A conference marking the 75th anniversary of the publication of John Maynard Keynes’ most famous work comes as debate over the controversial economist’s policy prescriptions rages as never before. Keynes’ theory, authored in the midst of the Great Depression, has a unique resonance for many economists and policy makers amid the worst economic crisis since the 1930s, though for many others, it is exactly the wrong approach.
Nobel-prize winning economist and New York Times columnist Paul Krugman addressed the plenary session of the conference, held at Keynes’ alma mater, Cambridge University, this week. And while most of his talk was technical, he left no doubt about just how sharply divided is the debate between Keynesian economists and their classical economic opponents, decrying a “descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds.”
Krugman was referring to now dominant chorus of economists and politicians who oppose the interventionist policies Keynes called for as a means of combating recession and unemployment. “Why are we making so little use of Keynesian insights now that we’re living in an economy that, in many respects, resembles the economy of the 1930s?” Krugman asks.
And with characteristic rhetorical flourish, Krugman answers that “there is no excuse for the timidity of Barack Obama, the wishful thinking of Jean-Claude Trichet, and the determined ignorance of almost everyone in the Republican Party.”
The key insight of Keynes’ General Theory of Employment, Interest and Money, published in 1936, is that demand rather than supply governs economic activity. Keynesians hold that activist policies such as government spending on public works can compensate for economic weakness by boosting aggregate demand in the economy.
Some historians argue that it was precisely FDR’s economic experimentation in a plethora of social programs known as the New Deal that provided the Keynesian boost in aggregate demand that lifted America out of the Great Depression. Others argue that FDR’s policies actually retarded economic growth, and sent the economy back into recession. Still others cite the vast military build-up leading up to World War II to either support or refute Keynesian theory.