"I am not a Marxist" was Karl Marx's classic rejection of his own misguided followers. If John Maynard Keynes were alive today, he might feel the same way about the Keynesians who damaged his reputation and ignored his prescription for curing inflation.
Keynes is justly famous as this century's most influential economist because he did three things right. He recognized the major problem of his time as depression, recognized the cause as insufficient demand and recognized the solution was federal deficit spending to stimulate demand.
If all that seems obvious now, it is only because Keynes' doctrines have permeated economics. His ideas were regarded as heretical by the best conventional economists of his day, particularly the then-radical idea of using federal deficit spending to stimulate demand.
Radical ideas require radical young men and women to accept them, since older thinkers often develop a hardening of the categories to accompany a hardening of their arteries. The Young Keynesians of the 1930s enjoyed the excitement and ferment of a radical idea whose time had come.
he idea of deficit spending was more than just a technical means to cure depression. It justified the expansion of government power and influence in the economy that began with the New Deal. For decades, liberal politicians and Keynesian economists enjoyed a mutually beneficial symbiosis that led to a zenith of their mutual power in the late 1960s.
Stimulating the economy was a good idea at one time, but the Keynesians took it to its illogical extreme. Like the sorcerer's apprentice, they knew how to turn on the flow of deficit spending but not how to turn it off. By the time Richard Nixon declared himself a Keynesian in 1971, Keynes' idea of fiscal stimulus was finished as the solution to the economy's problems.
Like old French generals who would rather fight the last war than the current one, the Keynesians have not made the transition from fighting recession to fighting inflation. As young men and women, the Keynesians rebelled against the conventional economic establishment of the 1930s with its obsolete doctrines. As old men and women, the Keynesians find they are the conventional economic establishment, replete with obsolete doctrines. Their reluctance to recognize the inflationary consequences of too much deficit spending transformed the Keynesians from saviors of society to menaces to the economy.
The Keynesians became obsolete for the same reason that the economists of the 1930s became obsolete -- they refused to change their thinking while the world changed around them. Keynes himself was a first-rate thinker who had no such problem in shifting from past ideologies to current realities.
In the introduction to his General Theory in 1936, he wrote: "I myself held with conviction for many years the theories which I now attack . . . the difficulty lies, not in the new ideas, but in escaping from the old ones."
If Keynes' reputation suffered because his followers were unable to change while the world changed around them, then it also suffered from the inflationary bias of his followers' actions. Keynes himself, however, was well aware of the dangers of inflation as shown by his writings:
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does so in a manner that not one man in a million is able to diagnose."
Recognizing the evils of inflation is one thing; prescribing an adequate remedy is quite another. When Britain's Chancellor of the Exchequer consulted Keynes about how to cure inflation in the postwar boom of 1920, his response was to pursue a policy similar to the one now being employed by our own Federal Reserve. He recommended "a stiff dose of dear money" and "would go for a financial crisis." To break inflationary expectations, he "would go to whatever interest rate is necessary . . . and keep it at that for three years."
First-rate thinkers are seldom blessed with first-rate followers. Keynes was the intellectual field marshal in the war against depression, but the old generals he left behind are no longer fit to command.
It is young, unconventional generals who are creating the new ideas to combat inflation, notably supply-side economics and the rational expectations theory.
The war against inflation still has no field marshal, but the economist who becomes one might profit from the example of Keynes' ideas and give followers the same advice that Talleyrand gave his young diplomats: "Not too much zeal."