John Maynard Keynes, the conservative

The economist was right about much, but his prescriptions have been misapplied

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Conservatives speak disparagingly of "Keynesian economics." If he were alive today, I suspect John Maynard Keynes would be critical, too, of policies advocated in his name.

Lord Keynes (1883-1946) was the most celebrated economist of the 20th century, chiefly because in his "General Theory of Employment, Interest, and Money" (1936) he told politicians exactly what they wanted to hear.

Despite that, Keynes deserved his fame. He was a genius who made a fortune in the stock market (he made most of his picks while lying in bed in the morning, that day's edition of The Times in hand). He had a quick wit. He was fun at parties. And he had an important insight.

Keynes repudiated classical economic theory, say disciples such as Paul Krugman, Princeton economist and columnist for The New York Times.

Keynes didn't think so. The market system is "the best safeguard of the variety of life," preserving "the most secure and successful choices of former generations," he wrote in 1936.

Keynes had little regard for the Krugmans of his day. He visited the United States only once, for the Bretton Woods conference in 1944. When asked how things went, Keynes lamented: "I was the only non-Keynesian there."

Keynes wrote his seminal work during the Great Depression. In times like those, when the "animal spirits" of the people are depressed, governments should "prime the pump" with tax cuts or spending to get the economy moving again.

Trying to balance the budget during economic downturns can make things worse, Keynes said. A deficit in these circumstances is good even if -- especially if -- it causes inflation. For unemployment to drop, real wages must fall. Labor unions that would never accept direct pay cuts could if they were disguised by inflation.

Keynes didn't approve of budget deficits or inflation, per se. What he proposed in the General Theory was a remedy appropriate only for a particular set of circumstances. When times were good, governments should run surpluses to make up for deficits during hard times, Keynes said.

The great flaw in Keynes' thinking was his assumption government could act wisely and impartially to stimulate the economy. Spending is popular, tax increases unpopular, in good times as well as bad. So politicians run deficits year after year. Debt mounts. Inflation eats away the savings and investments of the industrious and prudent.

Friedrich Hayek (1889-1992) highlighted these dangers in "The Road to Serfdom." He was awarded the Nobel Prize in Economics in 1974. British author Nicholas Wapshott last year described Hayek's criticisms of the General Theory as "The Clash that Defined Modern Economics." That book title doubtless sold more books than "Friends Dispute Many Particulars, but Agree on the Big Stuff" would have, but isn't as accurate.

Hayek treasured his relationship with Keynes, which began when Hayek was a student in London. Both were opponents of socialism. Both admired British conservatives David Hume (1711-1776) and Edmund Burke (1729-1797).

After reading "The Road to Serfdom," Keynes said in a letter to Hayek: "We all have the greatest reason to be grateful to you for saying so well what needs so much to be said. ... Morally and philosophically I find myself in agreement with virtually the whole of it."

"On the great issues of political philosophy and personal freedom, they were in the same camp," wrote British economist and Keynes biographer Robert Skidelsky.

Their differences were due in part to their time horizons. Hayek focused on the long run, while Keynes' most famous quote is: "In the long run, we're all dead."

Both perspectives are important. The lives of people are short, but peoples live on.

Hayek was absolutely correct about the long run. But what's good in the long run is cold comfort to a man who must provide food and shelter for his family in the short run. Milton Friedman, an economist admired by conservatives, agreed with Keynes that rote application of policies which work "in the long run" can deepen and prolong recessions.

"Keynesian economics" has flopped chiefly because his remedies have been applied in circumstances where Keynes said they wouldn't work.

But that's the fault, chiefly, of self-styled disciples who've distorted his teaching. Though he was wrong about many particulars, Lord Keynes himself was a friend to values that conservatives cherish.

jackkelly

Jack Kelly is a columnist for the Post-Gazette (jkelly@post-gazette.com, 412-263-1476).


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