The great theme of Keynesian economics is the “business cycle” of boom and bust. Before him, many economists thought that this was a law of Nature, and applied technical economics in support of the most wickedest of policies. Specifically, it was widely held that the only way out of a recession, depression, or panic was to allow the market to reach a Walrasian equilibrium, a Pareto optimum in which wages were driven down so low that even in those dire circumstances every worker would be employed. Note that Adam Smith’s greatest nightmare is a Pareto optimum.
Everything for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.
Keynes showed that such a market equilibrium was impossible, starting from the undoubted fact that workers would and did mightily resist such a development. In technical terms, we say that wages are sticky. This fact goes back to the founding of the medieval guilds to protect skilled workers from rapacious aristocrats. What he did not set out to prove, in his General Theory of Employment, Interest and Money, but Adam Smith had pointed out long before, was that capitalist owners and managers, Scrooge-like, would take every opportunity to drive down wages and steal the productivity of the workers for themselves. This turned out later to be the entire point of Reaganomics, which we are only just recovering from. And now the Wrong-Winger economic charlatans are determined to steal Social Security, Medicare, and Medicaid from the people as well. They have given up on repealing the ACA/Obamacare for the moment, but don’t anyone believe they won’t come back to it.
Adam Smith’s Invisible Hand works tolerably well in a stable economy, as between the local baker and dairyman who, in effect, barter bread for butter and the reverse. In such a case both necessarily profit, because each trades something not needed for something vital. The case becomes totally confused when we introduce money, and the pretense that every penny is of equal value, a property that holds of nothing else. The first drink of water that prevents a person from dying is of incalculable value. Water beyond what one can drink has no value of that kind, only a market price. Diamonds have high prices due to their rarity and desirability (to those with more money than sense), but no value for sustaining life whatsoever. Yet they do have industrial value.
Capitalism is the oppression of man by man. Communism is precisely the reverse.
Communism, per Marx and Lenin, is state ownership of all agriculture and industry. Fascism, per Mussolini, is corporate ownership of the state.
The lords of the Soviet Union and Maoist China had the same rapacious policies, but without the capacity for growth of a technological capitalist economy with a modicum of economic freedom and human rights. Similarly for the Southern Aristocracy of slaveowners. But let that pass, because we have other tofu to stir-fry today.
Market Failures
So.
The business cycle.
Pre-Keynesian economics was a counsel of despair. Nothing could be done about corporations running up asset bubbles, going back to the Dutch Tulip Mania and beyond, and creating vast, wealth-destroying crashes from self-working Ponzi schemes. The South Sea Bubble. The Great Depression. And again in the Tech/Dot.com Bubble that Bill Clinton bragged so much about, and the Housing Bubble under W. (aka George the Third Jr., per Dave Barry—George Washington, George H.W. Bush, George W. Bush).
Keynes worked out in considerable detail that this was all nonsense, and said so in various publications and lectures, most notably his General Theory. I will spare you the technical background that fills most of the book, and talk instead about policy since then.
Governments could borrow money, which was still around, even in the depth of the Great Depression, and use it to keep wages and employment up. Railroads and other infrastructure, for example, didn’t go anywhere when the money for a quarter of the population went for a Burton.
This theory has had astounding successes in protecting economies. It was so successful, and so obviously true, that I am not even going to give you any of the math. I will just note that Keynesian monetary and fiscal policy have nothing to do with printing money, as in the notorious German and other hyperinflations.
A little later, in The Economic Consequences of the Peace, Keynes pointed out that the Treaty of Versailles at the end of WW I demanded that Germany pay reparations in more gold than there was, and predicted dire consequences. Germany in fact went into hyperinflation, and then to blaming Jewish bankers for the French policy, and from there straight downhill to Hitler.
Keynesian countercyclical spending worked up until the point where economic and political charlatans like Milton Friedman and Arthur Laffer and Grover Norquist worked out that it was interfering with the ultra-rich growing even richer from the sufferings of others, and set out to create various forms of propaganda claiming to discredit Keynes or make his work irrelevant.
The most successful such program goes by the name of Starve the Beast.
- Give the ultra-rich and corporations unconscionable tax cuts and subsidies.
- Blame your opponents for the resulting deficits.
- Demand cuts to social programs, initially for Blacks, but then for women, immigrants, science, education, and indeed everything in sight.
Sell this bill of goods to those who are mortally afraid of losing inherited privilege, who, it turns out, are more than willing to give up everything good for themselves,
as long as Blacks [and the rest of Those People] get hurt worse.
Lee Atwater
Let us remember that the basic purpose of any tax cut program in today's environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.
Alan Greenspan
Deficit Investment
It turns out, however, that we can do better than Keynes. We don’t have to just borrow and spend. We can invest in the country and its people, and indeed the world, with returns greater than any legitimate business. I will not belabor this point, but just point out that it is the foundation of Bidenomics. This stands all of economic bogosity on its head, and thus allows us to bring inflation down and employment up at the same time, and find that greatest of economic unicorns, the soft landing from the disastrous policies of the Trump administration, and from the covid pandemic. Thus infrastructure, chips, renewable energy, the electric vehicle industry, and much more, along with health care, education, countering disinformation, opposing tyranny, and again much more.
We can also take a further step.
Anti-Capitalist Meetup: The Unbalanced Budget Amendment's Time is Coming
What if we had a mandate for unemployment benefits and infrastructure spending and middle class tax cuts in 2007 and 2008, and then tax increases weighted to the rich and corporations in 2010, expanding when the stock market overheats?
This idea is beginning to take hold.
Forbes: We Need an Unbalanced Budget Amendment
The Unbalanced Budget Amendment - The New American
An Unbalanced Budget Amendment - Marginal REVOLUTION, by Alex Tabarrok
Automatic stabilizers such as unemployment insurance are one area that has worked quite well. What other areas can be automatized? Funding for states? How about an automatic payroll tax cut tied to the unemployment rate? (fyi, Keynes favored the latter).
We could even adjust taxes so that those in permanent recessions, namely all of the economically and socially oppressed, would always qualify for stimulus measures until they gain actual equality.
In the Bible, Joseph doesn't advise the Pharaoh to balance the budget; instead, he tells the Pharaoh to save during the seven fat years so he will be prepared for the seven lean. An unbalanced-budget amendment reflects this simple and ancient wisdom.
Reihan Salam: The National Review: A Structurally Balanced Budget
Yes.
Even Bill Buckley’s National Review.
References
Keynes
- “How Far Are Bankers Responsible for the Alterations of Crisis and Depression?” 1913
- The General Theory of Employment, Interest and Money (GT)
- Treatise on Money (TM),
- Tract on Monetary Reform (TMR),
- Treatise on Probability (Ph. D. dissertation)
- The Economic Consequences of the Peace
- Keynes, John Maynard (1973). The collected writings of John Maynard Keynes. London and Basingstoke: Macmillan for the Royal Economic Society. Edited by Sir Austin Robinson and Donald Moggridge. Vol VII is the General Theory ; Vols XIII and XIV contain writings on its preparation, defence and development.
Others
The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analyzing the economy and can help you make better financial decisions.
IOW: Nothing you can do about it except to extract money from it and leave others to suffer.