3 September 2018

John Maynard Keynes: The Best Economist Since 1899?

Written by Frank Li

In a previous post (Milton Friedman: A Man of the Past?), I concluded that Milton Friedman, an extreme advocator of "free market" and individualism, is mostly an economist of the past. In this post, I will highlight John Maynard Keynes, a balanced advocator of both "free market" and "managed market", as the best economist since 1899.

1. Who is John Maynard Keynes?

Below is an excerpt from Wikipedia - John Maynard Keynes.
John Maynard Keynes, 1st Baron Keynes[2] CB FBA (/keɪnz/ KAYNZ; 5 June 1883 - 21 April 1946), was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and was one of the most influential economists of the 20th century and the founder of modern macroeconomic theory.[3][4][5][6] His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots.

2. John Keynes on YouTube

3. Keynes's famous book: "The General Theory of Employment, Interest and Money"

The General Theory of Employment, Interest and Money of 1936 is the last and most important book by the English economist John Maynard Keynes. It created a profound shift in economic thought, giving macroeconomics a central place in economic theory and contributing much of its terminology[1] - the "Keynesian Revolution". It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular. It is pervaded with an air of mistrust for the rationality of free-market decision making.

4. "The General Theory of Employment, Interest and Money" on YouTube

5. Keynesian economics

Below is an excerpt from Wikipedia - Keynesian economics.

Keynesian economics (/ˈkeɪnziən/ KAYN-zee-ən; sometimes called Keynesianism) are the various macroeconomic theories about how in the short run - and especially during recessions - economic output is strongly influenced by aggregate demand (total demand in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.[1]

Keynesian economists generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high). These can be mitigated by economic policy responses, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, which can help stabilize output over the business cycle.[3] Keynesian economists generally advocate a managed market economy - predominantly private sector, but with an active role for government intervention during recessions and depressions.[4]

6. My assessment

Simply put, in economics, Keynes sits between Adam Smith, the father of capitalism, and Karl Marx, the father of communism.

Specifically, while Keynes was unquestionably an advocator of the free market, he recognized that (1) the free market cannot possibly be all self-functioning and self-stabilizing, and (2) a critical and indispensable "balancing" force is the government, especially in time of crisis (e.g. the Great Depression).

In short, on the role of the government, Keynesian economics can be simply summarized in two points:
The government saves in good times.

Unfortunately, most democracies today, especially the U.S. as well as the U.K. to a less extent, seem to remember Keynes's point 2 only, without any memory of his point 1, resulting in a bad reputation for Keynesian economics, especially for the fiscal hawks.

Fortunately, one country stands out in "following" the real Keynesian economics (i.e. the government not only spends, but also saves): China!

7. Governance: the U.S. vs. China

The image below highlights a key difference between the U.S. and China in government spending.

The image below highlights a key difference between the U.S. and China in well-being.

In short, as compared with the U.S., China spends far less, but with far better results, in terms of creating a "harmonious" society.

Why is that?

China's government is better than America's, however slightly! For more, read: Towards an Ideal Form of Government.

8. Discussion

Time is the best judge for everything, including John Maynard Keynes, whom I regard as the best economist since 1899.

Here is the reality of the 21st century:
The dramatic rise of China, whose economy is more planned than the free market.
The precipitous decline of America, whose economy is opposite to China's.

Keynesian economics makes a world of sense today. Two main reasons:
It is a valid theory, developed on top of the past economic theories, including both Adam Smith's and Karl Marx's (Adam Smith vs. Karl Marx),
It was developed mostly in Britain, a great country with a long history, without an excessive delusion of exceptionalism.

In contrast, exceptional at birth, America is proving to be not exceptional at all. Hence, most, if not all, of the theories, economic as well as political, developed in the name of American exceptionalism over the past 200 years are likely to be proven false over time. Two examples:
Milton Friedman is mostly an economist of the past, thanks to his extremism on the free market and individualism. For more, read: Milton Friedman: A Man of the Past?
Just because our government is dysfunctional, it does not mean that the government has little role in the economy. Instead, make the government work first, and then work better, like China has been doing over the past 2,000 years!

9. Make the government work!

China's rise over the past four decades has turned the world upside down, from politics to economics. This is yet another attempt of mine to re-write history in economics (History 2.0).

More profoundly, two messages to America:
Just because America is hugely resourceful in nature, it does not mean America can be good forever, without a functional government.
Governance is hard. For more, read the image below.

America has a long way to go to prove itself as a country built to last.

Let's focus on America's trouble today ... For the best diagnosis, as well as the best solution, read this book: American Democracy - Why is it failing & how to fix it?

As for the rest of the world, including the rest of the West, make the government work first, like China has been doing over the past 2,000 years!

Bottom line: No country can possibly be great without a great government! Today, China has the most functioning government in the world!

In a 2-hiker world, all one hiker needs to do, when chased by a hungry grizzly, is to run a bit faster than the other hiker.

10. Closing

John Maynard Keynes is the best economist since 1899!

Keynesian economics makes a world of sense today, although it has been mostly abused in the West, with the government spending only, without savings.

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