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August 15, 2009

Economist's View - 2 new articles

"Keynes was Really a Conservative"

Bruce Bartlett argues that the conservative position that governments "do nothing in the face of the greatest economic downturn since the Great Depression" would endanger the very thing free market ideologues are trying to preserve, the capitalist system itself. This was something that Keynes understood very well.

Though this argues that Keynes was a conservative, I don't think it much matters what label we attach to Keynes, it is the idea that government intervention preserves rather than destroys the capitalist system that is important. If we had no government intervention at all, no automatic stabilizers such as unemployment compensation and food stamps, no Social Security for the elderly to fall back upon when equity and stock values plummet, no stimulus package, and no financial bailout package, conditions would be much, much worse and the calls to overthrow the basic capitalist system would be amplified far beyond what we hear even with these programs in place.

Keynes is right that these programs help to make the cyclical swings in capitalist systems less devastating and hence help to preserve the system that we have. But that's not the only reason to provide social insurance. The capitalist system is unmatched in its ability to provide goods and services, and to respond to changing demand, but it is also highly cyclic and the swings in the economy can cause great misery for people who have done nothing to deserve the misfortune the system has bestowed upon them. The people who have lost their jobs and their ability to provide for their families deserve our collective help not just because that's the only way to preserve the capitalist system, but also because it's the right and moral thing to do:

Keynes Was Really A Conservative, by Bruce Bartlett, Commentary, Forbes: Conservatives continue to decry the $787 billion stimulus package... At best, they think it accomplished nothing because the additional federal borrowing took as much out of the economy as the stimulus put in. At worst, the deficits and enlargement of government will lead to slower growth and inflation not too far down the road.
Those on the right have been making this same argument ever since ... John Maynard Keynes popularized the idea of using budget deficits to stimulate growth in ... 1936... For this reason, Keynes, even more so than Karl Marx, is the principal bête noire of free market economists. They believe governments should never do anything to counteract economic downturns. ...
What Keynes understood is that ...[i]n really severe downturns, such as we suffered in the 1930s and are suffering today, government action is essential to turn the economy around; the private sector simply can't do it on its own. He also understood that democratic societies cannot long tolerate high levels of unemployment. At some point, people will jettison capitalism for some sort of socialism, which would threaten democracy as well.
Keynes' efforts were motivated by a strong desire to maintain the liberal capitalist order. Honest conservatives have always understood this. In 1945, economist David McCord Wright noted that a conservative political candidate could easily run a campaign "largely on quotations from The General Theory." The following year, economist Gottfried Haberler, of the conservative Austrian school, conceded that the specific policy recommendations of Keynesian economics were not at all revolutionary. "They are in fact very conservative," he admitted.
Peter Drucker, a conservative admirer of Keynes, viewed him as not merely conservative, but ultraconservative. "He had two basic motivations," Drucker explained in ... 1991... "One was to destroy the labor unions and the other was to maintain the free market. Keynes despised the American Keynesians. His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was the real father of neoconservatism, far more than [economist F.A.] Hayek!"

John Kenneth Galbraith, whose politics were well to the left of Keynes,... agreed with this assessment. "The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to endure that the system would survive," he wrote. But, Galbraith added, "Such conservatism in the English-speaking countries does not appeal to the truly committed conservative." ...

It was obvious to those on the political left ... that Keynes was one of socialism's greatest enemies, even if some on the right still view Keynes as a crypto-communist. ... Keynes told playwright George Bernard Shaw that the whole point of The General Theory was to knock away the Ricardian foundations of Marxism. ...

Indeed, the whole point of The General Theory was about preserving what was good and necessary in capitalism, as well as protecting it against authoritarian attacks... In order to preserve economic freedom..., which Keynes thought was critical for efficiency, increased government intervention ... was unavoidable. While pure free marketers lament this development, the alternative, as Keynes saw it, was the complete destruction of capitalism and its replacement by some form of socialism.

"It is certain," Keynes wrote, "that the world will not much longer tolerate the unemployment which … is associated--and, in my opinion, inevitably associated--with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom."
In Keynes' view, it was sufficient for government ... to use monetary and fiscal policy to maintain total spending (effective demand), which would both sustain growth and eliminate political pressure for radical actions to reduce unemployment. "It is not the ownership of the instruments of production which is important for the State to assume," Keynes wrote. "If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary."
One of Keynes' students, Arthur Plumptre, explained Keynes' philosophy this way. In his view, Hayek's "road to serfdom" could as easily come from a lack of government as from too much. If high unemployment was allowed to continue for too long, Keynes thought the inevitable result would be socialism--total government control--and the destruction of political freedom. This highly undesirable result had to be resisted and could only be held at bay if rigid adherence to laissez-faire gave way, but not too much. As Plumptre put it, Keynes "tried to devise the minimum government controls that would allow free enterprise to work."
The threat of totalitarianism may not be as great today as it was in the 1930s. But it would be naïve to believe that it was possible for the government to stand by and do nothing in the face of the greatest economic downturn since the Great Depression, as many conservative economists advised. The alternative to stimulus could ultimately have been something far worse from the conservative point of view, as Keynes well understood.

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