Zachary Carter, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes

Can John Maynard Keynes teach us anything new for dealing with the problems created by the covid-19 pandemic? Hasn’t his thought been thoroughly integrated into current economics? (“We’re all Keynesians now.”)

We can learn something, argues Zachary Carter, maintaining that today’s Keynesian economics, on the right as well as on the left, has missed Keynes’ key insight. The heart of Keynes’ insight, culminating in The General Theory of Employment, Interest and Money, is not just the possibility of adding fiscal and monetary policy to the classical economists’ view of markets. The heart of Keynes’ insight is that markets are incapable of coping with uncertainty.

For Keynes, using government management of expenditures and interest rates was key to preventing the spread of authoritarianism and dictatorships and to forming a just society. But government action needed to go beyond using monetary and fiscal policy to tweak an otherwise reliable market system. Contrary to the beliefs of 19th century proponents of laissez-faire (“liberals”), and contrary to the beliefs of recent neoliberals, markets cannot maintain economic stability. Markets cannot maintain economic stability because, while they can manage risk, they cannot not manage uncertainty.

Despite all the mathematical sophistication of modern financial analysis, the economic collapse of 2008-2009 demonstrated that markets cannot cope with events that cannot be forecasted—that is, they cannot cope with uncertainty.

When we risk money on the roulette wheel, we know the probabilities and, if we want to, we can hedge our bets. Uncertainty is something quite different. There is no way to hedge your bet against someone walking into the casino and shooting up the roulette wheel when you are just about to win big.

It was uncertain, up to the beginning of 2020, whether there would be a worldwide pandemic in 2020. There was no way the markets could hedge against the pandemic. Likewise, markets thought they had hedged all their bets leading up to 2008. But the collapse of the financial house of cards was not something markets could hedge against. An unpredictable event brought the entire economy to a standstill that only government action could kickstart. (The fact that a few individuals saw what was coming (Michael Lewis, The Big Short) could not offset the failure of the market as a whole, with its firms that were “too big to fail.”) While it was fiscal and monetary policy that pulled the economy through in the short run, in the long run the Great Recession showed the necessity of active government regulation of financial markets.

Events for which the markets cannot plan, events which are, in prospect, uncertain or perhaps even inconceivable, can overwhelm the ability of markets to manage economic activity. Only the government, Keynes argued, can hold the economy steady by using taxation, monetary policy, and public-works projects to keep people working, to keep markets working, and to keep economic disparities within the bounds of economic and social health.

In 1789, the various states ratified the United States Constitution “in Order to… establish Justice, insure domestic Tranquility, … [and] promote the general Welfare.”
Keynes’ great insight, according to Carter, was to recognize the crucial economic role of government in achieving these goals.

During Keynes’ lifetime (the first half of the 20th century), the main threat to justice, tranquility and the general welfare was unemployment and poverty, unemployment and poverty that resulted from governments’ misguided efforts to lower prices (actually lower them, not just stop or control inflation) and avoid a negative balance of trade. These draconian austerity policies along with “the economic consequences of the peace” created the conditions that led to the rise of fascism in Spain, Italy and Germany. Many in Great Britain and the United States were also strongly attracted to fascism.

In the summer of 2020, the main threat in the US is the unemployment, poverty, anger and distress resulting not only from the covid pandemic but also from 40 years of neoliberal (i.e., “free market”) policies causing job losses, housing losses, and growing economic inequality. Between 1970 and 2019, household income in the lowest quintile fell from 4.1% of total household income to 3.1%. Household income for the lowest 3/5 (bottom 3 quintiles) fell from 32% to 25% of total household income.

Between 1983 and 2016, median household wealth for the lowest quintile fell from $0 to negative $1099. A large share of national wealth moved dramatically to high-income households. The share of lower income households fell from 7% to 4%. The share of middle income households fell from 32% to 17% while the share of high-income households rose from 60% to 79%.

In the last third of his book, Carter argues that, in the 70 years since Keynes’ death, public policy, following “Keynesian” economists on both the left and the right, missed the most important thrust of Keynes’ work. The field of economics was influenced strongly by Paul Samuelson’s neoclassical fusion of Keynesian elements with classical market theory, and later by Milton Friedman’s attacks on government involvement in the economy and his unlimited faith in the ability of free markets to solve all of humankind’s problems. The resulting neoliberalism (so called because it harkened back to the 19th century liberals’ advocacy of laissez-faire) was practiced by both Democratic and Republican administrations. (Cf. Bill Clinton’s abolishment of the Glass-Steagall law, his “welfare reform,” and his support of NAFTA; also Obama’s failure to rescue homeowners after the 2008-09 collapse in his drive to cut the deficit).

Keynes’ study of history taught him that markets, money, and financial institutions do not spring automatically into existence as people truck, barter, and trade. Rather, they are creations of governments, and government is necessary to maintain them.

Though Carter’s book was completed and published before the pandemic, it would seem from what he tells us about Keynes’ insights, that not only do we need a unified, national plan for fighting the pandemic, but we also need the government to take appropriate action to maintain the economy as well as possible and to restore it when the time comes.

As we see financial markets struggling to anticipate what’s going to happen, as we see a giant share of the economy shut down and unemployment rising exponentially, it’s clear that the bulk of the economy could not have hedged against the pandemic. But the pandemic is also revealing that the health care system cannot hedge against a pandemic. The health care system cannot supply the beds and supplies (PPE, ventilators, medicines) that would be needed only in an unpredictable emergency. The health care system cannot supply the research and epidemiological information necessary to cope with a pandemic. The health care system cannot create a nation-wide Playbook for dealing with a pandemic. The health care system cannot coordinate nation-wide supply-chain problems.

Carter’s and Keynes’ hope would be that the government can respond to the pandemic and the harm done by 40 years of neoliberal deregulation and income redistribution to the rich in a manner which is more just and equitable than its response to the Great Recession of 2008-2009.

Read the book for the details of the arguments I have presented here and the many other themes, including Keynes’ personal life, that Carter explores.



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