Co-authored by Victoria Chick
Never has a book on economics been so anticipated.
John Maynard Keynes's The General Theory of Employment, Interest and Money was published 75 years ago today. Back then, there were queues outside the Economists' Bookshop in Houghton Street, London. Opening hours had to be extended to deal with the rush of those eager for an alternative to policies that had ruined the global economy.
The impact on the field of economics wasn't unlike that on the scientific community when Charles Darwin published On the Origin of Species in 1859. Just as with Darwin's book, Keynes's shook the foundations of economic orthodoxy and had profound effects on his profession. The main thrust of Keynes's work was also met with outright denial from his peers, including close colleagues, who reduced his theory to what one described as "diagrams and bits of algebra." Above all, they denied the centrality of his theory of the rate of interest.
This "bastard Keynesianism," as British economist Joan Robinson called it, subverted and continues to block the Keynesian revolution both in vision and in method. Monetarists were concerned with the quantity of money. Keynes's overwhelming concern was with the rate of interest on money. He argued that monetary policy should always support the private and public economy, stimulate it, and prevent recession.
Safe and Risky
The centerpiece of his policy prescription was to sustain low rates of interest across the spectrum of loans: short- and long-term, real, safe and risky. Countering determined efforts to undermine these policy goals, Keynes used his position at the Treasury and the Bank of England, and his influence with U.S. President Franklin D. Roosevelt, to make this vision a reality. Interest rates were forced down from 1932; the bank rate was set at 2 percent until 1951.
To achieve this goal, which he argued was essential to sustained investment, growth and full employment, Keynes rejected the liberal-finance model based on deregulated international-capital flows. Instead he constructed a managed- finance model relying on domestic credit and restricted flows of international capital. From the end of the World War II until the 1970s, finance was managed, and low rates of interest prevailed. But with the celebrated move to free markets, this approach to finance was also rejected.
'Golden Age'
For the 30 years since 1980, policy has supported liberalized, deregulated credit creation and capital flows. Since the Golden Age of 1950 until 1973, the borrowing costs for U.S. and U.K. businesses, adjusted for inflation, have doubled to about 6 percent, according to data assembled by Geoff Tily, author of the 2010 book Keynes Betrayed.
Under liberalization, high rates of interest have been accompanied by the unsustainable growth of credit. This led to a series of excessive expansions and debt inflations and then severe contractions and debt deflations, beginning on the periphery of the global economy before spreading to Japan and South East Asia.
The contrast between the Golden Age and the Age of Liberal Finance has at root this upward shift in the rate of interest. In the U.K., unemployment averaged about 2.5 percent in the Golden Age and close to 8 percent afterwards. Economic growth in the U.K. and the U.S. averaged 0.5 percent higher per year during the Golden Age than in the liberal-finance era, according to their respective National Accounts authorities.
Economists Stray
The global economy was finally ruined in 2007-09 as the financial system in the U.S. and Europe imploded under the weight of accumulated private debt. Subprime borrowers were the first to buckle under the weight of "dear money" -- costly, unpayable debts. The widespread belief that it was low interest rates that caused the credit crisis is indicative of how far economists have strayed from Keynes's theory and analysis.
Equally, the idea that interest rates are now substantially lower, stems from a focus on policy rates while the high, real rates paid by consumers and businesses are ignored. To reduce real rates of interest for both industry and consumers requires the full embrace of Keynes's approach to the global system: a coordinated effort to reverse financial liberalization.
Only with finance restrained can there be prospects for public and private-sector expansion. Keynes's General Theory -- not the "Keynesian" theory of textbooks and conventional wisdom -- offers the same way out of today's crisis as it did in the 1930s. But the economics profession must begin a reappraisal of his central contribution to monetary theory.
And just as with On the Origin of Species, society must reconsider conventional wisdom and reconcile itself to the extent and scope of Keynes's vision.
Victoria Chick is emeritus professor of economics at University College London and a co-founder of Prime -- Policy Research in Macroeconomics.. Ann Pettifor is a director of Prime and co-author of The Economic Consequences of Mr. Osborne. To contact the writers of this column: Victoria Chick at v.chick@ucl.ac.uk Ann Pettifor at georgia@advocacyinternational.co.uk.
This post was originally published on bloomberg.com.
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His system would be easier to implement in a nation in which you don't have to fight a greedy aristocracy...
...not much else to read into it than that...
The problem is that the left controls most of the educational system in this country, so the historical record of the abject failure that Keynesian econ is gets scant attention in our schools, and must be obtained by one's own initiative to learn.
And just as with On the Origin of Species, conservative dogma has rejected conventional wisdom and refuses to reconcile itself to the extent and scope of Keynes's vision in order to concentrate wealth and power to of benefit the few over the many.
That we dispense with Keynesian ideology will perhaps be the new conventional wisdom, born of experience with its well documented failings.
Wrong. Economic theories are imperfect models designed to map reality based on the ceteris paribus assumptions of the prevailing economic climate. As correlations between economic variables change and systems evolve, static, inorganic economic philosophies must be either amended, adapted or cast aside entirely when they cease to be viable.
An economist has no business calling himself a 'Keynesian' since that ultimately reflects a near-religious form of association that has more to do with staking one's personal identity on a system of beliefs as opposed to a fluid search for truth reminescent of a rational investigation into economic phenomena in the light of first causes. Just as no physicist will call his or herself 'Newtownian' since subatomic particles defy the Principia due to the measurement paradox, reality/observable phenomena must be the ultimate standard.
Keynesian economic theory fails to account for the misallocation of capital that inevitably results when rates of interest are held below the equilibrium rate for extended periods of time- it is ironic that western economists universally lambast soviet-style central planning and price controls because of its interference with the signaling mechanism provided to producers and consumers while asserting that Central Banks are somehow exempt from this logic. The rate of interest is the price of money. Artifically low costs of credit encourage malinvestment which must be liquidated.
What are the failures we have seen..... they all seem to revolve around "credit" and people trying to make money off of "interest rates".......The S&L scandal , or Credit default swaps.....The Banking industry drools every time it see a way to "sell credit" and make money via interest ..... so of course it doesn't want that way of making money "regulated" and "controlled' .... for a long time in western charging interest for money was a "sin" ... an for good reason.... because making money from money really produces nothing.... but money .... the idea of "money" is supposed to be a universal barter device, we can use to trade for skills and products we all need......it is the real human need for those skills and products that gives money any real value .....but instead we have reversed money's roll and now create skills and products around money simple to make more money..... we are essentially chasing our own tail..
Same thing happened with corn-based ethanol subsidies. It turns out to be a massive boondoggle that has driven up food costs, and created more environmental harm by encouraging developing countries to cut down jungle for palm groves. These are the unintended consequences of foolish central planning authoritarian Keynesianism.
We need the market to discover information. We need the process of evolution at work in our economy to improve. This is a universal principle. We don't need overeducated fools forcing their solutions on the world. We need liberty.
I don't think so.
A bit confusing.... but I can understand the overall post.
Friedman advocated steady, low inflation. Kenya's inflation has been around 10%, way higher than anything Friedman advocated. Even what Friedman advocated was way too high. Read George Selgin's "Less than Zero".
mises has kicked him around and submitted him in the economic wrestling ring
ding,ding,ding
new champ austrian theory
The results of history are in, and they are conclusive.
Please, read an actual piece of his, rather than the Friedman school counter-arguments to arguments Keynes never made.
Or didn't you read that far into his ideas...?
Thus, the most logical course would be to immediately begin shifting the ballast of prosperity downward, yes, "redistributing the wealth". That is the obvious solution, and we will soon see who will prevail - the masses, or the few, extremely powerful, elite.