For that, I recommend turning to the renowned British economist John Maynard Keynes. I’ve been reading Zachary D. Carter’s excellent new biography of Keynes, finding the book and Keynes’s ideas remarkably timely. Keynes’s towering body of work points toward a more inclusive economy and society, one that throws off the yoke of dominant assumptions that, 74 years after Keynes’s death, still repress functional, representative democracy.
Most people associate Keynesian economics with governments spending their way out of recessions, a policy playing out in real time across the globe. That’s certainly core to the Keynesian revolution in political economics, but to stop there fails to capture the scope of insights Keynes developed long before he was pushing Roosevelt to spend expansively on the New Deal during the Great Depression of the 1930s.
Through the First World War and especially during its aftermath, when his sage guidance was ignored, Keynes struggled to reconcile the tragic occurrences he saw unfolding with the classical assumptions that markets, and thus the societies they support, would always naturally settle into optimal conditions.
Keynes correctly predicted that imposing severe reparations on post-World War I Germany would plant the seeds for the next world war. He saw, contrary to the classical model in which he’d been trained, endless cycles of booms and busts born of assumptions about money, wages and work that relentlessly delivered high unemployment and stagnant earnings for workers amid huge returns for “rentiers” (those whose incomes derived from compounding wealth, not work).
He witnessed the political discontent that grew out of these dynamics and understood how the failure of the capitalism of the day — underwritten by untethered, often corrupt financial markets — provided powerful fuel for communism. Keynes rejected Marxism, believing instead, as Carter notes, that “it was time for capitalism not to be overthrown but to be ‘wisely managed.’ ” But Keynes understood and feared the political outcomes of an economic system that failed to deliver consistent security, if not prosperity, to most people.
Why did capitalism need management?
Because, contrary to assumption, it didn’t manage itself. Keynes observed, for example, that individual people often saved more than businesses invested (again, contrary to assumption). To this day, economics students are taught that savings equals investment, and that the way to boost investment is to save more (this is a common argument against running budget deficits).
But people worried about the future — maybe due to … oh, I don’t know, an invisible, pernicious microbe — will, from the perspective of broad social welfare, oversave and underconsume. There is no invisible hand to magically balance such things out, and thus an enlightened government must intervene to offset imbalances.
This all sounds theoretical until you realize that the U.S. labor market, as I pointed out last week, has been at full employment only 37 percent of the time since 1972 and the black rate has never reached that mark. In other words, the assumption that full employment is the norm is thoroughly disproved by the data now, and it was no truer in Keynes’s time. Yet it still pervades economic thinking and policy.
Keynes saw that markets do not settle into an “optimal equilibrium” but can diverge from such conditions for years on end. Moreover, markets exist in a political context that determines who wins and who loses. Examples include product and industry regulations, labor standards (e.g., minimum wages and overtime rules), the extent of collective bargaining, anti-discrimination rules and their enforcement, and employers’ leeway to fire workers at will.
In his time, as today, that political context is held in place by economic “rules” that can be as damaging as they are wrong. Keynes argued for years that tying currencies to the inflexible gold standard was a source of endless, needless suffering. But you could find contemporary examples of such fictive “rules” in ideas such as the conservative argument that we may not like pollution but we must bear its costs, lest we thwart growth and innovation. Even the economic signals we measure — the gross domestic product, as opposed to people’s well-being (which are far from the same thing) — are politically determined, and those decisions have implications for who prospers and who struggles.
Keynes died in 1946, and a few decades after his death, a counterrevolution in economics restored most of the false beliefs he labored to disprove and displace. In the economic orthodoxy, a wide range of anti-Keynesian ideas again took hold: Government was treated as the enemy of the “free market”; any trade deal was assumed to be a good deal; and minimum wages, safety net benefits and taxes on the wealthy all supposedly distorted incentives. Economics, it was argued, must be concerned only about growth, never about its distribution.
But because Keynes was so fundamentally correct about how economies actually work, these false assumptions have once again been exposed for what they truly are: rules of a rigged system.
So, where would Keynes guide us today? It seems unnecessary to tout deficit-financed, Keynesian stimulus, as that tool has been applied aggressively to offset the current recession (though it’s essential that it not stop too soon).
But we are not hearing Keynes’s message in regard to inequality. He would view our vast disparities in income, wealth and political power as economically and socially damaging. He would stress the excess saving problem when too much buying power is concentrated at the top, a problem that is actively holding back the current recovery. He would handily connect the dots between persistent inequality and the rise of false populists who promise to depose the elites, all the while funneling even more wealth their way. Perhaps most important, he’d recognize the plain injustice and inherent instability of an economic system that generated so much wealth but left so many behind.
Even with our feckless national leaders, we will carry on through hell and get to the other side of this crisis. What we do when we get there, however, remains an open question. I recommend the Keynesian path, as it is the one most likely to lead us to the economy that we need now more than ever.