Keynesianism

In the 1930s, economist John Maynard Keynes spotted the inherent shortcomings of neo-classical economics. The neo-classical model predicted that the free market would keep the economy more or less in equilibrium, and that flexibility in wages and prices would ensure full employment. Keynes formulated his ideas in the face of clear evidence to the contrary. He pointed out that neither prices nor wages changed easily and that, as a consequence, unemployment was a frequently recurring reality. This also meant the market was unable to price things to guarantee economic efficiency. He argued that these shortcomings with the market mechanism made it essential that, when the market failed, governments should intervene in order to promote full employment.

This further shortcoming in neo-classical thinking was influenced by Say’s Law, an unhelpful legacy of classical economic thought which states that the production of goods and services necessarily creates its own demand. Say’s Law would have some merit if the process of production involved paying adequate rewards to labour, and if people were not inclined to save. Keynes realized that these two conditions rarely hold in the real world. He argued for government intervention to increase demand through public investment in infrastructure, and that such expenditure should be ‘counter-cyclical’. During a downturn public spending should increase to offset the decline in private demand; during a boom it should be reduced as private enterprise recovers and takes up the slack.

Keynes wanted to change economics to address the social problems arising from a slavish adherence to neo-classical theory. He saw that many people are excluded from productive involvement in the economy and that society is frequently subjected to massive disruption by business cycles. But interestingly, like his neo-classical predecessors (and like Karl Marx, whose analysis of the struggle between labour and capital also largely disregarded the third factor of production) Keynes continued to ignore the role of land. As economist Brian Hodgkinson points out, “such an enormously influential book as Keynes’ General Theory of Employment, Interest and Money refers to land briefly four times.” Keynes came from an upper-middle-class land-owning family, and played a key role in the management of the estates around Cambridge when he was bursar of King’s College. His legacy lives on in many ways: it was recently reported that Trinity College has invested £440 million in land occupied by Tesco stores.

Keynes’ contribution was immense; he gave a much-needed moral boost to the discipline. His awareness of the importance of money and debt distinguished him from his neo-classical predecessors. His version of economics was far more closely related to events in the real world. But his purposeful exclusion of land from economic calculations meant he was unable fully to confront the root causes of endemic poverty and chronic instability.

Excerpt from Four Horsemen: The Survival Manual.