by Roger Bourke White Jr., copyright July 2015
Assignment: In your own words explain the Keynesian macroeconomic model.
Lord Keynes and his economic model became high profile in 1936. It has been a popular macroeconomic model ever since, with fierce advocates and detractors.
What follows is my interpretation of why the model emerged and became popular in the 1930's, and what interpretations are being talked about today by those still interested in the model. To be clear: this is not a discussion of the primary source material -- Keynes' actual writings -- this is about how people are interpreting his works. As with religious texts, the writings and the interpretations are very different from each other. And the interpretations are more important because these are what influence the course of historical events.
Lets talk about the context of his work first.
Keynes was a busy and influential man in England during World War One, the 1920's, and the 1930's. In the 1920's he got interested in economics and that interest continued into the 1930's. He became a writer on the topic and published several books. Because of his innovative writings he is considered one of the fathers of Macroeconomics. Keynes lived in the British Empire, but he was equally interested in what was happening in the US.
When the Great Depression followed the US stock market bust of 1929, everyone was surprised at the depth, extent, and length of the slowdown. The previous post-War busts of the 1920's had been smaller in stock fall and economic contraction and much shorter in duration. This one was a deep slide, long in duration, which spread through many industries, and around the entire world.
This is not to say the 1920's didn't have its economic problems, it did. There was labor unrest, lots of flux in the jobs being created and lost. The Great Gatsby (1925) (the book, not the movies) talks about the social changes happening. In particular there was a lot of social unrest being caused by the mechanization of agriculture. Farm prices were chronically below expectations, and food exports were vital to maintaining whatever prosperity could be found in the industry. Steinbeck's "Grapes of Wraith" (1939) was describing the farmers' plight of the 1920's as much as it was the 1930's. But in the 1920's the recoveries were faster, so overall optimism remained high.
The Great Depression started at the beginning of the Hoover administration. In fact, the name "Depression" started as a euphemism for "recession", as in, "This is no recession! This is just a small depression."
But it wasn't. It was big, not small, and unsolvable. The Hoover administration couldn't fix the problem; businesses in the Hoover era couldn't fix the problem; and neither could anyone else that tried. As people started turning blue in the face from holding their breath waiting for "the pause" to end... lots more people started coming up with lots of answers to the question, "Why did it happen?" and "OK... What should we do about it now?" Lots of people... it became what I call in my writings "A Time of Nutcases".
A Time of NutcasesA Time of Nutcases happens when change -- big change, fast change, scary change -- is in the works. This causes stress on the community. Because the community is stressed, and conventional leaders and programs are not relieving the stress, the community enters into the Time of Nutcases. This is a time, lasting months-to-years, when the community experiences a lot of new leaders emerging who express a lot of new ideas. Many of these new leaders are people who have for years been advocating ideas that were too crazy to be popular, but, now that the not-crazy ideas are not working, many of these previously too-crazy ideas will get their time in the sun -- The Time of Nutcases. |
Keynes' ideas fall neatly into this category. They were new and different, and in more sedate times they would have become just another economist's theory.
What made them different in the mid-1930's was they offered President Franklin D. Roosevelt (FDR) and his administration academic justification for the massive government intervention they were already undertaking to end the Great Depression.
GDP = C + I + G + Nx is the succinct summary of Keynes' ideas, much as E = M*C^2 is the succinct summary of Einstein's work. What the FDR administration latched onto was the concept of adding lots of "G" when "I" isn't big enough -- this justified the lots of government intervention and spending the administration was already engaged in.
Keynes' ideas helped justify the Roosevelt era government spending, but in retrospect those programs did little to successfully answer the question, "How do we end this?" The end didn't come until World War Two started and spread, spread enough to sweep up Europe, Asia, Africa and North America in the fighting. This changed the world's circumstance, and thinking, yet again.
During and following World War Two the world economies generally boomed until the late 1960's. In that era, boom plus Vietnam War fighting brought on Johnson's, "We can have both guns and butter." pledge, followed a decade later by Nixon's, "We're all Keynesians now." rejoinder when asked about his high spending rate.
With Nixon, a Republican, calling upon Keynes, it became clear that calling upon Keynes had become a trend in its own right: When the government wants an excuse to spend more, Keynes is ponied up.
The above is a fairly conventional view of Keynes and the Great Depression, World War Two, the Cold War and the Generation Gap 1960's.
What follows is something different. It is Roger's interpretation of what made the Great Depression go on for so long, and what World War Two offered that ended it.
One of the biggest differences between Agricultural Age living (developing culture lifestyles) and Industrial Age living (developed culture lifestyles) is the magnitude and styles of cooperation. The more developed a culture gets the more styles of cooperation are developed and the more pervasive they become. Cooperation becomes much more important. This is why universal education becomes so important. What is being taught in the socializing is all the new ways of cooperating.
But this is a learned skill, which means it doesn't come easily, and there are many ways of doing it. This means there can be lots of arguments. This is why both free speech and tolerance are such important virtues in Industrial Age cultures.
When the cooperating isn't happening a culture gets filled with acrimony instead of cooperation. This is important because it deeply affects the economy -- the more acrimony there is, the less well the economy functions. When acrimony gets really high, the economy comes to a screeching halt, and some kind of social crisis ensues.
It was the transition from cooperating to acrimony which made the Great Depression so "great".
One of the lesser noted lessons taught during World War One was how people should cooperate. This was learned during the war, and then practiced during the 1920's. Then at the end of the 1920's, after the scary shock of the stock market crash and the following credit panic, the developed cultures of the world slid into acrimony thinking rather than cooperative thinking. A couple of examples of this being the universal raising of protective tariff barriers and inventing "sit down strikes" which paralyzed factories.
In sum, various groups within developed cultures stopped cooperating, and the various developed nations stopped cooperating with each other -- domestic and international trade both nosedived.
The Roosevelt Administration tried to solve this acrimony with government programs. Mussolini, Hitler and Tojo tried to solve this with Fascism. Stalin and Mao tried to solve this with Communism. (When Keynes popped up, Roosevelt justified his programs with Keynes' writings.)
None of these worked. The acrimony kept right on, in full force. After a few years of trying, Hitler moved on to another instinctive favorite for solving social problems "Blame Them", and had some spectacular successes until the German invasion of Russia bogged down.
This change to Blame Them, and big-time war, changed the world playing field dramatically, and other cultures serendipitously took full advantage. This gave places like America, England and the Soviet Union the opportunity to switch back to cooperation -- Big Cooperation. "We must come together to defeat the Fascists." became a powerful theme for letting bygones be bygones domestically, and getting back to the business of growing the economy and productivity.
It worked. America relearned how to cooperate, and it won the war. After it won the war, it taught the Germans, Italians and Japanese how to create cooperative, non-Fascist, societies.
Curiously, the Cold War turned out to be a benefit in keeping Big Cooperation going. The threats both the US and the USSR felt from each other kept the necessity for cooperating high, and both nations continued to boom.
But the party didn't last forever. In the 1960's the Baby Boomers started to have a big impact on the US economy. These were people who had not experience either the Great Depression or World War Two -- they grew up in a completely different, peaceful, prosperous setting.
Their thinking was different. And the lessons of the importance of cooperation were going to have to be learned once again.
Likewise, in the 2010's we are experiencing a lot of political acrimony, and this has slowed the recovery from the Great Recession of 2007. We are still waiting for the good excuse to get back into Big Cooperation mode to come along.
Back to Keynes. Keynes was writing about a big mystery of the time: the business cycle. He was trying to explain why they happened and how they could be smoothed out. Even today, this mystery is far from solved.
Keynes' writing is important because it provided academic justification for big government involvement in the economy. This justification is an interpretation of Keynes' writing, not quite what he himself had in mind. But it is still a potent justifier, even today.
Roger's interpretation of the events surrounding the Great Depression is different than Keynes. In my eyes it is cooperation and acrimony that are the key issues that influenced the strength and duration of the Great Depression and the booms that came before and after it.
If we want to avoid big busts in the future, we need to be paying more attention to cooperative thinking and less on whether to, or whether not to, have lots of government intervention.
--The End--