Robert Skidelsky, Keynes biographer writes on the 80th anniversary of Keynes’ magnum opus – The General Theory.
In 1935, John Maynard Keynes wrote to George Bernard Shaw: “I believe myself to be writing a book on economic theory which will largely revolutionize – not, I suppose, at once but in the course of the next ten years – the way the world thinks about its economic problems.” And, indeed, Keynes’s magnum opus, The General Theory of Employment, Interest and Money, published in February 1936, transformed economics and economic policymaking. Eighty years later, does Keynes’s theory still hold up?
Two elements of Keynes’s legacy seem secure. First, Keynes invented macroeconomics – the theory of output as a whole. He called his theory “general” to distinguish it from the pre-Keynesian theory, which assumed a unique level of output – full employment.
In showing how economics could remain stuck in an “underemployment” equilibrium, Keynes challenged the central idea of the orthodox economics of his day: that markets for all commodities, including labor, are simultaneously cleared by prices. And his challenge implied a new dimension to policymaking: Governments may need to run deficits to maintain full employment.
The aggregate equations that underpin Keynes’s “general theory” still populate economics textbooks and shape macroeconomic policy. Even those who insist that market economies gravitate toward full employment are forced to argue their case within the framework that Keynes created. Central bankers adjust interest rates to secure a balance between total demand and supply, because, thanks to Keynes, it is known that equilibrium might not occur automatically.
Keynes’s second major legacy is the notion that governments can and should prevent depressions. Widespread acceptance of this view can be seen in the difference between the strong policy response to the collapse of 2008-2009 and the passive reaction to the Great Depression of 1929-1932. As the Nobel laureate Robert Lucas, an opponent of Keynes, admitted in 2008: “I guess everyone is a Keynesian in a foxhole.”
He says 20 years hence, Keynes will still be relevant for different reasons:
Two final reflections suggest a renewed, if more modest, role for Keynesian economics. An even bigger shock to the pre-2008 orthodoxy than the collapse itself was the revelation of the corrupt power of the financial system and the extent to which post-crash governments had allowed their policies to be scripted by the bankers. To control financial markets in the interests of full employment and social justice lies squarely in the Keynesian tradition.
Second, for new generations of students, Keynes’s relevance may lie less in his specific remedies for unemployment than in his criticism of his profession for modeling on the basis of unreal assumptions. Students of economics eager to escape from the skeletal world of optimizing agents into one of fully-rounded humans, set in their histories, cultures, and institutions will find Keynes’s economics inherently sympathetic. That is why I expect Keynes to be a living presence 20 years from now, on the centenary of the General Theory, and well beyond.