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As part of his continuing series Making Sense of financial news, Paul Solman has a unique look at the legacy of economist John Maynard Keynes, who first introduced the concept of government intervention in the economy, and his countertenor Friedrich Hayek.
Now: weighing the legacy of another famous economist, one from the past whose theories are part of today's national debate.
NewsHour economics correspondent Paul Solman has the rap on the man behind the idea of government intervention in the economy. It's part of his continuing reporting Making Sense of financial news.
British economist John Maynard Keynes, born 1883, died 1946, he was an economic revolutionary in the 1930s, an icon of orthodoxy by 1965, pretty much passe as of 1980 in the advent of Ronald Reagan.
But thanks to the financial crisis and all the stimulus spending based on his theories, Keynes is back, perhaps bigger and badder than ever, as in this educational rap video from producer/director John Papola and economist Russ Roberts.
BILLY SCAFURI, writer/comedian:
John Maynard Keynes wrote the book on modern macro, the man you need when the economy's off track. Whoa. Depression, recession, now your question's in session. Have a seat, and I will school you in one simple lesson.
The countertenor, if you will, is Friedrich Hayek.
ADAM LUSTICK, comedian:
This is Hayek, the winner of the Nobel Prize.
Intellectual opponent of Keynes throughout the '30s and '40s and hero to conservatives ever since.
BILLY SCAFURI AND ADAM LUSTICK:
We have been going back and forth for a century. I want to steer markets. I want them set free. There's a boom-and-bust cycle, and good reason to fear it. Blame low interest rates. No, it's the animal spirits.
Russ Roberts is, like Hayek, a government-spending skeptic, who acknowledges, however, that grand master Keynes is today's economic force to be reckoned with.
Robert Skidelsky, a member of the British House of Lords, is Keynes' famed biographer, interpreter, and author of a new appreciation, "Keynes: The Return of the Master."
We invited Lord Skidelsky and Professor Roberts to debate Keynes' cure for today's great recession, appropriately enough, in the boardroom of the International Monetary Fund, an organization Keynes helped create to deal with the aftermath of the Great Depression.
Skidelsky sums up Keynes with three ideas. One, markets are inherently volatile. Two:
Large-scale unemployment can develop. And the third idea is that there's nothing to stop that unemployment growing unless the government comes in with a stimulus to replace declining private spending by public spending.
RUSS ROBERTS, professor of economics, George Mason University: Often with borrowed money, and, in the current situation, that's what we're doing now. And I think it's mistaken, but I think it's very much a Keynesian argument, and people invoke Keynes all the time.
And, so, the essence of Keynes in that sense is, economy, because of uncertainty, has the propensity to occasionally contract and maybe stay contracted…
… with too many people unemployed. Therefore, whenever that happens, we have got to, as a government, spend the money to get the economy back up and moving.
Absolutely. And you don't wait until you have reached this low point before starting spending. You — you — you intervene in the downward slide by injecting extra aggregate demand into the economy.
Aggregate demand means just more spending from everybody?
Just more spending, yes, total spending.
I had a real plan any fool can understand, the advice, real simple. Boost aggregate demand.
What's not to like about stimulating an economy when millions of people, 15 million at the moment, at the very least, are out of work?
Capitalist economies have slowdowns, contractions, slumps, recessions, and depressions. Some of that is due to natural forces, some due to government mistakes.
We have a long history of contractions in the United States. The 1933 Depression wasn't the first one. We had one in 1894. We had one in the early 1920s. And the economy bounced back fairly quickly without government intervention.
Yes, says Skidelsky, but:
There were terrific sufferings. I mean, people, whole communities were uprooted and every — but, in the end, things got going again. We do not live in that sort of world. And I don't think we can take risks of the kind I think you're implying.
I think the political downsides of taking those risks are going to be too great. And, in Germany, they were absolutely horrendous in the early 30s.
Is that not true?
Well, my claim is that, in our attempts to engineer our economy from the top down, we have actually made, in many — many cases, the world less secure, workers less secure, and lowered our prosperity, and hurt people.
Because, otherwise, the system would have adjusted?
Would have done better.
To Keynes, however, it was spend or suffer, as the Papola-Roberts rap recounts.
Boom, 1929, the big crash. We didn't bounce back. Economy's in the trash, persistent unemployment, the result of sticky wages. Waiting for recovery? That's outrageous.
A modern economy doesn't quickly adjust to a shock, Keynes argued. Prices don't simply plummet until consumers will buy again. People are loath to sell their homes at steep discounts, workers unwilling to take deep pay cuts. That's why prices and wages are called sticky. Government has to protect the economy from itself, Keynes thought. But Roberts thinks markets, unprotected, do a better job.
What markets do is, they punish you if you systematically make the same mistakes over and over again. When you destroy the punishment system that markets naturally perform, you're going to see more myopia, more hubris, more overconfidence.
Yes, but it's interesting, the word you; they punish you.
If it was just that you made a mistake and the markets punished you, because you were out of a job, that's fine. But they actually punish millions of people for the mistakes of a quite a few people. And no government, no democratic government, is going to allow that degree of punishment.
Unemployment for long periods of time?
Unemployment and the bankruptcy of lots of companies who are not making mistakes. They're just affected by the people that have made the mistakes.
So, then, Lord Skidelsky, what do you think Keynes would actually have us doing now?
I think he might have wanted a bigger stimulus, actually, because the stimulus hasn't actually brought about a recovery. It stopped the slide.
But what would he have said to the comment, look, in the long run, it will all turn around and be OK?
He would have said in the long run, we're all dead.
I don't think he believed that economies would remain depressed forever. He thought they would recover, but that they wouldn't recover fully to a full employment position once they had been severely shocked without a continuous stimulus for a long period.
And I think that's the prospect we face today, actually, incomplete recovery.
And do you not worry about that?
Well, unfortunately, what Keynes has done is, he has given solace to politicians who want to spend money wastefully on special interests, rather than on things that would help us.
Is that completely unfair?
No, not completely unfair.
There's a lot of waste. There's going to be a lot of waste in this, but the waste doesn't matter. There's more waste if you have heavier unemployment. You see, you're balancing a smaller waste against a larger waste. There's no — no ideal way out of the hole.
This right now, right now, not six months ago, not two years ago, but right now, is a problem of anxiety, wariness about the future. The question is, how do you create people's confidence going forward?
And, thus the question becomes one that Keynes posed 70-plus years ago. Amidst the irrational ups and downs, how do you nurture the real impetus of economic growth: confidence, optimism, animal spirits?
There's a boom and bust cycle and good reason to fear it. Blame low interest rates. No, it's the animal spirits.
Because, as a memorable NewsHour voice reads Keynes' memorable words…
"If the animal spirits are dimmed and the spontaneous optimism falters, enterprise will fade and die."
But, says Roberts:
You have to face the possibility that the stimulus package, which has increased our federal deficit this year to maybe $1.5 trillion, is actually discouraging confidence.
Your so-called stimulus will make things even worse. Just more of the same, more incentives perversed. And that credit crunch ain't a liquidity trap. It's just a broke banking system. I'm done. That's a wrap.
We're doing a lot of things that are bad public policy that I, as an economist, believe are going to hurt our chances for growth in the future.
But Robert Skidelsky thinks Keynes' theory of spending does stimulate confidence, making him again the man of the hour, and therefore aptly rhapsodizing here one last time.
My general theories made quite an impression. I transformed the econ profession. You know me, modesty. Still, I'm taking a bow. So, say it loud and say it proud. We're all Keynesians now.
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