After almost four years of stimulus-packages,
deficit-spending, and quantitative easing, it now seems obvious
that traditional “Keynesian” remedies to our current economic woes
have failed to put America back on track. Nevertheless many
economists and politicians continue to promote such measures as the
primary means for overcoming our economic problems. How else can we
explain former House Speakers
claiming that unemployment benefits
translate into growth, or Nobel Prize winners
insisting that previous stimulus-packages
were inadequate to do the job?
The reasons for this stubbornness are many. It reflects,
for example, an almost-touching faith in particular technical
arguments, such as claims that a dollar of state-spending creates
more demand than a dollar of tax-cuts.
It’s arguable, however, that something else is also
driving this state of affairs: the deeply-held belief that modern
economies require an enlightened class of experts to manage them.
Obviously it’s a position that helps rationalize the pre-eminence
of anyone belonging to such a group. But it also owes much to John
Maynard Keynes’s own views about the role of intellectual elites in
contemporary societies: convictions that, over time, look ever more
hubristic.
Keynes himself is often regarded as a rather rebellious
figure. Like most of the Bloomsbury circle of British artists and
writers with whom he was associated, Keynes was inclined for much
of his life to regard traditional morality with a deeply jaundiced
eye. Nor did Keynes hesitate to publicly mock government leaders
with whom he disagreed. The book that first brought him fame,
The Economic Consequences of the Peace (1919), not only
trashed the Treaty of Versailles as morally and economically
ruinous. It also portrayed politicians such as Britain’s Lloyd
George (“ill-informed”), France’s George Clemenceau (“dry in soul,
empty of hope”), and America’s Woodrow Wilson (“slow and
unadaptable”) as men with feet of clay, veering between utopian
idealism and Machiavellian cynicism.
Yet despite his iconoclastic reputation, Keynes was a
quintessentially establishment man. For his entire life, Keynes
moved easily among the Oxbridge-Whitehall elites that dominated
Britain throughout the 1920s, '30s, and '40s. Nor was Keynes
himself averse to government service. Among other things, this
included time as a senior Treasury official, a Bank of England
director, and leadership of Britain’s delegation to the 1944
Bretton Woods conference — all of which he did while working as an
active Cambridge don.
It’s a pattern that contrasts with the path followed by
Keynes’s free-market critics such as Friedrich Hayek and Wilhelm
Röpke. Generally shunned by America and Europe’s political and
academic insiders, they exerted influence primarily from the
“outside”: not least through their writings capturing the
imagination of decidedly non-establishment politicians such as
Britain’s Margaret Thatcher and West Germany’s Ludwig
Erhard.
The story of Keynes’s rise as the scholar shaping economic
policy from “within” is more, however, than just the tale of one
man’s meteoric career. It also heralded the surge of an army of
activist-intellectuals into the ranks of governments before,
during, and after World War II. The revolution in economics
pioneered by Keynes effectively accompanied and rationalized an
upheaval in the composition and activities of
governments.
From this standpoint, it’s not hard to understand why New
Dealers such as John Kenneth Galbraith were so giddy when they
first read Keynes’s General Theory. Confident that Keynes
and his followers had given them the conceptual tools to “run” the
economy, scholars like Galbraith increasingly spent their careers
shifting between tenured university posts, government advisory
boards, international financial institutions, and political
appointments — without, of course, spending any time whatsoever in
the private sector.
In short, Keynes helped make possible the Jeffrey Sachs,
Robert Reichs, Joseph Stiglitz’s, and Timothy Geithners of this
world. Moreover, features of post-Keynesian economics — especially
a penchant for econometrics and building abstract models that
borders on physics-envy — fueled hopes that an expert-guided state
could direct economic life without necessarily embracing socialism.
A type of nexus consequently developed between postwar economists
seeking influence (and jobs), and governments wanting studies that
conferred scientific authority upon interventionist
policies.
But as Röpke observed in the 1950s, these developments
also reflected an understanding of the economy as a type of
hydraulic machine, the functioning of which could be directed
towards pre-determined ends by flipping levers such as
interest-rates and public-sector spending levels. Not surprisingly,
such views often went hand-in-hand with a certain disdain for —
and ignorance of — the messier real world of business. As the
American businessman and banker Russell Leffingwell observed of
Keynes and his acolytes following Britain’s 1931 decision to
abandon the gold standard:
The Treasury civil servants who to a greater or less extent
follow him, have not the judgment of practical men. They are
mathematical tripos men. They are civil servants. They are
professors.…They are not bankers and they are not business men. The
one thing that bankers and business men… know is that confidence is
based on keeping one’s promises. That is something Keynes will
never know.
To be fair to Keynes, he expressed doubts at the end of
his life about what he had helped unleash. In 1946, Keynes told the
British economist Sir Henry Clay, “I find myself more and more
relying for a solution of our problems on the invisible hand which
I tried to eject from economic thinking twenty years
ago.”
Likewise Hayek records Keynes as criticizing that same
year the monetary policies then being developed by some of Keynes’s
most prominent disciples. “They are just fools,” Keynes reportedly
insisted. “You know, my ideas were frightfully important in the
1930s.… But you can trust me, Hayek, my ideas have become dated.”
Six weeks later, Keynes was dead.
Unfortunately for the rest of us, the dirigiste
genie that Keynes helped foster is well and truly out of the
bottle. Making matters worse is that it’s a type of madness that
doesn’t immediately appear totally crazy, not least because it
appeals to the planner inside all of us. Exorcising this demon
requires more than just reassessing our expectations of economics
and governments. It also involves our political-academic complex
partaking of that most difficult of medicines to which all of us,
but perhaps especially intellectuals, are inherently resistant: a
generous dose of humility.
