WASHINGTON – What does it mean to be Keynesian? It was the British economist John Maynard Keynes who declared that when, like today, economic growth grinds to a standstill and businesses fail to provide enough jobs, governments have the ability, and the duty, to fill the gap.
Keynes developed his theories in the wake of the 1929 stock market crash and the Great Depression.
He urged raising “aggregate demand” by loosening credit, spending on public works and cutting taxes. The government should run deficits, Keynes argued, but should be careful to pay them down when people were working again and wealthy enough to pay taxes.
Keynes died in 1946, so he did not see the fruits of his labor. In the decades in which Keynesianism was at its height, from 1945 to 1975, the West enjoyed greater prosperity than ever. The Marshall Plan, which pumped billions into shattered European nations after World War II, created jobs and affluence that kept the Soviets in check.
But later, when business cycles and electoral cycles fell out of step, presidents disregarded Keynes’ warnings and kept their foot on the gas too long, reducing taxes, boosting spending and offering cheap credit to ensure re-election. The result was stagflation — a toxic mix of low growth and high prices.
Today, in the often deliberately misleading language of our bifurcated politics, “Keynesian” has become an insult, shorthand for spendthrift, wasteful, debt-ridden, elitist, socialist.
In this sense, was Keynes a Keynesian? Was he deep in debt, a big-government socialist, a lifelong bureaucrat who profited from his handiwork? Hardly.
Keynes was briefly a government employee, but for most of his life he offered advice to prime ministers for free. As an academic he was paid little, but he understood market forces better than most Wall Street traders and created not one but two fortunes.
Each morning, he lingered in bed telephoning his stockbroker with instructions. By the end of 1927, he had amassed $3.4 million in today’s money; by 1936, he was worth $44 million. His market advice was much in demand, not only from governments but from the National Mutual and Provincial insurance companies, which put him on their boards.
Keynes made not only himself but his friends and his alma mater, King’s College, Cambridge, rich too. As part of the Bloomsbury Group, a circle of artists and intellectuals, he multiplied their modest trust funds, leaving them free to be creative. Without him we may not have the novels of E.M. Forster and Virginia Woolf, nor the artworks of Vanessa Bell, Roger Fry and Duncan Grant.
Keynes also had an eye for a bargain. Seeing a collection of impressionist paintings for sale in Paris, he persuaded British officials to take them in lieu of French war debts. They now hang in London’s National Gallery.
Keynes was a lifelong member of Britain’s centrist Liberal Party. He wanted to save capitalism, not replace it. It is a mark of his ingenuity that his policies were adopted not only by those on the left but also by conservatives from Winston Churchill and Harold Macmillan to Dwight D. Eisenhower and Richard Nixon.
Would he still be a Keynesian today? It is an odd truth that we owe our understanding of how an economy works to him, even if many of his remedies have lost popularity. Surely the ever-ingenious Keynes would have found a way to adapt his theories to fit our current predicament.
Nicholas Wapshott is the author of “Keynes Hayek: The Clash That Defined Modern Economics,” forthcoming in October.