The House That Keynes Built, by Paul A.

Samuelson, Commentary, NY Times, May 29,

1983: When I was asked some years ago whether Keynes was dead, I had to reply: ''Yes,
Keynes is dead. And so are Newton and Darwin.'' My point was that John Maynard Keynes
had become part of history. ...
But by coupling the name of Keynes with two great men who altered the course of human
thought, I was emphasizing the fact that Keynes was ... in the top class along with Adam
Smith. Economics remains permanently different because of Keynes's innovations in the
big-picture analysis of government fiscal and monetary policy now known as
macroeconomics.
My colorful teacher, Joseph A. Schumpeter, who taught me ... at Harvard, ... was a great
scholar. He formulated a theory of the business cycle and of economic development based
on the crucial role of the innovating entrepreneur. ... But it is in no sense demeaning to
Schumpeter's high achievements to place him outside the class that contains Newton,
Darwin and Keynes.
Keynes is associated in the popular mind with free and easy government spending. And,
during the Great Depression of the 1930's, he did in fact advocate unbalanced budgets as a
device to create jobs and get the capitalist machine running again. Young economists by the
hundreds rallied to his banner. I know, I was one of them.
But Lord Keynes was not the first, nor the last, to advocate public works in times of slump.
... The history of science shows that being an important influence in politics is not a way of
holding lasting fame in the annals of scholarship. Adam Smith is remembered in our
modern universities because he laid the foundations for the mainstream microeconomics
which we still teach - the economics of prices, profits and the corporation - and not because
he preached the gospel of laissez faire, for which today's politicians love to remember him.
John Maynard Keynes likewise enjoys within the academic profession of economics a
scientific reputation that is quite distinct from his celebrity as an adviser to British and
American heads of state on the use of stimulative fiscal policy.
Inventing Macroeconomics
A simple prescription for the Government to lower tax rates and increase spending actually
did make good sense in the early 1930's when grass grew on main street and one bank
failure led to another. By wartime 1942 and peacetime 1952, however, such simple
Keynesianism was dead, as dead as the view that the mountains are 5,000 years old and that
all matter is water, air, fire and stone.
What remains alive, however, is the apparatus of thought born with Keynes which
recognizes that the supply of jobs and the supply of workers who want jobs are not
automatically brought into balance in the short run by economic forces - and that
governments need not stand idly by and let workers suffer long bouts of high
unemployment.
Before Keynes, when I was learning my microeconomics as an undergraduate at the
University of Chicago in the early 1930's, we had no handle on this problem. We had to
attribute the persistent unemployment to uppity workers who insisted on wages that were
just too high. But that was not a satisfactory explanation.
What perplexed us, and should have perplexed us more than it did, was how to explain why
the crestfallen workers seen in the Chicago breadlines had been less uppity in the palmy
days of 1928. We mistakenly tried to blame the high American tariffs for the huge
unemployment of the Great Depression or blame Federal Reserve policy for feeding the
great stock market boom that preceded the Depression.
What made Keynes different from the village print-some-money cranks whom we have
always with us, was the fact that his 1936 volume, ''The General Theory of Employment,
Interest and Money,'' did not take a narrow look at one or two isolated parts of the
economy. He tackled the whole thing in one brilliant analytic formulation and provided
economists with new ways of looking at how the entire gross national product is
determined and how wages and prices and the rate of unemployment are determined along
with it.
This was the advent of ''macroeconomics,'' a study that is now so commonplace in the
profession. ...
Science is a Darwinian jungle -the survival of the fittest. New theories kill off old.
Measurements test expectations, refuting most pet notions and corroborating a few
survivors.
By 1939, Keynes himself was shedding his depression skins, shifting away from viewing
unemployment as the primary problem, to focusing attention on the rising problems of
inflation. His pamphlet on how Britain should pay for World War II to avoid inflation
developed a new theory of ''demand inflation'' - whereby prices rise endlessly as labor and
capital between them try to enjoy more than 100 percent of the output producible at full
employment.
And as Keynes's own thinking underwent changes, so American scholars who call
themselves Keynesians - or, more accurately, post-Keynesians - have gone far beyond 1936
Keynesianism. ...
Keynesian thinking was obviously not always well received, especially in the early days. At
the same time, a scientific theory benefits not only from its friends, but also from its
enemies. And the adversary process of scholarship that has produced the monetarist
theories of Milton Friedman and others has helped to sharpen the modern application of
Keynes's thoughts rather than to destroy them.
Monetarism emphasizes the critical importance of the money supply in determining the
level of total output of goods and services in a nation's economy. This sharply contradicts
the Great Depression version of Keynesian economics, which had downplayed the role of
money and put its major emphasis on fiscal policy and the flows of income. Monetarism
demonstrated the importance of the money supply both on the basis of historical evidence
and plausible economic analysis.
I applaud this emphasis. Like Tobin, Modigliani and other American eclectic post-
Keynesians, I was sharply critical of the Neanderthal Keynesianism that still dominated
British economics as recently as 20 years ago.
I am not a monetarist, however. My reason and my reading of experience will not permit
me to believe in a one-factor theory of causation. ... At the same time, I seriously doubt that
freezing the growth rate of the money supply for all time is the best way to run an
economy. ...
The Legacy of Keynes
One must not forget the birthday child at the centennial party, concentrating only on his
partisans and enemies. ...
Keynes himself was, in a word, brilliant. Son of a learned Cambridge don and an activist
mother (the Mayor of the town of Cambridge), he ran away with all the honors at Eton
College (a prestigious boys school near London) and Cambridge University. With Virginia
Woolf, Vanessa Bell and Lytton Strachey, he founded the precious Bloomsbury Set. As a
youngster he virtually ran the British Treasury in World War I.
Wider fame came to him when he resigned from the Versailles peace delegation and
warned that the punitive Versailles Treaty would only end in another rising within
Germany. Hitler proved him right 15 years later.
In 1925, Keynes also warned Winston Churchill, then Chancellor of the Exchequer, against
the folly of England's going back onto the gold standard at the punitive prewar exchange
rate of $4.87 for the pound. Churchill, with misgivings that did him credit, was forced by
the banking establishment to disregard Keynes's advice. The rest, alas, is history - a
subsequent decade of mass unemployment and the eventual eclipse of Britain as a leading
economic power.
Keynes was a canny speculator. He ran a successful insurance company, endowed the ballet
and enriched King's College, his alma mater. Despite himself, he became respectable,
masterminded World War II British finances, and set up the 1944 Bretton Woods system of
fixed exchange rates, which lasted until 1971... He died a peer, Lord Keynes of Tilton.
For 20 years, American conservative opinion considered Keynes a radical. Herbert Hoover,
who often attacked Roosevelt's deficit spending -invented the pejorative term ''Marxist-
Keynesian.''
Actually, Keynes was an elitist exponent of the middle classes. Like Bertrand Russell, he
recognized even before Stalin's hegemony the totalitarian inefficiencies of a system run in
the name of the working class.
An optimist who lived at a time when the world economy was running so badly that clever
gimmicks could still work wonders, Keynes's object was to save capitalism from itself. In
the end, his prescription in its most simple form self-destructed, as the obligation to run a
full-employment humanitarian state caused modern economies to succumb to the new
disease of stagflation - high inflation along with joblessness and excess capacity.
Economists of the most diverse views are constantly asking themselves: What would
Keynes advise if he were now alive. And usually - whether the economist is a free-
marketeer like Friederick von Hayek or one with strong interventionist leanings like John
Kenneth Galbraith - they pay Keynes the supreme compliment of believing that if brought
back to earth, Maynard would be favoring just what each of them happens to favor. ...
For whatever good or ill Keynes may have wrought in economic ideology, when asked late
in life what he would do differently if given a chance to live his life over again, his only
reply was, ''I'd have drunk more champagne.''
On his hundredth birthday which takes place on June 5, (it also happens to be Adam
Smith's 260th birthday) we can all join in a symbolic toast for a life well fulfilled.