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Friday, November 11, 2011

Would Keynes Still be a Keynesian?

Recently, I made a discovery that may be pure coincidence but almost seemed to defy the laws of probability. I noticed that with one exception the individuals whom I considered to be the greatest economists of the 20th century all lead long or unusually long lives. Perhaps studying the nuances of the marketplace gives one a reason to keep going!

For example, the two giants of the Austrian (radical free market) School, Ludwig von Mises and Friedrich Hayek both lived to be 92. Milton Friedman, the elfin, ebullient leader of the Chicago School (Monetarists) died at 94. His ideological sparring partner, six feet nine inch Institutionalist John Kenneth Galbraith, hung on to be 97. Financial journalist and economist Henry Hazlitt passed on at 98 and Paul Samuelson, whose Keynesian oriented textbook introduced millions of college student to economics for two generations died at 94. Robert Heilbroner, author of the brilliant tome on history of economic thought, THE WORLDLY PHILOSPHERS, lived to be 85.

Depending on your politics, most people would rate Hayek, Friedman, and John Maynard Keynes as the greatest and most influential economists of the 20th century. Unlike the other luminaries Keynes died much younger at age 62. That simple fact has made me consider a number of what if scenarios.

John Maynard Keynes, later Baron Keynes of Tilton, was considered Britain’s foremost intellectual in the 1920’s. Even the arrogant and supremely self-confident philosopher Bertrand Russell, always said he came up short when trying to debate Keynes on any subject. Keynes was a brilliant mathematician and economist.

In the late 1920’s, the two leaders of the Austrian school, von Mises and Hayek began to warn of economic danger in the western world, as credit buildup was excessive. When the U.S. stock market crashed in October 1929 followed by a depression a year or so later, they were seen as seers. When asked what should be done, they essentially said “nothing.” The market would self correct as Adam Smith’s “invisible hand” (outlined in 1776 in his WEALTH OF NATIONS) would usher in a return to a normal environment. In brief, the invisible hand is a theory that states that collectively if all individuals in a society act in his or her self-interest, they would produce all the goods or services that are required by society. The invisible hand did not need government guidance of any kind. This pure laizzez faire approach would produce the greatest good and eventually generate economic growth.

By 1933, much of the Western world was out of patience. In the U.S., unemployment was at 25%. New York Governor Franklin Delano Roosevelt was elected president and was sworn in as our chief executive on March 4, 1933. Although he had run on a platform featuring a balanced budget, Roosevelt ran away from conventional economics shortly after taking office. He abandoned the gold standard, confiscated the gold of private citizens, and engaged in a wide array of government stimuli under the umbrella of “The New Deal.” Among these were the Works Progress Administration (WPA), which gave construction jobs to thousands of unemployed young men, and the Social Security system that was an attempt to supplement the income of older Americans.

While purists howled, Roosevelt pushed on with his experiments. Keynes, observing similar suffering in the United Kingdom, penned his THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY (it is a world class boring read, believe me, and is probably the most influential book that has been so rarely read by its supporters) in 1936. With a heavyweight like Keynes endorsing the Roosevelt approach and wrapping some discipline around it, Keynesianism became a mainstream approach and remains so to this day in much of the civilized world. It is amusing to see the GOP presidential hopefuls debate these days. Only the unelectable Ron Paul of Texas is a true free market advocate; he is an Austrian through and through. The others all exhibit varying degrees of Keynesian in their thinking but would deny it vehemently if challenged.

Because so few have read Keynes’ General Theory they feel free to interpret it to suit their needs. Keynes was indeed a champion of government intervention when the market went haywire. He wanted public works projects to kick-start the economy and get people working, spending, and creating demand for products. But he also was in favor of things that politicians choose to forget. After the crisis was averted, Keynes believed that governmental budgets should be balanced over time. What!!! Keynes said deficit spending was fine during the dark days of depression and during World War I and II, but year in and year out you balanced your budgets! So, what would Lord Keynes think of the U.S. with their 47 years of deficits over the last 50. Not much, I would think.

He would certainly have agreed to the TARP bailout of 2008 but what would be have thought of the decades of reckless spending leading up to it?

Like all serious thinkers, he was intellectually honest enough to question his theories. In April 1946 he attended a luncheon at the Bank of England. Everyone else was saying that the US and Europe may fall in to a depression as returning servicemen needed to find jobs at home. Keynes was very upbeat and accurate about the U.S. prospects and felt that it would take more time in Britain, which had serious war damage in major cities. Then he said something fascinating—“I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”

A few days later Keynes was dead. Had he lived 30 years longer as many of his fellow economic giants did, I am certain that what we call Keynesianism would look very, very different today.

Also, right-wingers often dismiss Keynes as a socialist. This is utter nonsense. The Labor party always wanted Lord Keynes to join their ranks. He stayed with the Liberals, a centrist party, and was very upset when Clement Attlee, a Labor (Socialist) party M.P. became Prime Minister besting Winston Churchill, the Conservative, and Archie Sinclair, the Liberal leader. He was also a fabulously successful speculator who was worth perhaps $40 million dollars just before World War II. His beloved Kings College at Cambridge let him manage their funds and their endowment exploded upward under his guidance. Were he 35 today, he might well be a hedge fund manager. Some socialist!

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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