Rising economic chaos is leading to the sudden return to prominence of an economist once thought largely consigned to history.
“The only way out of the crisis,” writes liberal commentator Will Hutton, is through the “economics of Keynes”.
Keynesian economist Graham Turner has written a well-received book giving an explanation of the crisis and his solutions.
But are Keynesian economics a solution to capitalist crisis?
John Maynard Keynes was born in 1883 and received an impeccable English ruling-class education at Eton and King’s College, Cambridge.
As a senior treasury official, Keynes walked out of the British delegation to the Versailles Peace Conference that concluded the First World War.
Here Keynes first revealed his abilities as a critical insider. He condemned the ruling class for its follies – so that it could learn to rule better.
Later, as a lecturer in economics, Keynes was unable to reconcile orthodox economic theory with a seemingly permanent recession. Millions across the world were unemployed following the stock market crash of 1929.
Conventional theory at the time claimed that this could not happen. If markets were able to adjust freely, wages would simply fall until it was profitable for capitalists to hire workers.
Any unemployment was therefore the result of either workers’ greed or laziness.
The obvious paucity of these arguments pushed Keynes into taking an increasingly radical position.
He recognised that capitalism had got itself into a terrible state and aimed to develop an economic theory that could provide solutions.
Keynes’ masterwork, The General Theory of Employment, Interest and Money, appeared in 1935.
It opens with a devastating attack on conventional economics.
Keynes showed that we cannot talk about individual markets – say for oranges or cars – as if they represented the whole economy, because all markets are tied to each other in complex ways.
Keynes then makes two major points. First, that saving money is not the same as investing it.
So capitalists will hoard their wealth if they think that investing it will not be profitable.
Second, in order to make profits, goods have to be sold. But if wages have been cut, everyone has less money to buy goods. The whole economy can be dragged down by wage cuts.
An individual boss will cut their workers’ wages to boost their own profits, but if all bosses do this, the economy will fall into recession.
Free markets, then, will not automatically restore growth.
Keynes proposed that governments should systematically intervene in the economy by boosting the demand for goods and services – spending money on public works and cutting interest rates to make investment more attractive.
After the Second World War, a watered-down version of Keynes’ ideas gained wide acceptance.
Governments across the world paid lip-service to “demand management”, believing that they could carefully intervene into the economy to maintain full employment and economic growth.
Capitalism grew as never before. But the growth occurred without Keynesian intervention.
When the boom collapsed in the early 1970s, attempts to apply “demand management” failed miserably. Inflation and unemployment both rose together – something the Keynesian economists thought was impossible.
Governments that had championed intervention as a way of staving off crisis now blamed that intervention for the crisis.
The flaw in Keynes’ theory was his inability to get to the heart of capitalism. Capitalism is exploitative – workers produce value and bosses capture some of the value as profit.
But capitalism is unplanned and competition leads to overproduction, booms and slumps.
What may be in the short term interests of individual bosses ends up destabilising the system as a whole.
The solutions Keynesian economists propose now are only partial.
Many are ideas socialists would support, such as nationalising industries. But because they don’t deal with the exploitation and competition that are central to the system, they cannot ultimately provide a solution to the crisis at the heart of capitalism.