The Legacy of a Visionary: How Keynes’ Economic Theories Shaped Policy and Prosperity Over the Decades
A non-tragic “hero of ancient Greece”
April 21, 1946, Easter. John Maynard Keynes, a 62-year-old economics guru, died of a heart attack at Tilton Farmhouse on the southwest coast of England this morning. From 1943 to 1944 he was worn out and debilitated by the Bretton Woods negotiations. Returning from Washington, his health continued to deteriorate. The day before his death, Cairns went to the seaside by car with his wife and mother. On the way back, he felt in good health and decided to go for a walk with Lydia. He described to her a book of poetry he had just bought, and concluded, “All this has but one meaning: don’t worry, there is always divine justice.” Westminster, London, 2 May
1946 A memorial service was held for Keynes at Sturt Cathedral, with then-Prime Minister Clement Attlee presiding over the service. Most of the senior members of the British government cabinet, members of the board of the Bank of England, Keynes’ old colleagues in the Treasury, the US ambassador to the UK and, of course, his close friends – the “Bloomsbury Group” – will be present at the memorial service survivors.
On the other side of the Atlantic, the Americans also held a grand memorial service for Keynes at the Washington National Cathedral.
Keynes’s old opponent, the economist Hayek, wrote a sincere condolence letter to Lydia, saying that Keynes was “a truly great man I have known, and I admire him infinitely. Without him, the world will become a worse”.
Economist Robert Skidelsky, author of “The Biography of Keynes”, made a poetic summary of his life with ancient Greek mythology: Keynes is not a tragic type, he is a successful hero.
”He heard the beautiful song of the siren, but he was prepared to avoid hitting the rocks, sticking to his talent and the general direction the world gave him. He was very shrewd in pursuing all good things, both life and work. He miraculously came close to achieving that.”
Private Lives: Rebellion and the Mainstream
On June 5, 1883, John Maynard Keynes was born in a family of scholars at the University of Cambridge, England.
His birthday is on the same day as Adam Smith, the author of “The Wealth of Nations”, with a gap of 160 years. Smith is the founder of modern economics and is known as the “father of microeconomics”. He is most well-known for comparing the free market to the “invisible hand”; Keynes, who was born later than him, was later called “macroeconomics”. the father of economics”. The two worked together to build a scientific and complete modern economic system.
Keynes’ father, Neville, was an economist who studied under neoclassical economics authority Alfred Marshall. Marshall had high hopes for him, but Neville lacked ambition and settled for university administration. Keynes’s mother, Florence, was a rare, highly educated woman at the time. She was enthusiastic about public affairs and served as the mayor of Cambridge.
Keynes showed superior intelligence at an early age, and his parents were proud of it and raised him with all their strength. He received a King’s Scholarship to attend Eton College, and later went to King’s College, Cambridge University to study as an undergraduate. He was soon attracted to his father’s mentor Marshall, who persuaded him to give up mathematics and work towards becoming a professional economist.
After working as a civil servant in the Ministry of Indian Affairs for two years from 1906 to 1908, Keynes returned to Cambridge to teach numismatics with the help and recommendation of Marshall and economist Pigou.
From childhood to adulthood, Keynes had a dazzling love life, among which his most important lover was the visual artist and beautiful man Duncan Grant. Duncan exemplifies the type Keynes loved—the natural, spontaneous artist, complete within himself but in need of external protection. Another important love in Keynes’ life, the Russian ballet dancer Lydia Lupokova who later became his wife, was also of this type.
In Cambridge and London, Keynes made a number of lifelong close friends. They all share the ideas of G. E. Moore, a Cambridge moral philosopher, and are named the “Bloomsbury Group” because they live in the Bloomsbury neighborhood of London.
The “Bloomsbury Group” occupies a pivotal position in the history of British culture in the 20th century. There are many well-known figures among its members, including the writer Virginia Woolf and her husband, her sister and painter Vanessa Bell, writer E. M. Foster, Lytton Strachey, and Duncan, who had a long emotional entanglement with Keynes, and so on.
This is a group of bohemian artists and intellectuals with rebellious spirit. They abandoned the customs and morals of the Victorian era, and took Moore’s “supreme goodness” as the criterion of action and life. The members are known for their colorful and open relationships.
Keynes was atypical in this small circle: the only economist, a successful person praised by mainstream society, and held a key position in the key departments of British power. But he continued to provide generous financial support to his friends and later managed their finances, supporting their artistic, literary and publishing endeavors.
The circle of friends of the Bloomsbury group had a profound influence on Keynes’s thoughts and actions throughout his life. For him, a philosophy of the ends of life takes precedence over a philosophy of the means of life, which is economics.
Paris Peace Conference, Pauperization, War Prophet
Keynes has always had a strong interest in public policy, and he was never the kind of pure theoretical scholar.
When Keynes graduated from Cambridge in 1906, he worked as a low-ranking civil servant in the British Ministry of Indian Affairs for two years. Cambridge economist Austin Robinson once said that Keynes learned there “to look at economics from the point of view of a chief executive”. He has also mastered dealing with the upper echelons of society, including how to “craft a conversation to impress a 40-year-old.”
Returning to Cambridge to engage in teaching and research in economics and completing his treatise on the Indian currency system allowed him to obtain the qualifications to enter the “Royal Indian Monetary and Financial Council”. These qualifications, fame and connections made him an expert consultant to the British government.
When World War I broke out in 1914, he was called up to the British Treasury to help. In November 1918, the four-year “World War I” ended. In January of the following year, Keynes participated in the Paris Peace Conference as the chief representative of the British Treasury. Before the peace talks, Keynes became responsible for formulating the policy and position of the British government on the issue of German reparations.
As early as two years ago, he co-wrote the historical lessons of collecting war reparations. In October 1918, he made a point in a memorandum to the Treasury that the compensation demanded from Germany should not be sufficient to destroy German production capacity.
At that time, there was a food shortage in the defeated Germany, the people were starving, and the social order was on the verge of collapse. However, the victorious powers did not care about these issues. In the conference hall in Paris, various political forces are playing games, and the voices of greed, belligerence, and revenge have the absolute upper hand.
In the peace talks, another Keynesian issue—plans for the reconstruction of Europe after the war—received a cold shoulder. U.S. President Wilson wrote to the British Prime Minister that it was impossible to help Germany rebuild its economy. “From the beginning we intended to deprive it of all its capital.”
Exhaustion, disappointment and frustration made Keynes fall ill. He moved out of the hotel where the British Treasury negotiating team was staying and found a quiet apartment west of Paris to hide. He wrote to his mother that he spent half of his time in bed, only reluctantly aroused when he met with Chancellor Chamberlain, Field Marshal J. C. Smuts and Prime Minister Lloyd George. “I don’t like the prospect at all. , went straight to bed.”
Back in England, he hid in a farmhouse rented by his old lover Duncan and his partner Vanessa in the countryside. He wrote “The Economic Consequences of Peace” in one go in two weeks. In the book, Keynes exposed the absurdity of the victorious power’s claims in a calm, ruthless and ironic tone. He pointed out: The peace talks have nothing to do with peace, the victors just want revenge greedily, eager to make Germany surrender forever.
He then predicted that heavy reparations would bring political instability and extreme regimes, leading to another world war. Twelve years later, this prophecy has become a reality – trapped in huge war reparations, Germany is struggling in poverty, extreme nationalism is on the rise, the Nazi forces rise through this, and finally launched a retaliatory world war.
”The Economic Consequences of Peace” was published in December 1919. Eight months later, it has been translated into more than ten languages around the world, with a sales volume of 100,000 copies.
It also made a lot of people angry. British Chancellor of the Exchequer Austin Chamberlain described his dissatisfaction as “distressed” in a letter to Keynes. Keynes was excluded from the decision-making circles of the British government for several years thereafter, although Chamberlain continued to consult him on monetary policy.
In France, he became “persona non grata”. Some hardline media simply accused Keynes of being pro-German, saying that he did not understand how important it is to teach the Germans a lesson. A newspaper published a letter from a reader suggesting that Germany award Keynes its highest honor, the Iron Cross.
In Robert Skidelsky’s view, “The Economic Consequences of Peace” is actually a special kind of personal manifesto, Keynes wants to make economists the “monarchs” of the 20th century, because other methods are no longer feasible .
This is the rebellion of economics against politics. “Only an economist’s view of social well-being, combined with new standards of professional excellence, can provide the last line of defense against unrest, against madness, and against recession.”
Finding the “middle way” in the race against war and revolution
The monstrous flood of “World War I” and the resulting social complications have fundamentally changed the political landscape of the 20th century.
The recession and world wars experienced by the capitalist world in the 1920s and 1930s discredited the faith and optimism of the nineteenth century in laissez-faire—that, if the capitalist market economy were allowed to develop freely, it would give Bring jobs to all who want to work and make all people rich.
All over the world, social experiments of all kinds have come into fashion. No matter what background these experiments come from, they all revolve around how to greatly increase the role of government and limit the freedom of industry and commerce.
One such program was German fascism. In fact, both the British fascist community and the German political circles at the time threw an olive branch to Keynes, and they greatly appreciated his economic thinking. When the mayor of Hamburg visited King’s College Cambridge, he was also invited to visit Hamburg and give a speech.
At that time, Hitler’s “New Germany” seemed to have won a dazzling victory-by October 1934, 3 million people in Germany had been reemployed within two years, which was half of the original unemployed population. . Keynes was not interested in this, because Hitler’s economic recovery plan mixed too many imperialist goals and terrorist methods.
At the end of 1933, Karl Meschauer, a German-Jewish banker who met Keynes at the Paris Peace Conference, died under anti-Semitic persecution. Keynes later rejected the invitation of the mayor of Hamburg, “After my friend passed away, there was nothing to attract me.” of German academics fled Germany. Keynes was involved, contributing money and effort.
Another option is the Soviet model of a centrally planned economy. Keynes expressed his romantic feelings for the Soviet system, but since his second visit to the Soviet Union in the 1920s, he has taken a clear opposition position-even in the Great Depression of the capitalist world in the 1930s. Among them, a very important reason comes from his and Lydia’s personal experience.
Lydia is Russian, and her family and friends are still in Russia. In 1931, accompanied by friends, she went back to Leningrad to visit relatives. She was sad to find that her mother, her sister, and her ex-husband were crammed into a small apartment, “for seven years, sleeping only on chairs at night.” Their friend, Russian ballet master Fedor Lopukhov was already the chief choreographer of the Mariinsky Theater, but he had to write overly flattering letters of thanks for Keynes regularly sending him toilet paper rolls, money and clothes from London. After Stalin came to power, Lydia was advised to be very cautious about commenting on Russia publicly or privately, otherwise her family might be implicated.
On December 11, 1923, Keynes published “On Currency Reform”, proposing, “At present, what we need most urgently is innovation in currency issues.” New laws are needed to manage the domestic economy and business cycle simply by lowering interest rates and issuing bonds.
In the book, his most distinctive point of view is to compare the relative advantages and disadvantages of inflation and deflation, “of the two, if you exclude extreme inflation like what happened in Germany, deflation is the worse business”, “because in a world that is getting poorer it is far worse to cause unemployment than to disappoint the rent-collector.”
In this way, Keynes deviated from the “quantity theory of money” of orthodox economics at that time, that is, he believed that there was a constant relationship between money and prices. He believes that in the long run, this constant relationship exists, but looking at the problem “from a long-term perspective” is a misleading analysis of the current situation itself.
”In the long run we are all dead,” said Keynes. “Economists set themselves the task too easily and too uselessly, for in bad weather all they can tell us is that the storm has passed. Then the sea will return to calm.” In
April 1924, the British “Nation” magazine published an article calling on the government to launch a public project funded by taxpayers to bring the country back on track. Keynes also wrote and engaged in public policy debates. In Does Unemployment Need a Vigorous Remedy? “In the article, he gave an affirmative answer.
”We have been stagnant for too long. We need impulse, shock and speed.” He proposed that the ultimate measure to cure unemployment is to spend 100 million pounds on public housing, build roads, and improve power grids; Confidence in enterprises, “Let’s try this idea boldly”, “Even if some projects will fail in the end, it is very likely.” On November
6, he gave a lecture titled “The End of Laissez-faire” at Oxford University Speech, an eloquent, ironic, radical attack on laissez-faire. In his view, the result of relying on self-interest is the end of politics.
At the same time, he dismissed the political tradition against free markets. He explained that he never advocated for the state to replace private enterprise. “The important thing for the government is not to do what individuals are already doing-doing it better or worse, but to do it. Things that absolutely no one is doing right now.”
Keynes tried to find a “middle way” between laissez-faire and planned economy, between conservatism and social democracy, and even between the fundamentalism of both parties.
In economic thought, Keynes was a radical. In terms of social goals, he is a firm “moderate conservative”.
Keynes vs. Hayek—a great and enduring debate
In February 1931, a 32-year-old Austrian economist was invited to the London School of Economics. His name was Friedrich August von Hayek.
At that time, Keynes was already the most prestigious economist in the Western world. The “Economic Consequences of Peace” written after he withdrew from the Paris Peace Conference made him the embodiment of conscience and justice, and became a celebrity in Germany and Austria, two defeated countries. Hayek, who was 16 years his junior, recalled that Keynes was “our Central European hero” for his heroic denunciation of Britain, France and the United States.
The LSE invited Hayek to give lectures, which was a well-planned cooperation.
The young and conceited Hayek came prepared – he wanted to make a name for himself in London and gain a firm foothold, and challenging the famous Keynes was the best way. He was invited by Lionel Robbins of the London School of Economics. Robbins became “the youngest professor in the UK” at the age of 31. He wanted to make the London School of Economics the center of economic thought in the UK and even in Europe, comparable to the economics center led by Marshall and Keynes – Cambridge University Compete.
Robbins, a believer in free-market solutions, admired Hayek’s “Paradox of Savings,” which refuted a Keynesian-like argument made by two American economists: that during a recession, the government should Public programs are used to drive demand, and there is a direct relationship between employment and aggregate demand.
Hayek first gave a lecture at the Marshall Institution in Cambridge as a warm-up, but was met with a cold reception by Keynes’ disciples and followers-the group of young economists known as the “Cambridge Circus”. Members of this small circle included the Robinsons, Richard Kahn, Piero Sraffa, James Mead, and others, and they often discussed the economic issues raised by Keynes together.
Hayek, with a strong Austrian accent, wrote down a series of mathematical formulas on the blackboard, while explaining in detail why the business cycle would go from boom to bust: The real cause of the Great Recession was excessive investment, and its source of funds was the banking system The credit created; if the government intervenes and creates more money, it will only prolong the economic suffering. The quickest solution is to get the masses to save more and lower interest rates, leading eventually to a revival of investment.
Kahn stood up and challenged, “You mean, if I go out tomorrow to buy a new coat, it will increase unemployment.” ”
Yes,” Hayek said, “except,” he pointed to the blackboard “It needs to use very complicated mathematics to demonstrate and explain the reasons.”
But at the London School of Economics, Robbins made all the arrangements for him-the largest lecture hall, carefully selected audience. Here, Hayek fired his first shot against Keynesian economics. Through four lectures, he refuted Keynes’ “Government Intervention Theory” with a set of convincing logic. He believes that Cambridge’s theory seems reasonable, but it is full of loopholes. He then offers his own remedy — forget about quick fixes, only time will heal an unbalanced economy.
The lecture caused a sensation, and Robbins, the mastermind behind the scenes, was very pleased with himself. Beveridge, the dean of the London School of Economics, immediately invited Hayek to be a visiting scholar. Unanimous vote.
Hayek continued to strike. In May, he published a 26-page book review in the Journal of Economics, a journal of the London School of Economics, on Keynes’s new academic work “On Money”. In order to attract Keynes’ attention, he deliberately adopted aggressive, arrogant, and even violent language.
Hayek’s provocation really angered Keynes. He immediately wrote 34 criticisms on this book review, first responded in the “Journal of Economics” in November, and then the two confronted each other through private letters, and did not even fall behind on Christmas Day-early in the morning, Hayek’s The letter was sent to Keynes’ residence; in the afternoon, Keynes posted the reply letter.
The heated debate quickly escalated into personal attacks. Keynes, too, lost his grace and turned to Hayek’s earlier work, Price and Production. The dogfight continued until February 1932. Tired, Keynes wrote back a final letter to Hayek, unilaterally ended the debate, and set to work on his most famous magnum opus, The General Theory of Employment, Interest, and Money (“The General Theory” for short). He wanted to use an airtight argument to show why, in the absence of private investment during a recession, increased public investment would create jobs without bringing about the crisis Hayek believed was inevitable.
However, neither the “Cambridge Circus” nor Hayek’s followers would let it go. They agreed to debate regularly in a pub halfway between Cambridge and London, and published their content in a new journal, the Review of Economic Research. In addition, a joint seminar is held on a Sunday every month.
To their excitement, Keynes, Hayek, Robbins and others also appeared at the seminar from time to time.
No one at the time understood the magnitude of the Hayek-Keynesian debate, and its place in the history of economic thought.
This debate between laissez-faire and state intervention will become the most important debate in economics and public policy in the past century.
The “Keynesian Revolution” on the road to prosperity
In 1932, at the beginning of the new semester, Keynes took a set of revised proofs in hand and began a series of lectures to explain his thoughts on the post-money era. In the fall, he reopened the second round of lectures, and the title of the lecture was changed from “Pure Monetary Theory” to “Money Theory of Production.” An undergraduate student from the United States later recalled that when
Keynes spoke, everyone was afraid to speak. “It’s as if we were listening to Charles Darwin or Newton!”
These two series of lectures heralded the beginning of the “Keynesian Revolution”. At the end of the lecture, Keynes handed over the polished proofs to the publisher Macmillan. In February 1936, “The General Theory of Employment, Interest, and Money” was officially published, marking the first shot of the “Keynesian Revolution”.
On the title page of the new book, Keynes declared that “this book is mainly dedicated to my fellow economists”, and admitted that he had spent 10 years trying to persuade political scientists and civil servants to reduce unemployment through government-funded projects, but failed. get too far. Therefore, his target audience is a whole generation of idealistically driven young economists in British and American universities. Against the backdrop of the Great Recession, they were all desperate to do something.
In just a few years after the publication of The General Theory, Keynes captured the minds and hearts of many young American economists. In 1934, there were only 20 academic papers mentioning his theory; from 1936 to 1940, there were 269.
The 26-year-old John Galbraith was a lecturer at Harvard University at the time. He later recalled that the “General Theory” caused a frenzy on Harvard campus after its publication, “The “General Theory” immediately attracted all economists under the age of 35, like a kind of The virus hit an isolated tribe of islanders in the South Seas, and it was so virulent that it sickened everyone.” But he also notes that “economists over 50 show quite a strong response to the disease.” Immunity.”
Among the young Keynesians, Paul Samuelson, a 21-year-old Harvard student, soon became a recognized leader, and then the authority and disseminator of Keynesianism in the United States. He later inherited, Developed and supplemented this theory, and popularized this theory.
Samuelson later became the first scholar in the United States to win the Nobel Prize in Economics. His classic book “Economics” is the best-selling textbook in the world. For generations. His book systematically brought modern economic theories including Keynesianism into China for the first time, and made this way of thinking and vision take root in China.
In addition to young economists, Keynes also conquered many mature converts in academia, business, and finance. Among them were the 50-year-old classical economist Alvin Hansen, who later became known as “America’s Keynes,” and many Washington officials came to listen to his lectures on Keynesianism; Eccles, who was appointed by Roosevelt as the first chairman of the Federal Reserve Board of Directors, and sat in this seat for 14 years.
On the west coast of the Atlantic, Keynesian thought swept through many sectors of the American economy and occupied the federal government in Washington. At that time, Lippmann, the most influential columnist and opinion leader in the United States, also converted to Keynesianism. He told a Harvard scholar, “Laissez-faire is dead, and the modern state must take responsibility for modern economics as a whole.”
At the same time, Keynes published a series of articles in The Times, which was subsequently expanded and published as The Road to Prosperity. In this book, he provides the most complete, rigorous, and convincing statement of his imaginative economic views in the past, and presents his arguments clearly and confidently-at the smallest cost to the taxpayer. Create millions of jobs.
The General Theory was an obscure academic work written for fellow economists; The Road to Prosperity was more accessible, written by Keynes specifically for finance ministers with limited knowledge of economics. Needless to say, the title alone is enough to tempt politicians from all over the world.
In “The Road to Prosperity”, for the first time, he integrated the “multiplier theory” that his disciple Richard Kahn analyzed carefully after statistics into his proposal – the government should spend money to increase aggregate demand, The newly added capital creates new jobs, and the newly employed people will generate new purchasing needs, and the supply of these new needs creates new jobs; in turn, the newly employed people create jobs for others… …Keynes put the UK’s “multiplier” at 2, but in order not to give the impression of being exaggerated, he gave it 1.5, meaning that for every £1 the government spends on creating new jobs, it contributes £1.50 worth of value to the overall economy .
This became a key point of The Road to Prosperity—economists and finance ministers should look not just at the parity of national income and spending but at the level of the country’s total income, what Keynes called the country’s “aggregate need”.
Keynes also proposed for the first time that tax cuts could be used to stimulate the economy. He estimated that spending £100 million a year could provide jobs for one million people, of which £50 million might come from tax cuts.
Tax cuts later became the signature policy of Keynesians and of Keynesian finance ministers.
Roy Harold, Keynes’s official biographer, commented that it was a radical idea, “not just to finance public works with loans, but also to stimulate additional purchasing power by cutting taxes without cutting current spending. It’s pretty much deficit finance in the full sense of the word.”
In early 1933, Keynes sent a copy of “The Road to Prosperity” across the Atlantic to the newly elected US President Franklin Roosevelt. That’s the suggestion of Harvard professor Felix Frankfurter. Frankfort was Roosevelt’s closest political friend and head of his “think tank”.
He told Keynes that urging Roosevelt to spend more public money to ease unemployment at this point would play into the president’s hands. “I’ve heard from the United States that there is a considerable amount of opinion in the Senate in favor of a major increase in public works,” “I think a letter from you expressing your independent position and opinion would greatly accelerate the momentum at this moment.”
On the last day of 1933, Keynes published an open letter to the President of the United States in the “New York Times”, calling on the President to increase the country’s public spending and return the country to prosperity. Frankfort pre-sent a copy of the letter to the White House before it was published.
Occupy Washington, and the world
In fact, the “Roosevelt New Deal” with the “Keynesian Revolution” as the guiding ideology has been quietly launched.
In the United States, the stock market crash of 1929 and the ensuing Great Depression provided a historical opportunity for Keynes’ economic revolution. At that time, domestic investment in the United States dropped by 90%, and 13 million people were unemployed nationwide, accounting for a quarter of the adult population. If farm workers are excluded, the real unemployment rate is as high as 37%. In Toledo, Ohio, four out of five people lost their jobs.
According to American historian Arthur Schlesinger, “everywhere the chain of shelter and food for the unemployed collapsed as the burden grew heavier,” “avoiding violence or even revolution (at least some thought) became a matter of fact. Big deal.”
At Frankfort’s suggestion, Roosevelt formally invited Keynes to visit the United States in 1934. In May, Keynes first went to New York to receive an honorary degree from Columbia University, and then met with a large number of New Deal supporters, business leaders and members of the President’s think tank to learn more about the US economic situation from the inside.
At 5:15 p.m. on Monday, May 28, Keynes strode into the Oval Office of the White House and shook hands with Roosevelt as he sat there. The two talked for about an hour, and Keynes focused on explaining Kahn’s “multiplier theory”. Roosevelt later said to Frankfort, “I chatted with Keynes for a while, and I liked him very much.” But he admitted that the other party said a lot of inexplicable numbers, which made him puzzled, “He must be a mathematician, no What political economist.”
Although he may not have fully understood Keynes’s “multiplier theory”, Roosevelt grasped the core issue-he welcomed the world’s most famous advocate of “anti-laissez-faire views”. That’s what the young economists in Washington, bent on saving the world, understand.
In May 1933, the U.S. Congress passed the Federal Emergency Relief Act and established the Federal Emergency Relief Agency to quickly allocate various relief funds and materials to states. In the second year, the simple relief was changed to “relief with work” to provide a large number of unemployed with the opportunity to engage in public works.
By the eve of World War II, the U.S. federal government had spent 18 billion U.S. dollars on various projects and relatively small direct relief costs. The U.S. government had built nearly 1,000 airports, more than 12,000 stadiums, and more than 800 school buildings and hospitals. , not only created job opportunities for craftsmen, unskilled workers and construction industries, but also provided all kinds of jobs for thousands of unemployed artists. It is by far the most ambitious and successful relief plan undertaken by the US government.
This sum of money passed through the pockets of workers, through different channels and consumption, and returned to the hands of capitalists, becoming the “motivating water” for government investment to stimulate private consumption and individual investment.
In 1933, the unemployment rate in the United States was still at a high of 25%, but it dropped to 17% the following year, and by 1935 it was 14.3%. By 1936, national production in the United States had returned to 1929 levels.
But Keynes himself took a cautious attitude towards the “New Deal” report card. He has repeatedly emphasized to admirers that government funding to alleviate unemployment is only appropriate at the bottom of the cycle or during a recession; once the economy recovers, it is not appropriate to continue pumping money into the system.
By the spring of 1937, domestic production, profits, and wages had returned to pre-1929 levels. Roosevelt thought the economy was back on track. As the federal government cut spending, tightened credit and raised taxes, previously established job-helping agencies began to slow. But soon, a new recession began, which lasted throughout 1938.
With the election looming, President Roosevelt returned to the Keynesian formula of continuing to fund a new round of job creation. In a “fireside chat” on April 14, 1938, the president explained that helping the unemployed would protect America from extremism like Germany and Italy.
At this time, the international situation is already very tense. In 1933, after Hitler came to power, he revived the armament program on a large scale. Within a year, Germany got rid of the high unemployment since World War I and achieved full employment. Under the threat of war, European democracies such as Britain and France were worried and began to expand their military.
Keynes then wrote to Roosevelt, arguing that the “Roosevelt recession” was due to “the error of optimism” and urging him to stick to it.
What happened in Germany forced Roosevelt to continue spending heavily, as Keynes suggested. To prepare for war, he ordered a massive rearmament program: annual U.S. defense spending from $2.2 billion in 1940 ballooned to $13.7 billion the following year.
On September 3, 1939, the day when “World War II” broke out, the Wall Street stock market returned to the high level before the stock market crash in 1929.
lifelong rivals in the same trenches
In 1940, Germany launched a blitzkrieg against the United Kingdom with a major air raid on London. LSE staff and students relocate from London to Peter College, Cambridge.
Although the two were academic “rivals”, Keynes showed kindness and enthusiasm for Hayek. He insisted on finding a house for Hayek near King’s College. The time spent together has made the two very close friends, as have each other’s families. Hayek later recalled that the two shared many interests, notably history, “besides economics. Basically, we didn’t talk about economics when we met.”
The two met from time to time at King’s College and performed their teaching duties together. Together they were on duty at night, patrolling the roof of King’s College’s Gothic church with shovels and brooms in hand, watching the night sky vigilantly for incoming German bombers.
It’s a comical and symbolic picture: two of the greatest economists of the 20th century, despite opposing views on economics, are actually in the same trenches, defending what they have in common—freedom, democracy, Values and institutions of individual rights. On top of their heads, there is a common enemy – all kinds of political extremism. The only difference between the two is that each thinks the right way to defend is different.
It was during this period that Hayek wrote his most socially influential and widely read work on political economy, The Road to Serfdom. He wants to explain one thing – those who advocate replacing the market with a planned economy, no matter how well-intentioned they are, are tantamount to embarking on a path that may lead to tyranny. He worried that when World War II was won, the victorious Allies might conclude that wartime economic management could hasten a more prosperous and just postwar society. He warned that such a policy was a prerequisite for totalitarianism.
He also affirmed the motivation behind Keynes’ grand plan – the dangers of long-term mass unemployment. He conceded that it was a “super important problem,” “one of the most serious and pressing problems of our time.” But his solution was still to oppose government intervention.
In June 1944, on behalf of the United Kingdom, Keynes went to the United States to host the upcoming negotiations on the international monetary mechanism, and read Hayek’s “Road to Serfdom” on board. He then wrote to Hayek in the United States, “morally and philosophically, I almost agree with its views: I not only agree, but are deeply moved.” He then reminded Hayek that Hitler’s rise in
Europe Not the convenience of big government as he said, but precisely because of the failure of capitalism and mass unemployment. Then he took the United States as an example and pointed out that if the unemployment rate in the United States returns to that of the 1930s in peacetime, political extremism may appear and the world will be drawn into war again.
Hayek was concerned with the link between government intervention and tyranny. Keynes, on the other hand, believed that totalitarian tendencies were rooted in individual moral choices.
Boom, Bust, and a Giant’s Legacy
After Keynes’s death in 1946, Hayek sent his widow a condolence letter, and at the same time told his wife Hella something that he later regretted: He is now “perhaps the most famous living economist.” Ten days later, he found that Keynes had become a saint, but he was gradually neglected and forgotten.
After the end of World War II, devastated Europe and Japan in Asia became the best laboratories for practicing Keynes’ vision of peace and prosperity.
Americans believe that they should keep in mind the historical lesson given by Keynes in “The Economic Consequences of Peace”: instead of punishing the defeated countries with poverty, they provided a lot of aid and brought West Germany, Japan, and Italy back to the free market. In 1946, the most active evangelist of Keynesianism, the economist John Galbraith, served as a State Department adviser, advising the occupied countries on economic policy.
In the United States, Keynesianism has also embarked on a new journey. A series of new bills of rights related to guaranteed employment were passed. In 1946, President Truman signed into law a compromised Jobs Act that put the federal government in charge of “promoting the achievement of maximum employment.” For the first time in history, the federal government of the United States assumed responsibility for managing the economy, expanding executive powers beyond its existing constitutional responsibilities, and controlling currency and trade. “Macroeconomics,” as Keynes created it, became an official tool of government.
For the next 30 years, legislative and executive agencies have scrambled to push that power to the extreme, manipulating the economy through taxes and the like in order to maximize prosperity and win elections.
The post-war period from 1950 to 1960 was the golden 20 years of rapid economic growth in the United States. Ordinary people don’t need to work too much, they have TVs, cars and other big things, and they have plenty of leisure time to travel by plane. The middle class has emerged in large numbers, and new communities are everywhere. Self-confidence, optimism and heroism permeate the personality and temperament of these two generations. This is the economic miracle brought about by Keynesianism and the cultural miracle born from it.
In the 1970s, the economy of the Western world ushered in the “stagflation” era. Around 1973, the Organization of the Petroleum Exporting Countries (OPEC) in the Arab world quadrupled the price of crude oil in retaliation for the US meddling in Middle East affairs. The outbreak of the oil crisis led to high prices and a sudden brake on economic growth. A new economic phenomenon emerged—low economic growth or even stagnation, accompanied by inflation. After Watergate, Ford succeeded Nixon as president. During his tenure, both inflation and unemployment reached Depression-era highs.
Keynesian economic theory has reached a dead end—according to Keynesians, unemployment and inflation cannot rise at the same time. But it turns out they were wrong. Milton Friedman, a representative of “neoliberal economics”, commented, “Stagflation declares the end of naive Keynesianism.
” Yeke ushered in the highlight moment of his life-in 1974, he was awarded the Nobel Prize in Economics. At the award ceremony, he slammed the dangers of Keynesianism, calling it “quack” and “fundamentally false.” Two years later, Friedman also received the honor. In his speech, he praised Hayek as his ideological mentor.
Milton Friedman followed Keynesianism in his early years, participated in the “Roosevelt New Deal”, and later turned to it. He is the most effective person in promoting Hayek’s thought. In fact, his economic thought is different from Hayek’s Austrian school, and his “monetarism theory” directly learned from Keynes. But he shares Hayek’s political philosophy, and both agree that inflation hurts more than unemployment.
In 1979, in the United Kingdom, Mrs Thatcher, the leader of the Conservative Party, entered 10 Downing Street. In November 1980, Republican candidate Ronald Reagan won the U.S. election. Two hardline conservative politicians came to power.
Thatcher read Hayek’s The Road to Serfdom when she was a student at Oxford. As leader of the Conservative Party, she declared war on the post-World War II political consensus. Hayek and Friedman were guests of 10 Downing Street.
She set about reducing the size of the public sector, reducing the money supply, cutting taxes, freeing corporations from government regulations, paying down the national debt, and selling off state assets. With unemployment and crime rising in the streets, cabinet members fretted as evidence of her policy failures. But the “Iron Lady” resolutely refused to return to the old path of Keynesianism, and tried her best to sell Hayek’s books and ideas to members of the House of Commons. Britain became the first economy in the world to try to solve the inflation problem with Friedman’s “monarism” policy.
The ruling actions of the “Iron Lady” encouraged Reagan on the other side of the Atlantic. After entering the White House, he also hired Friedman as the think tank of his new economic policy, and launched the so-called “Reaganomics” – including curbing inflation through tightening money, reducing control over industries, and reducing taxes on a large scale. Among them, the top personal income tax rate was reduced from 70% in 1981 to 28% in 1988, and the corporate tax rate was reduced from 28% to 20%.
In the end, inflation was brought under control and the dynamism of the free market economy was unleashed. From 1983 to 1986, U.S. economic growth soared to 4.8%, which also boosted employment, and by the time Reagan left office in January 1989, the unemployment rate was only 5.3%.
But that’s not the whole story — the Reagan administration cut entitlement programs while ramping up defense spending, from $267 billion before he took office to $393 billion in 1988, as a result of an arms race with the Soviet Union. After he ended his two presidential terms, the United States “reduced” from the world’s largest creditor country to the largest debtor country.
In the view of Keynesians, the so-called “Reaganomics” is nothing but a trick and a gimmick. Robert Solow, a Nobel laureate in economics, pointed out that the economic prosperity of the United States from 1982 to 1990 was achieved by the measures of the Reagan administration to increase expenditures and lower taxes. A classic case of expansionary budget deficit growth.” Galbraith also sneered that the people who completed these tasks were “involuntary anonymous Keynesians.”
When the Soviet Union collapsed in 1991 and Hayek’s warnings in The Road to Serfdom gained popularity, free-market ideals prevailed. The following year, at the age of 92, Hayek died without regret in Freiburg, Germany.
From 1978 to 2008, the increasingly globalized free market flourished overall. After the end of the “Cold War”, some of the world’s top economists even believed that: the cyclical dragon has been defeated, macroeconomics has been successful, and the core task of preventing depression has really been solved. Economist Alan S. Buderin said, “By 1980, it was difficult for you to find academic macroeconomists in the United States under the age of 40 who would claim to be Keynesian.
” Powerful treasury ministers and Federal Reserve chairmen generally agree that a blend of Keynesian and Friedman views should be adopted to maximize economic growth and stifle inflation.
In 2000, John Galbraith, a hard-core believer in Keynesianism, was asked: Is the Keynesian era gone forever? He replied, “No, just another recession — it’s very likely.” In
2008, a financial storm triggered by the subprime mortgage crisis quickly swept the world. The crisis declared that more than a decade of experimentation in allowing largely unregulated markets to automatically create economic prosperity and growth had failed.
In order to deal with this “fierce financial crisis once in a century”, President Bush immediately turned to Keynes for help.
In February, Bush asked Congress to invest $168 billion in the form of income tax rebates to stimulate the economy, and the Treasury Department purchased $700 billion of “non-performing assets” from the banking industry. The government and the state intervene in the economy with all their strength, hoping to save the financial and banking industry. In the United States, the government gives money directly to the banks. In Britain, the government bailed out banks through a stock swap.
“For 30 years, Keynes’s reputation has gradually faded.” One of Keynes’s biographers said wryly, “but in almost 30 days, the late economist was rediscovered and restored.”
In September, the 158-year-old Lehman Brothers, the fourth largest investment bank in the United States, declared bankruptcy with a total debt of US$613 billion. Ben Bernanke, then chairman of the Federal Reserve, pushed through a package of actions to encourage banks to resume lending. In October, Treasury Secretary Henry Paulson received $700 billion authorized by Congress to rescue other financial firms on the brink of bankruptcy to prevent the domino effect of the collapse of Lehman Brothers. On December 16, the Federal Reserve cut interest rates to zero.
Governments and central banks around the world have taken actions similar to those in the United States. In November 2008, the G20 summit was held in Washington, and the leaders of various countries reached a common policy, promising to cut interest rates and allow public spending to exceed taxation in order to cope with the oncoming global economic recession.
On October 23, 2008, “Time” magazine published a column entitled “The Return of Keynes”. Nobel laureate Robert Lucas is the economist who has done the most to bury Keynesianism. At this time, he also admitted, “I guess under the fire of bullets, everyone is a Keynesian.”
Keynesian economists have regained their former prestige and influence on government decision-making. In the 2008 financial crisis, the emergency response plan proposed by Bush Jr. and continued to be promoted by Obama was a thorough Keynesian plan. However, the stimulus packages of the two presidents failed to reduce unemployment quickly. Many Americans have been shocked by the sheer scale of government borrowing, and criticism of public programs as a “waste of money” has revived.
Starting in 2020, a three-year pandemic has dealt another blow to the recovering global economy. Governments around the world have introduced various economic rescue, unemployment relief and economic stimulus measures.
In the United States, the Biden administration has launched the so-called “Biden economics”, which includes a rescue plan, a work plan and a family plan. Among them, the “American Jobs Plan” covers an infrastructure investment of 1.2 trillion US dollars, plus a 3.5 trillion US dollar budget, which intends to rebuild the national infrastructure, stimulate the return of manufacturing, and create millions of new jobs.
With the rapid intensification of the global geopolitical crisis, this makes people can’t help but think of the “Roosevelt New Deal” in history.
History seems to prove once again: “As long as the world needs it, Keynes’ ideas will always exist.”
