Defending Keynes

John Maynard Keynes (1883-1946) was a British economist and philospher who, to me, is the greatest of all twentieth century economists. He is certainly not as obscure as Robert Nozick, who I also have written about, but he is definitely mischaracterized by many people, even those who have studied economics.

Part of this is likely due to him not having a “one size fits all” economic philosophy, but people characterizing him as such. He wrote of his times, not of how things will always work. Regard for him spans the chasm from brilliant to short-sighted depending on who you might ask. If you ask Time magazine, though, they regarded him as one of the 100 most influential people of the twentieth century.

He loved philosophical debates with his friends, one of whom was Bertrand Russell. Russell would say that it was impossible to praise Keynes too highly. He also said Keynes was the “sharpest and clearest intellect” he had ever known, and, on debating him, “I took my life in my hands, and seldom emerged without feeling something of a fool.”

As a relatively young man, Keynes had risen to a position within the British Treasury Department where his opinions were not only sought, but also highly regarded. He was part of a team that attended the peace talks in Versailles to create a treaty settling World War I. His thoughts there were not so well received, and the treaty went so far away from his thinking on how reparations from Germany should be settled that he resigned his prestigious position in protest. He then wrote his best selling book “The Economic Consequences of the Peace” in which he described the settlement as leaving Germany no choice but to cause bigger problems in Europe in the future. Of course, that bigger problem was World War II.

Keynes was a capitalist, but not in the John Rockefeller or Andrew Carnegie mold of capitalism. He would be much more akin to a Henry Ford type capitalist in that he saw the value of well paid and well treated labor force. He understood that economies did not thrive so much by rich people getting richer, but more so by labor being able to create demand and, in turn, the supply that would be created to meet that demand.

When the Great Depression hit, the common thought of economists was to leave things alone and let it work itself out. Keynes, though, applied physics to the problem after noticing that the economy was in perfect balance. He noted there was no demand, and that was balanced by no supply. His thought was that it would be better to create a small bit of artificial demand through government spending, and that this artificial demand would be followed by some real supply, which, in turn, would be followed by some real demand, and so on.

The thought was similar to imagining a swing with a child in it at total rest. A slight nudge to get the swing moving, followed by the child then using leverage to create momentum, would result in the swing moving back and forth again in desirable fashion. Franklin Roosevelt did this through works projects, and, indeed, the swing began moving. However, contrary to Keynes’ advice, the government kept pushing the swing. The thought, apparently, was “if a little is good, then a lot is better.” Keynes kept pleading that a little was sufficient, and more was excessive. Most people who have low regard for Keynes do not consider his subsequent urging to let the economy regain its momentum, and focus only on the original idea as if the continuation of spending was also his idea.

To think government spending was his only approach to economic stability is to disregard that at various times he might also use tax policy, interest rates, and money supply as means to spur a lagging economy or to rein in a runaway economy. This varying approach to various problems is exemplified through his quote in rebuttal to someone who accused him of being wishy-washy on economic policy: “When the facts change, I change my mind. What do you do, sir?” Another quote that dispels the argument that he is the father of inflation, but rather a pragmatic philosopher who acknowledged the problems with inflation, is this: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of its citizens.”

Toward the end of his life, the Austrian economic philosophy would be formulated as a competitor to Keynesian economics, and as the true economic philosophy that would work best in the long run. Keynes would say of it, “Long run is a misleading guide to current affairs. In the long run we are all dead.”

I will leave my defense of this great man at this point, and finish the article off with some more of his quotes for your kind consideration.

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“The difficulty lies not so much in developing new ideas as in escaping old ones.”

“Education: the inculcation of the incomprehensible into the indifferent by the incompetent.”

“Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be.”

“I do not know what makes a man more conservative – to know nothing but the present, or nothing but the past.”

“It would not be foolish to contemplate the possibility of a far greater progress still.”