For the last three decades laissez-faire conservatives have sought to systematically discredit the ideas known as \u00e2\u20ac\u0153Keynesianism.\u00e2\u20ac\u009d This assault has had deleterious consequences for economic policy and public economic understandings. It is time for Keynesians to fight back.<\/p>\n
Keynesianism refers to the set of ideas associated with the great British economist John Maynard Keynes, who published his magnum opus, The General Theory of Employment, Interest and Money, in 1936. The General Theory provided a framework for understanding the Great Depression. But far more than that, it provided a framework for understanding the \u00e2\u20ac\u0153big picture\u00e2\u20ac\u009d operation of modern capitalist economies. In a sense, it was to economics what Einstein\u00e2\u20ac\u2122s general theory of relativity was to physics.<\/p>\n
Keynesianism rests on the simple compelling insight that, subject to capacity limits, the level of economic activity is determined by demand for output. This principle explains a wide range of phenomena in capitalist economies. If demand is insufficient, firms will reduce production and employment and the economy will fall into recession. That is why we worry about consumer and business spending.<\/p>\n
Most importantly, Keynes explained why market economies do not automatically generate sufficient demand to ensure full employment. In fact, demand is usually slightly less than that needed for full employment, which means market economies spend most of the time with unnecessary unemployment that is economically wasteful, socially destructive and the cause of great individual suffering. Moreover, on occasion the employment shortfall can be large, as during the Great Depression. However, though recognizing that market economies usually fail to produce full employment, Keynes was not anti-market. Markets work well for those that are employed; the problem is they tend to create insufficient employment.<\/p>\n
This failing means that there is a role for government in ensuring full employment. Thus, government can affect demand through taxes, social security and unemployment insurance, and through spending on infrastructure and government services. Government can also affect demand through labor and minimum wage laws that impact wages and income distribution. Finally, central banks affect demand through their control over interest rates.<\/p>\n
The period 1945 \u00e2\u20ac\u201c 1975 is widely regarded as having been a golden age of mass prosperity, and it was a time when Keynesian ideas dominated policymaking. In 1971 President Nixon famously declared \u00e2\u20ac\u0153We are all Keynesians now.\u00e2\u20ac\u009d Since then Keynesianism has been in retreat, though owing to its outstanding earlier success policymaking still remains subject to Keynesian influences. This influence is evidenced by Federal Reserve interest rate policy and by the acceptance of larger budget deficits in recessions. However, there has been a retreat in politics and academic teaching, with important consequences.<\/p>\n
This retreat is the result of both attack by the right and over-selling by the left. With regard to the right, it always opposed Keynesianism\u00e2\u20ac\u2122s identification of an important policy role for government and it disliked progressive taxation. The right also opposed labor market institutions and financial regulations that promoted robust stable demand at the expense of their economic and political power. With regard to the left, it tended to overstate the extent of Keynesian market failure, to understate the effectiveness of market prices and incentives in driving economic action, and to stretch the case for government replacing market production. Finally, Keynesian success in achieving full employment aggravated the perennial problem of conflict over income shares, thereby causing higher inflation. This problem needed a political solution that was never forthcoming, and the right skillfully used the inflationary OPEC oil shocks of the 1970s to blame Keynesianism for the resulting economic disruption.<\/p>\n
The political, intellectual and rhetorical retreat from Keynesianism has had enormous consequences. First, there has been a retreat from true full employment, which means that we live today with unwarranted unemployment. Second, the pre-Keynesian ideology of self-adjusting economies has reasserted itself and been used to rollback financial regulation, labor market protections, trade unions and the minimum wage. This has worsened income distribution and created a proclivity to boom-bust cycles. Third, the case for progressive taxes and a more equal income distribution have been rolled back as this is no longer viewed as part of the demand management policy agenda. Fourth and finally, the relevance of Keynesianism for globalization has been suppressed. Keynes was always cautious about free trade and skeptical about international mobility of financial capital because of the impacts on employment and the ability to conduct national economic policy. These concerns speak to the 21st century relevance of Keynesianism and the need for a Keynesian counter-revolution.<\/p>\n