John Maynard Keynes is not
just a popular but a revolutionary name in social science and especially
economics. A British economist and professor at King’s College, Keynes was
already popular in academia but what made him a legend was his book The General Theory of Employment, Interest
and Money that appeared after the Great Depression of the early 1930s. The
timings were just perfect for Keynes. Those days’ people lost their faith in the
market system but also understood that it is the market system that can grant
liberty and avoid authoritarian regimes. In this Keynes’s ideas took a middle
ground that was compatible with many people.
Keynes believed in
government intervention and he did believe in market failure but he wasn’t a
socialist. His alternative was never socialism or Marxism which he most
probably disliked too. Orthodox Keynesianism had no issues with the classical
microeconomics model that advocates a market system. But, what changed? The
change was “Macroeconomics”. The man behind popularizing macroeconomics is none
other than Keynes and his main concern was the “macro” level of the economy.
follow methodological individualism. It doesn’t see an economy based on
individuals, markets, firms, or industries but rather sees the economy as one
collective nation! In macroeconomics, there are ways looked to enhance
employment and “aggregate” demand level. Irrespective of the situation, product
type, and consumer preferences, what matters is the output to keep increasing,
and for that expenditure or spending needs to increase. Here the priority is a nation,
this isn’t socialism but is called nationalism.
Keynes wanted high
spending in the economy (at least during recessions). More spending would increase
employment and hence keep aggregate demand high too. Now, where should the
money be spent? It doesn’t matter much because if it did then the solution of
no problem would be to simply “spend” as nobody can foresee where would be the
need to spend more. If the government was so capable of making spending or
investment decisions, then there wouldn’t be a need for the market system.
Let’s not forget how Keynes was also the one to suggest that to increase
employment give people jobs digging mud and put it back. So, the matter of
where the efficient spending is to be made was not a concern but simply the
spending had to be done.
Now, it doesn’t matter
whether those people are earning with no real output until they spend that
money and at the macro level the numbers are favorable. An increase in spending
will bring the boom to some sectors at the expense of others that will be
affected by it. But, the spending would be successful if “aggregate” variables
of the economy like output, demand, or employment increase and it won’t take
into account how some sectors would be affected unfairly by it.
Keynesianism is economic
nationalism and what Keynes tended to bring into the field of economics wasn’t
something extraordinary or new too. Adam Smith in the 18th century
was debating against similar thoughts with Mercantilists. So such kinds of
thoughts seeing the economy from a national perspective prevailed way before
Keynes too and rejecting such ideology lead to the existence of economics by
Adam Smith who showed the importance of liberty, free trade, and the invisible
hand of the market mechanism. James M Buchanan called such thinking an
“organismic” notion of collectives which means collectives are organisms.
After Keynes overhyped
popularity, Macroeconomics changed the discourse of analysis and policy suggestions.
Over time more research has been based on the macro level and so have been
policy suggestions. The increasing growth of macroeconomics lead to the propagation
of fatal theory like the Phillips curve. It made one believe that with
inflation the growth of output is good for the economy. But, fortunately, the
inspiring independent works of Milton Friedman and Edward Phelps showed how the
economy despite all these short-run alterations comes back to the “natural
level”. The natural level means the level of economy determined by market
forces or derived from microeconomic working.
But, it can’t be said that
macroeconomics is completely useless too but probably the famous “Lucas
critique” has quite in a way shown the limits macroeconomics and econometrics
have. Hayek in his time was also one of the rarest names to oppose it. Every
economy is built on a micro foundation that needs to be respected. My issue with
macroeconomics has been that it has neglected the essence of consumer
sovereignty by distracting scholars and students away from microeconomics.
Though, mainstream microeconomics with restrictive assumptions has also done a
great deal of harm in undermining the importance of consumer sovereignty.
Austrian Economics exceptionally has respected and adhered to the concept but
has forgotten or ignored to take it further and make more scientific
discoveries which they could do in my opinion.
But despite that, the less
importance of consumer sovereignty reality in the free market and the rise of
macroeconomics go well together, and looking economy from a macro perspective
has deprived us to see the essence of the market mechanism. Now, it seems like
economics has become a field to give policy suggestions which is not wrong but
why can’t it be based on microeconomics?
nationalism gets very toxic and has many disadvantages. One of the leading
figures to represent it in history is Hitler. But, it would be very unfair to
put Keynes and Hitler on the same page. Keynes politically also believed in
liberty what he expected from his theory was not something that truly turned
out in reality. Keynes’s concerns about aggregate demand and market failure are
still believed by economists but his technical economic theories are largely
irrelevant for analysis today.
Even though many of his
theories might be wrong but his intentions weren’t and it can not be denied
that he was a brilliant mind which was acknowledged by his fierce academic
rival F.A. Hayek too who was also his friend.