck in a prolonged period of high unemployment and idle resources. Only judicious government monetary and fiscal policy could assure a return to sustainable full employment.

In the decade following publication of The General Theory Keynes s ideas captured the hearts and minds of a growing number of economists. The book was soon translated into a variety of foreign languages, including German; that edition appeared in the autumn of 1936. Addressing himself to the Nazi economists of Hider's Germany in the preface to the German-language edition, Keynes declared that his theory of "aggregate demand" management by government was more easily adapted to a totalitarian economy than a relatively free-market system:

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state, than . . . under conditions of free competition and a large degree of laissez-faire... .Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced.

While it would be wrong to suggest that Keynes had any direct sympathy for totalitarianism or the Nazi system, he understood clearer than many of his followers that the more the government controlled the economy the easier it would be to implement what soon became known as Keynesian-style policies.

Klein's The Keynesian Revolution represented the growing consensus of the time among economists and government-policy advocates on how monetary and fiscal tools should be used to manipulate the economy. The book was widely assigned to college students in their economics classes, thus further spreading Keynes s message.

In the final chapter Klein outlined what would be necessary from government if the Keynesian "insights" were to be fully applied for the "social good." In a world guided by Keynes's ideas Americans would have to accept a greater degree of government regimentation than they had in the past. Should they be afraid of this? No, Klein assured his readers: "The regimentation of unemployment and poverty is infinitely more severe than the regimentation of economic planning." He was sure the American people would "quickly come forth with support" for the required regimentation of economic planning.

The "economic planners" would have to have "complete control over government fiscal policy so that they can spend when and where spending is needed to stimulate employment and tax when and where taxation is needed to halt upward price movements." The traditional congressional budget process would have to be put aside.

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