Keynes: In the long run, we’re all impressed by his relevance

With all its prophecies of danger, Keynes' General Theory held out a promise and proposed a cure.
With all its prophecies of danger, Keynes' General Theory held out a promise and proposed a cure.


  • The economist overturned the view that free-market capitalism achieves its own equilibrium. The Keynesian idea of fiscal stimulus had hauled the US out of its Great Depression before it fell out of favour in the 1980s, but the pandemic crisis revived it. Keynes was proven right again.

Three economists have straddled the policy space globally as no one else. Adam Smith (1723-1790), with his ‘invisible hand’ and free market, promoted welfare of all and hoped to bolster the wealth of countries; Karl Marx (1818-1883) prophesied the death of capitalism under its own weight of contradictions to usher in a utopian classless society. 

And John Maynard Keynes (1883-1946) understood that an economic equilibrium does not always happen on its own and capitalism can slip into severe economic depression, which could be squelched through public investment and generation of employment.

Such was the case in the US when its national income precipitously fell from $87 billion in 1930 to $42 billion in 1932, a time when the song ‘Brother, can you spare a dime?’ grew popular. By 1933, the US was virtually prostate.

America’s jobless millions were like an embolism in its vital circulatory system of commerce. Economists wrung their hands and wracked their brains and called upon the spirit of Adam Smith, but could offer neither a diagnosis nor remedy. The grim prognostications of Marx cast long shadows.

The man who tackled the crisis, Keynes, was almost seen as a dilettante at the time.

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Keynes’ magnum opus The General Theory of Employment (1936) had been attracting attention, though. He had written to George Bernard Shaw in 1935: “I believe myself to be writing a book on economic theory which will largely revolutionize in the course of the next ten years—the way the world thinks about economic problems."

He was, as usual, prescient. The book, like his Economic Consequences (1920), was to be a bombshell. It turned economics on its head, very much like The Wealth of Nations (1776) of Adam Smith and Das Kapital (1867) of Karl Marx had done.

The General Theory had a startling and dismaying conclusion. Free market capitalism had no automatic safety mechanism, as had been assumed. A depression, in other words, might not cure itself at all; the economy could lie stagnant indefinitely like a ship becalmed. Keynes found that there would be no flood of savings at the bottom of the trough.

When an economy goes into an economic tailspin, there would be no glut of savings, but a drying up of it. This happened in the US. In 1929, American private citizens put aside $3.7 billion of their income. By 1933, they were saving nothing. US corporations also found themselves losing money.

Keynes turned out to be right. Savings were a kind of luxury that could not withstand hard times. No one can blame society for this, since saving is an obvious private virtue. It is equally impossible to chastise businessmen for not investing if they saw no reasonable chance of returns.

Also read: We can’t hope to attain Keynes’ equitable society without policy intervention

The difficulty was not a moral one—a question of justice, exploitation or even human foolishness. It was a technical difficulty, almost a mechanical fault, and the price of inactivity was unemployment.

Certainly, it was an unsettling outlook. But it would have been utterly unlike Keynes to have made a diagnosis of gloom and leave it at that. With all its prophecies of danger, the General Theory was never meant to be a book of doom. On the contrary, it held out a promise and proposed a cure.

As a matter of fact, the cure had begun before its actual prescription was written. The medicine was being applied before doctors were sure what precisely it was supposed to do. Franklin D. Roosevelt’s ‘100 days’ of the New Deal had enacted a flood of laws that had languished behind a dam of governmental apathy.

These laws were meant to improve people’s conditions and morale. However, Keynes’ tonic was different and explicit: the deliberate undertaking of government spending to stimulate the economy.

The US government was suddenly a major investor in roads, dams, auditoriums, airfields, harbours and housing projects. Keynes came to Washington in 1934 and urged Roosevelt to extend the New Deal Program. He hoped that heavy government expenditure would prime the economy’s pump to act as a stimulus and spur a revival of private investment.

Keynesian economics dominated the discipline from the 1940s to the 1960s. In 1971, Richard Nixon said: “We are all Keynesians now." But by the 1980s, it was hard to find an American economist under the age of 40 who professed to be a Keynesian.

In part, it was a failure to find a satisfactory way of reconciling Keynes’s macro view of the economy with the Marshallian micro view that emphasized the centrality of individual markets.

Keynesianism was also weakened by a resurgence in inflation and related thorny questions. Another influential economist, Milton Friedman (1912-2006) focused attention on the centrality of controlling money supply as the panacea for spiralling prices. From yet another quarter came a growing disenchantment with the government’s activist role as recommended by Keynes.

Also read: Will our new investment cycle be Keynesian or Schumpeterian?

However, the pandemic years (2019-2021) brought a resurgence in interest in the Keynesian precept of fiscal stimulus to combat an economic slump. When private drivers of an economy weaken, goes the logic, public spending must fill in.

Indeed, Keynes was broadly prescient in arguing that the government cannot wait interminably for an equilibrium of savings and investment. Despite his stellar contribution to public policy, however, Keynes never addressed the issue of distributive justice and the need to expand opportunities for the underprivileged adequately.

Today, attention has turned to yet another economist, Thomas Piketty, who is fervently arguing for wealth redistribution through appropriate fiscal measures to stem the menace of rising inequality. Will his argument have an equally lasting impact?

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