The Distortion of John Maynard Keynes

by The Rationalist

Monday, July 20, 2009 at 01:09 PM EDT

Author’s Note: The following is a relatively esoteric treatise on the political naiveté of John Maynard Keynes. In this author’s opinion, it is absolutely essential for a conservative to be able to rebut an argument in which someone cites Keynesian economics as justification for inflated stimulus bills. Whilst some parts of this article might be slightly dry, I believe that the “take home” of the article is especially poignant, especially in these trying times.

John Maynard Keynes is arguably the most influential economist of the 20th century. In his seminal work, The General Theory of Employment, Interest, and Money, he established a middle road between laissez-faire capitalism and socialism. Keynes was convinced of the necessity of substantial government intervention in the private sector, most noticeably during recessions, due to his belief that classical laissez-faire economics was no longer a realistic or attainable model.

His most popular arguments against the free-market were the “paradox of thrift”, which discussed the tendency of private actors to save or become thrifty in a depression (decreasing the demand for goods, and therefore increasing or lengthening the depression), and his promotion of government investment, where he said that the government, not private actors, are in the best position “to calculate the marginal efficiency of capital goods on long views and on general social advantage”.

The two concepts largely go hand in hand – according to Keynes – since more private market participants tend to save in a recession, they also tend to invest less, creating a supply shortage. He argued that the government, using its ability to tax, spend, and print money, can selectively invest to compensate for the decrease in private investment, giving a helping hand to an economy in the midst of an economic down turn.

The recent stimulus plans, by both former President Bush and President Obama, are perfect examples of this. Any deficit created by these government funded investments can simply be compensated for during times of prosperity by raising taxes and cutting the programs created to fight the recession. Indeed, Keynes had no intention to replace the free market, but rather to carve out the government as being the backup to private spending and investment.

Proponents of free-markets responded with their own works. Most notably, Friedrich Hayek, who wrote the lauded and influential The Road to Serfdom, in which he defended classical liberalism and emphasized the efficiency of free-market resource allocation. While Keynes influenced the early Cold War economics of the Kennedy-Johnson administrations, The Road to Serfdom largely influenced the economic ideology of Ronald Reagan and Margaret Thatcher. Keynes himself had this to say about the free-market, anti-collectivist arguments presented by Hayek:

“In my opinion it is a grand book…Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.”

Of course, he then went on to say that he thought it would likely fail in practical application.

Revealingly, impracticality is perhaps the main argument against Keynesian economics as well. According to Keynes’s biographer and friend, Roy Harrod, Keynes held the strong belief that the State would be composed of public-spirited officials capable of taking “the long view”. Obviously, in practicality, this isn’t the case.

Instead, we have politicians subject to special interest groups, intra-party political pressure, and electability concerns making decisions about government investment. The natural result is a strong deviation from the Keynesian views that first incited the rash of government spending; while politicians enthusiastically spend money to mitigate a recession, they are hesitant to cut the subsidies, investments, and government programs once recovery occurs, and fear the political ramifications of increasing taxes to decrease the deficit.

This is why Keynesian policy largely leads to massive debt and inflation; after massive expenditures during a recession, the government never recoups their losses because (1) they keep spending through the programs they created in the recession, and (2) they generally don’t take the necessary steps to harvest funds during prosperity to pay off the debt. The record shows that since the 1960’s, the U.S. Government has only achieved a budget surplus twice.

Many have said that this is a result of Keynes’s political naiveté – it seems obvious that in a democratic society it would be impossible to deftly and fluidly manipulate budgets and government spending based on the current economic environment. Anyone who has ever walked down K Street in Washington, D.C. must be aware of the immense influence that lobbyists have on our government spending. Well documented political factors seem to dissolve Keynes’s ideal of the public-spirited official.

The fact of the matter is that most economic theories operate in ideal environments, while their application faces the adversity found in reality. The political official flaw highlighted by our current massive deficit is simply the result of Keynes’s theory operating in reality. Similarly, not everyone in Adam Smith’s mold of free-market capitalism acts with rational self interest, which also causes issues.

The inherent danger today lies in the distortion of John Maynard Keynes. In Keynesian economics, the country would experience both governmental stimuli in a recession, and diminished spending coupled with smaller government in times of prosperity. Most moderates aren’t opposed to some level of government investment, as outlined by Keynes, to jump-start a flailing economy, just as they aren’t opposed to keeping the market largely free.

But when politicians and ideologues, hostage to special interests and political posturing, rely on Keynes as an unquestionable justification for big government, they both misrepresent his ideals, and damage his legacy.