John Maynard Keynes, 1908 - drawing by Gwen RaveratKeynes is probably best known for his advice for governments to use their spending and taxing power to manage aggregate demand in capitalist economies and thereby mitigate the severity of cyclical recessions. "Keynesianism" was the dominant mode of economic thought among American economists in the post-Second World War decades, until the late 1970s or so, after which more conservative prophets of the "free market" became more prevalent.
Now that the world's financial system has seized up due to the negative consequences of those conservative bromides being enacted into policy on a wide scale, Keynes' ideas have suddenly regained a new respectability. Particularly the notion associated with him that government deficit spending can be used to lift economies out of recession.
Actually his notion of demand management involved more than just deficit spending. Recessions may be triggered by different events. But what makes a recession is the reduction of aggregate demand. Supply of goods and services at the height of an expansion starts to significantly exceed demand. This presses on company profits and production is reduced. Workers are laid off. This reduces demand further. And a self-reinforcing downward trend is underway.
Eventually supply and demand will come back into equilibrium - the market "clears" in economic terms - and demand then begins to press on supply, companies crank up production, more workers are hired, and a self-reinforcing healthy trend begins.
But the fact that recessions may satisfy the charts and graphs of neoclassical economics in that way doesn't say how deep the recessions will be, how much damage they will do and to whom, and what longer-term economic or security interests will be compromised if the business cycle is allowed to run this "natural" course, "natural" at least in the supply-and-demand graphs on which economics relies.
Keynes argued that in a recession, the government should go into deficit spending mode by some combination of increased spending and decreasing taxes. Theoretically, government could decrease spending and taxes, as long as the result was government spending exceeding tax receipts. This would mean that the government was putting more money into the private economy to generate aggregate demand, either by directly demanding resources for its spending projects or by putting more money into the hands of consumers.
The experience of the Great Depression made the notion of deficit spending to combat recession respectable, really for the first time. Roosevelt's New Deal practiced the deficit-spending aspect of Keynesian economics. But FDR apparently never lost his faith in balanced budgets. As Paul Krugman has been insistently pointing out these last few months, Roosevelt's insistence on balancing the budget in 1937 had the effect of slamming the still-ailing economy into recession. That happened because the reduction in government contributions to aggregate demand allowed another downward spiral to start.
Keynes advocated that governments manage demand in both recessions and expansions. As expansions continued, he advocated that the government should run surpluses, either by decreasing spending or increasing taxes. That would reduce aggregate demand and slow the economy down enough to prevent or at least delay what economists and financial journalists like to call "overheating", i.e., getting to the point where a new recession is likely.
As one of the most famous Keynesians, John Kenneth Galbraith, pointed out in his famous book, The Affluent Society (1958), there was a basic problem with this prescription. Not an economic problem, the economics of the idea make good sense. The problem is political.
And we've seen the reasons why many times over in the 50 years since the book appeared. Everyone likes to have their taxes decreased. Nobody likes having them raised. Everyone likes seeing their favorite government programs funded. No one likes seeing them cut back. So the raise-spending/cut-taxes part works politically for recessions; the lower-spending/raise-taxes part for restraining expansions is far more politically problematic.
Keynesian economics was lacking in another respect, too. As Galbraith pointed out in The Age of Uncertainty (1977), "The Keynesian remedy was asymmetrical; it would work against unemployment and depression but not in reverse against inflation." That limitation became a major concern in the 1970s. At the moment, it is not an urgent problem for the American economy, to put it mildly.
Kenneth Galbraith's son James points out in The Predatory State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (2008) that something important has also changed since the early 1970s. Keynes looked at governments manipulating aggregate demand in the context of a world economy where national governments could effectively regulate aggregate demand in their own countries. The version of "free trade" that became ascendant after the end of the Bretton Woods currency system in 1973 and that became the gospel of "neoliberalism" and the "Washington Consensus" means that few countries any longer have such a capability to the same degree as before. With the current level of globalization, counter-cyclical measures have to be effective on an international as well as national scale.
And, in the post-Bretton Woods world, US federal budget deficits are now essentially a chronic condition, not subject to the kind of manipulation that was possible in the 1950s and 1960s. Although Galbraith notes that the "Washington discussion circuit" continues to treat budget balancing as a sacred goal and makes the false assumption that deficits are "the product of domestic policy decisions taken in the context of balanced trade and full employment".
Harry Dexter White (l) and John Maynard Keynes 03/08/1946In the real world, the only way that balanced trade will be possible for the United States is for the dollar to lose its status as the world's reserve currency. "For practical purposes, the realized budget deficit no longer depends on federal budget policy decisions, but rather on international trade and the financial position of the private sector". (I posted about this issue at greater length in Obama's economic program, American jobs and the myth of the balanced budget 11/30/08.)
That's not to say that Keynes' ideas are no longer relevant. On the contrary. But it does mean that the international context of managing aggregate demand has changed and has thus become more complicated.
Keynes had quite an interesting life. He was a British representative at the Bretton Woods conference in 1944. His particular proposals were rejected in favor of those fashioned by the American Treasury Department's chief economist Harry Dexter White. The proposals that White had largely shaped became the basis for the International Money Fund (IMF) and the currency system that so greatly benefited the US in the period of 1945-73. James Boughton in Harry Dexter White and the International Monetary Fund Finance & Development Sept 1998, described the differences between the approaches at Bretton Woods of Keynes and White:
To Keynes, what the world needed was an independent countervailing balance to American economic power, a world central bank that could regulate the flow of credit both in the aggregate and in its distribution. To White, what was needed was an adjunct to American economic power, an agency that could promote the balanced growth of international trade in a way that preserved the central role of the U.S. dollar in international finance.President Truman appointed White as the first Executive Director of the IMF, but he was soon accused of having been a Communist and an agent of the Soviet Union. White denied the charges intensely. As Boughton writes, "His spirited defense of his loyalty to the United States and its values, made at hearings before the Committee on Un-American Activities of the U.S. House of Representatives in August 1948, left him exhausted. He died three days afterwards."
Those allegations against White, based on what relatively little I've seen on the subject, seem very improbable. But it's a weird irony of history that one of the main architects and the first head of IMF, an institution that is still attacked (and by no means only by Communists!) as a key instrument of American imperialism, should have come under such accusations.
Keynes most famous book, the one in which he elaborated the economic theories for which he is especially remembered, was The General Theory of Employment, Interest and Money (1935–36). But he is also remembered for an especially prescient book, The Economic Consequences of the Peace (1919), in which he criticized the economic penalities that the Treaty of Versailles imposed on defeated Germany. He predicted that the financial burdens imposed were so great that Germany would not be able to meet them and they would therefore contribute more to endangering rather than insuring the peace in Europe. This is hardly controversial now. But it was at the time he wrote it. And he therefore earned the wrath reserved for those who are prematurely correct about such an important issue. (The link give has the full text of the book.)Although Keynes had sexual experiences with both sexes, he married a Russian ballerina named Lydia Lopokovo. A ditty at the time, as recalled by the elder Galbraith, ran:
Was there ever such a union of beauty and brainsAnd the elder Galbraith, always alert to the ironies of life, recalled Lord Keynes (he was eventually knighted) this way in The Age of Uncertainty:
As when the lovely Lopokova married John Maynard Keynes?
Those who are comfortable with things as they are, conservatives in the literal sense, have often and rightly been suspicious of intellectuals and have thought them troublemakers, unable to leave well enough alone, more reprehensible by any measure than the poor or discontented whom so unnecessarily they arouse. Intellectuals have usually thought themselves disliked because others were jealous of their brains. More often it's because they make trouble.Tags: harry dexter white, keynes, james galbraith, john kenneth galbraith
But intellectuals can render conservative as well as radical service. Before and after World War II, their ideas did much, for a time, to save the reputation of capitalism. As the ideas of socialism did not come from the masses, those that saved capitalism did not come from businessmen, bankers or owners of shares whose value had gone with the wind. They came principally from John Maynard Keynes. His fate was to be regarded as peculiarly dangerous by the class he rescued.
No comments:
Post a Comment