I came up—or took undergraduate courses in Economics, anyway— at the end of the “we’re all Keynesians now” era, the famous phrase coined by Milton Friedman and amplified by Richard Nixon in the 1960s. Keynesian economic policy was bedrock to the New Deal order that lasted from the Great Depression to 1980. But that year, my junior year (Macroeconomics 300), now actually marks the official historical overthrow of Keynesianism at the level of national economic policy by the same Milton Freidman and Ronald Reagan. A new morning was dawning in America, privatizing, union busting, and anti-government initiatives headlined the Reagan Revolution/Neoclassical/Neoliberal free market capitalist agenda, and were about as anti-Keynesian as you could possibly get. Not that I understood very well at the time the terrible turning point unfolding. From my coursework I got that Keynesianism boiled down to a vague idea that the government played a necessary stabilizing role in the economy (which sounded right enough and kind of obvious). And I knew that the ascendance of Reagan was bad news, a conservative movement win, white bigots and the rich get richer, basically, but I did not realize at all what an assault and overthrow of the spirit of Keynesian governance and so-called Big Government it all was.(1) I got the idea soon enough but by the time I had I’d shelved Keynes’ big book, The General Theory of Employment, Interest, and Money (1936), as unreadable academic stuff. I’d try to get to it later, maybe.
In college I had already read Keynes’ relatively short journalistic book about the negotiations for peace after World War I, The Economic Consequences of the Peace. In that one he argues that the end of WW1 was a tragic farce of belligerent Nationalism and Scrooge banking elites. The punitive economic measures of the Treaty of Versailles, he insisted, would make any subsequent peace harder if not impossible to sustain. The Price of Peace in the aftermath of WWI, Keynes seemed to be saying, meant thinking twice about screwing your National enemies as it is likely to lead to more horrific war and social unrest and so a disruption of peaceful commerce. Grimly, if presciently, he forecasts the rise of fascism three years before Mussolini rises in Italy and fifteen years before Hitler takes over in Germany. So from my first exposure Keynes struck me as a guy on the right side of history but his economics, from what I’d heard, were difficult if not impossible to follow so I left him alone.
But then more recently, so many years later, I jumped at the chance to read Zachary D. Carter’s The Price of Peace, a big biography of Keynes published in 2020. A perfect way, I figured, to go deeper into Keynes’ economics, when they’ve never seemed more relevant, without actually having to read more of Keynes hardcore macroeconomics straight. So rewarding was Carter’s The Price of Peace, however, I finally did get around to taking a crack at Keynes’ General Theory, his economics magnum opus. Difficult, sure, mathematics I can't follow, some entirely inscrutable sections, but also lots of interesting and possibly crucial points, several of which seemed missing in the negative Keynesian concept bandied about by business elites and their economic ideologues. The Price of Peace felt like a primer to a true Keynesian revival; it was for me, anyway.
Keynes made his academic career at Cambridge, a foundational citadel of classical capitalist economic theory; “free markets,” “Invisible Hand,” cost-benefit analysis, and all the rest. Alfred Marshall, the Chair of the Cambridge Department of Economics when Britain was the empire on which the sun never sets, wrote the first standard textbook of modern capitalist market theory, Principles of Economics, in 1890; where he plots and diagrams and propagandizes the dynamic logic of the self-regulating capitalist economy and Laissez-faire (leave the economy alone) rule behind the Industrial Revolution then sweeping the world with modernity. The book was hugely influential in English speaking economics education and still celebrated as a foundational economics subject source when I took undergraduate courses in 1980.
In the Economics department at Cambridge Keynes was a prodigal son. His father taught in the same Economics department alongside Marshall. Keynes, Maynard to his friends, was something of a math prodigy growing up and became a member of the Apostles, an ultra-elite group of scholars at Cambridge, at the age of 19. Keynes’ mind was said to be so sharp he intimidated the philosopher Bertrand Russell, one of the most eminent Apostles at the time. As an undergraduate Keynes was a fierce advocate for free market globalization. He was surely intended to extend the academic glory of classical capitalist economic theory at Cambridge. But his story takes a different turn, one Neoclassical free market economists still resist.
Keynes actually first thought he wanted to do philosophy but then changed his mind after reading Ludwig Wittgenstein’s Philosophical Investigations, which he felt effectively discredited the Cambridge analytic philosophy he had hoped to build on. Then when World War I broke out Keynes wanted to do something practical to help his country so he went to work for the British Treasury and began doing economics first as a job that eventually became his academic career.
Keynes was the intellectual heir apparent of classical economic theory and modern market ideology at Cambridge. He is often cited as the third most important economic thinker of all time after Adam Smith and Karl Marx. If Marx is Capitalism’s fiercest critic; most responsible for exposing Capitalism’s systemic injustices and corruption (expropriation and exploitation, etc). Keynes is Capitalism’s most technocratic (or sympathetic) critic; most responsible for demythologizing classical capitalist theory and shifting the paradigm about the relationship of the government to the economy.
From the time of Keynes’ second book, the Consequences of the Peace, in 1919, to The General Theory, in 1936, he grew increasingly skeptical of classical economic theory. By 1926 he’s calling for the end of Laissez-faire rule as a credible or sustainable ruling ideology and order. With his imperious patience and detail, and to the great annoyance of business elites, he explains why in fact Laissez-faire policies, self-regulating market policies, enable predatory market behavior and exacerbate social conflicts and destabilize societies. By 1936 and his General Theory he is debunking sacred classical capitalist theories and theorists in withering take downs, naming names, decimating free market theories about full employment and the so-called Invisible Hand.
For one simple example from The General Theory book: saving is not only not the be-all economic engine Adam Smith makes it out to be, Keynes chides, but there can be too much saving and, far more importantly, not enough spending and demand. Smith's small business perspective completely gets the macroeconomy wrong. When Keynes first came out with this stuff there were plenty of Road to Serfdom dogmatists around that did not appreciate his point of view, not surprisingly.
But Keynes was alarmed as well by the blinkered outlook of the markets and various captains of industry. Much classical self-regulating equilibrium free market theory he comes to think is mistaken at best or totally wrong. He grows convinced the hardships unfettered markets and Laissez-faire economic policies inflict on the laboring masses will lead to more social unrest and violent conflict and war. Economic collapse visits catastrophic miseries on everyone without a wealthy portfolio of assets to fall back on. Keynes sees in the Great Depression, in the historical cycles of boom and bust markets, the predictable austerity politics of free market elites that follow every economic downturn, the flammable material of anti-democratic political movements, strongman dictatorships, and fascism. He was not wrong.
Nonetheless, after vanquishing the Nazis in World War II and riding high on the material success of the New Deal order in U.S. and the Marshall Plan in Europe and development in postwar Japan, Keynesianism does in fact change mainstream economics after WW2. Not without resistance, of course. Keynesian academics in colleges and universities in the U.S. were persecuted by McCarthyites as socialist fellow travelers, if not outright communists, as much if not more than any other group of professionals in academia. And a counter movement of that old time religion, Neoclassical capitalists, emerges at the University of Chicago school of Economics by the 1950s, with some famous emigres still pining for the lost “free markets” of the Austro-Hungarian empire.
Nonetheless, all post-WW2 governments in the industrialized world developed government policies to stabilize markets and the economy during the Great Depression, by practical necessity (2). In the recovery this Keynesian model of government and market collaboration (“embedded liberalism,” Polanyi calls it) creates in Western Europe and Japan something of an economic miracle by the 1960s. And in the U.S. the New Deal order generates a boom economy in middle class consumer cultures, broadening economic prosperity like no period in American history before it.(3) So by the 1960s most college and university economics departments were more or less in fact “all Keynesians now” and living in a world where the government role in regulating and stabilizing the economy was generally recognized as necessary, if not crucial.
Or so everyone thought. But the fissure, one of the shrewder points in The Price of Peace, was always right there in the standard economics textbook of the Keynesian era: Paul Samuelson’s Economics, published in 1948 and still in use in my Economics 101 class in 1978, described by its influential author as a mix of Keynesian and Neoclassical economics. Carter sees in Samuelson and subsequent Keynesian economics in the U.S. something of a betrayal or obfuscation of Keynes’ most important insights into the relationship of the government and markets. And free market fundamentalists find in Samuelson evidence for the failure of Keynesianism.
One thread of this dispute comes to head in the story economists tell about 1970s and the Phillips curve. The latter, which graphs an inverse relationship between jobs and inflation (or employment and wages), was popularized in Samuelson’s textbook as a cardinal rule of Keynesian macroeconomics. But then a bad bout of Stagflation from 1974-1982, with unemployment and inflation both surpassing 5%, defies the Phillips curve for a stubborn eight years, fueling an anti-Keynesian reaction. The Curve became evidence Exhibit A in a mainstream economic attack on Keynesianism, led by Friedman, and shaped the story most mainstream economists in the U.S. tell about the 1970s to this day.
This story goes something like this: Keynesian economic policies were stifling free market competition with taxes and bureaucracy and regulations and endless red-tape.(4) Keynesianism and Big Government, same thing, were the problem. And, additionally (and even more gallingly), Friedman and corporate elites (and still echoed by mainstream economists today, to their shame), targeted the so-called "Cadillac" pension plans and exorbitant demands of labor unions as big part of the problem holding back economic growth. Cutting corporate taxes and deregulating the economy and opposing labor unions, or what came to be known as Neoliberalism, was the solution to what ailed the U.S. economy. Or in other words, “free markets" and Laissez-faire were back, baby!
This is more or less the official mainstream economics story about the 1970s. But Carter defends Keynesianism from this take and this is where his account of recent economic history receives the most push back in the responses to the book I’ve looked at. And probably the right place to note that Carter is not an academic economist but a journalist with a very good education in economic history. And for those who might use this distinction to dismiss Carter’s account, another reason economics is called the “dismal science.”
Keynes, in fact, did not formulate the Phillips curve (Samuelson and, believe it or not, once again, Friedman, were on the case) and, regardless, Keynes repeats in his General Theory book multiple times that macroeconomic relationships cannot be reduced to infallible mathematical formulas. The futility in this is evident in the inability of classical capitalist theory to produce full employment or deal with monopoly or anticipate economic downturns; or, crucially for Keynes, when private markets get stuck in a deflationary trap and cannot generate enough demand and jobs to stabilize the economy and promote growth. In this latter instance, according to Keynes, the government must become the spender of last resort to counter economic collapse and mitigate the devastation wrecked on human communities by cyclical economic downturns.
In short, the government, wherever necessary and appropriate, insures society against the worst depredations of private markets. Governments cannot control markets with models and graphs. And the government role isn’t to subsidize or propagandize the private markets profiteering flimflam, like Neoliberalism. Its role is to establish and modify rules for the economy that maximizes commerce and trade that nurtures general economic security and prosperity.
Economic historian Thomas Piketty tells a different story about the US economy in the 1970s, one Keynes might like a little better than the mainstream economic version used to discredit his ideas. One should consider, points out Piketty, that by the 1970s the postwar development of economies in Western Europe and Japan were quelling a post-WW2 export boom in the U.S with their own development. By the end of the 1960s the U.S. was no longer a net-exporter and the balance of trade had shifted, squeezing profit margins in the domestic economy. And then on top of this, the supply shock caused by the rise of OPEC, the independence of oil producing nations in the middle east, stresses out American businesses and consumers. Energy being so central to the economy drives up general inflation.
There were problems in the economy, like there always are, but instead of investing in American production, pursuing energy independence, or promoting more export trade, or negotiating in good faith with the growing demands of labor for living wages and a middle-class life, or taking even the slightest haircut on corporate profit margins, corporations sought to pass the costs of labor demands onto consumers (as inflation) and, ultimately, to undercut them altogether by breaking labor unions and off-shoring manufacturing jobs; thereby gutting middle class working life in the U.S for now going on three generations.
We saw beginnings of all this, the Reagan Revolution and Neoliberal agenda, in the headlines in Reagan’s first term. Right off he makes a big show out of breaking the union behind the Air Traffic Controllers and then, more surreptitiously, aggressively launching forty years of tax cuts for the rich and deregulating the economy for corporations, elevating private equity, and promoting the diminishing returns of a low-wage service economy and credit card debt for everybody else. Republican led, to be sure, but with plenty of help from Democratic administrations along the way. Union labor representation plummets. Overall, the income going to the bottom half of the country falls by 15% between 1980 and 2020 but manages to produce enough billionaires to keep the High-tech bread & circus party going even as the gig economy gets increasingly tougher for the 99%. Healthcare bankruptcies go up. The subprime mortgage crisis and The Great Recession. A Big Pharma designed Opioid Crisis. Student loan debt crisis. A homelessness and an affordable housing crisis. Deaths of Despair; falling average lifespans. Bottom line: the Keynesian economy grows almost twice as fast between 1930 and 1980 as does the market fundamentalist Neoliberal economy between 1980 and 2020.
After going on 50 years of the Neoliberal experiment one thing is for sure: Free market economics are in fact less pro-economic growth than Keynesian economics. Neoliberalism squeezes and chisels income and spending at the middle and low income levels of the economy so as to hoard obscene private concentrations of wealth at the top.
You could say the second half of The Price of Peace, even if Carter does not pile on as much as I am doing here, is about how mainstream economics, at least in the U.S., gets Keynes wrong. Keynesianism isn’t regulating the economy with fixed mathematical models and graphs. It’s an adaptive use of macroeconomic models to answer a question: How does the State, government, encourage the growth of private markets, commerce and trade, while curbing their predatory and destabilizing extremes? And in case you're having any trouble fathoming those extremes: try paying less than living wages, or externalizing the costs and burdens of pollution on the environmental commons, or evading the taxes necessary to support the public infrastructure that nurtures the general prosperity of society.(5)
To be clear, Keynes was not anti-capitalist. Keynes liked capitalism, played the markets, and supported free trade principles. He always voted Liberal and said he would never join the Labor Party because of its exclusive identification with one social class. He dismissed Marxism as throwing out the baby with the bathwater. Keynes doesn’t want to overthrow capitalism; he wants to save it from its own self-destructive myth and hubris. He was pedantic and effete; a founding member of the Bloomsbury set. He was undoubtably for a long time more than a little naïve about the actual working conditions of workers in Britain’s global empire. And his General Theory is, definitely, more tentative and provisional than the grand unitary title of his great work or his critics might suggest.
But be all that as it may, I was so turned on by Carter’s magisterial biography that I did finally get around to reading Keynes’ General Theory book. Could I follow all the math and macroeconomic concepts and their relationships? No way. But the gist of it was clear enough; and isn’t that far removed from my first undergraduate impressions. Keynes studied economics and history and learned from his times and came to see self-regulating market economics as a fantasy at best oblivious to important features of the really-existing economy and at worst, which it was unfortunately often, economically predatory and politically divisive.
As wrap-up I’ll offer up my own peanut gallery synopsis of Keynes’ General Theory: Unfettered markets produce tremendous wealth and, unfortunately, significant human calamity and suffering. They require the hegemonic power of good government to backstop and discipline the market’s risk taking and guide market activity towards the general welfare and prosperity of society.
Zachary D. Carter’s The Price of Peace is my favorite non-fiction book of the last five years, easy.
1. Grover Norquist’s libertarian anti-tax crusade still serves as an apt mission statement: “I don’t want to abolish government. I simply want to reduce it to a size where I can drag it into the bathroom and drown it in the bathtub.” And an imaginary cautionary riposte from Keynes might go: libertarian economics enable fascist politics.
2. I’ve heard this complaint about Charles Kindleberger’s encyclopedic history of economic downturns, Manias, Panics, and Crashes; that it offers no ideas or theoretical lessons to follow. Here’s one: a lack of or a slow response by governments to economic downturns and crashes—i.e., hands-off “free market” austerity policies-- make economic downturns worse and last longer. Every time.
3. If largely excluding African Americans and new immigrants as a surplus cheap labor source for employers, and so a shameful sop by government to exploitative business interests.
4. Wonder if any of those critics of big government bureaucracy in the 1970s are still alive and have ever tried to conduct any personal business on the phone or by mail with Xfinity or Verizon or Bank of America or any other giant private business of today? Obviously, the government has no monopoly on impenetrable and maddening bureaucracy.
5. Some “originalist” wiseacre might point out environmental destruction goes beyond the scope of Keynes’ day, and he never said anything about it, but it is another destructive extreme consequence of unfettered private industry and so obviously the sort of economic behavior he thought must be checked by government.
