What are you reading during the Great Lockdown? I’m having another go at The General Theory of Employment, Interest and Money by John Maynard Keynes.
I first struggled through this weighty tome as an undergraduate back so many years ago I don’t really care to recall. It was an excellent late night read, because the master economist did not have the lightest of touches. A few pages were usually enough to help you drop off into profound slumber.
But I struggled through it and retained sufficient of its content to help get my degree. Imagine my delight when one of the questions in my final exam was something like: “How did JM Keynes revolutionize economic thinking with his General Theory?”
Keynes has been generally credited with getting the world out of the Great Depression of the 1930s with the novel idea that people, and their governments, could spend their way out of economic downturns. The single most memorable take-away from the General Theory was the “multiplier effect” — the idea that one dollar, or one riyal, spent by governments would have an exponential effect on the economy.
One dollar of purchasing power gives an individual the means to subsistence and livelihood, but when it is spent it also provides economic sustenance to all the other people in the chain of production. According to the General Theory, it made sense in an economic downturn to pay laborers to dig holes in the ground and fill them in, because the wages they later spent made it a worthwhile economic exercise.
Prior to Keynes, the classical economists were wedded to the idea of financial discipline. You could only spend what you had, they said, conveniently ignoring the fact that governments had from time immemorial borrowed money — sometimes forgetting to repay — to fund things like wars limited public works.
Keynes’ theory changed all that, and ushered in the era of state-funded expenditure across a variety of areas like education, health services and essential public infrastructures.
The story goes that Franklin D Roosevelt, president of the USA in the 1930s depression era, had got a smattering of Keynsian theory from an earlier work by the British economist, The Means to Prosperity, and was sent a copy of the General Theory when it was published in 1936. It confirmed and extended the arguments FDR had used in his New Deal policy to tackle the depression.
By the late 1930s, the world was pulling out of the downturn and employment and spending were staring to rise again — though it should not be ignored that a lot of the state spending at the time was geared toward military expenditure for the world war that seemed increasingly inevitable as the decade wore on.
Governments would never again leave the economy to regulate itself according to the “unseen hand” of market forces within a rigid frame work of tight financial discipline. Even when Keynsian theory became unfashionably in the 1970s with the emergence of a new monetarist school of thinking, very few economic policymakers entirely gave up the tools that had developed to manage the macro-economy.
The global financial crisis saw Keynsian techniques back in fashion big time as governments threw money at the crisis in the form of “quantitative easing”, which remains in place to this day and has arguably led to a dated of recovery after the bust of 2009. China in particular spent aggressively on economic expansion to fix the problems caused mainly by the American financial and real estate sector.
In the pandemic crisis, most governments have once again reached for the Keynsian instruction manual with a mixture of fiscal and monetary instruments to tackle the economic effects of the Great Lockdown (as the IMF called it).
The ones that focus on fiscal measures, like support for real companies going through a tough time, are regarded as the most effective, though the importance of bolstering the financial system through monetary techniques shut not be underestimated.
America’s $2 trillion “bazooka” was a classic example of the GeneralTheory, and was part of an estimated $5 trillion total spent by G20 countries to counter the pandemic.
The challenges thrown up by the pandemic are unprecedented. Fortunately, there are tried and tested ways dealing with them. Happy reading.
• Frank Kane is an award-winning business journalist based in Dubai.