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The Price of Peace – Tackling the Deficit Myth

Insights that can form the basis of a modern Keynesian revolution
Steven Hail

John Maynard Keynes 1883-1946 lived here 1916-1946 (Spudgun6, 21/2/2015, Flickr cc)

Seventy-five years ago, as the world emerged from war, there lay ahead a daunting set of challenges. There was reconstruction of Europe and Japan; the long overdue end of empire; the perceived threat of communism; the urgent demands for greater equality than had ever existed before – i.e. for full employment, public services and social welfare systems; and the re- orientation of economic activity away from the demands of war and towards improvements in the quality of life of millions, and eventually of billions of people.

It was thanks to the work of one man, then in the last years of his life, that policy makers could address those challenges with confidence that they could be met. John Maynard Keynes,

in his 1936 masterpiece, The General Theory of Employment, Interest and Money, and in several other books, and a series of academic papers, essays and pamphlets had provided something that could be described as a periodic table for economists and politicians in the years ahead.

He had explained how to achieve and maintain full employment; that there was no justification for the inequalities of income and wealth which had existed in the gilded age; provided a philosophical basis for the goals of economic policy in both the short run and the long run; and even hinted at how challenges as intractable as war or climate change could be met.

The essay Economic Possibilities for our Grandchildren and the pamphlet How to Pay for The War are just two of many classic articles forming part of the rich tapestry that Keynes left behind.


Between 1945 and the mid-1970s, in country after country, those challenges were met with considerable success, using broadly Keynesian tools, even though some of Keynes’ most important insights were neglected after his death in 1946. Yet there was a growing and well-funded neoliberal campaign to roll back the advances which the Keynesian revolution had made possible, to throw away the periodic table he had left behind, and to restore the pre-war levels of inequality and privilege.

The first major success of the campaign was the Chilean coup of 1973, and the path to global neoliberalism was clear- ed by the oil crisis of the next couple of years, the inflation spike which went with it, and the failure of progressives to counter myths and half-truths spread by economists like Milton Friedman and politicians like Margaret Thatcher and Ronald Reagan.

This global counter-revolution, largely completed between 1975 and 1985, was not based on science or on evidence, but on propaganda, marketing and the development of a narrative the mainstream progressive movement found itself unable or unwilling to resist.

But just as pre-Keynesian classical economics was unsustainable in the 1920s and 30s, and offered no solutions to the problems attending the Great Depression, or reconstruction after 1945, so modern neoliberalism has both contributed to the problems which beset modern capitalism, and offers no guidance about what to do to resolve those problems.

The world now needs to turn back to Keynes and to a modern form of Keynesian economics. Keynes the philosopher provides all of us with guidance regarding the purpose of economic activity and what it means to offer as many people as possible the opportunity of a good life.

Keynes the economist, and others who have developed the elements of a modern form of genuinely Keynesian economics, have given us the chance to rediscover and to modernise that periodic table he left us, which has for so long been abandoned and ignored.

A book which has recently been published to great acclaim demonstrates the relevance of Keynes and his body of work today. The author is Zachary Carter and the book is The Price of Peace: Money, Democracy and the Life of John Maynard Keynes.

Another book which is about to be published takes aim at many of the myths underlying the neoliberal narrative and provides us with the elements for a  second Keynesian revolution. The title is The Deficit Myth: Modern Monetary Theory and the How to Build a Better Economy, and the author is Stephanie Kelton.

Anyone who would like to understand the essential tools we need to meet our modern challenges – unemployment, underemployment, insecure employment; excessive inequality and the concentration of power among a rich elite – and, of course, the threat of climate change and ecological break- down, should read both of these books. But the more controversial of them, and the one which neoliberals and their apologists will be more offended by, and which will provoke the more emotional and aggressive reactions, is Kelton’s.

Stephanie Kelton, CL Institute for Innovation and Public Purpose (Kirsten Holst, Flickr cc)

Professor Kelton addresses six inter- related myths, which have become part of the dominant narrative in recent decades, and which entrench conservatism, privilege and inequality – even when there are in office progressive governments – and frustrate genuinely progressive agendas.

The first myth is that currency-issuing federal governments should run their budgets like households. The second is that government deficits are evidence of excessive spending. The third is that the government’s debt is a burden on future generations of taxpayers. The fourth is that government deficit spend- ing uses up private sector saving and discourages business investment. The fifth is that we are dependent on the rest of the world to pay for our deficits. And the final myth is that we will be unable to pay the costs of supporting an ageing population in the future.

Once it is understood that for a country like Australia, with a currency-issuing government, which does not borrow in foreign currency and maintains a float- ing exchange rate, what limits spending is the productive capacity of the economy, and the threat of inflation, and never insolvency and a lack of dollars, this insight can form the basis of a modern Keynesian revolution.

The monetary system was very different in Keynes’ time, as were economic institutions generally, social forces, technology, the structure of the global economy and the challenges which had to be faced. But imagining Keynes alive in 2020, I believe he would have written a book very much like The Deficit Myth. A book which makes clear that meeting the challenges of climate change and building a better future, depends on how we manage our real resources, and not on whether the government balances its budget. A book which explains that governments normally run deficits, and indeed that government deficits allow for private sector surplus- es. A book which explains that government deficits can be too large, but that the outcome of an excessive deficit is inflation and not insolvency. One which identifies how a federal job guarantee can stabilise the economy at full employment without causing inflation.

We all need to read and absorb The Deficit Myth. It is a modern classic. Then we need to tackle the deficits that really matter. The jobs deficit. The public services deficit. The climate change deficit. To do that, we need to understand how our monetary system really works, and how and why we have for so long been misled.

I warmly recommend both The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, by Zachary D. Carter (Random House); and The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (Public Affairs), by Stephanie Kelton.

Dr Steven Hail is a lecturer in Economics at Adelaide University, and is an ERA member.

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