Sixty Years of Citizen Keynes

Sixty Years of
Citizen Keynes

About John Maynard Keynes 1883 -- 1946

Some Tributes to a Forgotten Revolution

1996 marks not only the 50th anniversary of the death of the economist JOHN MAYNARD KEYNES, but also the 60th anniversary of the publication of his landmark volume the General Theory of Employment, Interest and Money.

In this special feature, The Jobs Letter takes a look at Keynes and his nearly forgotten revolution, as well as essential summary of several tributes that have been published in recent months.

" In 1936 the whole classical model of how the economy worked was challenged — one might say overthrown — by the publication of John Maynard Keynes's General Theory of Employment, Interest and Money. Once they had been absorbed, Keynes's theory and its implications dominated economic policy-making for a third of a century. It is a pity that it was not two thirds of a century..."
— Michael Stewart, author of Keynes in the 1990s (1993)
" Keynes did more than open up a more persuasive account of the dynamics of the capitalist economy than that offered by classical economists — he turned economics on its head. For his focus of attention was on how the economic system worked as a system. Rather than accept that the economic whole was the sum of its component markets, he insisted that the whole had properties and dynamics of its own — what biologists call 'emergent' properties..."
— Will Hutton, author of the State of the Nation (1996)
"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 influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back... Sooner or later, it is ideas, not vested interests, which are dangerous for good or evil."
— John Maynard Keynes

WILL HUTTON

Will Hutton is a columnist for the Guardian Weekly, and author of the best-selling book The State of the Nation, recently published in NZ

Sixty years ago a 53-year-old economist published what remains the century's economic masterwork. John Maynard Keynes's General Theory of Employment, Interest and Money may not be quite the holy grail of economics, but it is the nearest anybody has ever come. It is still the most successful attempt to invent a new language and new categories in which to think about the dynamics of contemporary capitalism.

Yet in 1996, all too few protest their loyalty to Keynes and Keynesianism. The old Keynesian confidence in both Britain and the United States that successful application of the tools of macro-economic policy — the manipulation of government spending, taxation, borrowing and interest rates — can lift economic growth and move towards full employment has disappeared across the political spectrum.

Any such initiative today is vetoed by the global capital markets, it is said, along with the belief that "artificial" attempts to boost demand and investment must end in self-defeating increase in inflation.

The best that can be done is some tinkering at the macroeconomic margin, while concentrating on the so-called supply side — targeting public initiatives at lifting skills, research and development or the physical infrastructure.

The central plank of conservative orthodoxy — that stimulating the economy risks inflation if unemployment falls below some "natural" rate ("nairu" — the non-accelerating inflation rate of unemployment) — is proving an inoperable concept.

It is not good enough to protest at the unfairness and inefficiency of the organisation of economy and society; you must have an explanation of why they operate in the way they do — and a remedy. Herein lies the importance of Keynes. Even in a free market, he shows, prices cannot successfully co-ordinate the varying intentions of varying economic actors with varying time-scales so that the outcome is always the best.

That is why markets produce monopoly, instability, underemployment, underinvestment, and inequality — and why it is imperative that the state acts to lean against those trends using the full panoply of macro-economic and regulatory policies.

"The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones."
— John Maynard Keynes

TONY THIRWALL

Tony Thirwall is a columnist for the Observer newspaper

This year marks the 50th anniversary of the death of John Maynard Keynes, the greatest economist of this century, and one of the few social scientists to lend their name to a revolution in their discipline. He dominated the economic stage and had the ear of politicians and prime ministers for nearly 30 years.

What Keynes did, against the background of depression in the thirties, was to revolutionise the way economists think about the workings of the economy at the macro-economic level. In particular, he showed how high unemployment can persist over long periods -- orthodox theory predicted it to be a temporary phenomenon rectifiable by the free play of market forces.

Throughout his life, Keynes campaigned for full employment as the sine qua non of a civilised society. He never lived to see the golden age of full employment that most industrialised economies enjoyed until the early seventies. And now, his vision has all but vanished, and European economies appear paralysed at rates of unemployment topping 10 per cent.

Keynes's attack on the classical orthodoxy in his greatest work, The General Theory of Employment, Interest and Money (1936), amongst other revolutionary propositions, said that cutting wages will not necessarily create more jobs, because less money in people's pockets means less purchasing power. Economies left to their own devices may get stuck in depression with heavy 'involuntary' unemployment over long periods, and only the government can rectify this through fiscal policy.

Keynes's General Theory still provides the backbone of macro-economic theory in terms of the concepts it introduced. But its conclusions have come under continual attack, particularly from America where there is greater distrust of the role of government.

In the sixties, inflation began to rear its ugly head and Milton Friedman launched his monetarist counter-revolution, the essence of which was to say that governments cannot spend their way out of unemployment without ever-accelerating inflation, the root cause of which is excessive growth of the money supply. According to Friedman, economies will gravitate to a "natural" rate of unemployment, determined by real, not monetary, forces.

An even fiercer onslaught under the name of neo classical macroeconomics, led by Robert Lucas, followed in the seventies. This argued that Keynesian economics had outlived its usefulness because it could not explain the combination of high unemployment and rising prices (or "stagflation").

Both Friedman's model of the natural rate of unemployment and Lucas's of the business cycle, deny the existence of involuntary unemployment from the outset. Both assume what needs to be proved: that markets do not always "clear" on the basis of voluntary exchange.

In the early eighties, at the height of the recession, were the thousands who queued for jobs voluntarily unemployed? When unemployment in the UK fell as a result of financial liberalisation and tax cuts, had the nearly 2 million who were absorbed into the system been voluntarily unemployed until then? The answer is clearly no.

From the monetarist experiment of the early eighties to the fiasco of Britain's exit from the exchange rate mechanism in 1992, employment and unemployment have responded to the vicissitudes of monetary and fiscal policy exactly as one would have predicted from a Keynesian model.

The notions of continuous "market clearing" and no involuntary unemployment were discredited in the eighties. They continue to be discredited today with unemployment in Britain at more than 2 million.

Keynes had a broad vision of the functioning of capitalist economies, rare among economists today. For Keynes, economics was a moral science to be used as a means to the end of making the world a more civilised place in which to live. Keynes's abiding legacy will be to have shown that the free market cannot guarantee long-run full employment, which therefore establishes a role for the state in the economic affairs of the nation.

"I do not know which makes a man more conservative—to know nothing but the present, or nothing but the past."
— John Maynard Keynes

SIR ALEC CAIRNCROSS

writing in the Economist 20 April 1996

I particularly remember a lecture in 1933 when Keynes tried to convey how new ideas were born. Never did they arrive, he said, with the hard edges that later critics came to attribute to them when trying to define their terms... Ideas were apt to be like fluffy balls of wool with no fixed outline, and the relationship between concepts when first perceived was likely to be equally woolly. Keynes mistrusted intellectual rigour as likely to get in the way of original thinking, and saw that it was not uncommon to hit on a valid conclusion before finding a logical path to it.

"I would rather be vaguely right, than precisely wrong."
— John Maynard Keynes

JAMES K GALBRAITH

James K. Galbraith is Professor at the Lyndon B. Johnson School of Public Affairs and Department of Government, The University of Texas at Austin, and co-author of Macroeconomics, a textbook from Houghton-Mifflin.

Full employment is the hoariest phrase in our lexicon, the true mark of a Keynesian relic. Full employment was an objective well suited to a world of unionised industrial workers, a time when fewer women worked, when there were no migrants to speak of and little competition from Third World manufactures.

Today is very different: it is full of people who work, of overworked people, of people who work desperately, all the time, in bad conditions, at the expense of their children and their social and cultural and political lives, and for whom work provides little relief from the desperation of their position. Full employment at high wages appears an impossibly remote objective to most people under these conditions, because it would mean not merely "finding a job," but finding a job radically different from those known actually to exist. For this reason, full employment has largely lost its value as a political objective.

The Left should stop recycling Keynesian employment policies, New Deal public works and welfare programs and the Civil Rights movements. As social forces these are spent, in some cases corrupted, and as economic programs they have been outflanked. We have been losing in part because we are viewed, rightly, as the guardians of "old ideas." As such, we have lost our moral standing, our voice.

The global economy is a fact. Globalised business has the technological and competitive edge and won't give it up. Nations which export jet aircraft cannot take the national or protectionist view. The national position has been outflanked, and the day of autarchy (if it ever existed) will not come again.

"Global unionism" intoned a California AFL-CIO leader recently, "is the only answer to global capitalism." I think this is correct. Global Keynesianism, one might very well add, is the only answer to global monetarism.

The term "Global Keynesianism" means only some system - a mechanism that has not yet been worked out - for managing interdependence to achieve high economic growth and employment, a common rising standard of living, and a minimum of financial instabilities attendant to higher growth.

The great economic powers — the United States, Germany, Japan — must stop thinking in purely national terms and start thinking of the larger community of which they are a part. They must understand that the growth of income in the countries to which they sell eventually determines the growth of income in their own countries.

We have not faced the responsibilities of interdependence since the end of the earlier Keynesian period and breakdown of the Bretton Woods system in the 1970s, perhaps not since promulgation of the Marshall Plan. We have abandoned governmental power to market forces, particularly to the global capital markets and the large financial institutions that play in them. However, market forces cannot replace governments in the functions of governance — neither within national boundaries nor in relations between nations.

About James K. Galbraith

"To the economists — who are the trustees, not of civilisation, but of the possibility of civilisation."
— John Maynard Keynes, as his toast for his Farewell to Treasury.

SOURCES

"Keynes still has the best answers" by Will Hutton, the Guardian Weekly 7 April 1996
"The Return of Citizen Keynes" by Tony Thurnwall, the Observer, reproduced in the Guardian Weekly 28 April 1996
"Cairncross on Keynes" by Sir Alec Cairncross, the Economist 20 April 1996
"A Global Living Wage" by James K. Galbraith in Political Quarterly Fall 1995 and "Global Keynesianism in the Wings" in World Policy Journal Fall 1995

Some Tributes to a Forgotten Revolution

About John Maynard Keynes 1883 -- 1946

Robert Reich on John Maynard Keynes

James K Galbraith on Global Keynes

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