The Keynesian In Me

I have a Bachelor’s degree in Economics, and sometimes I regret having not been able to pursue a Master’s degree, as my faculty advisor wanted me to do. Before graduation from college I had been offered a job as a radio announcer, and not only was that a childhood dream, I was broke and really needed to earn money. So that’s what I did instead of furthering my formal education.

The 1970’s were a particularly good time to learn about Economics, because of the gas crisis and the rise of so-called Stagflation — high inflation leading to high unemployment. My opinion is that OPEC squeezed the supply of petroleum when it saw the huge increase in demand caused by my generation coming of age. As one of my high school teachers put it, “There are so many of you! You’ll be competing with each other for everything all through your lives, from jobs to houses to cemetery plots.”

That was why some of my contemporaries did better by not going to college. They got an earlier start in life, and some of them — including a couple of guys I know — were already homeowners by the time I had finished earning my degree. It would be another ten years before I bought my first house. In Economics, deciding to go to college instead of working is called an Opportunity Cost. Today we have seen that, for many students, excessive debt has wiped out the potential financial benefit of attending college for at least ten years after graduation. For myself, as I headed towards 30 years old — along with millions of other peak period Boomers — starter homes skyrocketed past $100,000, even after Paul Volcker broke the back of Stagflation by raising the prime interest rate to an unprecedented 20.5%.

So, in hindsight, I think I did the right thing by not getting a Master’s degree, especially considering that I ended up settling on, and genuinely enjoying, a career in technology. But I have always liked reading about Economics, and I’m currently wading through a book I haven’t looked at in over 40 years, when it was itself 40 years old — “The General Theory of Employment, Interest and Money,” by John Maynard Keynes.

At the start of my studies in Economics I once had the privilege of meeting the prominent Keynesian economist John Kenneth Galbraith. But by my last semester it was already obvious that the so-called Chicago School, under Milton Friedman, was taking over economic theory. One of the confounding papers by Friedman I read essentially argued that a single dollar means just as much to a rich man as a working man. I jokingly called it “The Uncle Scrooge Effect,” but as my faculty advisor correctly predicted, it would become the prevailing theory.

Why did this happen? A significant contributing factor was that Keynesian economics didn’t predict Stagflation, let alone have an answer for it. Which ignores the fact that no economic model predicted a breakdown of the Law of Supply and Demand. Nevertheless, Keynes fell into academic disfavor, and deregulation gained traction as the cure to what were seen as over-regulated markets. Conservative convert Reagan — who was, let’s remember, an actor and not an academic — was elected in 1980, and ever since then wealth has been moving to the top, and staying there.

Keynes’ ideas are clearly explained in this video with Terry Gilliam-style animation. The background on Classical Economics is particularly useful, because as Keynes stated at the outset of the General Theory, he assumed his readers were fellow economists, and his writing style can be tough going.

And for an opposing view, here are the ideas of Friedrich Hayek, which helped take us to the chaos of 2008, when the free-market Neo-Conservatives were forced to adopt a decidedly Keynesian approach of saving the failed credit markets. Bill Clinton — who is an academic — made a huge mistake of going along with Ayn Rand disciple Alan Greenspan, and gutting the Glass-Steagall Act. As with immunization, the fact that a safeguard has worked so well for such a long time doesn’t mean it’s no longer needed.

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Blog of Douglas E. Pratt

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