In the long run we are all dependent on Keynes

Peter Clarke 2009-01-09

For over 20 years after his death in 1946, the name of John Maynard Keynes achieved a sort of posthumous veneration that mythologised him, as not just a great economist but an infallible prophet. This happened on both sides of the Atlantic and across party lines. It was President Richard Nixon who declared that “we are all Keynesians now”. Well, times change. Myths become vulnerable to debunking – and, if you wait long enough, to rebunking too. The Keynesian era came to grief in the 1970s. For about 30 years Keynes's reputation languished. Then, in about 30 days, it has apparently been restored.
But the world has moved on since the 1930s when Keynes evolved his most important theories. His own defiant dictum, that he changed his mind when the facts changed, has been on the lips of current policy-makers. There never was a timeless “Keynes” whose every utterance had prophetic force. There was instead a historical Keynes who came up with lots of bright ideas as he confronted different problems.
This is why Keynes supported the New Deal measures of Franklin D. Roosevelt in the depression-stricken US of the 1930s. The openness to experiment that Roosevelt displayed under pressure of events was something that appealed to the similar can-do temperament of the British economist, whose name was then applied in a manner that can best be termed inventive.

True, the New Deal meant public works programmes that Keynes had long advocated in response to the slump in Britain. It was common sense to put idle resources to work. Savings otherwise not invested and workers otherwise left unemployed, could create valuable public assets if government took the initiative.
US Keynesianism, however, came to mean something different. It was applied to a fiscal revolution, licensing deficit finance to pull the economy out of depression. From the US budget of 1938, this challenged the idea of always balancing the budget, by stressing the need to boost effective demand by stimulating consumption.
None of this was close to what Keynes had said in his General Theory. His emphasis was on investment as the motor of the economy; but influential US Keynesians airily dismissed this as a peculiarity of Keynes. Likewise, his efforts to separate capital projects from ordinary budgets, balanced if possible, found few echoes in Washington, despite frequent mention of his name.
Should this surprise us? It does not appear to have disconcerted Keynes. “Practical men were often the slaves of some defunct economist,” he wrote. By the end of the second world war, Lord Keynes of Tilton was no mere academic scribbler but a policy-maker, in a debate dominated by second-hand versions of ideas he had put into circulation in a previous life. He was enough of a pragmatist, and opportunist, not to quibble. After dining with a group of Keynesian economists in Washington, in 1944, Keynes commented: “I was the only non-Keynesian there.”
The fate of his ideas in Britain was hardly less ironic. An analysis he had evolved to cope with the deflationary problems of the slump in the 1930s had to be adapted, during and after the war, to opposite conditions. Indeed the General Theory has sometimes been dismissed as depression economics. Yes, it focused on the insufficiency of effective demand to sustain employment but his essentially symmetrical analysis could equally be applied to excess demand. For he invented a sort of macro-economic way of thinking about the economy that we use today.
What went by the name of the Keynesian consensus in postwar British economic policy was indeed macro-economic. But it relied on fine-tuning consumption through fiscal policy, supplemented by interest rate changes. Yet the General Theory had advocated regulating the economy through investment, not consumption, combined with a low and permanent rate of interest.
Keynes may have underestimated the difficulties of timing public investment and been too sceptical about the effectiveness of stimulating consumption. His name, however, is rightly invoked to license fresh economic approaches rather than take refuge in inert doctrinal purity. Another Keynesian dictum – “in the long run we are all dead” – was an admonition against the irresponsibility of doing nothing if we obstinately rely on the self-correcting power of market forces. His yardstick for assessing the costs was whether the economy can be expanded by such measures. That is what justifies government action, not only for short-term expediency but also in the long run.
The writer was professor of modern British history at Cambridge university