Reflections on John Maynard Keynes

John Maynard Keynes (1883-1946)

THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY (1936)

Let us critically review the following quotation from this classic work of the welfare state that was so integral in Franklin Delano Roosevelt’s New Deal.

. . . the existing theory of unemployment nonsense. In a depression…there was no wage so low that it could eliminate unemployment. Accordingly, it was wicked to blame the unemployed for their plight. The second proposition proposed an alternative explanation about unemployment and depression. This centered upon aggregate demand—i.e. the total spending of consumers, business investors, and public agencies. When aggregate demand was low, sales and jobs suffered. When it was high, all was well. (The General Theory of Employment, Interest, and Money)

The Great Depression was a crisis of liquidity. The purchasing power of the people had fallen so that there was an oversupply of goods and services that resulted in deflation and a general collapse of the political economy. The economy had to be pump primed by the state. That is called demand side economics, as opposed to supply side economic theory from Adam Smith to Milton Friedman. Was it collectivist in nature? Yes! Was it socialistic? Yes! Was it communist totalitarian in purpose? No! By manipulating the money supply and the interest rates, a society could spend its way out of a Great Depression—even with indefinite budget deficits. World War II, of course, ended the Great Depression by creating full employment in a total war where the industrial plant had a shortage of workers. That was inflationary. Inflation is the hidden cost and risk of deficit spending. The state must maintain its credit and credibility in tandem with its fiscal responsibilities. The Federal Reserve Bank performs exactly such responsibilities.

Keynes was for the free floating of currencies and the abolition of the gold standard. Money had to be cheap and ready to print in paper form—not gauged to an arbitrary standard of the fetish commodity of gold that has no inherent valueand  rather impracticable in large quantities. Keynes was concerned about social justice and the right of all workers, globally, to have a job and a decent quality of life. He assumed man was cooperative by nature and rejected the Social Darwinist premises of his opponents, who lacked the flexibility in thought to develop new programs to meet an unprecedented crisis that threatened the very legitimacy of democracy and its capitalist civilization. He argued that capitalist could reform itself with socialistic measures and that these reforms did not lead down the road to communist dictatorship.

In the election of Barack Obama, Americans will see a variation implemented of the New Deal. Basically, President elect Obama plans to spend his way out of a deep recession. It is economics, dummy. That issue propelled Obama into office in these extraordinary times.