John Maynard Keynes felt little solidarity for workers and inspired a century of establishment economics. The West’s revived socialists have adopted him as their own anyway.
This would not have been his experience. With the 1936 publication of his The General Theory of Employment, Interest and Money—probably the most influential work of economics written in the 20th century—there were certainly dedicated free-traders who denounced his assault on laissez faire, but committed socialists immediately attacked him as capital’s wily messiah, and they continue to do so. His economics, they said, was merely the sugar-coating that allowed the working class to swallow the capitalist pill. The accusation isn’t entirely unfair. Keynes did famously claim that “the Class war will find me on the side of the educated bourgeoisie.”
At the same time, of course, many of those who identify as progressives have long championed Keynes and Keynesianism, and Keynesian economics is now crucial to the social-democratic revival. Activists may not be chanting his name in the streets, and it’s safe to assume that left reading groups are still more likely to parse Karl Marx. But however hesitant he might have felt about it, Keynes is now firmly at the center of the progressive imagination. There are many thinkers pushing the left beyond orthodox neoclassical economics—but the most prominent are Keynesians.
This change in Keynes’s status isn’t just a straightforward case of misreading by one side or the other. It’s the product of an ambiguity at the heart of Keynes’s own thinking that leaves a great deal of room for political maneuver. So much, in fact, that some of the more heated postwar battles in economics have been between schools of self-identified Keynesians: critics of capitalism who think Keynesian economics can make a bad system less cruel, and proponents of capitalism who think it can make a good system work better. Although they share a common enemy—the market fundamentalism of the Chicago school of economics—they have usually existed in a state of bitter disagreement. Temporary reprieves happen for one reason: crisis. In an emergency, Keynesianism seems both to have a better chance of addressing contemporary challenges than economic business-as-usual, and to be a lot more politically plausible than some of the more radical programs the left has on offer. As the Nobel-winning Chicago economist Robert Lucas put it, “everyone is a Keynesian in a foxhole.”
The recent financial crisis is a lesson in how true that can turn out to be. Even among some whose faith in the self-regulating market had seemed unshakeable only a few months before, including more than a few of Lucas’s colleagues in mainstream economics, the foxhole of 2007 and 2008 reanimated Keynesian ideas and policy shockingly quickly. As the Wall Street Journal announced at the time, Keynes was “The New Old Big Thing in Economics.” This return to Keynes, however brief, only makes Keynesianism’s status all the more complicated. Although virtually always associated with the left, it is neither entirely welcome on the left nor entirely unwelcome on the right. This goes some way to explaining both how a bourgeois post-Edwardian economist could end up essential to much of the economic thinking of the Euro-American left, and how readily many supposedly orthodox economists and free-market businesspeople became Keynesians in the subprime foxhole.
There is, of course, the Keynesianism long associated with the welfare-state policies Friedman spent his career trying to discredit. It’s not clear what Keynes would have made of the permanence of the welfare state’s massive institutional infrastructure. (The General Theory would suggest it is not what he had in mind: “public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment … but they may become a more doubtful proposition as a state of full employment is approached.”) Nevertheless, Keynes definitely believed that in a “slump,” coordinated state action—especially low interest rates and employment supports if necessary—was the answer.
He met with U.S. President Franklin D. Roosevelt in the 1930s and encouraged him to use federal resources to fight the Depression (although it is not at all clear what, if any, aspects of Roosevelt’s New Deal were consciously Keynesian). And when the transition to a peacetime economy in the United Kingdom needed a boost at the end of the war, he welcomed the Beveridge Report, now recognized as the founding document of the welfare state insofar as it is the origin of the National Health Service, social insurance, workers’ compensation, rent control, and more. If U.S. President Harry S. Truman’s Fair Deal or President Lyndon B. Johnson’s Great Society programs are called “Keynesian,” it’s not entirely unwarranted.
But there has also always been what could be called a “right-Keynesian” way of doing economics and economic policy. Indeed, although the welfare state is commonly thought of as the victory of left-wing economic policy, during its heyday it was actually tied to a way of economic thinking that was in no way anti-capitalist. The Keynesian economics that ruled the disciplinary and policy roost in the postwar Golden Age—and justified its welfare-oriented institutions such as public housing or collective bargaining—was absolutely not left-wing and certainly did not understand itself as such.
This Keynesianism has remained influential, if not dominant, within economics to this day. This is not well recognized largely because contemporary common sense seems to suggest that a well-functioning capitalist economy must have as little to do with the state and social life as possible. But in the decades of the postwar boom, most economists believed the state had a crucial role to play in making capitalism work, buffering citizens from its arbitrary punishments and rendering its inequalities legitimate. There’s nothing left-wing about that.
The “revolution” The General Theory aimed to inspire involved escaping the orthodoxy he called “classical economics,” a somewhat ill-defined category in which he included many if not most of his colleagues, much to their consternation. To oversimplify somewhat, Keynes argued that The General Theory overcame “classical” thinking by abandoning its indefensible attachment to Say’s Law—the presumption that markets’ price mechanism always efficiently links supply and demand, bringing all available resources, including labor, into production. Worse still, to Keynes’s mind, this suggested that when all engines were evidently not firing, it was best not to intervene, because they would naturally push the economy back up to full employment. All sub-full employment conditions were, by definition, in what he called “disequilibrium.” This is the kind of economic analysis, for example, behind central banks’ reluctance to lower interest rates and abandon the gold standard when the Depression hit.
But this was 1936, remember. After years of widespread unemployment and vast pools of idle resources in every nation in the capitalist West, it seemed pretty clear that markets were not self-correcting, and that the economy could quite easily find a disastrous equilibrium, or even no equilibrium at all, far below full employment.
The most common criticism Keynes had to deal with in the months after The General Theory’s appearance was that it was simply old wine in new bottles, readily translatable into “classical” terms. The timing of this debate is crucial. While the formalization or “mathematization” of economics had begun several decades earlier, by the 1930s the discipline was at an important moment in the transition. The profession was leaving behind the expository mode of expression favored by Keynes and most earlier political economists, which relied on little and quite simple math to make its point, and turning to the highly technical, formally complex mode of argument that dominates today. While Keynes himself was suspicious of the reliance on increasingly formal methods—“I doubt if they can carry us any further than ordinary discourse can”—this was (and is) the conceptual language through which much of the debate about The General Theory has played out, among both admirers and critics.
In practice, this involved framing Keynes’s ideas using the terms and models of the classical economics he claimed to relegate to the dustbin of history. The contest over the results of these efforts is the origin of the split in the Keynesian worldview and the multiple political purposes Keynes and Keynesianism seem to serve. What today is called “post-Keynesian” economics, essentially the left-Keynesian position, rejected the retranslation into classical. Those now called “New Keynesians,” occupying the loose right-Keynesian position, celebrated it. A wide gap has since opened up between the camps, the space between what the economist Axel Leijonhufvud has called “the economics of Keynes and Keynesian economics.”
Perhaps the seminal moment in the emergence of this division is the controversy over the so-called IS-LM model of the macroeconomy. First formulated in 1937 by Keynes’s friend John Hicks, IS-LM was designed to describe an economy on classical terms in a manner that took account of one of The General Theory’s principal criticisms of classical economics: that it always assumed a tendency to full employment. With IS-LM, Hicks tried to capture this criticism by devising a new type of classical equilibrium model. At its simplest, Hicks’ model says that economic output (including levels of employment) will be determined by the intersection of two curves (“schedules”): one that describes the range of possible relationships between investment demand and the supply of savings (investment-saving, or IS, which we can basically think of as the “real” economy), and another that describes the range of possible relationships between the demand for and supply of money (liquidity preference-money supply, or LM, essentially the financial side of the economy). The model is almost perfectly intuitive: macroeconomic equilibrium is the point at which conditions in the “real” economy intersect with credit conditions in the money markets. There is no reason to expect the level of output at this point to involve full employment.
Hicks’s IS-LM model is the first step in what has since been labeled the “neoclassical synthesis,” the marriage of Keynesian intuition and classical equilibrium analysis. The bulk of the synthesizing work was eventually done by postwar American economists such as Paul Samuelson and Alvin Hansen, who found in IS-LM an extraordinarily useful tool for policy analysis: If the IS curve is the real economy, then we can shift it with fiscal policy; if LM is money markets or the financial side of the economy, we can shift it with monetary policy. As Samuelson put it, with skillful use of the two, we can have a “managed economy” that behaves like a neoclassical model. In other words, we can—and indeed must—use regulatory tools to realize the high-growth capitalist economy the classicals said markets would produce if left to themselves. This, not any sort of left-wing agenda, is the Keynesian economics that cemented the economic foundation of the welfare state, and—with important changes of course—this common sense remains at the heart of modern economics. Paul Krugman and Joseph Stiglitz, among the most prominent economists working today, are both New Keynesians in this tradition.
Much of this work was done in Cambridge, Massachusetts, especially at the Massachusetts Institute of Technology, where Krugman and Stiglitz were trained. Across the Atlantic at the other Cambridge, however—Keynes’s University of Cambridge—many of Keynes’s students and colleagues saw the neoclassical synthesis as a step backward, the dilution or even betrayal of Keynes’s contribution. Led by Joan Robinson, among the most brilliant and creative economists of the 20th century, the basis of a more critical Keynesianism—what we now call “post-Keynesianism”—took shape. Robinson, never one to mince words, labeled the neoclassical synthesis “bastard Keynesianism,” an ad hoc mix of cherry-picked bits of The General Theory and classical arrogance.
The distance between the Keynesian camps today originates in these contrasting postwar trajectories, and for the most part it has tended to only grow wider.
Today, the intra-Keynesian debate matters at least as much for our understanding of contemporary politics as our grasp of economics proper, because it also captures the conversation around key public policy questions. Right now, New Keynesians such as Krugman, Stiglitz, and Janet Yellen dominate much of the public-intellectual space in economics, while some of the most incisive economic minds on the left, such as Ann Pettifor in the U.K. and Stephanie Kelton in the United States, are post-Keynesians.
Having uncertain expectations about the future was in many ways the element of The General Theory that Keynes most emphasized after its publication. Businesses invest and hire (or not) based on expected future demand, consumers spend (or not) based on expected future income. It is quite possible those expectations will turn out to be mistaken. If so, then it is virtually guaranteed that at any moment things are going to be at least a little out of balance—too much of something, not enough of another. In that shifting reality, everyone is constantly readjusting their expectations of tomorrow, next year, or a decade from now—and the further out we look, the more uncertain we get. As Keynes famously said, regarding most important future events, “We simply do not know.”
For Robinson and those who follow in her footsteps, the suppression of fundamental uncertainty in the neoclassical synthesis is among the most egregious of its many errors. IS-LM, and the menu of fine-tuning policy choices it seemed to provide, took economics back to the realm of abstraction and away from Keynes’s insistence on an economics for “the kind of system in which we actually live.” It dismissed true uncertainty and replaced it with a set of equilibrium points, none of which was really uncertain insofar as it was mechanically determined by the dynamics of the model. Hyman Minsky (whose financial instability hypothesis helped a lot of people understand Lehman Brothers’ collapse) called it “Hamlet without the prince.”
These differences have become very public recently in the heated debate around so-called Modern Monetary Theory. This theory—which is founded on the claim that a sovereign cannot default on a debt denominated in its own currency, and thus has the fiscal flexibility to use deficits to generate full employment (or address the climate emergency)—grew directly out of post-Keynesian economic soil. New Keynesians for the most part vehemently disagree. Krugman, who calls himself a “conventional Keynesian,” says Modern Monetary Theory forgets what are to his mind unimpeachable truths of “standard macroeconomics”—like the fact that expanding deficits lead to higher interest rates that crowd out private investment. Indeed, he uses the IS curve to make his argument, leading Kelton to dismiss the “crude, IS-LM interpretation of Keynes” on which it is based.
Much of that momentum has come from the increasing size and effectiveness of youth-led activism. The generational shift is potentially crucial here, because the fact that more and more young people are embracing socialism and getting involved in left politics is, maybe ironically given Keynes’s own sentiments, arguably much more closely related to the broad appeal of left-Keynesianism than to that of Marxism. Not that these youth are not truly radical—many of them are formulating a sophisticated socialism based in the ideas of Marx, Antonio Gramsci, and Rosa Luxemburg. But the radically individualist, pro-market, and increasingly unforgiving economic thinking that has dominated American debate since before they were born has for many of them made what once seemed reasonably nonradical to their grandparents—Keynes’s Keynesianism—seem radical. It is no fault of theirs that for more than a few of them, socialism can easily look something like an environmentally sustainable version of the welfare state that labor unions have been demanding for decades. At the packed rallies for the Green New Deal, Roosevelt is as much a hero as Salvador Allende.
Some degree of rapprochement between the Keynesianisms was perhaps always a possibility, because Keynesianism, whatever its stripes, has always been about addressing a crisis, actual or potential. Keynes wrote The General Theory in the 1930s in the shadow of growing social disorder, and insurgent fascisms and radical socialisms, not to mention collapsing empires. While the “or else” that loomed over the Cold War-era West was perceived as more foreign, there can be no doubt that both the Bretton Woods system (which Keynes helped design) and the economics of the welfare state were constructed at least partly in societies that embraced capitalism but never quite trusted the goods that free markets would deliver. Today, after the embarrassment of the financial crisis, economics rediscovered Keynes, and, for many, the simultaneous crises of ecology, inequality, and democracy only make Keynesianism of some variety more appealing than the status quo.
In other words, Keynes has become essential to much of the left partly because the widespread sense of impending crisis calls out desperately for something to be done, and partly because the vast differences between them seem increasingly irrelevant in the face of potential calamity. In fact, a Keynesian rapprochement is arguably already underway. Stiglitz, perhaps the most prominent economist-public intellectual in the English-speaking world, has dedicated enormous energy to analyzing and advocating substantial carbon taxes and measures for addressing inequality both within and between nations. His latest book is subtitled Progressive Capitalism for an Age of Discontent. Esther Duflo, another Keynesian and one of this year’s Nobel Prize winners, has a new book out that takes on similar problems. Both begin from the same place—the world is increasingly anxious about the future of civilization, and has a reason to be—and both begin there not by chance. This is to a significant extent what Keynesianism has always been about.
Keynes himself said that our problems are mostly a “frightful muddle, a transitory and an unnecessary muddle,” from which science, experts, and reason could almost certainly rescue us. On this, virtually every Keynesian agrees. Change—maybe radical, maybe not—is afoot. Whether it will be enough, soon enough, is by no means clear. Climate change alone would seem to demand more transformative political-economic surgery, but at present, at least, the plan to get there goes through Keynes.