English economist and philosopher John Maynard Keynes is largely considered to be the father of modern macroeconomics. His ideas in the early 1900s have had a huge impact on both economic theory as a whole and the economic policies of governments worldwide.
In the second part of this three-part series, we discuss Keynesian economics, starting with a refresher on the classical and Austrian schools of economics. We also unpack how he diverged from his contemporaries, the key ideas in his revolutionary book “The General Theory of Employment, Interest and Money,” why Keynesian economics remains largely relevant today, and more.
- [02:01] Recap of classical economics
- [03:54] Recap of the Austrian school of economics
- [08:07] The context in which John Maynard Keynes found himself in
- [13:39] How Keynes’ economic and educational background shaped his key ideas
- [17:38] Why Keynes differed from his Austrian contemporaries
- [21:26] The key ideas of Keynes’ book “The General Theory of Employment, Interest and Money”
- [26:14] Richard Kahn and his contributions to Keynesianism
Links & Resources
🟢 @TheDylanBain on Instagram
🟢 @TheDylanBain on Threads
🟢 @TheDylanBain on YouTube
🟢 Intuitive Finance on Facebook
🟢 Intuitive Finance on Twitter
🟢 The General Theory of Employment, Interest and Money by John Maynard Keynes
🟢 The Relation of Home Investment to Unemployment by Richard Kahn
🟢 The Economics of Imperfect Competition by Joan Robinson
🟢 Mr. Keynes and the “Classics”; A Suggested Interpretation by John Hicks
🟢 Stabilizing an Unstable Economy by Hyman Minsky
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:16] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And Happy Friday, everybody. And if you’re new here, on our Friday shows, we try to take something in news and go one step deeper except when Dylan decides he wants to do a series on economics. So if you are new here truly and you didn’t know that, I would highly recommend you go take a look at my previous two episodes on classical economics and Austrian economics. It’ll help make a lot of this make more sense.
[00:00:43] But one of the reasons that I’m even talking about this is because we’re, at least theoretically at the time of this recording, gonna be over with the debt ceiling debate and debacle, which is good. But one of the things that’s been bandied about are all these ideas of like, what’s the role of government and what should we be doing with the economy and what makes the economy go up or what makes the economy go down and economic devastation and all sorts of fun and happy stuff. And I don’t think that the general public really has a good understanding of where these economic schools of thought came from or what people are saying when they say, “Well, if you just cut all the taxes, then the economy will grow,” or “Well, the government should do something about unemployment,” or “Maybe we should have less regulations.” Like, where did these ideas come from? They don’t just appear out of the void. They actually come from schools of thought. And it’s also important to understand that while I’m dividing economics up into different schools — and so far, I’ve covered the classical school and the Austrian school, and today we’re gonna be covering the Keynesian school — most economists have far more in common on a philosophical level than they actually do have differences on that same level. And so what we’re really arguing about here is, you know, for lack of a better term, a lot of details.
[00:02:01] Well, before we jump into our topic today, let’s just recap from the last couple of weeks. We started off by talking about the classical economists. Now, and I pointed out that the classical economist would not have considered themselves economists, let alone classical economists. Most of them were moral philosophers, and these are people like Adam Smith who wrote two books during his life, “The Theory Of Moral Sentiments” and “The Wealth of Nations.” Both books were meant to be moral treatises and commentaries on society. And then, the classical economists really wrapped up a lot of their work with John Stuart Mill, who is also famous for his ideas on the moral philosophy of utilitarianism. And some of the ideas that these philosophers — David Ricardo was included in this, too — was the idea of supply and demand. They were looking at an industrializing society and really asking the question of like, “What are we actually looking at?” because this is the first time in human history that we’ve actually had this to even look at. And so what Smith and his other contemporaries are looking at and saying, “Well, okay, well, there’s a supply that’s being created. There’s a demand. There is clearly some sort of relationship between them, but we don’t really fully understand that.” This is where we come in with Say’s law, where it says that any supply will create its own demand. And we’re gonna talk about that today and why that probably doesn’t make any sense. But the other observation that a lot of the classical economists were making was that there’s a specialization that’s occurring in the economy. You know, the famous example, of course, with Adam Smith was only, you know, if one man tried to make a pin, it would take him all day. But if he didn’t and he specialized in just pulling wire or finding ore or whatever, that that team of people all working in their own self-interest could produce far more pins collectively than they could individually. There’s also the ideas of competitive advantage and market failures that came out of classic economics.
[00:03:54] Then, we covered the Austrian school, and the Austrian school is probably more contemporary than the Keynesian school that we’re gonna be covering today. But the Austrian school is where we really have a lot of discussions. And I put it first mostly because it, you know, the Austrian school tends to get a lot of press time anytime the government’s doing something incredibly stupid, like the world’s dumbest game of chicken, which is the debt ceiling debate. But the Austrian school of economics really had a lot of different things that are very important to our current understanding of economics. Number one, of course, is the individual being the main economic driver, that is, human beings are perfectly rational. They have information and they’re acting solely in their own interest, and they should be allowed to do so. So there is this idea of individual liberty that really comes through in the Austrian school, and it’s important to understand that they exist, you know, in the history timeline here as a response to the rise of Bolshevism in the Soviet Union. So like there is some politics that’s being played here. And if you can go find Austria on a map, yeah, you’d probably understand why they were a little more concerned about the Russians than, say, the British were at this particular point in time. Anyway, the Austrians also came up with the idea of marginal utility, which is to say if I have a box of donuts, I’m gonna get a lot of pleasure from the first donut, but by the donut number six, I’m probably over it. And then, opportunity cost. If I’m gonna go to one university, I’m giving up the opportunity to go to another university. If I take one job, I’m giving the opportunity of another job. There is a cost to saying “yes” to something. The idea that the entrepreneur is actually the economic beating heart and entrepreneurship should be encouraged at all costs — that’s also an Austrian idea. And then, there is, of course, praxeology, which is their method of being able to assess economics. The way that this works is they start off with their basic assumptions that the individual is perfectly rational and acting in their own self-interest and they are the main economic driver. And then, you think really hard with lots of thought experiments as to what would go on. You never have to go outside. You don’t need any data. You don’t have to do any math. You just think really hard and then come up with what you think the solution would be. And then, that’s going to be the proof. That’s how they work. Like, there’s always this joke that, you know, if you’re really bad at math but you wanna pretend you are good at math, you go into economics, but the Austrians took that joke way too far. So they actually would say that data is not actually useful; that we shouldn’t even be looking at anything empirical, which, as a data hound myself, kind of gives me the hives.
[00:06:27] But that brings us to the third school. And this school kind of fits directly in between the classical economist and the Austrian school. Although the Keynesianism and the Austrian school really kind of grew up together. They were concurrent contemporaries in the economic world, and we’re gonna talk about how that works out. I mean, the reason that I say the Austrian school was a little bit later is because “The Road to Serfdom” by Hayek was published in 1945, and that was one year before John Maynard Keynes, who founded the school we’re talking about today, died. But a lot of the work was done ahead of that, and I’m also getting over my skis.
[00:07:04] One of the things that classical economics and Austrian economics very much agreed upon was the idea that, in general, for the most part, and outside of any extreme cases, the government should stay more or less hands off. Now, the classical economist would say that if you take a look at a homeless person, you know, that homeless person is a market failure — something went wrong, and if we find the the way to correct it, whether to remove regulation or put a regulation in place, then it’ll help the market be more efficient; then homelessness will no longer be a thing. Whereas the Austrians would look at a homeless person and say, well, if the market produced that, then clearly it’s good. And they’re very much laissez-faire, complete hands-off, no government interference. The government’s sole thing that it should do is protect borders and enforce contracts — full stop. And so Keynesianism, though, is a complete departure from that very idea. What truly separates Keynesian philosophy from Austrian or classical economics is really the idea of the role of government and whether or not we can actually control an economy.
[00:08:07] But you’re gonna need a little background before we really talk about this. So let’s go back to October 24th, 1929, also known as Black Thursday. This was the day that the United States stock market crashed, losing 10% of its value on that Thursday, and then 13% more on the following Monday, and then it just was all to the races on the following Tuesday. This is considered to be the spark for the Great Depression. And here in the United States, we’ll think about the Great Depression as something that was very intimate to us, but it wasn’t. It was contagious and it spread through the entire global economy. Once we got sick, the British got sick with it, and then, of course, the British Empire got sick, which then translated to the French, and you can kind of see where this is going. And this, of course, is 1929, so we’re 10 years after the end of World War I. And so there’s been a lot of economic development, a lot of government spending that’s been going on, and we had the Roaring Twenties. But when the Great Depression kicked off, one of the things that happened was that investors who had bought stock on margin, which is to say they took out a loan and then bought investments with it, the banks did what was called a margin call. And what a margin call is is where they say, “Hey, I know we agreed that you could have that money for 10 years, but I need it right now, and so come on and get it.” When the investors then turned around and sold their shares in the market, it further depressed the market. But they were selling them typically at less than what they had purchased them for, which means that the banks didn’t get all their money back, which then led to bank failures. And as the banks started failing, they started calling in any loans to get liquidity.
[00:09:48] One of the things that you might remember if you’ve ever read something like “The Grapes of Wrath” is this idea — or even if you’ve seen the movie “O Brother, Where Art Thou?” which is a fantastic movie, highly recommend, especially if you like bluegrass in any way, shape, or form — but one of the things that they point out in both of those pop culture contexts is the idea of the bankman coming over to enforce a contract. The idea of signing the contract with the devil; that idea that somehow like, you sign with your own blood in this contract — this comes up out of this period of time in the start of the Great Depression. Why? Well, because all mortgages at that time were callable. What that means is that you could get a 30-year fixed mortgage, but the bank had a call option on it means they can demand you have to pay it off at any moment. So if you have a mortgage, stop and think about that — that, you know, right now with the debt ceiling debate coming on, that there’s a very real possibility that whatever bank holds your mortgage and you’re making payments to could show up and say, “You either pay off this entire mortgage or I take your house.” That was what was going on during the Great Depression. This is why so many family farms that were still producing lost their land because the banks called it in. So you can kinda see how this is going — stock market crashes, margin calls, bank failures. Now, we’re starting to pull in loans.
[00:11:12] The next thing that, of course, happens is that we had a bunch of factories that were producing consumer goods. American consumerism was starting for the very first time in the 1920s, and there was an expansion of personal credit. You could buy a vacuum cleaner from a door-to-door vacuum cleaner salesman, and you could buy it on credit — store credit. Couple all of that with we had a lot of tariffs and war debts that people tried to pay off with the Treaty of Versailles and everything else like that. And if you remember from my section on classical economics, one of the things with competitive advantage that we learned was that some countries are good at some things and some countries are good at other things. And when they just — those two countries focus on when they’re good at and trade with each other, they both end up better. But tariffs prevent that and paying war debts also prevents that for a variety of different reasons.
[00:12:00] So when the Great Depression kicked off, one of the things that immediately everybody said was they started looking at the classical economists and they started looking at the Austrian economists and they started asking, “Well, what do we do?” Well, what do they both say? Of course, John Stuart Mill and the classical economists, you know, they’re well in the past at this point, and so they’re turning to the, you know, who are the best economic minds around, and they are at this time all Austrian economists. So what did they say? Don’t do anything. Just let it be and the market will heal itself. But the problem, of course, is now you have people who are massively unemployed. Prices are not falling. So this is, of course, the idea of supply and demand, right? As people lose jobs, demand’s gonna fall, and then prices would fall to match, but they didn’t. And that’s an important thing. So classical economics are no longer describing what we’re actually seeing in this Great Depression, and Austrian economics are saying, “Nope. If those people starve, that’s just the market acting and you have to let ’em go.” And people obviously are not liking this. At the same time, if you know your history, 1917, about 10 years earlier, the Bolsheviks overthrew the czar in Russia, thus creating the Soviet Union. And so when people are kicking around, you know, the capitalist would say, “Well, oops! You lost your farm not because you didn’t pay, but because, well, I made some bad bets at the bank, so I called in your loan and took away your family farm. But hey — that’s capitalism. Best system in the world, right?” And then, of course, we had the American Communist Party coming around going, “Goddamn capitalists.”
[00:13:39] So obviously, you can kind of see the political tension that’s going on at this time that’s really driving people to want to have a solution. And that is where a gentleman by the name of John Maynard Keynes steps into the picture. John Maynard Keynes, for an economist, was really bizarre. For starters, I’ve read a lot of things in my life. And like, I always kind of joke that this show is a lot of like, Dylan reads things so you don’t have to. But I have to tell you that out of all the economic literature I’ve read in my life, Keynes is by far the best pros as far as economics pros go. He’s very conversational in how he writes, and that’s a byproduct of who he was as a person. He was not upper class like so many of these other people were. I mean, John Stuart Mill and Adam Smith — they were top-tier level people within the society. Now, no, they weren’t nobles or aristocrats or something like that, but they were definitely in the solid middle class, if not upper class. Whereas John Maynard Keynes, he’s coming out of a solidly middle class background in England at the height of its empire, right? So this is where class structures are really rigid and somehow he’s able to become what is kind of a celebrity. He’s a socialite. He goes to parties and he mixes with the upper tier of society.
[00:15:01] One of the things to note about Keynes, though, is that he was a mathematician. And so when he went to college, his focus, he studied the classics and he studied history, but his degrees are all in mathematics. He actually got his BA in mathematics in 1906 from King’s College, Cambridge, where, you know, and if you know anything about the British systems, a lot of the people that are there are upper class people, and now you have John Maynard Keynes, who’s coming from a far more humble beginning, actually being a successful socialite even in those circles. Keynes was competitive. He was driven. When he was in college, he was a competitive mathlete although that’s not what we would call them at that time. He was driven to show that he was the best. And one of his professors even went so far to say that his optimism meant that he was so confident in himself in the world that he believed he could find a solution to literally any problem if you just gave him the time and space to do it.
[00:16:03] Now, after he graduated, he took a job in the civil service, served in India, and then when World War I started, he came back to Britain and started working to, you know, help support the war effort. One of the interesting things that comes out of this time is that Keynes applies his mathematical skill to an analysis of the Treaty of Versailles that was signed in 1919. And Keynes was one of the very first people to come through and say, “If we do this, if we actually enact this Treaty of Versailles, these are the economic effects that the math is telling me is going to occur.” And what he’s looking at are things like aggregate demand and liquidity of the money supply. These are terms that Keynesians will use all the time — Keynesians, of course, being the term for people who are students of this man and his way of thinking. They look at the world from the standpoint of there is a money supply, and when people have money, they go do things, and those things that they do are economic activity. If you adjust the money supply, they will do more or less of whatever those things are. And those things that they’re doing, they create demand. And aggregate demand — that is, the demand across the entire economy — will dictate how fast an economy grows, how big of a bubble we make, how big of a bust we have when it all blows up in our face. That’s what he’s looking at. And he’s looking at it and saying — taking the available data at the time and crunching some numbers and saying, “Okay. At this level with what we can see, this is plus or minus where I think we’re gonna end up.”
[00:17:38] And one of the things that’s interesting to note is that he was spot-on more or less with a lot of his economic predictions, everything from the collapse of the Weimar Republic to the hyperinflation that they experienced to the lockup demand that they had, and then, of course, a lot of the ways that Germany tried to get around it. That’s kind of impressive because if you remember his contemporaries are Austrian economists who believe that we shouldn’t be looking at any empirical data. Like, math is bad and we shouldn’t be doing it. They use praxeology where they think really hard about a problem and come up with an answer. And Keynes is like, no, no, no. Like, you can actually — there’s math here. Like, did you know that accounting exists? And he’s one of the — he is like the first person to really be applying what we consider to be economic analysis today. Like, we take this for granted that you could take economic data, crunch some numbers, come up with a conclusion, and have at least some idea of what you’re about to do, like what that effect’s gonna be. This was brand new when John Maynard Keynes was talking about it.
[00:18:41] And so when you get to something like the Great Depression, one of the things he looks at is he goes, well, what’s locking everything up is that we’ve had all these loans called in and our money supply can’t grow because we’re locked into the gold standard. So when we come up to something like Black Thursday, what he’s looking at is goes, the problem is is that on Black Thursday when the stock market crashed, people have debated what caused it. But the best answer that is most explanatory is people panicked. And as we know, money is emotional. So when one person started selling, the next person started selling, then the third person’s looking at the first two going, “They know something I don’t. And that drove it down, which then triggered margin calls, which then triggered bank failures, which then took away people’s farms and houses. And what that did is that it had this massive constriction of the money supply when that happened because all that wealth evaporated. And what Keynes is saying is there’s no way for us to be able to expand that wealth because it’s all tied to the gold standard because we’re set to this one thing. And so this is what’s holding us back. If we could expand the money supply, then we could start, you know, generating more economic activity, which is gonna get the flywheel of the economy going.
[00:19:54] Ladies and gentlemen, if you’re listening to this and you’re like, “Some of this stuff kind of sounds familiar, Dylan,” well, that’s because it is. Like, literally every economist says this stuff. Every politician says this stuff. “We gotta get the American people back to work.” “I’m gonna have a jobs program.” “This infrastructure bill will actually generate 60 billion jobs.” Like, that’s Keynesianism. And they’re doing the exact same thing. We’re gonna build this bridge, and what that’s gonna do is it’s gonna give people jobs, and then they’re gonna go spend that money, and that’s gonna expand the money supply. This is Keynesianism 101. Everybody from FDR to present, as far as US Presidents are concerned, have had these thoughts and they’ve been using this rhetoric because when he says this, he’s flying in the face of orthodoxy. It’s like declaring something that we have all taken for granted in the public square as to be suddenly false. What he’s doing is he is literally the first major direct challenge to classical economics. And that’s huge because Austrian economics is really just taking the classical approach to a further extreme to the entire like, anarcho-capitalist idea. Keynes is coming back and saying, “No, no, no. Like, there’s a lot more going on here and, in fact, we can measure it. You don’t have to lock yourself in a room and just think really hard about it. We have data, and we can use it.” And so he’s flying in the face of the classical economists and the Austrian economists who were dominant at the time.
[00:21:26] But again, history is informative here. We’re talking about the Great Depression. He started really disseminating his works and as I’m gonna go through a lot of the people who were students of his a lot of these works are in 1931, 1933, 1936, 1937 that really lay the foundation for this economic philosophy. And all those dates are smack in the middle of the Great Depression, which was a global economic depression. But really, like, the place where you can really point to and say, “Okay, this is where John Maynard Keynes really outlines his economic theory” is with “The General Theory of Employment, Interest and Money,” which he published in 1936. Essentially, the observation he made is that demand is critical to determining economic activity. This is radically different than supply-side economics as that we’re going to be talking about next week. He’s saying, “No, no, no. It’s not supply. It’s demand. The supply will take care of itself if the demand is there. But if the demand shrinks, that creates oversupply, which is what’s actually creating the problem for us. And therefore, because demand is critical to determining economic activity, the demand is what we need to manage, and we manage it by having fiscal and monetary policies that will increase demand when the economy is contracting and decrease demand when the economy is expanding.” And again, if you’re starting to say, “Well, hey, I think I heard Jerome Powell of the Federal Reserve say the same thing,” yeah, you did because it’s the same stuff.
[00:23:04] The other thing that he says in this book is that inadequate demand could lead to prolonged periods of high unemployment. So this is the idea that if people are freaked out, they’re gonna hoard their money. They’re gonna hold onto it. This is in part what he refers to as a liquidity trap, that is, nope, no, no, nope. We’re gonna hold onto all this money and it’s not gonna go anywhere. And then, what do I do? If I’m hoarding money, I might drive less. Okay, so I’m purchasing less gas linked demand goes down. That, you know, now threatens the job of the entire oil and gas industry. Okay, well, I stop eating out. Okay, well, now US Foods and Sysco, you know, who do a lot of supplying to restaurants, their jobs are threatened, the restaurant workers’ jobs are threatened, the franchise owners for McDonald’s they’re threatened because I’m hoarding my capital. I’m not spending because I have inadequate demand because I’m freaked out. Most people during the Great Depression were freaked out and they did reduce their demand, which meant that, well, I might want to employ people, but there’s not enough demand for me to actually hire somebody else ’cause I’m not making enough money. What I need as a business owner is for that person to spend.
[00:24:12] One of the things that Keynes I think was very sober on was being realistic about the idea that all employment was a byproduct of the demand. Like, you don’t hire an employee just for the hell of it. You hire them because you feel that by doing so you can make more money. All employment is a result of an inefficiency somewhere. This is why the idea of AI technology is so unbelievably terrifying to people because if AI is super efficient, that means that my job, which is a result of an inefficiency somewhere in the system, is going to go away. So Keynes is saying, “Well, no, no. If you wanna solve the high unemployment, you have to solve the inadequate demand, and you do that, again, through fiscal and monetary policy.” So what he’s arguing for is an active government intervention into the economy to increase spending in times in which the spending would otherwise be down, like the Great Depression, because by doing that, the government could then come in, intervene in the economy, do things like create jobs, create a jobs program, you know, put people back to work, pass an infrastructure bill, you know, for shovel ready projects, pass a COVID stimulus package under like we did under the Trump administration. Whatever it is, put money into people’s pockets one way or the other, and then they will generate demand that will then increase spending across the economy, which will then increase economic activity. This is exactly what every president in my entire life has talked about anytime we have anything resembling something bad. Now, the Austrians for their part are in the corner like, rocking back and forth and screaming because my God, my God, don’t they understand that we have to do nothing in the market and just think really hard about things? And my God, Keynes has math. Run for the hills. This though is the foundation of basically how every Western economy operates. Like nobody actually follows a lot of the Austrian stuff, but then everybody follows a lot of the Keynes stuff.
[00:26:14] The other Keynes disciples that really came out of this — and I use the term “disciple” specifically because Keynes was a very large personality. Like, people either loved him or hated him as the Austrian economist sreally did. Hayek himself was extremely critical of Keynes, and it kind of looks bad because he was critical of Keynes only after Keynes had died and was no longer there to defend himself. But that’s a story for a different time. Some other Keynesians that we should really should talk about are people like Richard Kahn. He wrote a book called “The Relation of Home Investment to Unemployment.” He published this book in 1931 in response to a lot of the bank failures that were going on and people shutting, you know, calling in these mortgages and taking homes away from people. What he was doing — he was actually building off a concept that Keynes had started, and then he really like, took it and ran with it. But it was basically just the observation that money flows through an economy. And this makes sense. Like, all the economists were just looking at what was going on and going, “How do I describe this?” So what Kahn is doing is he’s saying, “Well, if I have $1 and I go down to the convenience store and I buy a pack of gum with that $1 and I hand it to the cashier, it now goes into that drawer. That dollar then could be used to pay the cashier, who will then go down to the next store and he’ll use that dollar with four others to buy himself a soda. And then, those $5 will go into that cash but that original dollar is now still in the cash register, and at the end of the night, the guy will count up all of his bills, he’ll put ’em in an envelope. That cash then goes to the bank, so now that dollar is in the bank. But where it showed up, it showed up in my hand first. So that’s one. It showed up in the first convenience store. That was two. It showed up in the pocket of the cashier who was paid a wage. That’s three. It showed up in the cashier’s till at the second convenience store. That’s four. And then, end up as a bank deposit by the business. That’s five.” So what Kahn is looking at is saying, “Money flows through an economy, and every time it moves, it multiplies economic activity.”
[00:28:19] Whoa. Whew. Let’s just unpack that. You can kind of think about it like this: if a bank is handed money, like by the government, for whatever reason, they take that, they put it in. That’s a deposit. Okay. They have a deposit. Then, they loan out that money, and then that person will do something like buy a car. Okay, well, what happens? The dealership’s gonna take a cut. So now, that money ends up as a bank deposit at a different bank. And then, they pay the person who was selling the car, the salesman, who then takes that money and puts it into a third bank. So the money the government gave you now gets counted three times throughout the economy. By helping encourage lending, you’re creating a multiplier effect as money flows through the economy, thus increasing economic activity because every time that dollar goes through somebody’s hands, it’s for something of economic value. There’s obviously limits to this, but this is huge.
[00:29:10] This is why whenever there’s a disaster — and, you know, I’m a millennial, so I’ve seen plenty of them — during the 2008 financial crisis, George W. Bush, who was president at the time, was like, “Well, we gotta get money in people’s pockets.” And so what did they do? They sent out a stimulus check. It was like, for $320. Well, why is he doing that? Because he’s giving it to me at the bottom of the economic ladder so that I will then go spend it. And I did. I actually bought a bicycle. It was a Felt Z100. It’s hanging in my garage as I’m recording this. When I did that, I created economic activity, which then caused the business to do economic activity, and that’s what George Bush was trying to do. He was trying to take advantage of this multiplier effect by increasing the money supply by handing it to me at the very bottom of the economic ladder. It’s really just the observation that the more money we have, the more we go do things. The less money we have, the less we do things. And that has a ripple effect through the entire economy. Different from what the Austrians are saying, where they say, “Well, the individual is actually supreme.” Keynes and Khan in this particular case are saying, “Well, individuals are important, but they’re responding to incentives, and one of the incentives and one of the things in their environment is this thing called the money supply. So if we muck around with the money supply, we can get the individuals to go do things.” And so there’s this influence thing. This is, of course, kind of sounds almost Orwellian to put a tongue-in-cheek term on it, which is why, you know, Friedrich Hayek, in his “Road to Serfdom,” pointed out in his view that all economic interference inherently leads to authoritarianism. He’s pointing directly at Keynes when he says this, even though he says he’s pointing at Marx. The idea that we could monkey with the money supply and get the humans to do different things would really cut down on the idea that they’re these perfectly rational, independent economic actors. And yet we have it.
[00:31:05] Another person who was writing around the same time was somebody called Joan Robinson, and what she wrote was “The Economics of Imperfect Competition.” This book came out in 1933. And what she’s really pointing out here is something a new concept what was new at the time, and it’s called monopsony. What monopsony power is is when you’re the sole buyer of something. Monopoly power is when you’re the sole seller of something, but monopsony is when you’re the sole buyer. And what her work is saying is that, well, if you have a sole buyer of one thing, that person becomes the market-maker that destabilizes the market so no free market could possibly work. One way that that we can see this is when you look at it and go, “Well, where are all the good jobs in town? Oh, they’re at the hospital.” Okay, well, then, we’re really not gonna wanna do anything that’s gonna disrupt the hospital. Like, you know, ask ’em why we’re charging six to a hundred thousand dollars for a knee replacement because there are jobs on the line and they’re the only people giving good jobs in this community. You can look at Peoria, Illinois for another example of this because Caterpillar for years was based there. They would go out of their way to stop other businesses from moving into town because they didn’t want to have to compete for the workers in the town, and therefore they became one of the few buyers of labor in the town, which had huge effects because now you have an entire town who rises and falls on the fortunes of Caterpillar. Monopsony power is just as corrosive in Robinson’s mind as monopoly power because the incentives are all screwed up. But until this point, like, the idea of a single buyer had never really crossed anyone’s mind. But we’re also looking at, you know, at this time, having a lot of company towns where you either work for the mine or you don’t work at all.
[00:32:53] Perhaps one of the most important things to come out of this from an analysis perspective is something called the IS-LM model. And it came out in a book called “Mr. Keynes and the ‘Classics’; A Suggested Interpretation,” which was published in 1937. So this person’s looking back at a lot of this work, but you can kind of tell it’s like less than 10 years. So like, oh, the classics? Like, really? But like I said, Keynes and a lot of, you know, the people who were students of his, they write in prose. They don’t write in economic-ease. And so what this was saying is that like, there is an investment savings model that goes with the liquid money supply. So what they’re looking at is they’re saying there’s a relationship between interest rates and the output in an economy. There’s a balance that starts to happen. So when the Fed is saying like, “Oh, we’re gonna raise rates,” what they’re doing is they’re trying to actually lower output. We’re raising rates to fight inflation, so we’re doing that to lower output. This is using this model. That’s how the Fed decides if they’re going to raise interest rates or not. When we have an economic catastrophe, they do the exact opposite because they’re trying to increase output. So by lowering interest rates, they’re introducing more money into the economy. There’s this balance point that then becomes the liquid money supply, which is a curve that represents at equilibrium point between interest rates and savings and the output. Now, it’s really kind of interesting when you start thinking about this type of thing because, well, is it true? And the answer is, well, it’s better model than just lock yourself in a room and think really hard about it ’cause there is some math around it. And it does — there is a relationship, but it’s sticky. And that was one of the things that really plagued Keynes during his time was this idea that like, well, prices are sticky and none of this stuff is an exact science, but at least we know which direction we’re gonna head in.
[00:34:45] And last but not least, there was there’s a gentleman by the name of Hyman Minsky who wrote a book called “Stabilizing an Unstable Economy,” but this one came out in 1986. And so he’s writing afterwards. So now, we’ve had Austrian economics has really come into the stage. The Chicago school has appeared, which we will cover next week. But basically, what he is saying is capitalism by its nature always leads to periods in which speculative bubbles appear. And the goal of the government should be to pop those bubbles before they happen or to deal with them in the aftermath. Now, if you’re looking at it and you’re saying, “Hey, in 1986, I feel like Dylan’s talked about that.” Yeah, that’s because that’s the year that we had the highest rate of bank failures due to the savings and loans crisis in the United States since the Great Depression. Oh, and what had happened? Well, during the Great Depression, when we had 9,000 bank failures in one year, they passed a bunch of regulations, and then Reagan removed them that led to then the savings and loan crisis. So, again, we have the first major financial catastrophe since the Great Depression and the Keynesians pop up again because this is a theme. Of course, they do.
[00:35:57] So let’s just kind of go back and unpack like what are the ups and downs. And if you haven’t noticed, what I’m really trying to point out is that because of the analysis and the math that the Keynesians have, it’s a commonly used tool. But it’s not without its critics. So let’s go through the pros and cons, just like I did with the other two schools. The pros really boil down to this. Number one: there’s this idea of countercyclical policies. Essentially, when aggregate demand falls because of a recession, spend, spend, spend. Don’t think about what’s gonna happen. Just get on it. One of the criticisms about the response to the 2008 financial crisis was how long we had persistent high unemployment afterwards. This is Keynes 101. This was his bread and butter. And a lot of economists said, “Well, the problem was we were so worried about government interference and we were so worried about some other boogeyman that we didn’t do enough support fast enough to make a difference and get people back to work.” Now, it’s important to understand that like, that’s really tempting. Like, spend, baby, spend. Like, this, of course, is why we are in a problem where we have a debt ceiling debacle because the other half of what he said — and, ladies and gentlemen, I want to highlight this ’cause we’re gonna see this again with the Chicago school, which I’m gonna cover next week — most people don’t read the entirety of what Keynes said. They hear the spending part. So that’s what Hayek heard. That’s what all the Austrian economists heard. That’s everyone who hates Keynes. “He just wants to spend money with no regard.” The other half of this, though, is when times are good, you gotta get the money out of the economy, right? You remember it’s about, you know, if there’s more money, people do more stuff. If there’s less money, people do less stuff. The economy can overheat because there’s speculative bubbles. There’s the boom and bust cycle. This is where the bear and the bowl of the market come in, right? What Keynes is saying is that when times are really good, you gotta get the money out, and the way you can do that is you can either do that by increasing taxes to help, you know, slow down the economy or you can increase interest rates or preferably both. So when times are good, you raise taxes. When times are not so good, you spend money. Whatever this current system is you’re doing the exact opposite of what you would want to increase that. And his idea is like, the government should be managing the economy. We’re gonna get to why here in just a second.
[00:38:17] Number two is unemployment. Keynes is the first person to look at unemployment and go, “This is a major issue.” Remember the approach to homelessness, right? The Austrians would say, “Well, that’s what the market wills, so don’t do anything. Don’t help that person. Just let the market work.” And Keynes goes, “No. Like, that guy’s unemployed. Let’s give him a house. Let’s get him a job. Let’s make him a productive member of society.” He’s the first economist who’s really looking at this. And if you remember all way back to John Stuart Mill with the classical economists, you know, he was looking around and he was going, “Well, there’s a market failure because what happens to that kid who lost his arm into the machine in the factory? He can’t work anymore, and the market is not gonna provide for him.” So he considered that to be a market failure. Keynes is continuing that work. So what Keynes would say would be like, “Well, we need to stimulate demand to increase employment.” So if unemployment is high, we do things like infrastructure spending or, you know, stimulus checks or whatever to stimulate demand. During COVID, we did this. We sent out checks. And what happened? It was — Amazon had a really great year. Why? Because we spent a bunch of money.
[00:39:25] Alright. Number three is stability. One of the roles for government that Keynes saw was that the government is the guarantor of society. That is, they’re supposed to create stability and confidence. This is, of course, why the FDIC exists — to create confidence in the banking sector. They step in with support. This is why Congress — we need Congress to act. Why? If you actually are an Austrian economist, you’d be like, “Congress should do nothing. In fact, abolish Congress. Let’s just get rid of it, and then we’ll just hope for the best that humanity’s gonna be better than they actually have shown us throughout all of human history that they are.” But I digress. What Keynes is saying is that the government should take its role as to provide stability and confidence. Why? Because that’s the best way to get private sector actors to make a risk. It’s not about having government control. It’s about having a stable environment so that people feel more comfortable to do something like entrepreneurship. On a lot of levels, Keynes is actually supporting the Austrians in saying, “No, we need entrepreneurship, and the way you get entrepreneurship is that the government takes on some risk. They create a stable environment, and that person will go out and invent things.”
[00:40:34] Then, of course, there’s also social benefits. If you have gone to a library or you’ve driven on a highway or you’ve gone to a national forest, you have seen the byproduct of Keynesian economics at work. A lot of what Keynes talked about is that when unemployment is high, build roads, build schools, build hospitals. Put people to work, even if it is just going out there with the scissors and a ruler and cutting the grass manually. It will get ’em to work, they’ll then spend money, and that’ll jumpstart the economy. And a lot of what he said was you should do that through public works infrastructure. If you think about things like the New Deal, that’s exactly what it is. And, of course, the pros is, well, he had the answer to avoid the liquidity trap. Traditional thinking, whenever we have low rates and low investment where you have a bunch of margin calls or you have a shrinking money supply, the traditional way of thinking in Keynes’ mind was we are in an extreme case. The normal rules don’t apply. Therefore, we have to do something different. How do we get out of the liquidity trap? You spend your way out of it. That was what Keynes said.
[00:41:38] Now, there’s, of course, cons. And the cons are, well, number one, yeah, this is all like one part math and two parts art and three parts politics. So there’s a huge problem of overshooting. One of the things that people have started to say is, “Well, did we go too far in our COVID supports and now we ended up with inflation?” And the answer is we don’t actually know. We can say maybe or kind of, but we’re not sure.
[00:42:05] This is where a lot of people will get on Keynes is about the risk of inflation, which, of course, is number two because the overreliance on government spending then spurs too much demand, which then drives up prices because supply doesn’t come to match, which I’ve talked about ad nausea. One of the things that’s interesting is that the people who are most critical on this point are Austrian economists who don’t have any math or data to back themselves up, but Keynes does and his whole thing is we can’t calculate that. We’ve tried and we didn’t come up with it. One thing that I’ve said is there is no equation for the money supply to inflationary power because inflation has multiple variables, not all of which are easy to measure. But the risk of inflation is real. Like, this is something that can absolutely happen because if you have too much demand and not enough supply, it’s gonna cause prices to rise. And so it is emphatically a con of Keynesianism.
[00:42:59] Number three is public debt. And, you know, we have a debt ceiling debate going on right now. That whole like countercyclical policies thing? One of the things that he said was like, you know, when things are rough, run up the credit cards. But when things are good, pay them off. And people read the first part, but not the second part. So if you don’t read the second part and you raise taxes when times are good — and, of course, politicians, “Well, times are good. Don’t raise taxes. You’ll kill it.” Okay, so you admit Keynes is right and you’re also gonna say we’re just gonna completely ignore him. That’s more or less what they’re settling on when they say this. But if you, again, stop and think about it. Like, we spend our way out of it. But if we don’t raise taxes, we’re gonna be left with public debt and America would like to enter the chat and talk about it’s $31 trillion in debt and our habit of going to war at the same time as we lower taxes. But again, I digress.
[00:43:50] Another con is timelines. Well, if I take a fiscal or monetary policy approach, there’s going to be a time between which I make the policy and the policy has an effect. If that time is great enough, what’s end going to end up happening is maybe conditions have changed and my policy is no longer good. That is to say, well, I don’t know how long it’ll take.
[00:44:12] And then, of course, lastly is political constraints. The politics might not align with what’s best for the economy. And if you’re just go spend, spend, spend, it’s very possible you’re just buying votes. I mean, you can look at this and see it’s prima facie true. You know, we have inflation. One way to combat inflation would be to raise taxes and get more money out of the system. Who has suggested that? Nobody. So the politics don’t align with what’s probably best for the economy, which would be probably to raise taxes in order to pay down things like debt or if nothing else just pay our bills.
[00:44:46] And before I sign off today, ladies and gentlemen, I do wanna point out one thing though. And this is, you know, Keynes is much aligned in a lot of economic circles, particularly for the Bitcoin is a store of value type of folks. But his ideas were more or less adopted worldwide. The Chinese government and their two-tiered currency system? They’re all Keynesians. Most of our federal reserve at all of our central bankers in Europe and Japan and England — they all have this idea of Keynes. They are all Keynesian whenever it comes to trying to make the economy better and make themselves richer, and they’re all Austrians the second that we talk about welfare programs. But to put a finer point on it, fiscal and monetary policy as an economic lever — the idea that spending and tax cuts will actually have an economic impact — that’s all Keynes. Nobody before him really had that idea because everybody was, well, how do we do less in the economy? And Keynes was like, no, it’s exactly the opposite. You have to make policies. Those policies are gonna have effects, and they work as economic ladders.
[00:45:50] The other thing that Keynes talked about was things like subsidies for economic supports. So we have this in the United States where our price for gasoline at the pump is artificially low because we have all of these things in the place from subsidies, everything from direct wealth transfers in terms of cutting a check to preferable tax treatment for O&G firms, and this has an economic result of encouraging things like the suburbs and people buying Ford F-150s. So subsidies as an economic support clearly is having an effect because if we took that away and gasoline prices then rose to $12 a gallon, which is where it would probably go if we took all of them away at the same time, well, then, we’re not gonna buy pickup trucks and wanna live in the suburbs anymore.
[00:46:32] Leaving the gold standard, which every, you know, Western and modern economy has done is, again, Keynes 101. He was a major proponent of getting off the gold standard. And when you look at things like the New Deal post-World War II recovery, he was more or less vindicated because as they went off the gold standard, these economies started to recover. The entire New Deal under FDR during the Great Depression is all Keynesianism. The idea of creating the Civilian Conservation Corps and all of the other, you know, alphabet agencies during the Great Depression was the idea of getting people back to work to jumpstart demand. And you can look at the economic data. The United States was recovering, and then World War II was basically throwing gasoline on the fire, which was really just a collection of matches at that point. And the post-war recovery after the end of World War II was, again, done with a lot of government spending. You know, things like the Marshall Plan. Let’s spend a lot of money into Europe to get them to recover so that their economies come back and we don’t have a repeat of Weimar Germany. That was the entire idea and it’s because of Keynes’ work that they went and did it. And, in fact, when you get to the fifties and sixties in the United States, one of the largest economic expansions of all time, you see this extremely clearly because they have policies on taxes and investments, everything from, you know, we’re gonna put a man on the moon and return him back to earth safely. Well, why are we doing that? Well, ’cause we gotta show the Russians and it’s really economically good to have this massive scientific agency that’s gonna produce a bunch of stuff that we’re then going to be able to use in the economy. You know, things like Velcro, like literally came out of NASA. If you’re listening to me on a smartphone, just know that about 50% of all of that technology that’s in there was developed for NASA through government funding, and the rest of it was started off at university also started with government funding. But I digress. That’s the whole point. The idea — the entire United States interstate system was this more of the same stuff. So basically, anytime the government wants to rescue somebody from something in terms of, you know, a recession or a depression or a crisis, it’s Keynesianism is what they’re using.
[00:48:39] And I’ve pointed this out before and I’ll pointed it out again here. People like the GOP are all Austrian right now because they’re in the minority. The government shouldn’t do anything. It’s laissez-faire. I’m really concerned about the debt. We have to do all this other stuff. But just go back a couple years to when Trump was in power. 25% of the current national debt was incurred under Trump. Why? Well, COVID, mostly. Well, what was happening in COVID? The economy was crashing. We put a bunch of supports in. We spent, spent, spent to try to jump things. We did a really good job of it as the economy more or less continued to hum along. You know, look at employment right now. Employment’s not dropping. The GOP was extremely Keynesian under Trump, and they were Austrian under Obama, and then they were, you know, Keynesian again under George W. Bush in the early 2000s. And don’t get me wrong. The Democrats are more or less exactly the same. It’s just that the GOP are easier to see right now. There are no innocents when it comes to politics. I think I’ve been pretty clear on that.
[00:49:39] So there you have it, ladies and gentlemen. 52 minutes on talking about Keynesian economics. But I don’t feel bad for spending as much time on this as I had because I hope that I’ve made the argument of just how core and critical all of this is to our current economic understanding of how things work. This is where it comes from, ladies and gentlemen. This is why we have these discussions. And so I hope that I’m leaving you a little more educated here on a Friday. If you’ve been with me this long, please stop over to Instagram and leave me a message and let me know that you enjoyed the episode or Dylan, you should really cut these into smaller segments. And until next time, I’ll see you on Tuesday where we’re gonna talk about starting from zero. So have a great weekend. Don’t add to the population. Don’t subtract to the population. Don’t end up in the newspaper or in prison. And if you end up in prison, make sure that you establish dominance quickly. I’ll see you next week.
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