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We’re All Keynesians Now

December 15, 2006

More than 80 years ago, amid the cruelest economic recession the world had yet suffered, economist John Maynard Keynes arrived at a remarkable conclusion.World trade was at a standstill, millions were unemployed and famine stalked the land. Yet Keynes asserted that all this was totally unnecessary and completely avoidable.

Keynes pointed out that while the automatic checks and balances of the capitalist system took care of the normal rise and fall of business activity, there could be no such automatic recovery from an unusually severe slump (or, for that matter, an unusually prolonged boom.) The cure for a slump, he wrote, could be achieved only through massive government investment in the economy.

In fact, former U.S. President Roosevelt’s Works Progress Administration (WPA) had already started applying this solution, against fierce political opposition, before Keynes set forth the rationale, but it never achieved the success it deserved, precisely because of that opposition. So full employment was not achieved in the United States until the deluge of government spending in World War II reached more than seven times the pathetic $15 billion a year reached by the WPA.

This outcome was not lost on the politicians, who now throughout the world guide our fortunes by regulating the rate of government spending. But, of course, like all great discoveries, it can be deliberately misused.

Thus, if the rate of spending required to reverse an impending slump can be achieved only under wartime conditions, then, perhaps, so the argument goes, we should consider that option.

Of course, you need a controllable war, employing a highly trained volunteer army to keep casualties down, and a terrain matched to your particular strengths, such as flat land if you are strong in tanks or crowded cities if you are good at bombing. And, naturally, you have to provide some kind of rationale for going to war. Absent deliberate provocation, any kind of perceived threat will do.

I am not suggesting that a head of state might say to his ministers, “Gentlemen, the market’s down again; maybe we need a nice little war.” But a nod is as good as a wink to a blind horse, especially one trained in the Machiavelli stable. And if you think all this is unduly cynical, I refer you to the words of former U.S. President Nixon during his very first cabinet meeting in the middle of the Vietnam imbroglio:

“We are all Keynesians now.”

 

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