Since the publication of his book ‘The General Theory of Employment, Interest and Money’ in 1936, John Maynard Keynes has dominated political thought. This is true throughout the world and regardless of the party in power.
Keynes, who had proven correct in his prediction that the demands of the Allies for reparations from a defeated Germany following WWI would lead to future violence, turned his thoughts to solving the unemployment problem caused by the depression.
This was a pressing problem for the entire world. It deserved consideration by the most influential economists of the time.
Although there were economists who disagreed with Keynes, none had the power of his personality. As such he had the ear, if not the full attention, of world leaders, including F.D.R.
Keynes is the primary driver of the belief that the ‘government’ should control the flow of money via setting interest rates which directly affect the ease of borrowing.
He also suggested that ‘governments’ could and should ‘invest’ when the economy goes into recession.
To develop these ideas he created the concept of ‘macro’ economics. Micro economics looks at individual situations and is universally accepted as being represented by the supply/demand curve. Macro economics attempts to take and ‘overall’ view of the economy and ignores individual situations. (It is still very questionable that this can be done with any degree of accuracy. It’s very much like trying to ‘model’ the climate.)
Both ideas, controlling interest rates and government investment, emphasize that government can and should interfere with the free market when conditions are ‘deemed’ to require government ‘action’.
Keynes was wrong. It appears that he invented macro economics to avoid acknowledging that ‘government’ actions precipitate the very problems that he is proposing ‘government’ action to resolve.
The recent recession has been blamed on the greed of financial institutions and Wall Street. In fact Wall Street simply tried to create vehicles to protect the financial institutions and the financial institutions did exactly what the ‘government’ incentivized them to do. They made bad loans and sold the mortgages to Fanny and Freddy who encouraged those loans. It wasn’t ‘greed’ but simply what the government encouraged them to do.
The government solution, bail out the financial institutions and create more regulations. Nothing was done about the ‘incentives’ created by the government, in fact there is even some talk that mortgage lending must be ‘loosened’ again.
Think about it. Keynes doesn’t make sense. How can removing money from the private economy actually ‘stimulate’ that economy? The only way an economy can grow is by increasing the productivity of labor. A key element in increasing productivity is by employing capital. Since the government doesn’t produce anything, any money spent by the government cannot be available for increasing productivity.
Let’s take a quick look back in history and see how recessions/depressions resolved themselves before Keynes:
1802 GDP declined 25.5% – 1803 GDP increased 15%
1823 – 1824 GDP declined 14.3% and 7.7 – 1825 GDP increased 14.8%
1840 GDP declined 10.4% – 1841 GDP increased 7.9%
1894 GDP declined 11.7% – 1895 GDP increased 9.5%
1908 GDP declined 11.5% – 1909 GDP increased 6.7%
1921 – 1922 GDP declined 28.9% and 3.3% – 1923 GDP increased 20.6%
Compare these with the ‘Great Depression’ where Keynes started to have influence:
1930 – 1934 GDP declined 15.8%, 25.6%, 33.6% and 8.3% – 1935 GDP increased 23.6%
The ‘Great Depression’ was of much longer duration, but again we see explosive growth at its end.
Now look at the ‘Great Recession’:
2009 GDP declined by 2.2% (corrected value from USGOVERNMENTSPENDING.COM) – 2010 GDP increased 3.8%
Wow! For all the hullabaloo this was a wimpy recession! Did we really need to increase our debt by almost $6 Trillion dollars to fight this recession? But let’s assume it was a ‘great recession’, where is the exploding growth we’ve seen in prior examples?
Back in 1949, Truman had a GDP decline of 2.9% followed the next year by a 10.9 increase and then a 25.1% increase. (Was Eisenhower that good?)
It appears that the ‘free market’ had downturns of shorter duration and more explosive post-recession/depression growth. Kind of like pulling a bandage off quickly. I don’t see the proof of Keynes theory.
In spite of numerous, obvious failures after which Keynes is frequently declared ‘dead’, every ’emergency’ or downturn in economic growth sees his revival simply because of politicians.
Actually there are three characteristics of politicians that ensure Keynes being revived:
- Politicians feel a need to ‘do something’, they want to be seen as ‘problem solvers’ and action will appeal to their voters regardless of the results of those actions.
- Politicians love to spend. It is by spending that ‘brings home the bacon’ and again appeals to their voters.
- Politicians, just as most people, enjoy wielding ‘power’. They like being able to tell others what to do. Actions that impact the economy must give them a very big boost of ego!
Unfortunately, the public also likes the ‘promise’ afforded by Keynes. In spite of failures we like the idea that ‘government’ can do something to solve the problem of a slowing economy and/or unemployment.
I’m pretty certain that politicians won’t change their behavior so we can expect Keynes to reappear with every financial crisis.