Rereading Keynes

Keynes should be required reading for any serious student of macro. Keynes’ General Theory is not an easy read, but the insights are brilliant and logical reasoning a joy to follow.

Today Keynes is held by the establishment to be all about deficit spending and left-leaning ideas. Actually, the contrary is true, as anyone who reads the General Theory will conclude. Keynes did advocate government spending as a way out of recessions and depressions, but he also advocated fiscal prudence and, dare I say it, austerity, in good times.

In addition, anyone who thinks Keynes was a left-leaning socialist would do well to read the following excerpt:

In some other respects the foregoing theory is moderately conservative…. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment…. But beyond this no obvious case is made out for a system of State Socialism….

[If we] succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again…. [T]here is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed…. [T]here is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition…. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down….

[T]he traditional advantages of individualism will still hold good. Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency — the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed…. [A]bove all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty… greatly widens the field for the exercise of personal choice… best safeguard of the variety of life… the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

Whilst… [the policies I recommend] would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend… [them] as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.

For if effective demand is deficient… the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough…


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