Why Keynesian economic theories are needed in the modern world
The world needs to adopt a modern form of Keynesian economics to overthrow neoliberal ideologies
Adopting economic ideas of John Maynard Keynes could counter problems created by neoliberalism (Image by Dan Jensen)
Seventy five years ago, as the world emerged from war, there lay ahead a daunting set of challenges. The reconstruction of Europe and Japan; the long overdue end of an empire; the threat of communism; the urgent demands for greater equality than had ever existed before; 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 – eventually billions – of people.
It was thanks to the work of a man in the last year of his life that policymakers could address those challenges with confidence that they could be met. John Maynard Keynes, in his 1936 Master- piece, ‘The General Theory of Employment, Interest and Money’, as well as in several other books and a series of academic papers, essays and pamphlets had provided something that can be regarded 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 the many classic pieces of writing which form 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’s most import- ant 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 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 left 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 of the Great Depress- ion or of reconstruction after 1945, so modern neoliberalism has both contributed to the problems which now beset modern capitalism and offers no guidance about what to do to resolve those problems.
The world needs to turn back to Keynes and develop a modern form of Keynesian economics. Keynes the philosopher provides 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, give 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 been published to great acclaim recently 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 has recently been published takes aim at the multiplicity of 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’ by 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 the threat of climate change and ecological break-down — should read both of these books. But the more controversial of them, the one which neoliberals and their apologists will be more offended by and which will prov- oke the more emotional and aggressive reactions is Kelton’s.
Professor Kelton addresses six inter- related myths, which have become part of the dominant narrative within recent decades and which entrench conservatism and privilege, even when there are 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 spending 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.
The final myth is 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 floating exchange rate – what limits spending is the productive capacity of the economy and the threat of inflation, never insolvency and a lack of dollars. This insight can form the basis of a modern Keynesian revolution.
Monetary systems were very different in Keynes’s time, as were economic institutions generally, social forces, technology, the global economic structure, and the challenges which had to be faced. However if we could imagine Keynes
being alive in 2020, I believe he would have written a book very much like ‘The Deficit Myth’ — which makes clear that meeting the challenges presented by climate change and building a better future depends on how we manage our real resources and not on whether the Government balances its budget.
This book explains that governments normally run budget deficits and indeed that government deficits allow for private sector surpluses. It’s a book which explains that government deficits can be too large, but that the consequence 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.
Dr Steven Hail is Lecturer in Economics at Adelaide University and is an ERA member.