Don’t Call It A Comeback

Interview by Dan Morrell

Before his 2007 appointment as Denison University's provost, Bradley Bateman had earned a reputation as a leading scholar of the work of John Maynard Keynes–a name that quickly polarizes many economic discussions because his name is associated with government intervention in the economy.

You’re teaching your first day of Econ 101. What do you say to introduce Keynes?

That’s a tough question because most people’s understanding of Keynes is as a caricature of the real man. The standard picture of Keynes–the caricature– is that he’s the man who wrote The General Theory of Employment, Interest, and Money in 1936, and that politicians then used his ideas to save capitalism from the effects of the Great Depression. Later, his name became synonymous with government intervention in the economy. But much of this story just isn’t true. Keynes did solve the analytical puzzle of explaining how mar- ket economies rise and fall. We didn’t have an analytical model to explain either booms or depressions before The General Theory. But his ideas were not used by governments in their responses to the Great Depression.

So if Keynes didn’t save capitalism, how did his name become synonymous with the idea of government spending to stimulate economies?

What really happened in the ’20s and ’30s was that the national governments in most of the industrialized democracies began to intervene for the first time to try to help their economies. Germany, France, the United States, Italy, Japan, Sweden, and Norway either cut taxes or increased spending to try to stimulate their economies during the Depression. But they all did it for different reasons, none of which had to do with John Maynard Keynes. In Sweden, for instance, two political groups who traditionally had battled each other– farmers and urban workers–realized that running deficits to stimulate the economy was something that they could agree on. In Japan, the military demanded re-armament and the only way they could do it was to borrow money and create a deficit.

In the end, World War II happened and everybody ran huge deficits. Our economy started to boom during the war because of war production. But people remembered that after the First World War, economies crashed everywhere when we stopped production and millions of people lost their jobs as a result. So during World War II, economists tried to think about ways of avoiding that scenario. What Keynes did was give economists everywhere–in Japan, France, Italy, Germany, England, and the United States–a common language for explaining why running deficits could stimulate their economies and for explaining the ways in which they could manage economies going forward by using fiscal and monetary policies. So the Keynesian model wasn’t really used widely until the 1940s. It simply became the label that stuck to a set of disparate experiments. So 1945 though 1975–what the French call “the 30 Glorious Years” and others just call the “postwar boom”–became linked with Keynes. Even President Nixon said in 1969: “We’re all Keynesians now.”

The late 1970s and ’80s saw Reagan and Thatcher usher in a new era of economics that was decidedly different from Keynes’ policies.

It really was. In the public mind, I think, Reagan and Thatcher represent the move away from Keynesianism. Keynesianism had been beaten up pretty badly in the 1970s because, for the first time since World War II, we simultaneously had high unemployment and high inflation. Two oil embargoes raised prices radically, causing lots of unemployment as companies started laying off workers in the face of falling demand. It was a mess. Keynesian tools didn’t offer an easy answer. There was also a concerted effort in the financial press and out of several right-wing think tanks to blame what was happening on Keynesian policies.

Milton Friedman was one of the first economists to rush in with an alternative to Keynesian policies. He had been making strong arguments against Keynes for years, but suddenly people began to listen to him. He said, in effect, “You just have to set the growth of the money supply at a steady level. Inflation will stop, and we’ll get good stable economic growth.” But in order to believe that this simple solution would work, we’d have to assume many things about the economy that turn out not to be true. Once the Federal Reserve adopted Friedman’s policies in 1979, they almost immediately had to abandon them. But the failure of Freidman’s policies did not lead to a return to Keynesian ideas in the 1980s. Instead, new, more analytically sophisticated theories were developed in an effort to show that markets work best when there is no government intervention.

To the misinformed public, it became a battle between the good guys and the bad guys. Keynes became the figure in favor of heavy state intervention, and so, the bad guy. The good guys were people who wanted the government to do nothing or very little and to let the market function unimpeded.

But as I said a minute ago, this is a caricature of Keynes’ ideas. In the first place, he did not believe that the government needed to “manage” the economy. He believed that when there was a depression or a collapse in the financial system, public works projects (what we would call infrastructure investment) could stabilize the economy and help to get growth started. But he did not believe that the government should be involved in running the economy or using fiscal policy to guide the economy when it is doing well.

In the second place, he did not believe in running deficits in the government budget. It’s tough to explain, but long before the Great Depression, Keynes had argued publicly for taking capital expenditures off of the regular government budget. He argued that the government should keep its books the same way that corporations do and use a separate capital budget. So he argued during the Second World War that it was not part of his plan to run government budget deficits. He believed in stimulus programs that paid for themselves; he advocated infrastructure projects that would generate the income necessary to pay off the loans used to finance them.