Commentary Magazine


Lord Keynes and Human Nature

Robert Samuelson, the distinguished economics columnist for the Washington Post, has a column on one of the most important reasons for the anemic recovery. He blames, with very good reason, the fateful intersection of Lord Keynes’s economic paradigm and human nature, in this case the self-interests of politicians:

Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles….Kennedy’s economists, fashioning themselves as heirs to John Maynard Keynes (1883-1946), shattered…[the old] consensus. They contended that deficits weren’t immoral….This destroyed the intellectual and moral props for balanced budgets.

Walter Heller, Kennedy’s chairman of the Council of Economic Advisors, famously talked about “fine tuning” the American economy to keep it humming along smoothly, throwing off wealth and jobs like an engine throws off work-doing energy.

Keynes had argued that economies were machines, “a whole Copernican system, by which all the elements of the economic universe are kept in their places by mutual counterpoise and interaction.” Governments, thought Keynes, could keep an economy humming by deliberately running deficits in times of slack demand. Politicians, of course, were only too happy to have an intellectual justification for spending in deficit. This allowed them to spend money (“the mother’s milk of politics”) in order to satisfy various constituencies without having to raise the taxes needed to pay for the largesse.

But Keynes had argued equally that governments needed to run surpluses in good times, both to keep the economy from overheating and in order to pay down the debt run up in bad times, so that the money could be borrowed again when needed. But with the old consensus on balanced budgets now shattered, that simply proved politically impossible. Politicians, after all, had elections to win. Keynes had been thinking long-term. Politicians always think short-term.

Between 1947 and 1960, the government had run deficits five times and surpluses nine times. Between 1961 and 2012, through boom and recession, war and peace, the government has run surpluses five times and deficits 47 times. (And even those surpluses were essentially accounting fiction: the national debt rose in every one of those “surplus” years.)

We are not yet at the point where Greece and Spain are—able to borrow only at very high rates. But we are approaching it rapidly, at the rate of a trillion plus dollars a year. And the reason is that Keynes, by far, the most famous and most influential economist of the 20th century, failed to take the messy, self-interested reality of human nature into account when he developed his proposals. So his theory works in theory, but not in fact.