Friday, October 24, 2008

In The Long Run We are All Dead - JM Keynes

Readers Question: In an article on the BBC website John Sloman quoted this: ‘The long run is a misleading guide to current affairs - in the long run we are all dead ‘ JM Keynes

I thought this was very interesting as it puts forward the idea that we shouldn’t bother to think beyond our own lifetime, our own generation. Which I think is a terrible mistake.

This quote came from Keynes' General Theory of Money. During the Great Depression, the prevailing economic orthodoxy was the Classical view. This stated that markets would adjust to disequilibrium without government intervention. Therefore, when the Great Depression occurred in 1930, the classical response was to do nothing - because in the long run the markets would solve the problem (real wages would fall, people would return to work and the economy would return to full employment)

However, Keynes said this was madness - In the depth of a recession, why not try to do something about it, rather than leave to 'market forces'. Yes in the long run, the recession may end, but, here the long run could be 10 years. Keynes wanted to try and solve the depression now rather than wait for 10 15 years or however, long the 'longrun' was.

In particular Keynes criticised the idea that falling real wages would solve unemployment. He argued falling real wages would just leave people with less money and therefore aggregate demand would fall more. Keynes argued for public works schemes, financed by government borrowing to inject money into the economy and get people back to work and spending. This was too radical for the UK Treasury, and generally the UK didn't follow Keynesian policies in the Great Depression. If we had injected government spending, the recession may have been less serious and ended sooner.

See also: Keynesian Economics back in fashion


Baz said...

Hey there,

Great article - You wrote "Keynes argued for public works schemes, financed by government borrowing to inject money into the economy and get people back to work and spending."

What is meant by "public works schemes" and what sort of tactics would be needed in face of a recession. I hear that a lot and I'm curious about the specific programs.

Also, such measures mean more spending, which typically mean more taxes. But higher taxes are the last thing you'd need during recessionary times, so govts end up borrowing, right? But in a global recession like this one wouldn't it mean that borrowing would in turn be harder to accomplish?

Thanks again :)

Tejvan Pettinger said...

HI Baz,

Public works schemes are things like building new roads or trainlines. You get better infrastructure, but, you employ more workers.

This spending would be financed by government borrowing - selling bonds to the private sector. It can be a little more difficult in a recession, especially if public borrowing is already very high, but, the UK should be fine.

Jeffrey Huston said...

Keynes argued for government spending as a means of increasing aggregate demand. I find it curious that the discussion did not address the restrictive effects of high trade tariffs during this era, among which the Smoot-Hawley Tariff Act in the U.S. reamins notorious. It wasn't until Bretton Woods and GATT in the mid-1940s that nations took material steps toward muli-lateral trade agreements.

DB said...

This quote from Kenyes actually occurs in a 1923 work, A Tract on Monetary Reform, and had nothing specific to do with Depression era issues (unless, of course, Keynes was extremely forward looking). Keynes was speaking about the Classical view that inflation would take care of itself in a "free market" setting.

Anonymous said...

As it turns out FDR did oversee about ten years of a depressed America despite all the public works schemes and economic intervention he thought was necessary. We may never know how quickly America would have recovered if the government had taken a hands off/lower taxes/ lower spending approach. So the debate continues.

Anonymous said...

Hi there

I'm a student and I'm very confused about this quote.

Was Keynes advocating that we shouldn’t bother to think beyond our own lifetime and our own generation? Or was this the view of Classical economists at the time, and Keynes simply voiced this?

If Keynes truly did endorse this view, then surely this must have been one of his mistakes? Or did he merely forsee the Depression, and felt that the crisis should be solved ASAP rather than leaving it to the long run hence people have manipulated his words and used them out of context?

Sorry for such a surge of questions- this has been confusing me for some time now!

Thanks very much :D

Tejvan Pettinger said...

See also: Explaining in the Long Run

BarbaraEBj said...

Re: "confused student" No, Keynes did NOT advocate or endorse the view that we should not think beyond our own lifetimes or, more specifically, that market forces would resolve all problems with the economy "in the long run."

Instead, he felt that "in the long run" could be any number of years, too vague a number of years to be tolerated and that the resultant lowering of wages from an extended depression would NOT bring the economy back to normal quickly enough, because workers wouldn't be able to spend since they would be making so much less than they did before.

Keynes believed that the government MUST step in to manipulate the economy in instances of depression by "borrowing" and "spending" on infrastructure in order to bring workers back to work at a fair wage so that those workers would then start to spend again thus bringing the economy back to normal.

Thus the idea of higher debt and higher spending in order to recover from a depression (or, later, a recession) since the point is to put MORE MONEY in the hands of the WORKERS so that they will SPEND and therefore bring the economy back to normal.

Anonymous said...

However, Keynes had no idea how big and inefficient Governments would become. Nor did he envisage the massive size of the welfare state. He is silent on these topics. So advocates of Keynes ideas are missing the last 80 years of economic research and experience.