L1 Motivation
Why Study Keynes?
I have just started a new study group to read (or, for those who have already done so, re-read) Keynes’ classic The General Theory of Employment, Interest and Money. There are many reasons why I think this is a worthwhile enterprise. For starters, I plan to do this study following a new methodology for doing “social science.” I have derived this methodology from Polanyi, and described it at length in “The Methodology of Polanyi’s Great Transformation.” I am hopeful that this methodology will yield substantially more insight into the nature of Keynesian theory than any conventional analysis can. It is my ambition to write a radical and revolutionary textbook with the theme: “Macro-economics for the twenty first century” which will re-create the field from scratch. In fact, every revolution builds upon the accomplishments of earlier revolutionaries – we reach heights by standing on the shoulders of our predecessors. For several reasons, studying the thoughts of Keynes is a necessary first step towards a radical re-thinking of macroeconomics.
The first and most important reason is that this – launching a revolution in economics – is exactly what Keynes wanted to do, and succeeded in doing, to a certain extent. Some quotes from the preface to his book show that Keynes was convinced of the revolutionary nature of his theories. He writes that “The matters at issue are of an importance which cannot be exaggerated.” He himself underwent a revolution in his own thought: “I myself held with conviction for many years the theories which I now attack.” Leading economists, including Keynes, had forecast ever-increasing prosperity, and had minimized the significance of the Great Depression when it occurred, forecasting a quick recovery from a temporary glitch. When this failed to happen, the reputation of economists and of economic theory was substantially damaged. Keynes writes that he wishes to resolve the “deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory”. He writes that the “struggle of escape from habitual modes of thought and expression” was the main obstacle in arriving at his new, revolutionary, theory. Our current situation after the Global Financial Crisis, which has deeply damaged the reputation of economists and economic theories, bears a strong resemblance to the problems which Keynes faced and resolved with outstanding success.
In the aftermath of the Great Depression, economic misery was a major factor which led to the Russian Revolution and the rise of Hitler in Germany. Conventional economic theory held that market forces would automatically and quickly correct the temporary disequilibrium of high unemployment and low production in Europe and USA. Keynes argued that high unemployment could persist, and government interventions in the form of active monetary and fiscal policy were required to correct the economic problems. Many have suggested that Keynes rescued Capitalism by providing governments with rationale to intervene on behalf of the workers, thereby preventing socialist or communist revolutions. There is no doubt that strong and powerful labor movements in Europe and USA derived strength from the economic miseries of the masses, and also took inspiration from the pro-labor and anti-capitalist theories of Marx. Because of a large complex of different factors involved, that we cannot be sure whether Capitalism would have collapsed in absence of Keynes. However, we can be very sure that Keynes and Keynesian theories were extremely influential in shaping the economic landscapes of the 20th Century.
For starters, Keynes actually met Roosevelt (FDR) to try to persuade him of the necessity of an aggressive fiscal policy and of running budget deficits, in order to lift the economy out of recession. He was only partially successful. FDR, like nearly all political leaders as well as economists of the time, was convinced of the necessity of balancing budgets: this is the same ‘austerity’ being touted today as the cure for economic problems. Leading economists like Lionel Robinson and Friedrich Hayek argued in favor of austerity, and said that Keynesian remedies were dangerously wrong. They held the view that the Great Depression had been caused by excessively easy monetary policies in the pre-Depression period, and Keynesian interventions in the form of further easy monetary and fiscal policies would only prolong the agony.
FDR was not quite convinced by Keynes, but was politically savvy enough to announce that he would not balance the budget on the backs of the American people. Accordingly, he did go against his personal convictions, as well as his campaign promises of balancing the budget, as a sound and necessary economic policy. Keynes felt that the economic policies of FDR were timid and hesitant, and prolonged the recession un-necessarily. In light of contemporary experience of the tremendously aggressive expansionary monetary policy in the post-GFC era, we can see that bolder steps by FDR would not have caused the harms that he was afraid of. In fact, after the economy recovered somewhat, FDR went back to conventional wisdom and started cutting back on budget deficits in 1936. This created a mini-recession which has been labelled the “Roosevelt Recession of 1937”. Duly chastened, FDR embraced Keynesian policies with greater conviction, and increased deficit spending right upto the second World War. It was the effectiveness of Keynesian policies that led even arch-enemy Friedman to state that “We are all Keynesians now,” though he later recanted. Indeed, he master-minded the Monetarist counter-revolution in the 1970’s which eventually led to a rejection of Keynesian insights, and a return to the pre-Keynesian ideas of austerity as a cure for recessions. Forgetting the hard-learned lessons of Keynes led to a recurrence of problems very similar to those faced by Keynes in the form of GFC 2007.
How FDR Learned Keynesian Economics — Explains FDR's conversion to Keynesian Economics
Keynes Plan Defeated at Bretton Woods — Keynes had a brilliant system for trade, which was crushed by White of USA, whose plans ensured favorable system for USA at Bretton Woods.
Krugman: The Austerity Delusion — The same debate which took place in Keynesian times is still going on today
Wiki: Keynesian Resurgence post 2008 — Provides intellectual trajectory of how Keynes was rejected by academics, but re-installed to some extent after GFC 2008