For John Maynard Keynes, there is no point fixating on balancing the budget today in order to avoid possible deficit in the long run, because, “In the long run, we are all dead.”
By Anthony Kila
There is an ontological difference that separates John Maynard Keynes from other great names we meet in the pantheon of “The Unforgettables”. Whilst most great names and ideas made their way into our intellectual and practical worlds through their attempts to explain and or change our world by presenting theories and ideas that tell us how things work, John Maynard Keynes gained his position in the circle of the Greats by attempting to solve our problems.
He attempted to do so by looking at what was affecting us and then came up with what he thought were the best solutions to overcome our challenges. To that extent, it becomes easy to see why John Maynard Keynes is seen more of a reformist than a radical or a revolutionist, yet it is difficult not to consider his economic ideas as revolutionary.
If today we talk of a mixed system and nobody in mainstream political economy conversations proposes a system fully devoid of government intervention or a system fully devoid of private initiative, we owe it in grand part to John Maynard Keynes. The Master Economist was himself convinced and made it clear that “the political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty.”
Born by an economist father who was a convinced advocate of the free market and taught by great teachers of the laissez-faire economics, John Maynard Keynes himself was an active investor in the stock market. He showed no aversion for the free market and capitalist system. His faith in that system was shaken by the great depression caused mainly by the 1929 stock market crash.
Faced with a situation of dramatic and continuous growing high unemployment, low trading and low industrial activities and resultant fall in GDP, John Maynard Keynes realized that market might not ultimately be able to adjust itself. It occurred to him that the invisible hand articulated by Adam Smith and predicated on the idea that if every individual in the system was allowed to act in her best self-interest without any guidance or intervention, the system will autocorrect. It occurred to JMK that the sum total of individual interests might not be equal to the best interest of the whole economy.
Like a Christian moving away from the orthodox church and its doctrines, John Maynard Keynes began articulating a set of ideas wherein he began advocating for a visible hand in the economy. His new positions that will from then in the early 1930s, dominate economic policies across the world and became what we now term as the Keynesian Economics.
It is generally agreed in political economic literature (some disagree) that the first practical application of the Keynesian Economic theory was the American New Deal introduced and implemented by the administration led by President Franklin D. Roosevelt. Yes, from the wooden chairs and tables of Cambridge our own John Maynard Keynes wrote and had other influential and productive interactions with the leaders of the biggest economy of the world.
A fundamental plank of the Keynesian Economics is that the driving force of an economy is its demand, not supply as generally agreed till then. He observed and articulated that the total economic value of a system is determined and driven by what is demanded in that system. For John Maynard Keynes, in a production system, what we demand for (measured by how much we spend) determines what we produce and supply as well as its quantity and the number of people we require to work, (measured by employment and unemployment rate). It must be said here that the focus for John Maynard Keynes was the aggregate demand, in Keynesian Economics therefore, demand must include both private and public demand.
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Where demand for goods and services is low because people have no money to spend and capitalists have no money to invest or all of them decide to save the little they have for the rainy days, John Maynard Keynes articulated that Government should become visible and active. For him, Government should step in, take active steps to stimulate demand by putting capital into the system.
He taught us that government should put people to work so that they will have wages which will be spent to demand for goods and services and by so doing all these will revive the economy. The best way to stimulate the economy according to the gospel of the Keynesian Economics is by government spending on useful projects: infrastructure such as roads and rails. If you have doubts over the utility of government spending as a means of creating jobs to tackle unemployment and to stimulate the economy or you theoretically wonder what to do if there were no infrastructure to build. The Keynesian answer is to let people get paid for digging holes and filling them back.
A cogent and practical question John Maynard Keynes provided an answer to was how to fund public investment. According to Keynesian Economics, raising tax is not the solution, rather, solution lies in tax reduction. Where there is no money in the coffers of the government, John Maynard Keynes articulated that government should borrow to spend.
Yes, he embraced debts: The money borrowed to create employment will be paid back by a stimulated economy that has workers and capitalists producing and spending to buy goods and services and paying tax. For John Maynard Keynes, to solve economic crises of unemployment, decline in production, low trade and production, revive a falling GDP, government has to introduce two major policies: Fiscal policies aimed at cutting tax, spending more not less.
Secondly monetary policies aimed at changing the interest rates in a way that will get money into the system. For John Maynard Keynes, there is no point fixating on balancing the budget today in order to avoid possible deficit in the long run, because, “In the long run, we are all dead”.
Join me if you can @anthonykila to continue these conversations.
- Prof Anthony Kila is Centre Director at CIAPS Lagos.