After rescuing the planet from a worldwide economic depression in the 1930s, and after providing the U. S. a stable economy with high growth, low unemployment and negligible inflation in the 1960s, standard economic folklore suggests that Keynesian economics is not viable. Mainstream economists attack the notion of effective demand that John Maynard Keynes put forward in his 1936 book, The General Theory of Employment, Interest and Money. Why is that? Where does the evidence point to Keynesianism as unworkable?
Some mainstream economists scoff at Keynes’ assertion an economy can be finely tuned such that at some point in the future it will be necessary to work only 15 hours per week. They forget Keynesian economics lasted only briefly in the 1930s and then again only briefly during the Kennedy administration. So, if we’re looking for blame why we’re not on track for the 15-hour work week, it should be fair to say it has little if anything to do with Keynesian economics.
Keynes is vilified as a disrupter of the economic system while outsourcing, tax havens and regulatory capture become standard operating procedure for many large corporations; while corporate greed ensures hourly wage earners no longer participate in productivity gains; while financialization replaces a bona fide investment as the go to strategy for profit seeking corporations; while the poor end up paying a higher percentage of their income to taxes than the wealthy. Have mainstream economists become ideologues? Why are they silent on issues of ethics and morality? Is it acceptable to ignore the plight of half the population?
This is not to say Keynes, who is credited with being the father of demand-side economics, had all the answers. He could have been more emphatic with the necessity of paying down the debt in times of prosperity. He could have alerted us to the likelihood the rich and powerful would skew the economic system to their favor and refuse to share with labor the fruits of increased productivity. He could have laid-out in stark terms the dangers of hording of wealth and how a sufficiently progressive tax code is necessary to keep the economic pump primed. He could have shown how a well-functioning society makes business activities even possible and how it’s incumbent upon us all to recognize the need for societal investments to keep the wheels of business turning. With all his faults, however, Keynes still must be credited with identifying inconsistencies buried within mainstream economic thinking and with offering an alternative approach that has proven in the past to be successful.
It must be stated at this point, a significant portion of the population feels the economy is performing well. Growth is high, unemployment is low, and there is little prospect of inflation according to official reports. The other 80% of the population, however, only know what they’re experiencing. Real wages for hourly wage earners have been stagnant or falling since the early 1970s. 90% of all new income goes to the top one-percent. Nearly half the population would have trouble handling an unexpected $500 expense. One of five children in this country live in a state of poverty. The middle class is shrinking, and globalization of business activities is fueling anger and resentment in rural America.
Keynes was able to show the economy was not self-correcting as neo-classical economists were happy to assume. He was able to show that there was no actor available to lift an economy out of a recession short of governmental intervention or vast stretches of time as prices and wages adjust. He was able to show that putting full employment at the center of economic policy and not price stability was critical to growth and that both monetary and fiscal policy are necessary to make that happen.
Simple truths can go unnoticed. Mainstream economists seem to not recognize consumption as the other half of the production equation. What doesn’t get consumed no longer has to be produced, and what doesn’t get produced inhibits growth. Without appropriate wages to support adequate levels of consumption (and more specifically without sufficient buying power), higher levels of production are less likely.
Demand for goods and services is the proverbial “goose that laid the golden egg”. Demand and not wealth accumulation is responsible for growth potential and ultimately higher profits. Demand for products and services will propel higher employment levels by requiring business to adjust. Putting more money into the hands of the wealthy with our currently regressive tax regime makes the wealthy only more-wealthy. Greater concentrations of wealth do not automatically create more jobs. The authors of the 2011 book, The Gardens of Democracy, put it this way: Companies don’t hire when they have an abundance of money. They hire when they have an abundance of demand.
Keynes was able to show that in the short-run there was no automatic stabilizer built into an economy. He was able to show good public policy that considers adequate levels of public and private spending as being critical to the prevention of prolonged downturns such as we experienced during the Great Recession. He showed judicious use of fiscal and monetary policies benefit not only most workers but society itself with better infrastructure and social services. The business community and their economists have fought these ideas even though full employment and a more activist use of fiscal policy would be in their long-term interest. We would all be better served if business trained economists took a more expansive view of their true mission of delivering public good and recognize the value labor and a fully functioning economic community provide.
