The Arch-Heretic of Twentieth Century Economics: John Maynard Keynes was one of those rare heretics whose ideas worked so well in practice that they became (for thirty extraordinary years) the new orthodoxy. His radical economic thinking inspired everyone from Adolf Hitler to Mickey Savage.
IS IT POSSIBLE to be both a politician and a heretic? With the times so out of joint it’s a question more and more voters around the world are asking. Observing the peculiar unanimity with which the international political class has responded to the global financial crisis, this voter scepticism appears entirely justified. In only a handful of countries (the most obvious being Greece) have politicians either voluntarily, or by the sheer force of public opinion, promoted policies unsanctioned by the global guardians of economic and political orthodoxy.
This was certainly not the case the last time the world was mired in economic catastrophe. One of the most intriguing historical aspects of the Great Depression of the 1930s is the willingness of contemporary political leaders to challenge the economic orthodoxy of their day.
On the Right, in Germany, Hitler tackled his country’s massive unemployment and stagnant industry by embarking on a programme of comprehensive rearmament – what later came to be known as “militarised Keynesianism”. On the Left, in the Soviet Union, Joseph Stalin’s “Five Year Plans” mobilised the entire population behind a crash programme of industrialisation. Somewhere between these two extremes, Franklin D. Roosevelt’s “New Deal” put hundreds-of-thousands of Americans to work on bold public infrastructure projects such as the Tennessee Valley Authority and the Grand Coulee Dam.
Spend, FDR, Spend! The Grand Coulee Dam became one of the enduring symbols of the New Deal's massive investment in US infrastructure. When everyone else is broke, the state is both practically and morally obliged to stimulate the economy out of trouble.
What made these programmes so unorthodox was the way they were paid for. Herr Doktor Hjalmar Schacht, Hitler’s Minister of Economics, deployed his infamous “Mefo Bills” to pump-up the German arms industry. This financial device was somewhat akin to our first Labour government’s use of “Reserve Bank credit” to fund its state housing programme – only bigger. FDR was similarly persuaded to pay for his public works schemes by sending the United States’ budget into the red. By contrast, Stalin’s economic success was based on the super-exploitation of his own unfortunate people – especially the unpaid labour of the millions of political prisoners his secret police had poured into the “gulags” (Soviet concentration camps).
While Stalin followed the brutal methods adopted by Western capitalists in the early stages of the industrial revolution, and then throughout the wretched territories of their sprawling colonial empires during the late-nineteenth and early-twentieth centuries (check out the history of the “Belgian” Congo for the most gruesome example of pre-Soviet super-exploitation) both Roosevelt and Hitler were inspired (either directly or indirectly) by the thinking of the greatest economic heretic of the twentieth century, John Maynard Keynes.
Defying his orthodox colleagues’ advocacy of austerity measures to bring their respective governments’ books into balance, Keynes argued that politicians must counter the “paradox of thrift” by borrowing and spending their way back to prosperity: “For Government borrowing of one kind or another is nature’s remedy, so to speak, for preventing business losses from being, in so severe a slump as the present one, so great as to bring production altogether to a standstill.” His 1933 book, The Means to Prosperity, was read with great enthusiasm by FDR’s “Brains Trust” of economic advisers. German economists read it too.
So effective were Keynes’ heretical ideas at relieving the misery of the Great Depression and financing the Allies’ victory in World War II that, by 1946, they had become the new economic orthodoxy. And, if the proof of his theoretical pudding was in the eating, then the extraordinary longevity of the post-war boom (1945-1975) provides ample evidence for the efficacy of Lord Keynes’ economic recipes. Indeed, one could argue that the concerted (and unfortunately successful) campaign by corporate capitalism’s intellectual apologists to convince the world that the classical economists’ 1930s critique of the Keynesian “heresy” was correct, lies at the root of all our present evils.
It is tempting to say that what the world needs is “another Keynes” to lead it out of its present economic woes. But that would be wrong and foolish. Keynes’ ideas are there on the bookshelves: just waiting for a politician with the will to use them. Our world’s predicament lies precisely in the fact that its self-serving and morally compromised political class is simply too gutless and too heartless to risk the accusation of heresy.
As Keynes himself observed, these peddlers of neo-classical orthodoxy “resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight”.
This essay was originally published in The Otago Daily Times, The Waikato Times, The Taranaki Daily News, The Timaru Herald and The Greymouth Star of Friday, 15 June 2012.