John Maynard Keynes is widely misunderstood not because he is misread, but because so few take the time to read him. His economic theory goes beyond mathematical formulas to establish a philosophy. It is the philosophy of Keynes which ought to catch the attention of political theory. There is a historical element to Keynes’ ideas, and yet portions have ossified into the political conscience of today. Neoliberalism, for example, is often portrayed in opposition to Keynesianism, but there are many areas of philosophical congruence. Indeed, the economic philosophy of today is better understood as a blend of neoliberalism and Keynesianism. At first glance this sounds as though contemporary political economy rests on a contradiction, but these two economic philosophies find ways to complement each other. Let me explain…
Binyamin Applebaum recently wrote a brilliant hit piece directed at neoliberal economic theory called The Economists’ Hour. His key insight is that neoliberalism reoriented economic policy from the worker to the consumer. His attacks on neoliberal economists are aggressive and sometimes personal. For example, he contrasts the poor investment decisions of Milton Friedman with John Maynard Keynes. Of course, Keynes made poor investment decisions sometimes too, but these are downplayed by Applebaum. Nonetheless, Applebaum interprets Friedman as an intellectual departure from Keynes. And in many ways, he was. Friedman believed government had no role in the economy, while Keynes believed government played an important role. But this difference ignores a fact lost on most. Keynesianism is the bridge between liberalism and neoliberalism.
The two concepts fundamental to Keynesianism are the propensity to consume and the inducement to invest. Economists often refer to the formula for GDP as C + I + G + (X – M) = GDP. C is consumption and I is investment. The key insight for Keynes was consumption and investment are interrelated. This is often lost on those who think of Keynesianism purely in terms of economic policy. Most classical economists assumed investment was a function of the savings rate. Keynes understood savings comes out of consumption. So increased savings reduced the inducement to invest because there was less consumption within the economy. The inducement to invest increases with the level of consumption.
Economics is complicated because it is so abstract so let us think in terms of labor. Classical economists, beginning with Adam Smith, believed labor was unwilling to work for less than subsistence. This idea makes intuitive sense. Many parents leave their jobs to take care of young children because their income will not cover childcare. But both parents cannot leave their jobs without financial support from somewhere. Reduced incomes typically mean a reduced standard of living. Social safety nets can cover part of the gap, but Smith wrote before the development of the welfare state. Classical economists saw the alternative to wages as a withdrawal back into the traditional economy. The alternative to wages was to live off the land. This insight helps us understand how Keynes interpreted concepts like savings, wages, and investment.
Consumption, for Keynes, was a reliance on the economy, while savings was a withdrawal from it. The purchase of food creates jobs for farmers, truckers, and grocers. People can save through a garden where they grow their own food. This industry is good financially for the household but limits their participation in the economy. It reduces jobs and limits investment in new business. Household repairs are another common way for people to save large expenses. Keynes saw do it yourself enterprises as another form of savings where people withdrew from the economy. Savings is commonly interpreted as the surplus of income over expenses, but Keynes understood the most common form of savings was created not from money but time. People save expenses through their own industriousness, but for the economist this industriousness is not efficient. The handyman is a generalist, while economic efficiencies are created through increased specialization.
The consumer society is symbolized through luxuries and entertainment, but this based on an economic misunderstanding. Consumerism is better reflected in the two-income household and the sixty-hour work week. Individuals become consumers not so much from higher incomes but from a lack of leisure. Perhaps leisure is the wrong word. It is better understood as independent time. The forty-hour work week allowed people time to make repairs at home. But salaried jobs today often expect fifty to sixty hours of work so home repairs are hired out. The two-income household has brought about a change in economic behavior. Meals are chosen based on their ease so many grocery items are already partly prepared in advance. Childcare has become a growth industry with its own segmentation and specialization to attract customers. Keynes understood that greater participation in the economy through labor would bring about greater participation in the economy through consumption. The growth in markets was an inducement to invest which brought about new industries with greater demand for labor.
Neoliberalism is often interpreted as a nefarious ideology of consumerism that undermines other social priorities. Binyamin Applebaum faults neoliberalism for the prioritization of economic policy in American politics. His book is called The Economists’ Hour because economists became influential in all aspects of public policy. But Applebaum links this influence to the rise of neoliberalism. It ignores the influence or legacy of Keynes upon public policy. It ignores the influence of Keynes on neoliberalism itself. Consumerism is part of the Keynesian legacy. The expansion of the economy depended on the propensity to consume. Consumption commits people to the labor force which brings about greater productivity.
Applebaum’s defense of Keynes is sometimes puzzling because his book is largely a critique of market liberalization and free trade. Keynesianism was a response to liberalism, but it was also a natural consequence of liberal economic theory. Naturally, Keynes believed in free trade. This runs counter to the narrative of Keynes as an advocate of government intervention but makes sense based on his economic philosophy. Free trade makes people dependent on the economy. People earn wages to pay for imports. Less time at home means consumption continues to increase which encourages investment.
Neoliberalism is not simply a restatement of liberalism. It is a fundamentally new economic philosophy which is impossible to recognize without Keynesianism as a bridge between the two. Liberalism emphasized the rights of the individual. Economic liberalism extended these rights into free trade. It opposed tariffs and monopolies as impediments to individual rights. But the emphasis of liberalism prioritized rights and liberties over economic policies. Neoliberalism is a mirror image of liberalism. It looks the same, but everything is reversed. Economic policies are prioritized over human rights and liberties. Moreover, it emphasizes economic success as the measure of social success. But this philosophy is impossible to formulate without the emphasis on consumption from Keynes. Neoliberalism rejects the economic policies of Keynes, but in many ways embraces his economic philosophy.
Of course, Keynes did see a need for an increased role for government in economic policy. This is a critical difference between Keynesianism and neoliberalism, but his economic philosophies make neoliberalism a natural consequence of his own ideas. Globalization largely debunked Keynesianism. The stagflation of the seventies is said to have made his economic policies irrelevant, but this fails to recognize the more consequential element of globalization. The expansion of unlimited markets and the rise of multinational corporations decoupled the link between consumption and investment. Investment no longer depends on the consumption in the domestic market nor is it tied to any market. Capital is raised from around the world and companies create factories anywhere to export products everywhere. Keynes believed government spending was necessary to maintain consumption during a downturn to encourage investment. The Great Recession and the Pandemic are viewed as the reemergence of Keynesian economics, but this is only partly true. Keynes believed it was consumption which drove investment and thereby employment. Increased government spending encouraged private investment. But the Great Recession and the Pandemic used the government to inject money directly into corporations rather than rely on demand through new forms of consumption. This approach undermines the key premise of Keynesian economics. It is based on a belief that consumption depends on a financial and corporate framework that provides employment. This reverses many of Keynes’ assumptions. Of course, parts of the stimulus were designed to increase consumption. For example, the increased unemployment benefits elevated consumption during the crisis. However, they were designed to relieve economic pain rather than to reignite the economy.
Keynesianism is more than a theory of economics. It is an economic philosophy that shares many similarities to the economic philosophy of neoliberalism. Economic philosophies have a normative bias toward economic activity. And this normative bias has reordered social values so democracy, family, and religion have all become subordinate to economic success. Political theory has an obligation to reassess these values and explain how economic activity fits into a wider network of institutions. Keynesianism and neoliberalism are often discussed as purely economic theories with political ramifications. I interpret both as economic philosophies with political repercussions.
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