John Maynard Keynes: Dead 60 Years, Why Should We Care About Him?

[drbob]

Several weeks ago, I read in another blog A criticism of the economic theories of John Maynard Keynes.  We had a brief discussion of what we call Keynesian economics, which are sometime credited with helping us out of the Great Depression.  At the time, I did not know much about Keynes.  Indeed, I did not know much about economics, having taken only one low-level economics course in college.  However, the blog got me interested so I with the help of Google, I was able to find a couple of articles on Keynes and his literally earth shaking economic theory.  Here's a summary of what I found.

Keynes is hated with a passion by some people and revered as practically divine by others.  So, for an amateur like me, what you learn about him depends on who you read.  Keynes' economic theories completely turned the world of economics upside down in the early 1930.  Contrary to the views prevailing at that time, Keynes said that markets will fail if left to their own devices and that big government, with focused deficit spending, helps maintain a nation's economy.  Specifically, he argued that when an economy cools, you heat it up by cutting interest rates and initiating lots of government spending, particularly in infrastructure, education, and public health (anything there sound familiar?)  When the economy is booming, you cool it by raising interest rates and reducing spending on infrastructure.  At the time, this was such a revolutionary thought, that other economists believed he had taken leave of his senses.  However, FDR bought in to his theory during his second term and initiated strong deficit spending.  It worked!  The U.S. slowly came out of the depression.  Some will argue that it was WWII that brought us out of the depression, but that's not exactly true.  America was coming out of the depression before we got into the war, even before we began seriously supplying England.  The war simply accelerated what had already been happening.

Keynes' theories prevailed in economic thought and practice until the about 1970 or perhaps a bit later, then a more conservative, government-hands-off policy began.  President Ronald Reagan made the laissez faire policy into a practically a religion, and Bill Clinton followed with the claim that the "Era of big government is over."

Then our economy tanked and we elected Barack Obama, who brought back big government with a passion.  We're talking a trillion dollar deficit and government spending like no one has ever seen.  Obama, in his speech to Congress, reinstated the Keynesian philosophy when he said, "I reject the view that says government has no role in laying the foundation for our common prosperity."  John Maynard Keynes, just smiled from his perch in Heaven or Hades (you tell me which).

My research did not tell me whether or not Keynes' theories will work again or not. What I did learn was that there is a great gap driven by venomous invective between those who support Keynes' theories and those who see support a more conservative approach.  However, it matters not.  Keynes is back and like it or not, we are stuck with him for the next several years.