From Keynesianism to Socialism

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When President George H. W. Bush was perceived to have acted too slowly to counteract the 1992 recession, he lost re-election. His son learned the lesson and jumped aggressively to offset the 2000 downturn with tax cuts (invoking Ronald Reagan) and to adopt even more simulative measures in 2008 as the financial crisis erupted. But the measures adopted by President Obama using the same rhetoric and supposed logic have mot been effective because they have been used to perpetuate government programs, not stimulate the private sector. The result will be unprecedented structural deficits as far as the OMB can see.

True followers of Keynes should not be pleased by this. Alvin Hansen, known as “the American Keynes” argued against long term deficit financing. The budget should be brought into balance over the business cycle, with the increased revenue flowing in during booms used to pay down deficits run up during busts. And even though Milton Friedman is credited in conservative circles for advancing the “crowding out” hypothesis, it was actually Hansen who first raised the issue. He noted that borrowing to fund deficit-financed public works could raise interest rates, retarding private investment during growth periods. If private sector demand is high, then the government can and should step back to let capitalism thrive.

It should be noted that when the IMF warned about sovereign debt in Europe, it was not talking about counter-cyclical measures to fight recessions. It was warning about structural deficits stemming from ongoing government programs like health care and early pensions. Running deficits that strain financial markets during normal times leaves nothing in reserve for emergencies. And there is quite likely to be another recession by 2020 or soon thereafter. If there is already a $900 billion deficit when the next cyclical downturn hits, what will fiscal policy be able to do without triggering a sovereign debt crisis?

It was the political popularity of deficit spending that outstripped the responsible use of fiscal policy. Indeed, theories become popular mainly because interest groups find them useful as cover for advancing their own agendas. There quickly grew up a mutation of Keynesianism even while Lord Keynes was still alive, a mutation he denounced but could not quash.

When I was just starting my teaching career, I was stuck with Economics by Campbell R. McConnell, then the most widely used college textbook in the field. Its author was a follower of Abba Lerner, the founder of “functional finance” which is opposed to the “sound finance” of Hansen. The Lerner-McConnell view was that deficits never matter, and that the government should probably run them all the time because the private economy is inherently so unstable that it can not be trusted to provide full employment. Programs should not be funded based on the availability of tax revenue; they should be adopted on their own merits. And, of course, once the link between “buying” government services and paying for them is severed, there is no limit on what the politicians can do for their special interest supporters. Everything from Washington can be offered for free!

Here is the real root of the radical notion that government fiscal policy is not meant to merely save capitalism during a crisis but to replace capitalism as the engine of growth and social transformation. In accordance with the opportunity of “never letting a crisis go to waste,” Obama has moved decisively beyond Keynes towards what really can be called socialism.

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  • Michael Petek

    Get hold of Robert Skidelsky's book 'The Return of the Master.' Skidelsky, the biographer of Keynes, states that the heart of his theory is the irreducible uncertainty of the future, which unhinges the entire neo-classical approach. He also states that Keynes was not a nationaliser, nor even a regulator, and that he held that a government budget should normally be in surplus.

  • Gamaliel Isaac

    Keynes was a lot more socialist than people recognize. He also advocated absurd economic ideas that have cause economic problems since they have been adopted. Hazilitt wrote a book exposing what was wrong with Keynes as did Hunter Lewis. Every economist should read Hunter Lewis's book as should anyone trying to understand what's wrong with the Keynesian policies Obama is pursuing.

  • The_Inquisitor

    I suggest readers get ahold of "The Failure of the 'New Economics'" by Henry Hazlitt. He analyzes Keynes's tome chapter by chapter. Keynes sounds like the ravings of a madman. I can't believe anyone takes him seriously.

  • Michael Petek

    Henry Hazlitt could refute Keynes only if he could prove that a cardinal (eg 60 per cent) or ordinal (more likely than not) probability distribution can be assigned to any future event.

  • USMCSniper

    Keynes' particular depravity was the sexual abuse of little boys. In communications to his homosexual friends, Keynes advised that they go to Tunis, “where bed and boy were also not expensive.” As a sodomistic pedophiliac, he ranged throughout the Mediterranean area in search of boys for himself and his fellow socialists. Taking full advantage of the bitter poverty and abysmal ignorance in North Africa, the Middle East, and Italy, he purchased the bodies of children prostituted for English shillings[See Lytton Strachey, A Critical Biography, Michael Holyroyd, Holt, Rinehart and Winston, two volumes]. Such Leftist hypocrites then, as now, issued loud denunciations against poverty, imperialism, and capitalist immorality. However, for their own degenerate purposes, they eagerly sought out the worst pockets of destitution and backwardness to satisfy their perverted purposes through sexual enslavement of youngsters.. In degenerate areas of the Mediterranean, on the other hand, they found a pervert’s Utopia where the bodies of children could be purchased as part of a cultured socialist’s holiday.

    • scum

      Thanks God the Right has never been involved in child predatory activities. Oh, wait a minute, I forgot about the millions fondled by the Catholic Church and the Boy Scouts of America. Sniper, put your rocket back in your pocket, dude.

      • USMCSniper

        Most Homosexuals love their "chicken bait" (young hairless bed boys) and deny thet they are pedofiles of course. Me doth think you object too much,…. ehh… twinkle toes?

      • glpage

        What makes you think the homosexual, pedophile priests were conservatives?

  • FBastiat

    "Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts" by Hunter Lewis

  • kwg1

    Hayek, Von Mises et al have no trouble scuttling Keynes. Go to and do the research AND THEN COMPARE against not only Keynes theory but the effects of its implementation since it has been followed worldwide from the early 1900's!

    Keynes is IMHO persona non gratta!