The irrelevance of old-time Keynesianism

John Maynard Keynes was one of the great economists of the 20th century,  Maybe he was the greatest.  He is the father of the idea of economic stimulus.

His insight was that, in a capitalist free-enterprise economy, economic growth depends on a growing mass consumer market, which depends on masses of the public having money in their pockets.

So when the economy stalls and people are out of work, the best way to stimulate the economy is to give the people more purchasing power.

J.M. Keynes

Once they started buying things, businesses would hire more people, and there would be a multiplier effect that spread through the entire economy.

The important thing, according to Keynes, was to get people back to work and earning money—no matter how.  He famously said that hiring workers to dig holes and fill them up again would be better than nothing.

In the pandemic lockdown, governments are doing exactly the opposite of what Keynes recommended.  The government is actively trying to prevent millions of Americans from going to work.  By staying at home, they help limit the spread of the virus.

Congress recently voted an economic bailout that was called a “stimulus” bill.   But economic stimulus was not, and is not, needed.  What is needed is an economic sedative, combined with an economic life support system.

We do not need employment for the sake of employment.  We need to have virtually necessary jobs get done, less necessary jobs put on hold and useless jobs not to be done at all.  We Americans as a nation have not yet figured out how to do this.

One thing to remember about Keynes is that his goal was always to preserve the capitalist free-market system.  His aim was the moderate the boom-and-bust economic cycle by manipulating interest rates, tax rates and the money supply so as to stimulate economic activity.  This, he hoped, would make socialism unnecessary.

He was a member of Britain’s Liberal Party all his adult life.  He frankly said that he was an advocate for the middle-class intelligentsia, and was equally opposed to rule by the selfish plutocrats or the uncouth working class.

There was a time when his ideas worked just fine.  Many economists give his policy ideas credit for the long boom of 1945-1975, when it seemed as if the economic cycle had been conquered.

The problem is that the economic growth of the Keynesian era was based on using up fossil fuels and other natural resources at an ever-increasing rate.  This was feasible in his lifetime.  It is not feasible in an era of dwindling natural resources and climate-related disasters.

He himself realized growth could not go on forever.  In his 1930 essay, “Economic possibilities for our grandchildren,” he looked forward to the day when further economic growth was no longer needed and everybody could enjoy a life of leisure.

It may be that world output has actually grown as much as he hoped for, and that there is enough to provide everyone with what people in 1930 would have considered an adequate minimum standard of living.  But even if it has, there is no plateau of prosperity, as he hoped.

Our goal should no longer be economic growth for its own sake.  The goal should resilience in the face of emergencies. We should seek to create jobs not for an economic “multiplier effect,” but to do work that will enable us to cope with the coming bad years.

There will be hurricanes, floods, droughts and fires—probably even worse than in the past few years. There will be more pandemics—possibly worse than the present one. Moderating the economic cycle may come to seem too small a problem to be worth bothering about.


John Maynard Keynes entry in Encyclopedia Brittanica.

The Case for Economic Hibernation During the COVID-19 Lockdowns by Einat Wilf and Saar Wilfe for Quintette. The opposite of stimulus is what is needed.

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2 Responses to “The irrelevance of old-time Keynesianism”

  1. whungerford Says:

    The Cares Act has been called a stimulus bill, but it isn’t that. It was intended to allow businesses to retain idle employees and to provide necessary income to those in need. There is no lack of demand for goods and services now when they are available. People are anxious to go back to work; the governments job is to make it safe to do that.


  2. philebersole Says:

    Quite right. The CARES Act is not a stimulus bill. The fact that it was called one reflects the holdover of the old-time thinking.

    It was advertised as a bill to allow businesses to keep employees and provide necessary income. That wasn’t its main thrust.

    Keynesianism may be out of date, but neoliberalism is alive and well and still doing damage.


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