As the G-20 summit begins in London, the markets are looking for the magic words “coordinated fiscal stimulus” in the communiqué. There’ll be a lot of talk of more regulation, some will discuss global imbalances and token obeisance will be paid towards building a new financial architecture, but the big question that will be debated will be the Keynesian one of just how much deficit financing needs to be done to get the world economy out of its hole. The ghost of Keynes will loom large over the meeting.
The ideas of John Maynard Keynes, long dismissed as obsolete, are now back in fashion. That’s because conditions in the West are very similar to the Great Depression that prevailed during Keynes’ time and his advocacy of the need for a fiscal stimulus is appreciated much more keenly now that the economy is deep in a slump. Likewise, Keynes’ notion of a liquidity trap, a situation when lowering the interest rate no longer helps to stimulate the economy, is very much in tune with today’s policy environment. Laymen may find it odd that we could have one economics for good times and a vastly different economics for bad times, but at least the revival of Keynesianism is entirely understandable.
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But while we have forsaken our new and shiny monetarist gods and taken refuge in old ones, perhaps it’s not really being recognized just how subversive this particular old god is. Keynes viewed the money-grubbing culture of capitalism with lofty disdain, although his critique was from the point of view of an aristocrat—he had no love lost for Stalin’s Russia, although he did condescend to label himself a “liberal socialist”. In economic theory, he could scarcely have been more heterodox. Right at the beginning of his magnum opus, The General Theory of Employment, Interest and Money, Keynes makes the extraordinary claim, “I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.” No wonder orthodox economists were furious. Keynes assumed that less-than-full-employment was the normal state of capitalist economies and it required government action to ensure that all resources were productively employed. As he put it, “a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment”.
It wasn’t just classical economics that came in for criticism. Although he made a lot of money by speculation, Keynes was completely against the kind of financialization of the economy represented by Wall Street, and his quote about economic development becoming the byproduct of a casino is well known. He gleefully looked forward to “the euthanasia of the rentier”.
While we are all Keynesians now, perhaps not enough attention has been paid to the kind of world that Keynes wanted. The world before World War I was in many respects similar to our present one. Capital flowed freely across borders. Scholars have often compared the current period of globalization with the one that existed at that time. By the middle of the Great Depression, Keynes became sceptical of the benefits of globalization and wrote in the Yale Review in 1933: “The decadent international but individualistic capitalism, in the hands of which we found ourselves after the [first world] war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous—and it doesn’t deliver.” Recognizing the havoc that could be wreaked on economies as a result of capital flight, Keynes became an advocate of capital controls, sympathizing “with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national”. Small wonder that the world after Bretton Woods was built largely in that image, with capital controls and fixed exchange rates, although Keynes’ idea of a world currency for trade, the bancor, was scuttled by the US, whose leaders were more interested in setting up the dollar as the medium of international exchange. The Chinese central bank governor has recently said that Keynes’ proposal for an international currency unit was the correct approach.
But there are also big differences between now and the world in Keynes’ time. A lot of production, for example, is now international rather than local. International finance is much more complex. Countries such as China and India have been big beneficiaries of neo-liberal globalization and for them the system has clearly delivered.
Most importantly, not enough attention is being paid to the fact that Keynesianism failed during the 1960s and the 1970s and the system that took its place was an attempt to address those failures. Why did the need to replace Keynesianism arise? How do we ensure those weaknesses don’t recur? These questions need to be answered. The resurrection of Keynes is all very well, but the world has moved a long way since his time. What we need is a Keynes for the 21st century.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at email@example.com