It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one’s ideas to a conclusive test either formal or experimental.
—John Maynard Keynes
I have been thinking a lot about Keynes lately, and not only because I am reading a massive biography of his life. Keynes is one of those perennial thinkers whom we can never seem to escape. He exerted enormous influence during his lifetime and dominated economic thought and policy for thirty years after his death. Then, as inevitably happened, the Keynesian orthodoxy became too successful for its own good. His ideas came to be taken for granted, and his innovations became the conventional wisdom that the cleverest economists of the next generation came to reject. This ushered in the age of Neoliberalism—with Margeret Thatcher, Ronald Reagen, and Milton Friedman as the great standard-bearers—and the decline in Keynesian thought.
And yet, whenever there is a serious problem with the economy, everyone instinctively returns to Keynes. It was he who most convincingly analyzed the sources of economic recession and depression, and then plotted a way out of it. He was writing, after all, in the wake of the Great Depression.
To oversimplify the basic idea of Keynes’s analysis, it is this: High unemployment leads to a lack of demand, and a lack of demand can push financial systems beyond the breaking point. Put another way, the economy can be envisioned as an enormously complex machine that is composed of millions of cogs. Some cogs are small, some are large, and all are connected—either proximally or distantly. If one small cog stops working, then it may cause some local disturbances, but the whole machine can continue to chug along. But if too many cogs fail at the same time, the machine can come to a grinding halt.
As the coronavirus shuts down huge sections of the economy, this is exactly the scenario we are facing. Waiters, bartenders, actors, musicians, taxi drivers, factory workers—so many people face lay-offs and unemployment as businesses prepare to shut down. Besides this, if we are locked into our homes, then there are now far fewer places where people can spend their money, even if they have money to spend. It is inevitable that some people will not be able to afford rent, that some businesses will go under, and that much of the money that is available to circulate will remain unused in bank accounts. People are not going to be buying houses, or cars, or dogs, or much of anything in the coming weeks (besides toilet paper, of course).
Now, in a capitalist economy, anyone’s problem is also my problem, since buying and spending are so intimately related. The money you spend eventually becomes the money I receive, and vice versa. Thus, if there is a increase in unemployment (limiting the money you receive), an increase in bankruptcies (limiting the money the banks receive), and a decrease in spending (limiting the money I receive), then we have a recipe for serious economic contraction. A wave of bankruptcies inevitably puts pressure on banks; and if banks begin to collapse, then we are in grave trouble. Whether or not we like to admit it, banks provide an essential service in the economy, one which we all rely on. To return to my crude cog analogy, the banks are some of the biggest cogs of all; and if they stop turning, nothing else can move.
Keynes’s solution to this dilemma was essentially to use the government’s almost limitless ability to borrow money, and inject as much cash into the economy as possible. In other words, the idea is to stimulate demand, so that people can continue to spend money. It is an idea that has been criticized by so-called ‘responsible’ people for generations. Can the government really afford to go into so much debt during a recession? Can such artificial measures actually prop up an ailing economy? Can we tolerate such a huge degree of government involvement in a liberal society?
Republicans—and to a lesser extent, even Democrats—have been sharply critical of Keynesian economics over the years. When Obama wanted a stimulus package for the 2008 financial crisis, he faced endless opposition and criticism from the Republican party. And now that we are facing an economic crisis on a comparable scale, the Republicans are turning without hesitation to Keynes: hundreds of billions in stimulus, and even resorting to mailing checks to every American. One could hardly imagine a more straightforwardly Keynesian solution than this. Keynes had this to say about how the government could deal with a recession:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
This is the closest that Keynes got to the notion of simply giving people money. Paying people for absolutely useless work is better than nothing, since at least then people are being paid; and if they are being paid, they can spend their money; and if they spend their money, I can get paid; and so on. If this were a different kind of crisis—a kind where we did not have to practice social distancing—then perhaps we could imagine large-scale infrastructure projects as a way of combating recession. But now, we must resort to the even more radical idea of paying Americans to do nothing. Maybe Andrew Yang’s notion of a universal basic income is not so far after all?
Well, here is where I must warn my readers (all three of you) that I am really quite clueless when it comes to economics, so everything written here must be read in that spirit of ignorance. However, I think that Keynes’s quote is also quite relevant for non-economic reasons. As so often true in economics, we are facing an entirely novel situation. This is a crisis without precedent, and that means that all of our ideas of how to cope with the crisis are untested. The closest historical precedent to the coronavirus is the 1918 flu pandemic; and yet there are important differences between both the disease and the historical situation. We are thus operating without ‘conclusive tests,’ in Keynes’s words, of our ideas. It remains to be seen which country’s approach will be the wisest.
In the meantime, Keynes is an example for us to follow: an intellectual who responded to a historical crisis with both ingenuity and rigor. Let us hope there are many more like him.
Lotz in Translation 