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.