Bloomsbury bohemian: Keynes painted by Gwen Raverat in 1908, the year he left the India Office and returned to Cambridge
In most countries, balanced budgets are but a memory from days long past. All governments seem to be more or less Keynesian now but some, apparently, still not Keynesian enough. President Barack Obama recently declared that balancing the US budget was no longer a priority. The IMF and the OECD undermined the G20 meeting in Russia by warning that austerity programmes would be harmful. With his theoretical rationale for deficit spending, John Maynard Keynes, born 130 years ago next month, left a gigantic footprint. In the final chapter of his famous General Theory of Employment, Interest and Money, his magnum opus, Keynes writes: "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." Keynes wasn't necessarily talking about himself but this passage perfectly captures the power of his own ideas. Even in the public at large, almost everybody seems to know about him, which is rare for an economist. And hardly anybody is indifferent to him. Keynes is either deeply revered or violently rejected: some see in him the master, the saviour; others shiver in face of the devil incarnate.
It is true that Keynes turned economic science around. The publication of his General Theory in 1936 marks the birth of modern macroeconomics. It was nothing short of a revolution. Keynes changed the paradigm of his discipline. He dethroned the classical approach. He challenged the traditional view, according to which supply always creates its own demand (Say's law). He replaced the wage rate as the ultimate determinant of employment with effective aggregate demand. For this reason also, he didn't consider saving a virtue per se. He doubted that markets automatically return to equilibrium after a disturbance; he considered disequilibrium to be the rule rather than the exception.
He did not believe that people always behave rationally; on the contrary, "animal spirits" abound. Keynes also took fundamental uncertainty seriously, i.e. the kind of uncertainty about future events to which we cannot attach any numbered probabilities. And even though he was convinced that a market system is the best system we can possibly have, he did assign an active role to government, especially in the management of crises. In a situation in which at least the mainstream of economics was at a loss to explain why exactly the Great Depression had come about and what could be done to prevent a similar meltdown in the future, Keynes's new theory was met with fascination. It was rapidly adopted and expanded.
But Keynes's impact on theory was only the beginning. His legacy is also a political one. Keynes changed the way government behaved and was expected to behave. Keynes himself was active in government — not as a politician, but as a government official, as a delegate and as an adviser. He believed strongly that it was the duty of the enlightened bourgeois elite of his country to intervene and show the way. He was part of this elite, and he was an elitist. His friends describe him as patient and utterly charming if in good company, but impatient and easily disgusted by ignorant plebeian herds. For him, interventionism was fine as long as it was carried out by people with the right moral convictions. With this impossible caveat, Keynes endorsed interventionism and triggered the beginning of a more generalised trust in government, or state, activism.
In the political sphere, however, which is hardly ever able to deal with complicated models, conditions and nuances, Keynesianism was rapidly reduced to a set of core messages. Or to put it another way, Keynesianism rapidly degenerated into vulgar Keynesianism. Besides the general endorsement of state activism, this meant deficit spending as its major tool. In an economic downturn, government was expected to use fiscal policy in order artificially to increase consumption, which meant to run a deficit, and the Keynesian multiplier, according to which £1 of spending would generate more than £1 of revenue, would do wonders to boost the economy. Inflation is not a problem. The economic consequences — not of Mr Keynes directly, to quote James M. Buchanan, but of the use of his body of thought in politics — were an enormous rise in government activity and debt. In the Thirties, Keynes could never have imagined that government would ever eat up half of the gross domestic product.
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