John Maynard Keynes was the brilliant British economist who upended the laissez faire economic policy that prevailed in the early1930's -- the notion that the economy self-corrects and the best government can do is to get out of the way even during economic crises like the Great Depression. He developed the theoretical foundation for counter-cyclical economic policy -- the need for government spending and other measures to stimulate the demand for goods and services during downturns in order to restore business activity closer to full employment levels.
But as Zachary Carter writes in his recent biography of Keynes and sweeping history of economic thought from pre-WWI to the financial crisis of 2008 (The Price of Peace: Money, Democracy and the Life of John Maynard Keynes), Keynes was much more than the 'fiscal therapist' he is set out to be in the sanitized version of Keynesianism taught in economic departments throughout North America and Europe. He was a great philosopher of war and peace who challenged the very basis of limited government, free-market economies.
For Keynes, the crisis facing European and North American countries leading up to and during the Great Depression was not simply cyclical downturns and collapse of economic activity. That no doubt was a central concern, especially after the crash of 1929. But the larger issue for Keynes was the suffering in the general populations throughout Europe -- suffering exacerbated by wars, ill-conceived terms of the peace, the Depression of course -- but most fundamentally brought about because of a failure of free-market economies to foster the government support and investments needed to meet essential community and societal needs. It wasn't just the economic instability and insecurity that concerned Keynes; it was the political instability it gave rise to -- political instability manifested clearly in the rise of Bolshevik and Fascist extremism, leading directly to the unthinkable Second World War.
The irony of Keynes is that he developed what was then considered and some still think is a radical prescription -- aggressive government intervention to address the failure of free-market economies to provide the counter-cyclical and social investments a healthy society needs -- for quite conservative goals. He wanted to save liberal, western society from the oppression wrought by left and right wing populist extremism and the global chaos that inevitably follows.
Keynes' academic and political battles were fought in the period from World War I through to the end of World War II. The 'Keynesian' issues have mostly been resolved -- most economists and governments accept the need for government intervention to restore economic activity during recessions, albeit with conservatives and monetarists favouring tax cuts and low interest rates to stimulate demand and with liberals and progressives favouring government spending. But the bigger issues raised by the political economy of Keynes are as relevant and contentious today as they were in Keyne's own time.
The question remains -- can free-market economies, even with reasonable counter-cyclical fiscal and monetary policies, provide the support and investments needed to meet essential community and societal needs. And if that support and investment isn't there, can we expect a resurgence of left and right wing extremism with all the pain that can bring, as occurred in Europe between the two world wars.
John Kenneth Galbraith directly addressed this issue in his book, The Affluent Society. In his acerbic attack on the tax-cutting, limited government policies of conservatives, Galbraith wrote: "what is the advantage in having a few more dollars to spend if the air is too dirty to breathe, the water too polluted to drink, the commuters are losing out in the struggle to get in and out of the cities, the streets are filthy, and the schools so bad that the young perhaps wisely stay away".
The specific concerns Galbraith raised may not all be as relevant today, but the general issue certainly is. Do we or do we not need public sector investments to address the scandalous conditions of homelessness, poverty and substance abuse afflicting so many in our urban centres; to support workers and communities who bear the largest costs of the necessary transition away from fossil fuel industries; to make investments in high quality child care and education services for children of all backgrounds and family means; to support culture, art, public libraries and all of the social infrastructure that enrich our lives. The list could go on.
One of the interesting themes in Carter's biography of Keynes is the notion that in modern times the central problem is not scarcity -- it is not the classic economic question of how we can utilize labour, capital and natural resources most efficiently to maximize what we produce. The question that Keynes raised and is still so important today is not 'how' but rather 'what' should we produce and 'for whom'.
The Price of Peace: Money, Democracy and the Life of John Maynard Keynes is a long read, but well worth the trouble. It is great history both of Keynes and the leading economists who followed, and provides critically important background to understand the debates we are or at least should be having in the present, and the future we may be heading for if we repeat the mistakes of the past.
