WHY ARENíT WE ALL KEYNESIANS YET?
This year is the 150th anniversary of Karl Marx=s The Communist Manifesto - and the effort to rehabilitate the discredited prophet is in full swing. Never mind the dismal track record of Marxism as a governing ideology; article after article proclaims that today=s turbulent world economy is just what the great man predicted. One writer in The New Yorker even proclaimed Marx Athe thinker of the future@.
I say phooey. Sure, Marx wrote about economic upheavals; so did lots of people. What he never managed to do was offer either a comprehensible explanation of why such upheavals happen, or any suggestions about what to do about them (except abolish capitalism). By my reckoning, Karl Marx made about as much contribution to economics as Zeppo Marx made to comedy. Or as John Maynard Keynes, rather more elegantly, put it, AMarxian Socialism must always remain a portent to the historians of Opinion - how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and through them, the events of history.@
Harsh words - but Keynes earned the right to say them. For it was Keynes, not Marx, who cracked the code of crisis economics - who explained how recessions and depressions can happen. And as Japan and the rest of Asia have gone into an economic tailspin, it is Keynesianism, not Marxism, that offers useful guidance about how they might save themselves.
I have often wondered why Keynes - unlike, say, Freud - has never become a pop cultural icon. His life surely was interesting enough. Before the First World War he was a member of the free-thinking, Bohemian cluster of artists and writers known as the Bloomsbury Group (Trent Lott would not have approved of his private life). After that war he became famous as the author of The Economic Consequences of the Peace, an eloquent condemnation of the vindictive terms imposed on the defeated Germans; his concern was vindicated by the rise of Adolf Hitler, and the memory of his warnings helped convince a victorious America to aid, not punish, its prostrate enemies after World War II. As that war was drawing to a close, Keynes arrived in New Hampshire as the most important member of the British delegation to the famous Bretton Woods conference - which established an international monetary system that provided the world economy with much-needed stability for a generation.
But however colorful his resume, only one item on it really matters: his 1936 publication of The General Theory of Employment, Interest, and Money, which was to depression economics what The Origin of Species was to biology. Before the General Theory, economists could not explain how depressions happen, or what to do about them. (I=ve tried going through the pre-Keynesian business cycle literature; it=s a vast wasteland). After 1936, they could.
True, there was a long stretch - around 25 years - when many economists turned their backs on Keynes. They claimed, with some justice, that he made assumptions that could not be rigorously justified - and purists argued that a theory whose Amicrofoundations@ are based on observation rather than axioms should be regarded as illegitimate, no matter how well it might work in practice. The devaluation of Keynes was helped by the non-Keynesian nature of the problems facing the world in the 70s and 80s - inflation rather than deflation (although in the early 20s it was none other than Keynes who provided the first coherent explanation of the hyperinflations then consuming many of Europe=s currencies), inadequate saving rather than deficient demand. And for a while various anti-Keynesian ideas - ranging from mathematically impeccable academic demonstrations that recessions can=t happen (or if they do it=s only because people rationally choose to enjoy more leisure), to popular crank doctrines like supply-side economics - seemed to have crowded Keynes off the stage. But just take a look at Japan - an economy that clearly suffers from a lack of demand, not supply, where the clear and present danger is deflation, not inflation - and tell me that Keynesian ideas are no longer relevant.
So why isn=t Keynes a household word? Perhaps because we want our gurus to look and sound the part. Our savior is supposed to look like an Old Testament prophet, and rage against the evils of the world; a bowler-hatted member of the Establishment, who wants to rescue the system rather than destroy it, can=t make it past the casting department, no matter how unconventional his private life - or his ideas. Keynes also had an off-putting belief that good economics is the product of hard thinking - AEconomics@, he once wrote, Ais a difficult and technical subject, but nobody will believe it.@ Worst of all, instead of presenting depressions as a morality play, with villains and heroes, he portrayed them as a dangerous but treatable disease in an otherwise healthy patient, one that should be curable with a little minor surgery. Indeed, he once expressed the hope that economists might someday be thought of like dentists - that they would be regarded as apolitical professionals brought in to resolve technical problems.
Now I=m not saying that Keynes was right about everything, that we should treat The General Theory as a sort of secular bible - the way that Marxists treat Das Kapital. But the essential truth of Keynes=s big idea - that even the most productive economy can fail if consumers and investors spend too little, that the pursuit of sound money and balanced budgets is sometimes (not always!) folly rather than wisdom - is as evident in today=s world as it was in the 1930s. And in these dangerous days, we ignore or reject that idea at the world economy=s peril.