John Maynard Keynes
“”The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.
Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
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|The Worldly Philosophers|
John Maynard Keynes, Baron Keynes (1883–1946) was a British economic theorist whose work dominated pre- and post-World War II economic theory, during which it reached its maximum expression. He was variously described as an agnostic or atheist.:11 He served as the head of the British Eugenics Society from 1937 to 1944.
Keynesianism is in contrast with the Austrian school of Friedrich August von Hayek and Ludwig von Mises, and the Chicago/monetarist schools associated with Milton Friedman, both of which advocate for an unrestrained free market and came to be dominant in the 1980s with the rise of supply side economics.
Broadly speaking, Keynesian economics calls for higher marginal tax rates during "boom" periods, both to dampen economic extravagance and to build up a "nest egg," or "rainy day fund," and to then use those funds for public spending during "bust" periods, in order to buffer the working and middle classes from the disasters wrought by the "masters of the universe" and their money games.
Because of his focus on tax reductions for the poor and middle class, and an increase in government spending on infrastructure, conservative economists consider him akin to a socialist and/or Satan, but in reality he was not an advocate for the abolition of private property, but of a "subtle" control of it and effectively how to save the market from the outcomes of its own excesses.[note 1] In his personal politics, Keynes wasn't a socialist either, eschewing the Labour Party in favour of the pro-capitalist Liberal Party. However, because the application of his theory has become strongly associated with the social democratic[note 2] "welfare state", hardcore wingnuts are bound to use the "communist" label at all times though it's misguided at best. Libertarians may prefer the softer-sounding "statist".
More "intellectual" right-wingers have a more sophisticated strawman to attack Keynes with — to them, the word "Keynesian" means "Spend shitloads of money for no reason and never stop!" This could possibly be applied to Keynesian economists, highlighting the differences between Keynes' economics and Keynesian economics, yet even then most Keynesian theorists ask for a return to balanced budgets (i.e. cutting spending) after a return to sustained growth (some conservatives appear to have a problem with this).
The idea that the economy is driven by aggregate demand rebutted the then orthodox Say's Law. Free market-oriented economists argued that the market will always return to equilibrium and reach employment in the long run and that the government should do nothing lest it lengthen the natural return to equilibrium or enact programs that would lead to socialism. Keynes' reply to this was essentially "In the long run, we are all dead."[note 3] Keynes simply argued that too much savings at one time would create the paradox of thrift — money hoarding by everyone at the same time due to low consumer confidence became a negative feedback loop and made recessions even worse.
There are 3 main economic schools dedicated to Keynes.
Neo-Keynesianism was the result of combining neoclassical economics and Keynes's ideas. For this reason it is also known as the Neoclassical-Keynesian Synthesis. The transition from neoclassical economics to Neo-Keynesianism beginning during the Great Depression is known as the Keynesian Revolution. Neo-Keynesianism combined the aspects of Keynesian economics in the short run (such as sticky prices and wages) and neoclassical economics in the long run (such as markets will reach equilibrium and homo economicus). Eventually, the Neo-Keynesians attempted to account for inflation with the creation of the Phillips curve. Other important models for Neo-Keynesianism include the IS-LM model by John Hicks, which is used to derive the Neo-Keynesian Supply Curve and the Neo-Keynesian Demand Curve. Thanks to Abba Lerner, Neo-Keynesian began including fiscal policy to target full employment.
Market failures were an important feature of Neo-Keynesianism. For example imperfect competition due to monopolies or sticky wages and prices may lead to the economy not reaching full employment. For example, rational agents become irrational in the short run due to thinking that prices aren't sticky in the short run.
Neo-Keynesianism eventually came under attack from Monetarism. Eventually, the monetarists were able to prove that in the long run, there is no relation between inflation and unemployment due to stagflation in the 1970's. The inability of Neo-Keynesians to explain stagflation eventually lead to the demise of Neo-Keynesianism.
New Keynesianism was the result of trying to integrate the 1970's monetarist critiques into Neo-Keynesianism. Like Neo-Keynesianism, New Keynesianism maintains that the economy is Keynesian in the short run and neoclassical in the long run. The main differences between New Keynesianism and Neo-Keynesianism are that New Keynesianism has 2 main models that don't appear in Neo-Keynesianism. These 2 models are the New Keynesian DSGE model and the New Keynesian Phillips Curve.
New Keynesianism got combined with neoclassical economics in the 1990's to create the New Neoclassical Synthesis, which became part of mainstream economics and is often taught in textbooks today. Unlike New Keynesianism, the new neoclassical synthesis believes that markets approach equilibrium in both the short and long runs. Additionally, the new neoclassical synthesis uses its own version of the DSGE model, in which the New Keynesian assumptions are dropped (ex: No assumptions for price stickiness).
Post-Keynesianism differs quite a bit from the other Keynesian schools. Post Keynesians believe that markets don't achieve equilibrium in the long run due to a lack of effective demand. The main model in Post-Keynesian economics is the Stock Flow Consistent Model. Unlike the new neoclassical synthesis DSGE models, the Stock Flow Consistent models were able to predict the global financial crash.
Post-Keynesians often fought with the Neo-Keynesians, such as with the Cambridge Capital Controversy. However, Post-Keynesianism eventually fell out of favor as the Neo-Keynesians went mainstream. Eventually the monetarists ended up being the main enemy of the Neo-Keynesians. However, new developments within the Post-Keynesian school, mainly the sub-school, Modern Monetary Theory, is causing Post-Keynesianism to get more attention. For example, Alexandria Ocasio-Cortez has stated Modern Monetary Theory should be "a larger part of our conversation" on economics..
Keynes was known for his uncanny prescience. He attended the 1919 Paris Peace Conference as a member of the British treasury and estimated that the reparations imposed on Germany by the French and the British were on the order of ten times what it could ever hope to pay. He warned that the reparations would cause Germany's economy to collapse and possibly lead to political upheaval not just in Germany, but the entirety of Europe. He was roundly ignored, and then guess what happened?
Keynes was in correspondence with Franklin Delano Roosevelt as well around the time his General Theory was published. In 1937, America's GDP had reached pre-crash levels, though unemployment was still lagging. FDR had actually run in 1932 as a fiscal conservative, blasting Hoover for his spending. While FDR's first term was marked by a pragmatic approach that broke from any fiscal conservatism, he became sympathetic to conservative calls for austerity measures. (Sound familiar?) Keynes warned him that though the economy had recovered to a great degree, it was too fragile to shift gears just yet. FDR ignored him and raised taxes and cut spending to balance the budget while having the Fed run a contractionary policy. This resulted in the Roosevelt Recession of 1937-1938, which led to FDR reversing his policies and instituting "The Third New Deal" (the first two taking place in his first term), and whaddya' know, the economy started to turn around again.
Keynes also debated openly in written correspondence with Hayek, which has been immortalized in a music video rap battle. His record was tarnished to some degree by the buttloads of money he lost in stocks in 1929, but he later became even richer playing the market during the Depression. Anyway, the idea that to be credible you must at no point in time lose money while gambling on the stock market is somewhat strange.
Toward the end of World War II, he argued in favor of a world central bank and currency. Although no one knows what would have happened if his plan had won out over Harry Dexter White's, his criticisms of the White Plan (which led to the World Bank) came to bear, giving us further evidence that Keynes was receiving inside information from a time traveler.
Although Keynes' ideas lost ground during the latter half of the century with the rise of Friedman, the Chicago school, stagflation, and Reaganomics, the situation from 2008(-... who knows when) has already been dubbed "The Keynesian Resurgence" due to a renewed interest in revisiting Keynes' work while putting serious dents in the credibility of the more panglossian versions of (neo)liberal economics.[note 4]
He died in 1946, pronouncing these last words: "I only wish I had drunk more champagne."
Misrepresentation of Say's Law
Keynes popularized a misrepresentation of Say's Law that has entered popular discourse. Jean-Baptiste Say's original formulation meant that the total demand in an economy would never fall below or exceed supply. This was then reformulated as "supply creates its own demand" by James Mill, though Keynes is most often associated with this re-statement of Say's Law.
- Keynes at EconLib
- We Are All Keynesians Now… and All Monetarists, Too, Conference Board
- Keynes for Kids
- A wingnut takes on Keynes' "anti-Christian homosexual economics"
- His book The General Theory of Employment, Interest, and Money was written during the Great Depression, after all.
- Like Keynes, Social Democrats have generally advocated a "controlled" or "social" market economy (at least since WWII) and Keynesian economics were popular among pretty much all non-communist European governments, whether left or right, between roughly 1945 and 1979.
- Libertarians often take this out of context to mean that Keynes was denigrating the idea of saving money, which is a misinterpretation at best and a quote mine at worst.
- Though the picture presented by 2008-2015 has been quite schizophrenic with the early bailouts and stimulus packages being very Keynesian, but they were immediately followed by a focus on neoliberal-/conservative-style austerity measures and clamours about the level of public debt.
- The Cambridge Apostles, 1820-1914: Liberalism, Imagination, and Friendship in British Intellectual and Professional Life by WIlliam C. Lubenow (2007) Cambridge University Press. ISBN 052103728X.
- "A Personal View" by Austin Robinson. In: Essays on John Maynard Keynes, edited by Milo Keynes (1975) Cambridge University Press. ISBN 0521205344. Pages 9-23.
- The Galton Lecture, 1946: Presentation of the Society's Gold Medal (1946) The Eugenics Review 38(1):39-41.
- Why do Keynesians prefer government spending over private spending?, The Week
- Was Keynes a Keynesian or a Lernerian?, AEA
- Fear the Boom and Bust, click for nerdgasm
- Keynes, King's and Endowment Asset Management, NBER
- Real Last Words From Famous People
- Jean-Baptiste Say, The New School