Yet Ferguson’s comments force us to contemplate what Keynes really thought about the long run and why. The question now facing economic officials is whether austerity today is necessary to improve economic conditions tomorrow. Can we afford to be so cavalier about the long run as Keynes suggests?
The passage under debate — which comes from Keynes’s 1923 book, “A Tract on Monetary Reform” — discusses what is known in economics as the quantity theory of money: the notion that a change in a nation’s money supply causes a proportionate change in prices. Keynes, whose book “The Economic Consequences of the Peace,” a searing attack on the Treaty of Versailles, had already made him famous, pointed out that “in the long run,” this relationship was “probably true.” But, he went on, “this long run is a misleading guide to current affairs. In the long run we are all dead.”
Keynes always sought to present his ideas in simple, intuitive language. Here, he was only saying more strikingly what Irving Fisher, the American granddaddy of modern monetary theory, had said in 1911: that the proportional relationship between money and prices did not hold in “transition periods” from one price level to another. For example, if the quantity of money in the economy falls for whatever reason — say, higher interest rates — the first effect is to reduce output and employment, with prices adjusting only after a lag.
But Keynes immediately broadened his attack to economics as a whole. The passage continues: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” This was a bold way of criticizing what remains the dominant form of economic theorizing — developing long-run models that not only avoid the hard and interesting questions but are largely useless because they don’t give policymakers any guide on how to navigate in “tempestuous seasons.”
A few years later, Keynes was delighted to come across an exchange between two famous 19th-century economists, David Ricardo and Thomas Malthus, that encapsulated his own charge against the profession. Ricardo accused Malthus of having “always in your mind the immediate and temporary effects of particular changes, whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them.” To which Malthus replied, with considerable effect: “I certainly am disposed to refer frequently to things as they are, as the only way of making one’s writings practically useful to society, and I think also the only way of being secure from falling into the errors of the [tailors] of Laputa, and by a slight mistake at the outset arrive at conclusions the most distant from the truth.”
What a shame, Keynes thought, that Ricardo and not Malthus was the stem from which economics had grown!
Keynes’s focus on the short run was grounded in the philosophical principle of “insufficient reason.” If individuals have no sufficient reason to believe that a good situation today will have adverse long-term consequences, it must always be rational for them to aim to maximize their short-term good. In an essay on the conservative philosopher Edmund Burke, Keynes translated this moral principle of individual behavior into the political principle of prudence:
“Burke ever held, and held rightly, that it can seldom be right . . . to sacrifice a present benefit for a doubtful advantage in the future. . . . It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear. . . . We can never know enough to make the chance worth taking. . . . There is this further consideration . . . it is not sufficient that the state of affairs which we seek to promote should be better than the state of affairs which preceded it; it must be sufficiently better to make up for the evils of the transition.”
This is the bedrock of Keynesian economics. So Ferguson was quite right to say that Keynes discounted the future — but it was not because of homosexuality, it was because of uncertainty. Keynes would have rejected the claim of today’s austerity champions that short-term pain, in the form of budget cuts, is the price we need to pay for long-term economic growth. The pain is real, he would say, while the benefit is conjecture.
The principle of not sacrificing the present for the future can be seen in Keynes’s intolerance of persistent mass unemployment — sacrificing the current generation of workers to secure long-term improvements in the labor market. It emerges in his rejection of “debt bondage” — the imposition of crushing long-term obligations on borrowers, undermining their prosperity. “The absolutists of contract,” he wrote, “are the real parents of revolution.”
Personally, I think Keynes’s view of the future as radically uncertain is too sweeping. Although it is impossible to assign reliable statistical probabilities to specific events — Will North Korea launch a nuclear strike in the next five years? What will be the price of oil in 10 years? — we do have some experience of the likely long-term consequences of bad behavior, and it would be foolish to ignore it. The future is not a random bet.
But in many matters, politicians would be well advised to follow Keynes’s advice and prefer the present generation to future ones. There is only so much pain voters will tolerate. And there is insufficient reason to believe that today’s austerity will bring tomorrow’s prosperity.
Read more from Outlook, friend us on Facebook, and follow us on Twitter.