The Keynes Mutiny

"It is ideas, not vested interests, which are dangerous for good or evil."

-- John Maynard Keynes

We should always challenge the simplistic claims of the left--often echoed by the simplistic, stereotyped response of the right, which falls into the left's trap--about the nature, origin, and “liberalism” (rather than radicalism) of its ideas.

Here's a simple chart:

  • Obama and the Obamites: We are true heirs of liberalism and it is good.

  • The Opposition: You are true heirs of liberalism and it is bad.

Me and (hopefully) you: Wait just a moment there, Binky! You're radicals pretending to be liberals and we can prove it. Centrists and real liberals should be supporting the opposition today against you.

Consider John Maynard Keynes, who the current left claims as the patron of its economic policies. Of course, there is some justification for this idea but I believe Keynes would have been horrified by contemporary Obama administration policy.  True, Keynes advocated high government spending to stimulate economic growth. Let’s examine Keynes’ advice to President Franklin Delano Roosevelt to see how he might differ with disastrous current policies.

Remember what Roosevelt had been doing in his first months in office. His basic strategy was to restrict prices and slap on high levels of production controls, an approach neither side in today’s debate would advocate. So part of what Keynes was doing was to get Roosevelt to reduce the regulations restricting business that the president had imposed in his first months in office, another difference from Obama.

In his letter to Roosevelt of December 16, 1933, Keynes wrote: “The object of recovery is to increase the national output and put more men to work.” In other words, these two factors were the measure of success and Obama has failed on both fronts. Keynes wouldn't be impressed by the blame-Bush tactic.

Keynes continues:

In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market.

So Keynes argued that the key to success was to increase the public’s purchasing power and there were three ways to do so.

The first was pure persuasion: “Individuals must be induced to spend more out of their existing incomes.” Roosevelt had tried to do this by showing Americans that there was “nothing to fear but fear itself,” but the situation was too bad for mere words to work.

The second was in many ways the kind of policy that Republicans favor today:

The business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees….

A better way to state this sentence would be to stress that if companies expanded, or hired additional workers, or produced more (thus paying other companies who could hire workers), then the economy would recover.

Note that Obama says this approach has never worked. But that is not what Keynes said!  On the contrary, he explained that this would be phase two, “as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority.”