Keynesian Economics - A longer road than you think

November 25, 2017

Charming. Controversial. Brilliant. Bold. John Maynard Keynes came with no shortage of admirers and detractors, and indeed, this remains the case. If you don’t know who John Maynard Keynes was, you should. His genius and policy prescriptions have certainly affected you, your parents, and your grandparents. You may have even made an argument for or against policies borrowing from his ideas (if you had an opinion on the federal government’s stimulus package in the wake of the 2008 Great Recession, you can count yourself on this list).

  The Economist Who Did Stuff

He hurled himself at economic challenges of the most import during the 1920s to 1940s, from the peace conference following WWI, to financing the British government [’s equipping, fighting, and feeding its soldiers and citizens] during WWII, to battling the Great Depression in the U.S. and economic stagnation around the world. His opinions and prognoses were equally prescient, audacious/daring, and controversial. Through it all, Keynes became the father of modern day macroeconomic theory, a best-selling author, and an economic and political celebrity.

Prior to Keynes, economics lacked the theoretical framework to truly understand national economies. As such, when economic crises unfolded, policy-makers lacked the tools to understand and address them. Enter Keynes. His seminal work, The General Theory of Employment, Interest, and Money, published in 1936, provided the theoretical and applied framework/building blocks through which nearly all governments still perceive and analyze their national economies. Every economics student who has taken a macroeconomic course has learned the Keynesian identity: Y = C + I + G + NX, which stands for Economic Output = Consumption + Investment + Government Expenditure + Net Exports.

The General Theory of Employment, Interest, and Money

There's more to the story

Yet, the story behind the “General Theory” and the adoption of Keynes policy prescriptions remains little known. The basic lore is that the U.S had a Great Depression, FDR was elected and began enacting New Deal legislation, Keynes won the economic argument for more robust public spending in the U.S. to further juice the economy, the U.S. mobilized for World War II super-sizing aggregate demand, and the Depression ended. That’s too simplistic and not quite right. In fact, prior to the United States’ Great Depression in 1929, Britain and other European economies were experiencing a devastating economic contraction and exploding unemployment rates. British Conservatives in power at the time took few proactive actions to address these challenges.

As these economic conditions began to worsen in the U.K., Keynes began promoting elements later found in the “General Theory,” including as early as 1924. He began advocating for “national development” policies, a concept which was still in its infancy, as a remedy to the U.K.’s unemployment and an economic downturn: “We have stuck in a rut. We need an impulse, a jolt, an acceleration…there may be stimulating medicines that are wholesome.” In essence, by the 1920s, Keynes began advocating for a middle road which decried both Marxism and laissez-faire capitalism, both of which had popular support and passionate followers during the ‘20s and ‘30s. Keynes recognized that “capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable,” suggesting “the future will emerge…from an endless variety of experiments directed towards discovering the respective appropriate sphere of the individual and the social, and the terms of a fruitful alliance between these sister instincts.”

He continued advocating for policies which would counteract unemployment and improve economic growth prospects during Britain’s and other Western economies’ downturns, including by endorsing political leaders with similar policy views and by writing articles and books to persuade the general public. While some support began to grow, by 1934, Keynes believed he had yet to influence enough U.K. or U.S. policy-makers to broadly adopt his policies. As he so aptly stated, he had “failed” because “I have not yet succeeded in convincing either the expert or the ordinary man that I am right…It is, I feel certain, only a matter of time before I convince both, and when both are convinced, economic policy will, with the usual time lag, follow. “ Unknown to the public, he had already started to prepare his most compelling case to both audiences: he began writing “The General Theory of Employment, Interest, and Money.”

To his close friends, he confided that he believed he was “writing a book on economic theory, which will largely revolutionize – not, I suppose, at once but in the course of the next ten years – the way that the world thinks about economic problems.” What this statement lacks in humility, it makes up for in prescience. When published in 1936, the “General Theory” was a success in terms of sales, impact on economic policymakers’ thinking, and catching the general public’s attention. He leveraged the popularity of “The General “Theory” with economists, like-minded politicians, and academics by making speeches, writing articles in widely-read newspapers, and further advocating with less-sympathetic policy-makers. 

We are all Keynesians now

While his efforts yielded the adoption of some of his policy prescriptions, Keynes was hobbled for months in 1937 by a chronic health problem, caused by a bacterial infection in his heart that occurred years before. Many days Keynes was vivacious and ready to spar, others he had to be nursed to health by his wife. But in writing and in conversations with domestic and international policymakers, Keynes remained a fervent promoter of full employment as a means to mobilize Britain’s (and later America’s) resources to fight Germany during WWII. As both military and economic needs grew as the war escalated, government programs to boost aggregate demand were adapted at an increasing rate in both Britain and later the U.S., with the U.S. mobilization for WWII the most vivid and at-scale example of “Keynesian economics”.

With a booming economy following the war, the tools to smooth the inevitable dips and valleys in economic growth, Keynesian economics gained widespread traction as a prominent school of economic thought. It has remained so (see Nixon, 1971: “We are all Keynesians now.”; see Obama and TARP  in 2009), and will continue to remain a dominant school of thought throughout the world, not least, because of the pugnacious genius of its author.