The Fruits of Civilization (27-15) John Maynard Keynes

John Maynard Keynes

Economics is a very dangerous science. ~ John Maynard Keynes

English macroeconomist John Maynard Keynes (1883–1946) studied business cycles. Keynes’ fame came in the 1930s, in prescribing a cure for the Great Depression, which was to artificially stimulate the economy.

According to neoclassical economics, a free market economy would fairly quickly set itself right from a recessionary phase in the business cycle, and provide full employment as long as workers were willing to take whatever wages the market was dishing out at the time.

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. Markets can remain irrational longer than you can remain solvent. ~ John Maynard Keynes

In the grip of unrelenting depression, Keynes argued that aggregate demand determined the overall level of economic activity, and that sluggish demand could produce prolonged periods of high unemployment.

Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all. ~ John Maynard Keynes

Keynes found a welcome reception from politicians who were desperate to do something to battle mass penury. It helped that Keynes was advising as supposed science what politicians were inclined to do anyway: avoid revolution by putting people to work.

Keynes thought that the high level of interest rates kept the depression going. The problem was that the wealthy preferred to hoard money rather than invest it. Keynes termed this the marginal propensity to save.

The depression created what Keynes called the “paradox of thrift.”

In contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. ~ John Maynard Keynes

For Keynes, the paradox of thrift created a need for “central controls to bring about an adjustment between the propensity to consume and the inducement to invest.”

Keynes did not intend for “central controls” to be a step to socialism. Keynes was a liberal who favored individual liberty in economic life as much as practicable.

I find myself more and more relying for a solution of our problems on the invisible hand, which I tried to eject from economic thinking 20 years ago. ~ John Maynard Keynes

Besides lower interest rates, Keynes’ big-ticket solution for the depression dilemma was to ratchet up aggregate demand by government spending. This essentially meant printing money.

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As the United States, Britain, and other industrialized countries were ostensibly on the gold standard, they were limited in their ability to contrive lucre out of thin air. That withstanding, governments generally understood so little that measures to counter the Depression were often counterproductive. In the US, stifling trade, keeping interest rates high, and contracting the money supply were especially helpful in strangling recovery prospects.

Despite the political interventions during the 1930s, only the 2nd World War effectively ended the Great Depression. After that, Keynesian notions concerning fiscal policy were generally followed by the governments of industrialized nations.

Enthusiasm for Keynesian salves waned in the 1970s, as economists became pessimistic about the government’s ability to regulate the business cycle through fiscal policy. Milton Friedman and other monetarists thought they had a distinct point of view, even though it was not much different from what Keynes proclaimed. Friedman and others argued that governments could fine-tune the economy by tinkering with interest rates and the money supply. Oh, and during a recession, print money to stimulate demand.