The Undying Legacy of Keynes

John Maynard Keynes was an extraordinary man. He completely and totally revolutionized economics. He meant well. He truly believed he had the country’s best interest at heart when he rolled out his theories on recession and his ideas for a government fix.

People either love him or hate him. I think it’s impossible to do either if we truly understand him. It is impossible to divorce Keynes from modern economics. Keynes is famous for what is now called “Keynesian Economics”. But even classical economics has been greatly influenced by Keynes, so much so that we probably never know that much of our current economic thought, even that which isn’t “Keynesian” comes from Keynes.

His ideas on the relationship between savings and investment and the Keynesian Cross gave rise to the IS/LM model, perhaps the most thorough understanding of international economics our science has yet come up with.

Keynes indeed contributed very much to economics. Despite being a reluctant revolutionary, Keynes remained modest to a fault. He was just a good guy.

As such, it’s almost with reluctance that I criticize him.

Keynes believed there were unseen forces in place that prevented the economy from reaching efficiency (or as close as we can get in the real world to this theoretical idea of “efficiency”). He believed prices were fixed in the short run. As such the supply side of the economy couldn’t adjust to balance wages and prices with output.

Keynes theorized that since wages and prices wouldn’t adjust, the only thing that could adjust was output. Since something had to give, if prices didn’t adjust to bring us to full employment, output would have to drop, thus putting us in a recession.

To guard against the fall in output, Keynes proposed that we stimulate the demand side. Who says we have to wait for prices to adjust; are we just supposed to suffer in the mean time? From this, government intervention was born. Cutting taxes or increasing spending to stimulate aggregate demand was seen as the solution by Keynes.

Once politicians got a hold of that idea, it was over. While the occasional tax cut may have occurred from time to time, it’s as if the politicians just discarded that half of the equation and focused only on increased spending.

It’s this type of thinking that gave rise to government provided welfare. By the government creating minimum wage and backing labor unions, the “sticky wages” that Keynes bemoaned were cemented in place. I have a few disagreements with Keynes, but this is his biggest failure.

He recognized sticky wages were problematic to the economy. His policies were meant to temporarily offset that problem by using government intervention. That temporary fix might be nice, but it led to a temporary problem becoming a permanent one.

Instead, Keynes should have addressed the problem and not the symptom. Keynes was brilliant. He had unprecedented authority. People in high places listened to him. If he had encouraged governments to discourage sticky wages, the country we call America would be much different today.

If he had encouraged government to avoid policies like minimum wage and backing labor unions, his problem of sticky wages would have gone away. If he had used his considerable influence to explain to people that prices needed to adjust, that the worker should expect fluctuations in his wage, then instead of reinforcing the idea of sticky wages, instead of giving it credibility, he could have dismissed it. If Keynes had said we should do everything in our power to avoid sticky wages, it would have happened.

Instead we have had generations believing they are entitled to a certain wage that is not market determined. We have had generations believing that they need not worry because the government is there to solve their problems.

Keynes didn’t care much for notoriety. He didn’t care if he went down in history as the greatest (certainly the most notorious) economist ever. If he had put pressure on the correct issue – fighting sticky wages – instead of a reactive government policy, the whole idea of “Keynesian economics” might not exist today.

Keynes, by trying to solve a problem, just ensured that it continues forever. So I guess we can call him the greatest economist ever, certainly so if greatness is measured by relevance. Keynes, by his misguided policies, ensured that he remain forever relevant.