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Keeping the Keynes myth alive

The biographer of JM Keynes, Robert Skidelsky, writing in the Independent newspaper over the weekend, ponders what his economics hero might have done in the current environment. Not surprisingly, perhaps, Skidelsky argues that the economist would have advocated stimulating aggregate demand in some way, either through tax cuts, interest rate reductions or a combination of the two.

In the course of the article, he has a swipe at the “Austrian” school of free market economists who argued that Keynesian economics was – and is – quackery:

“However, his clinching argument in his 1930s debates with free market economists such as Friedrich Hayek was political. It was much too risky to allow economies to slide into deep depression. The example of Hitler was vivid in the minds of all democratic politicians. In 1928, at the height of Weimar Germany’s prosperity, the Nazis got 2 per cent of the vote. By 1930 they were up to 18 per cent. In 1933 Hitler was in power.”

The trouble with this argument is that when supposedly Keynesian stimulii were applied to economies in say, 1930s America, they did not work. Fact. As I pointed out here with reference to US official statistics, unemployment never fell much below the average levels for that decade until the outbreak of the Second World War. Paul Marks has also pointed out how FDR’s achievements were largely mythical, if not in fact the opposite. This woman has argued in a recent book that FDR’s policies made the situation worse. In the UK, the supposedly more fuddy-duddy governments of Baldwin and Chamberlain arguably presided over a less serious outcome by not adopting such “New Deal” policies. Meanwhile, in Japan during the 1990s and part of the ‘Noughties, a number of stimulus packages failed to revive the world’s second largest economy.

Now Mr Skidelsky presumably must be familiar with these statistics, and yet he argues that the reflationary policies of his hero, even though they have not been borne out by historical evidence, were somehow capitalism’s best defence against political fanaticism. He may be making the case that governments have to be seen to be “doing something”, even if it does not work much, to avoid the charge of callous neglect. But if policies don’t work, how is this supposed to calm political agitation? The German example is instructive: I would at the very least have thought that the destruction of the German middle class via the hyper-inflation of the 1920s was a major part of why Germany was so easily tipped over into extremism when economic problems hit home. And that reflation was caused by government, not the private sector. I also think that Skidelsky underestimates the extent to which people do, at a gut level, understand that the governments in power in the West bear some, if not all, responsibility for the present mess.

Meanwhile, I see the UK Labour government is going to take Britain down the wrong side of the Laffer curve by making tax hikes on “the rich” – including entrepreneurs and other wealth creators – a campaign pledge. And this despite evidence, which the government must surely realise, that higher marginal tax rates are destructive of revenues. Update: Fraser Nelson has a splendid, bullet-point take-down of Gordon Brown’s bare-faced lies on the economy and his supposed role in leading us to sunnier climes. It cannot be said too often what a complete shit the UK premier is.

21 comments to Keeping the Keynes myth alive

  • There was an interesting debate at the RSA on the relevancy of Keynes(Link)

  • criminal

    you don’t understand, the money is going to spent fixing our crumbling infrastructure and wind power.

    http://news.bbc.co.uk/1/hi/uk/4300723.stm(Link)

    just won’t someone think of our infrastructure!

  • Laura Harrison

    Skidelsky’s point about economic crisis leading to political extremism and then to war is something that was central to Keynes’s thinking.

    Keynes said in “The General Theory” that he thought his economics would be the greater friend of peace than the old (one might say Hayekian) economics had been.

    It’s not for nothing that one of the key books on Keynes is subtitled “Economic Paths to War and Peace”.

    (Author: Donald Markwell. Title: “John Maynard Keynes and International Relations: Economic Paths…”. Publication: Oxford, 2006.)

  • Ian B

    45% tax on income over £150,000 per year.

    Don’t worry everybody, free markets and liberty have made fabulous gains over the past decades, and Thatcher destroyed socialism. Really.

  • James

    Why did the Second World War pull America out of the depression?

  • James

    Why did the Second World War pull America out of the depression?

  • Johnathan Pearce

    Don’t worry everybody, free markets and liberty have made fabulous gains over the past decades, and Thatcher destroyed socialism. Really.

    No need to be a prick, Ian B, please. This is a bit below what I would expect of a decent commenter such as yourself. Seriously, since when has anyone on this board suggested that such gains are irreversible? They aren’t.

  • Ian B

    James asks a pertinent question. If we believe that WWII’s war economy ended the Depression, we must then accept that Keynes was right- and that putting millions of people into a work creation scheme, feeding them and clothing them by the state (and sending them at great expense on foreign adventure holidays), and having millions of others employed in constructing useless machinery for them to use to no practical purpose, much of which’s only purpose is its own destruction, is an effective economic policy. We should indeed immediately commence a pyramid building programme.

  • Gabriel

    Why did the Second World War pull America out of the depression?

    1) The exigencies of war meant that FDR decided to stop supporting the Unions in their mission to exploit everyone else through violent protection rackets.
    2) The huge upsurge in foreign demand for American goods, mostly, but not exclusively, military.

    Nothing to do with building pyramids at all.

  • RAB

    The only time full blown Keynesianism was tried in the Uk was in the sixties and early seventies under Wilson, Heath and Callaghan. We all know how wonderfully that turned out!
    Callaghan said in 1976 that you cannot spend your way out of a reccession and he was right.
    So does anyone know what Keynes had to say about the peculiar situation that Britain found itself in back then, when all our major industries were Nationalised monopolies and therefore uncompetitive internationally, coupled with a mighty trade Union movement that thought money grew on trees and could force the country to pay them whatever they demanded.However unproductive they were.
    I’m sure Keynes hadn’t counted on that when he developed his theories.
    Well I think we are well and truly screwed this time folks.
    Still we may get some good music out of it like last time.
    Little Keynesian ditty to keep the chin up anyone?

    http://uk.youtube.com/watch?v=8xTTWHMCXdg

  • tdh

    In another illustration of how, due to expectations, economic effect can appear to precede economic cause, some people have been severely curtailing their spending in anticipation of the draconian tax increases Obama had promised, before recently intimating that he might be a little merciful instead. Good thing he’s merely a pretentious jackass.

  • Alice

    “We should indeed immediately commence a pyramid building programme.”

    Marx was right; one of the key economic issues for any society is what to do with its surplus. Ancient Egypt used their surplus to build pyramids, which are still valuable tourist attractions 3,000 years later. Modern western societies pay the middle class to fill filing cabinets with forms. Ancient Egypt’s idea was clearly better.

    We tend to focus on taxes as the impediment to economic growth. Maybe regulation is really the more significant problem — and we have been paying more & more of our supposedly educated people to be progress-blocking regulators. Then we are surprised when industries die and innovation moves to China?

    Perhaps the reason that WWII spending worked to end the Depression where New Deal spending failed is that the dead hand of regulation was slapped back due to wartime exigencies?

  • Frederick Davies

    Also, these ideas that WWII helped end the Great Depression or that it was a Keynesian estimulus are not universaly agreed; see here and here.

  • Frederick Davies

    I meant “stimulus”.

  • Skidelsky’s point about economic crisis leading to political extremism and then to war is something that was central to Keynes’s thinking.

    The idea that economic factors alone cause war or peace is a Marxist notion. The materialist interpretation of hystory. Everything can be explained by economics alone. It was accepted by Keynes, and is widely accepted by many today.
    I don’t buy it. Like all Marx’s theories it’s nonsense. It’s not true that the Verssailes tready and indemnizations caused WW2, as Keynes said, or that the economic downturn caused Hitler.
    Other facors, culture among them, caused both WWs. Germany never had a democratic tradition or government. The always harbored idiotic romantic notions of greatness, see their folk sagas, their operas. They always had crazy authocratic rulers. And the depression didn’t bring a fascist or communist government to the US or Britain, only in Germany and Russia.
    Political extremism isn’t bred by economic factors, it’s a thing developed over long time in a nation’s culture.

  • Ian B

    I think it’s also the case that history hinges much more on individuals than economic theories recognise. The actions of a few people, at particular junctures, really do change the world. Just think how different history would be had Marx, Hitler or John bloody Maynard Keynes not lived, for instance.

  • Political instability comes from economic dislocation. Keynsian politics give the fiction of making things more stable whilst in truth doing the opposite.

    As someone who think the cause of liberty will in fact be served by some political instability, one and a half cheers for John Maynard Keynes :-)

  • Jacob

    “As someone who think the cause of liberty will in fact be served by some political instability”

    Economic dislocation alone is not enough, you need some individuals (agitators?) to bring on the political instability. So, what are you waiting for ?

  • Laird

    Although FDR’s New Deal programs doubled federal spending as a percentage of GDP, apparently that wasn’t sufficiently large to qualify as being truly “Keynesian.” This according to “noted” economic historian Price Fishback[1], writing on the NY Times’ Freakonomics blog:

    “John Maynard Keynes published an open letter to Franklin Roosevelt in major American newspapers saying more spending was not enough; the government needed to run larger deficits. As Keynes’s arguments were fleshed out after the 1930’s, various scholars ranging from Abba Lerner to E. Cary Brown to Claude Pepper have re-examined the New Deal budgets. They all agree that the New Deal cannot be described as a Keynesian stimulus program. We can only hope that the word will finally spread widely enough now to correct the myth.”

    So now we know. FDR just didn’t do enough to get us out of the Great Depression. I’m sure that Obama will get it right this time, though.

    [1] I couldn’t make up a name that good!

  • Except that Keynsian deficits won’t work either. The idea of the deficits was that if you tax and spend, then you take with your left hand what you give with your right hand, and achieve no increase in consumption.

    That’s true.

    But if you borrow, you do the same thing: you take wealth from those who have saved, and you spend it. Thus the people who *would* have gotten loans, without the borrowing and spending, to create or expand business are left begging, and again … your left hand takes what your right hand gives.

    Then there is the third possibility: just print the money. That is the route I expect (although Volker’s return scares me — I’m mostly invested in gold). But this reduces the value of existing money, and — through a much more devious route — your left hand takes what your right hand gives.

    I guess that’s why they bother to pay welfare, rather than just handing out printing presses, eh?

  • Paul Marks

    In the introduction to the German edition of the “General Theory” J.M. Keynes declares that his policies are better suited to the sort of political set up of which Germany was an example.

    In this Keynes was telling the truth (a rare thing for the “Great Man”) as in one issues more money unions can simply push up wages so their will be no reduction in unemployment – unless the unions are not allowed to that.

    Either by the free market (i.e. people not having to employ union members if they do not want to) or by government action – such as that the Nazis used.

    So much for Keynes being an alternative to nasty things – he never suggested a return to a free market in Britain, but direct political control ovet the labour market – ah yes he loved the idea, or perhaps it was the black leather and the whips.

    Of course under a free market one does not need to issue of lot credit money anyway – as reducing real wages by increasing prices is not needed to reduce unemployment.

    Under a free market wages and prices adjust to a credit money bust quite quickely – as they did in 1921 in the United States.

    And would have done in 1929 – if they had been allowed to.

    Ditto in Germany – if the pro union laws had been repealed and a free market been allowed to operate.

    Getting rid of institutional barriers to markets clearing (things like pro union laws and other such restrictions) this is the free market policy.

    But one can not try that – because it would destroy the Keynes myth.