A Man for All = Seasons



A Man for All Seasons The misunderstood John Maynard Keynes. John B. Judis, The New = Republic =20 Published: Wednesday, February 04,=20 2009 When the economy goes south, one name invariably surfaces on = the lips=20 of pundits and economists: John Maynard Keynes. That is because = the=20 twentieth century's greatest economist is generally associated = with the=20 idea that markets require government intervention in order to = function=20 properly. During boom times, when the market seems to be working, = no one=20 has any use for Keynes's skepticism toward unrestrained = capitalism. But,=20 during recessions--when the economy grinds to a halt and = Washington=20 suddenly looks like the only thing that can save it--Keynes = invariably=20 enjoys a revival. The current economic crisis, our country's worst = since=20 the Great Depression, is no exception. Everyone, it seems, has = spent the=20 past months rediscovering Keynes. But the tendency only to turn to Keynes for technical advice in = bad=20 times doesn't really do justice to his worldview. Keynes's ideas = were not=20 just a prescription for an ailing economy; they were a complete = theory of=20 capitalism, one meant to be relevant in both good times and bad. = They were=20 also more than just an economic program; his ideas about=20 capitalism--spelled out most thoroughly in his 1936 work, The = General=20 Theory of Employment, Interest, and Money--were developed in = tandem=20 with his political philosophy. Keynes saw each as bound up with = the other.=20 "The most pressing reforms which are economically sound do not, as = perhaps=20 they did in earlier days, point away from the ideal," Keynes wrote = in=20 1932. "On the contrary, they point toward it." Keynes, in other = words, was=20 interested in more than manipulating the levers of policy to keep=20 economies thriving. He was interested in how economics intersects = with=20 political questions of equality and fairness and justice. This fall, the Bush administration and the incoming Obama=20 administration have had to confront not just narrow technical = questions=20 about budget deficits, interest rates, tax cuts, and savings, but = also=20 broader political questions about the proper relationship between=20 government and the economy. Without our realizing or anticipating = it, the=20 entire panoply of concerns that Keynes faced in the 1930s has come = back to=20 us. Turning to him for answers is therefore an understandable, and = wise,=20 move--but only if we treat his ideas as what they are: not = quick-fix steps=20 for a battered market but long-term principles for creating a = functional=20 and just economy. Keynes, the son of a Cambridge don and of the = town's=20 first female mayor, entered Cambridge University in 1902 during = what=20 turned out to be the twilight of the British empire. British = industry was=20 being challenged by German and American rivals, but unemployment = hovered=20 around 5 percent--virtually full employment. This appeared to = confirm the=20 theory--which Keynes learned from Cambridge economist Alfred=20 Marshall--that market economies reach a natural equilibrium of = supply and=20 demand at full employment. Like his parents and other members of what was called the = "educated=20 bourgeoisie," Keynes was a loyal member of Britain's Liberal = Party. Once=20 advocates of political reform and laissez-faire individualism, the = Liberals had, by the early twentieth century, embraced an agenda = that=20 called for government to alleviate the externalities of capitalism = through=20 programs like social security and unemployment insurance. They = were=20 similar in outlook to many pre-New Deal American progressives. As Robert Skidelsky makes clear in his masterful threevolume = biography,=20 Keynes was a "new Liberal"--but with Bloomsbury's aesthetic = idealism and=20 disdain for vulgar capitalism thrown in. "I want to mould a = society in=20 which most of the existing inequalities and causes of inequality = are=20 removed," he declared. He initially thought this could be = accomplished=20 through classical economics. But, in the 1920s, he decided = otherwise. In the wake of demobilization after World War I, Britain had = suffered a=20 steep recession and unemployment climbed above 15 percent. = According to=20 classical theory, the economy should have eventually returned to a = full-employment equilibrium--which is what Keynes expected would = happen.=20 But it didn't. Instead, the unemployment rate hovered around 10 = percent=20 for the rest of the decade, then shot above 20 percent after the = Great=20 Depression hit Britain in 1930. Moreover, the remedies suggested by classical economics--wage = cuts,=20 balanced budgets, and the gold standard--simply made things worse. = Not=20 only did unemployment rise, but social unrest spread. In 1926, an = attempt=20 to cut miners' wages led to a general strike. Keynes sympathized = with the=20 strikers whom he saw as "victims of cruel economic forces which = they=20 never set in motion." Over the next decade, Keynes attempted to devise policies that = would=20 restore full employment--and a new theory of capitalism to back = them up.=20 He argued that market economies, if left to their own devices, = could reach=20 equilibrium at well below full employment. This challenge to = classical=20 economics rested on his reinterpretation of the relationship among = three=20 core economic activities--investment, savings, and = consumption. According to classical theory, if unemployment were to rise,=20 consumption would decline, but savings would increase. The = increase in=20 savings would lead to lower interest rates, which would lead to = greater=20 investment, which would lead to the restoration of jobs--in short, = back to=20 full employment. But Keynes rejected this logic. During a = recession, lost=20 jobs and wage cuts would lead to a reduction in consumer demand, = which=20 meant less incentive for businesses to invest and banks to loan. = And, if=20 businesses--skeptical about the rate of return from an = investment--failed=20 to invest, more workers would lose their jobs, consumption would = decline=20 even further, national income would go down, and any initial = increase in=20 savings would be wiped out. The economy would reach equilibrium = with a=20 high number of unemployed, which is exactly what happened in Great = Britain=20 in the 1920s and 1930s. Keynes's theory inverted the relationship between savings and=20 investment. Instead of the amount of savings determining the = amount of=20 investment, the amount of investment determined the amount of = savings. It=20 also inverted the relationship between consumption and savings. If = the=20 inducement to invest was determined at least partly by consumer = demand,=20 then the greater the propensity to consume rather than save, the = greater=20 the inducement to invest. Consuming, in short, was preferable to=20 saving. These two inversions had radical implications for government = policy. In=20 the past, governments had advocated budget cuts and tax increases, = along=20 with wage cuts and lower interest rates, to escape recessions; = Keynes was=20 arguing that, except for lower interest rates, these measures made = matters=20 worse. And, in a severe recession or depression, when pessimism = about=20 future business profits made lenders reluctant to finance = investment, even=20 government attempts to lower interest rates wouldn't help. What = was needed=20 instead? Budget deficits, rather than budget balancing, and public = investment and income transfer programs designed to put money in = the=20 pockets of the poor--that is, the people most likely to spend, not = save=20 it. As Keynes began developing his new economics = during=20 the 1920s, he also forged a new political outlook. Earlier, party=20 leaders--and Keynes himself--had trumpeted the "new liberalism" as = a=20 middle ground between Tory free-market conservatism and Labour = socialism.=20 But, in the articles he wrote in the late 1920s, Keynes shifted = left,=20 advocating policies that "constructive thinkers in the Liberal = party" and=20 "constructive thinkers in the Labour party" could support. These = ideas,=20 reflecting his newfound enthusiasm for government intervention in = the=20 market, took him well beyond "new liberalism." Keynes called for "the deliberate regulation from the center in = all=20 kinds of spheres of action where the individual is absolutely = powerless=20 left to himself. " He advocated government regulation of private = as well=20 as public investment through a new National Investment Board. He = wanted=20 government to set workers' wages and hours. He recommended that = private=20 corporations be ruled by two-tier boards, with the top tier = containing=20 employees' representatives--and that employees share in ownership = and have=20 their pay tied to profitability. He favored the nationalization of = the=20 Bank of England, but not firms or banks, which he preferred the = government=20 to regulate rather than to run or own. He eschewed the militant anti-capitalist rhetoric of the Labour = left,=20 but he also recognized that what he was proposing was actually to = the left=20 of much of the Labour Party. "I am sure that I am less = conservative in my=20 inclinations than the average Labour party voter," Keynes wrote. = In an odd=20 way, he was even to the left of the party's self-proclaimed = Marxists like=20 John Strachey and Harold Laski who, because they didn't think = capitalism=20 could be reformed, were unable to advance any practical remedies = to=20 challenge the Tories' laissez-faire approach. Keynes scorned these "catastrophists" in the Labour Party. He = also=20 despised Soviet communism. And he had a low opinion of Marx's = economics.=20 "My feelings about Das Kapital are the same as my = feelings about=20 the Koran," Keynes wrote Bernard Shaw in 1934. But he was = sympathetic to the Fabian socialism of Shaw, H. G. Wells, and = Sidney and=20 Beatrice Webb, which had influenced the Labour Party. After 1931, Keynes abandoned everyday politics and the = sparkling style=20 of his essays to write The General Theory. But that book, = while a=20 dry economic treatise, was also an eloquent statement of his = political=20 philosophy. "I expect to see the State, which is in a position to=20 calculate the marginal efficiency of capital-goods on long views = and on=20 the basis of general social advantage, taking an ever greater=20 responsibility for directly organizing investment," Keynes wrote. = He=20 argued that "a somewhat comprehensive socialization of investment = will=20 prove the only means of securing an approximation to full = employment." He=20 didn't say exactly what he meant by "socialization of investment," = but it=20 seemed to represent an attempt to bring socialist principles and a = concern=20 with "general social advantage" to bear within = capitalism. In 1939, Keynes described his political approach as "liberal=20 socialism." "The question," he wrote, "is whether we are prepared = to move=20 out of the nineteenth century laissez-faire state into an era of = liberal=20 socialism, by which I mean a system where we can act as an = organized=20 community for common purposes and to promote social and economic = justice,=20 whilst respecting and protecting the individual--his freedom of = choice,=20 his faith, his mind, and its expression, his enterprise and his = property."=20 Keynes envisioned not just a society with full employment and = economic=20 growth, but also one that sought to eliminate poverty and afforded = the=20 educated classes time to spend on the kind of artistic pursuits = that he=20 and his Bloomsbury friends had favored. He wanted to use = technical,=20 economic means to achieve moral ends. Keynes died in 1946. In the decades that = followed,=20 much of the debate surrounding his ideas came to hinge on a single = question: Did his theories apply to all modern, capitalist = economies--or=20 were his ideas relevant only to dire circumstances like those that = prevailed during the Great Depression? Keynes himself, of course, = believed=20 the former. He argued that, after World War I, Britain and the = United=20 States had entered a new "epoch" of mature capitalism in which the = continued pursuit of laissez-faire policies would lead away from = full=20 employment. Unemployment, Keynes wrote in The General = Theory, is=20 "inevitably associated with present-day capitalistic = individualism." Not surprisingly, the opposite view--that Keynes's economics = were=20 applicable only to a specific historical moment--was mostly = advanced by=20 conservatives. But, in the 1990s, when it seemed like capitalism = had=20 entered a new period of uninterrupted growth and full employment, = liberals=20 in the United States and Britain began writing Keynes off as well. = In=20 Prospect, a British journal identified with Tony Blair's = New=20 Labour, political scientist David Marquand declared in 2001 that = Keynes's=20 theory "was a system for the age of Fordist mass production, with = its=20 giant plants, giant unions and 'sticky' wages, not forever. " So who was right? Did Keynes's theories accurately describe the = economies that took shape in the decades after his death? Keynes = believed=20 that mature economies would be defined by several = features--features=20 which, if left unaddressed, would tend to push them toward high=20 unemployment. One of these was the advent of labor-saving = technology,=20 typified by factory electrification in the 1920s. This new = technology made=20 it possible for core goods industries to increase their output=20 dramatically while reducing their workforce. "We are being = afflicted with=20 a new disease ... technological unemployment," Keynes = wrote in=20 1930. "This means unemployment due to our discovery of means of=20 economizing the use of labor outrunning the pace at which we can = find new=20 uses for labor." There were, of course, ways out of this dilemma. The most = likely=20 recourse, Keynes wrote, was that capitalism would find new outlets = in "the=20 field of human services." But, as it turned out, services like = health care=20 often had to be sustained by government investments and subsidies. = The=20 other recourse was that new areas of capital investment could = arise--from=20 weapons production and the development of a commercial aircraft = industry=20 to computer technology and the Internet. These new areas could = also lead=20 to a burst of employment, but they frequently depended on public=20 investment. Another feature of mature economies, according to Keynes, was = that=20 rising standards of living would reduce the marginal propensity to = consume. The wealthier a household, the less likely it was to = spend most=20 of its income immediately. So in the absence of, say, = redistributive tax=20 policies and income transfer programs, a mature economy would = likely=20 suffer from an excess of savings over consumption. That would = cause a=20 reduction in demand, discourage investment, and lead to = unemployment. The history of Western capitalism after World War II largely = confirms=20 Keynes's ideas about mature capitalist economies. By the 1950s, = most=20 Western European countries were enjoying full employment. But that = was=20 primarily the result of the substantial new investment needed to = rebuild=20 war-torn economies. Capitalism had to start over--to remature. = Once=20 Western Europe fully recovered, its unemployment rates began to = rise,=20 reflecting the tendency Keynes had described. Developments on our side of the Atlantic also gave credence to = Keynes's=20 theories. Post-World War II demobilization and the reduction of = the=20 defense budget contributed to a recession in 1948. And, for the = next 25=20 years, defense spending played a large role in keeping the wolf of = chronic=20 unemployment at bay. But, after defense production began to = decline in the=20 early 1970s, unemployment began rising. It would not drop below 5 = percent=20 until 1997, when the economy was buoyed by a boom in a growing = area of=20 investment: computers and telecommunications. These innovations, of course, initially brought new employment = and=20 higher productivity. As Keynes would have foretold, however, the = boom did=20 not solve the problem of unemployment forever. The growth of these = industries eventually reached a point of diminishing returns in = new jobs.=20 In the early 2000s, employment began to drop--falling by 33 = percent over=20 the last eight years--in companies making computer and electronic=20 products, even as output increased. These declines might have led = to a=20 prolonged recession but were offset by the huge budget deficits of = the=20 Bush years and the housing bubble. When the bubble burst, though,=20 unemployment returned. The wolf was again at the door. And just as = they=20 had during previous downturns, Americans belatedly began = rediscovering=20 Keynes--even as many of them failed to notice that the problems he = long=20 ago identified had never really gone away, but were lurking in = their=20 economy all along. All of which raises the question: If Keynes's = economic=20 analysis is applicable in both good times and bad, and if his = related=20 political philosophy was designed to take account of issues like = fairness=20 and justice that are always relevant, why did we ignore = so many=20 of his recommendations for so long? The answer has to do with = American=20 skepticism of government, reinforced by a powerful coalition in = Washington=20 of Republicans and business lobbyists. This coalition balked at = carrying=20 out anything but the most attenuated version of Keynes's = policies--and=20 Democrats bowed to its wishes. To remove any hint of socialism, = Republican=20 and Democratic administrations created an unwholesome stew of = Keynesian=20 liberalism and business conservatism. The result has been policies = that=20 temporarily lifted the country out of recession but left it more = divided=20 economically and prone to more serious downturns. The most important tool that Keynes recommended for overcoming=20 unemployment was public investment. It enjoyed what Keynes's = associate=20 Richard Kahn called a "multiplier." Public investment in a new = hospital,=20 say, creates jobs and income not only for construction workers, = but for=20 the people and businesses that service the workers. Conservatives = and big=20 business, however, have objected to public investment--for = instance, in=20 high-speed rail or solar paneling--that would strengthen = government's hand=20 in dealing with an industry or compete with private industry. It's = socialism, they say--and, in Keynes's terms, it is. Next on the list of Keynesian tools are government programs = that=20 redistribute income from the well-to-do (who have the least = propensity to=20 consume) to the poor (who have the most). As John McCain = demonstrated=20 during the presidential campaign, such redistributionist programs = can also=20 easily be denounced as socialism. A less controversial, though still effective, tool for = combating=20 chronic unemployment is low interest rates. But it can be rendered = useless=20 during the kind of downturn Japan suffered in the 1990s and the = United=20 States is suffering today, when businesses can see only losses and = banks=20 only defaults on the economic horizon. That leaves, finally, tax cuts. These arouse the most = enthusiasm among=20 Republicans and business, but are the least effective means of = combating=20 unemployment. The bulk of income tax cuts usually doesn't accrue = to the=20 people with the highest propensity to consume. Moreover, in the = post-1971=20 era of yawning trade deficits, what is consumed is often imported. = That=20 may help employment in Japan or China, but not in the United = States. If you look at America's periodic experimentation with = Keynesian=20 policy, it has been guided from the beginning by a determination = to avoid=20 any measures that might be described as socialist. It began with = what was=20 later called "military Keynesianism"--defense spending being one = kind of=20 public investment that was politically safe. But it has = increasingly=20 centered on tax cuts. Kennedy's vaunted experiment with = Keynesianism=20 consisted of tax cuts. So did Ronald Reagan's and George W. = Bush's.=20 Whatever benefits these stimuli provided in the short term, over = the long=20 run, they have exacerbated the potential for chronic unemployment = by=20 widening income disparities and reducing the overall propensity to = consume. A complete reading of Keynes would have counseled a very=20 different approach. But that has never been the way Americans = treated=20 Keynes. Until, perhaps, now. As Barack Obama takes office, he enjoys a = great=20 opportunity. Historically, it has often taken wars or depressions = to win=20 support for major economic reforms. Crisis, at least in American = history,=20 has generally been the precondition for significant change. Obama also has a decided advantage over Franklin Roosevelt, the = last=20 Democrat who took office during a major downturn. Roosevelt could = count on=20 the willingness of the American public to accept radical = experiments, and=20 on the weakness of a business class discredited by scandal, but to = a great=20 extent he didn't know what to do with the power he had. In the = early=20 1930s, Keynes's ideas were barely known, and, even later, they had = to vie=20 with classical approaches for FDR's attention. In 1937, Roosevelt, = unsure=20 of his economics, actually went back to a classical approach and = erased=20 whatever gains he had made in easing unemployment. Obama--whose = chief=20 economic adviser Larry Summers is the nephew of Paul Samuelson, a = founding=20 father of American Keynesianism--will know better than to start = raising=20 taxes or cutting spending to reduce unemployment. Still, Obama faces extraordinary challenges in trying to = implement a=20 true Keynesian approach. Keynes recognized that a balanced and = stable=20 international monetary system--not subject to currency speculation = or=20 plagued by large trade surpluses and deficits--was a precondition = for=20 implementing his domestic agenda. He spent his last years trying = to devise=20 such a system--and some of his ideas were reflected in the Bretton = Woods=20 agreement. But Bretton Woods collapsed in 1971, leaving an = imbalanced and=20 unstable system that places limits on what a president can do. = Presidents=20 Ford and Carter discovered these limits in the 1970s when = inflation,=20 fueled by oil price shocks, blocked them from using deficits to = bring down=20 unemployment. Obama faces similar limits. He has to rely on = foreign=20 purchasers, particularly from China and Japan, to buy the bonds to = finance=20 America's large budget and trade deficits. If they balk at buying = U.S.=20 Treasury bills, interest rates will go up, creating still another = obstacle=20 to domestic investment; yet the United States cannot escape this = downturn=20 without running huge deficits. In short, Obama is going to have to = focus=20 on reforming global as well as American capitalism. Obama will also need to venture into some areas that Keynes=20 contemplated but previous administrations have avoided. In = subsidizing=20 banks and industries, for instance, Obama will have to concern = himself=20 with workers' wages--should a worker at Ford make more than a = worker at=20 Honda?--and exorbitant CEO salaries. And he is likely to consider=20 proposals to include workers or public representatives on = corporate boards=20 of companies that the Treasury subsidizes or owns a stake in. Moreover, Obama will need to venture into areas that Keynes did = not=20 anticipate. Keynes did not foresee government deciding which = industries to=20 subsidize. Government, he wrote in The General Theory, = should be=20 concerned with "determining the volume, not the direction, of = actual=20 employment." But facing the threat of global warming, finite oil = supplies,=20 and a large trade deficit, Obama will have to make decisions about = the=20 direction, as well as the volume, of domestic investment. He is = going to=20 have to pick winners and losers. Which industries will aid in = reducing=20 greenhouse emissions? Which will reduce the country's dependence = on oil?=20 And which will help reduce America's trade deficit? Obama won't be = able to=20 avoid these kinds of choices. Wittingly or not, he will be putting = government in a position to shape private capitalism according to = "general=20 social advantage." Of course, there will be objections from the GOP and = business--both of=20 which are weakened, but neither of which has lost all its clout in = Washington. If Obama heeds these protests and fails to act boldly, = he and=20 the country could suffer the same fate as the Labour Party and = Britain did=20 in the 1930s. Labour took office in 1929 on the cusp of the Great=20 Depression, but, as unemployment grew, it ignored Keynes's = warnings and=20 held back on public spending. In 1931, Labour was defeated at the = polls,=20 and didn't return to power again until 1945. Britain suffered = under=20 incompetent Tory leadership during much of the 1930s. Disheartened over these developments, Keynes wrote in 1932 that = Labour=20 Party leaders "differed from the leaders of other parties chiefly = in being=20 more willing to do or to risk things which in their hearts they = have=20 believed to be economically unsound." That epitaph could certainly = describe previous Democratic administrations, which borrowed = selectively,=20 and fitfully, from Keynes while ignoring his larger insights. Will = Obama=20 make the same mistake? Or will he become the first American = president to=20 finally, after 70 years, give the theories of John Maynard Keynes = a full=20 try? John B. Judis is a senior editor at The New=20 Republic.