Genevieve Simms

“We’re all Keynesians again,” declared investment guru Satyajit Das during his trip to Winnipeg last week. “We are all Keynesians now,” trumpeted an article in Time magazine last October. That same article quoted Robert Lucas, an economist at the University of Chicago who in 1995 won a Nobel Prize for theories critical of Keynes, as saying, “I guess everyone is a Keynesian in a foxhole.”

So, are we all Keynesians once more? On the face of it, it seems so. Last month, U.S. President Barack Obama’s $787 billion US stimulus package passed through Congress and has received widespread popular support. (As a side note, such numbers have long since defied any human scale of comprehension: at the rate of $1 per second, it would take 25,000 years to spend $787 billion.) Here in Canada, team Harper-Flaherty has given up any pretence of balancing the books and instead committed itself to deficit-funding on a scale that would make even John Maynard Keynes blush if he were alive today. And around the world, regimes of all stripes have once again found merit in an economist whose ideas lay in disrepute for the past 30 years.

Yet is this sudden rush to convert to Keynesianism a genuine recognition that unregulated free markets just don’t work? Or is it simply a short-term expedient, grabbing the last idea in the bag now that all others have failed? More importantly, is it possible to select just one aspect of Keynesian economic theory — i.e. relying on governments to buy our way out of a recession — or are we now committed to changing the very fundamentals of the 21st-century global economy?

John Maynard Keynes had already made his name with The Economic Consequences of the Peace (1919), in which he warned against imposing a punitive treaty on Germany after the First World War, when he published The General Theory of Unemployment, Interest and Money in 1936. The devastating impact of the Great Depression defied economic orthodoxy. “In retrospect it was inevitable,” writes Robert Heilbroner in his chapter on Keynes in The Worldly Philosophers (1953). “The stock market had been built on a honeycomb of loans that could bear just so much strain and no more.” In America, national income had fallen from $87 billion (1929) to just $39 billion (1933). More than 14 million Americans were out of work.

Against this background, Keynes’s ideas were revolutionary. The General Theory is a complex and rather dull book, but its key proposals are simple: (1) the level of employment is determined not, contrary to classical theory, by the price of labour, but by the spending of money; and (2) by their nature, free markets do not deliver full employment or maximize investment, and therefore, governments must intervene in order to achieve economic efficiency.

What these ideas crystallized into, eventually, was the general notion that governments should run deficits during recessions in order to stimulate investment and employment, but recoup that money during more prosperous years via taxation in order to build up a budgetary surplus for use in the next (and inevitable) downturn. Thus was born the principle that underlay post-war liberal welfare states in Europe and North America. That both continents, despite a considerable outlay of capital in waging the Cold War, enjoyed almost three decades of more or less uninterrupted growth seemed to validate the Keynesian revolution.

Chicago economist (and critic of Keynes) Milton Friedman admitted as much in 1965, when he became the first to announce that “We are all Keynesians now.” In an article penned that year for Time, Friedman conceded that “In Washington, the men who formulate the nation’s economic policies have used Keynesian principles not only to avoid the violent cycles of the prewar days but to produce a phenomenal economic growth and achieve remarkably stable prices.”

Yet even as Friedman offered his begrudging praise, he warned of the dangers latent within Keynesianism. Wages were increasing faster than productivity, and wholesale and consumer prices were also on the rise as demand continued to outpace supply. Nevertheless, he concluded, “If the nation has problems, they are the problems of high employment, high growth and high hopes.”

Within a decade, however, circumstances conspired to effect a second economic revolution in the West. The inflationary spiral that Freidman cautioned against received a massive boost in 1973 in the wake of that year’s Arab-Israeli conflict, when OPEC boosted the price of oil fourfold. Almost overnight, developed nations faced a lethal combination of high unemployment and double-digit inflation that defied any Keynesian remedy.

This crisis spawned the monetarist revolution, based on the ideas of Friedman himself. Freidman argued that governments could do little to ward off such recessions, but should concentrate instead on regulating the money supply in order to combat inflation. Eventually, the free market would find a new equilibrium, even if at a far lower level of wages. Britain’s Margaret Thatcher was the first leader to embrace this new policy, a policy that would become the central plank of neo-conservative platforms across the West over the next two decades.

By the 1990s, much of this monetarist approach had been discredited. Friedman himself died in 2006, by which time elements of a Keynesian approach to the economy were beginning to creep back in. It’s taken the advanced crisis of the past 12 months to fully restore the reputation of a man whose theories were anathema for the past generation or so.

Yet are we really all Keynesians once more? Or do we simply mistake the old economist for the Lone Ranger, riding in to save us at the last moment once all other hopes of rescue have been exhausted? Or perhaps he’s an over-benevolent Santa, descending the chimney with a seemingly bottomless sack of gifts, regardless of whether we’ve been naughty or nice.

It’s too soon to tell. And even if the various stimulus packages prove effective, it’ll still be too soon to tell. Only once we collectively support — no, insist on — governments that tax us progressively and rigorously in good times can we really call ourselves Keynesians once more.