John Cassidy compares perspectives on Keynesian economics between the 1930s and the present.
Half a decade has passed since the bursting of a huge asset-price bubble, and the U.S. economy is still depressed. More than ten million Americans are jobless, and many more are working part time. The gross domestic product has yet to recover its pre-bust level. In Florida and other areas where the speculative frenzy ran hot, vast developments stand empty. Overseas, things are no better, and in some places they're worse. Britain looks much like America. In Continental Europe, a debt crisis is wreaking havoc. Democratically elected governments appear powerless to turn things around. Political extremism is on the rise.
So conditions are grim when, on New Year's Day, 1935, the English economist John Maynard Keynes mails a letter to George Bernard Shaw. “I believe myself to be writing a book on economic theory which will largely revolutionize—not, I suppose, at once but in the course of the next ten years—the way the world thinks about economic problems,” Keynes tells his friend. “I can't expect you, or anyone else, to believe this at the present stage. But for myself I don't merely hope what I say,—in my own mind, I'm quite sure.” Keynes is right. When “The General Theory of Employment, Interest and Money” appears, in February, 1936, it provides an intellectual justification for the large-scale public-works programs that Keynes has been advocating for years, and that F.D.R.'s Administration has recently launched as part of the New Deal. Keynes argues against the idea that the economy will recover on its own, and in favor of active measures—the manipulation of public expenditures, taxes, and interest rates—to spur growth and employment. His theory will become the keynote of a new era of economic policymaking. The main impediment to such policies, Keynes writes, is the lingering influence of outmoded theories.