You Never Had It So Good

John Maynard Keynes
John Maynard Keynes

Disinformation And Deception About Keynesian Economics

In recent times the media and the internet has been full of disinformation about Keynesian economics. Even people like Max Keiser of RT have become part of this campaign

This article is my attempt to correct this, and to inform people of the truth about what exactly Keynesian economics is. It's important, because if an understanding of it became common knowledge, we would all be enjoying a higher standard of living.

In the recent economic crisis, the USA and UK governments, in an effort to boost the economy, have been using Quantitative Easing. In layman's language, this simply means printing money to help pay off the trillion dollar debts these governments have acquired from the banks. Many commentators have the cheek to call this Keynesian economics, which is completely wrong. What they are talking about is trickledown economics which is something completely different.

Back in the 1950s and 60s Keynesian economics was taught in schools and it was nothing like how it is being portrayed today. From the end of WW2 to the end of the 1970s all Western governments used Keynesian economics to keep their economies stable. We were told that it was Keynesian economics which got us out of the depression of the 1930s and was the reason why we had stable economies with sustainable growth. As Harold Macmillan, a British PM at the time, was to say famously in a speech in 1957, you've never had it so good. We owed it all to Keynes.

While governments continued to use Keynesian economics during the 1950s, 60s and 70s we never had any recession, depressions or any type of boom and bust economies. Yet soon after Keynesian economics was ditched at the end of the 1970s, we had a worldwide recession. Why did all Western governments act this way? If we had an economic system that was giving us growth and stability, why get rid of it and use other systems that gave us an instant recession and economic instability? The answer lies in how rich people viewed economic systems. Keynesian economics was great for the average working person but not so good for rich people. It had to go

Under a Keynsian economic system, from the end of WW2 to the 1970s, the gap between rich and poor slowly decreased. This was a great boon for the average working-class person as their standard of living increased all the time. But the rich were not getting the money they felt entitled to. It was awful for the rich then, because many of them couldn't afford the big yachts, private jets and large mansions in different countries that they can today. So because it is the rich who tend to rule countries, they got together, ditched Keynesian economics and replaced it with another type of economics that they called Monetarism.

When Monetarism was introduced, we quickly had a worldwide recession, terrible for working people but great for the rich because the gap between rich and poor immediately began growing and has been growing ever since. So how did this all come about? To understand this, we have to know exactly how Keynesian economics works.

This graph shows clearly how the working class were better off when Keynesian economics was used, after WW2, and how the rich now benefit, when it was discarded.
This graph shows clearly how the working class were better off when Keynesian economics was used, after WW2, and how the rich now benefit, when it was discarded.

Keynesian Economics in practise

Back in the 1930s, during the Great Depression, governments were looking around to see how they could get their economies working again. The economist John Maynard Keynes had the answer. He pointed out that the reason why economies all over the world in the 1930s were depressed was because of high unemployment and poor wages.

When people don't have money to spend, shops have fewer customers and factories have little demand for their goods. So Keynes’s solution to kick-start the economy once again, was to artificially create full employment and good wages for everyone. People would have surplus money, so they would be buying goods, and thus creating a big demand from factories that make these goods, boosting the whole economy.

President Franklin Delano Roosevelt kicked off the process with his 'New Deal' policy, begun in 1933. He created large government projects like the Hoover Dam, which employed large numbers of men, to try to get the economy going again. Then events were overtaken by WW2, when fighting a war produced full employment. Everyone either joined the military or made armaments in factories, and so unemployment was not an option. (All this was paid for in the USA, UK, Germany and Japan by simply printing money).

After WW2, Keynesian economics was adopted by all Western countries. It gave us over 30 years of economic growth and stability, until it was abandoned in the late1970s. There was no talk about austerity and cutting public services after WW2 to pay for the war. In fact, in Britain the opposite happened. The new Labour government created the National Heath service, the welfare state, and nationalized major industries like the railways and coal mining industry. Where did the money come from to pay for all this? Governments simply printed the money to do it all.

I don't know if Karl Marx said this, but it is still a great joke and explains a lot about capitalism.
I don't know if Karl Marx said this, but it is still a great joke and explains a lot about capitalism.

The gap between rich and poor

Keynesian economics is unpopular with the rich because it gives too much power to working people and unions. When you have full employment, as recommended by Keynes, and people don't like their wages or working conditions, they are free to leave and find a better job. This is possible, because with full employment, jobs are easy to find. Employers have to compete with each other for workers and find they have to give in to their demands just to keep them. An employer who didn't pay the going rate for a job or treated his employees badly, would quickly find no-one would be willing to work for him. This is very different from what is happening now.

In times of high unemployment, employees who don't like their wages or working conditions can't easily leave and find another job. They either have to put up with poor wages and poor working conditions or resign and become unemployed. This gives a huge advantage to employers and allows them to drive down wages and increase profits. This is why the gap between rich and poor decreased when we had Keynesian economics, then increased rapidly when we moved to Monetarism

Abandoning Keynesian also led to a rapid decline in the power of the unions in the 1980s. In the Britain of the 1970s, unions were all-powerful. Witness the way the miners’ union brought down the Conservative government in 1974. But when the miners tried to do the same in 1985 they were soundly defeated. Keynesian economics and full employment gave the unions the advantage in 1974, but Monetarism and high unemployment gave the government the advantage in 1985.

The theory of Monetarism involves cutting government spending and squeezing inflation out of the economy. Governments are the biggest employers in any country, so at any time they can increase or decrease employment easily. In a Keynesian economy, governments spend more on the infrastructure of the country to ensure full employment. Under Monetarism, governments cut public spending as much as possible, to keep unemployment high.

Monetarism can only work while governments have total control over the media. If we had a genuine free press and TV, someone could point out to the public that the only reason why we have high unemployment is because of government policy keeping it artificially high. No government could survive a revelation like that. This is why when Monetarism was introduced back in the 1970s, the media had to give its full backing for the policy to work. In the 1980s, they told the public that although times were hard now, if you just stick with us, things will get better.

They did indeed get better, but only for the rich, not for the working class. It didn't matter whether we had a left wing or right wing government, either, since both created high unemployment. The only difference is that right wing governments are more likely to push unemployment higher than left wing governments. Governments will also bring down unemployment just before an election, then pretend we are now having an economic recovery, to try and get more votes. They then create high unemployment once again after they have won the election.

This graph shows clearly that when Keynesian economics was ditched back in the 1970s the rich since then have been getting richer and the poor, poorer.
This graph shows clearly that when Keynesian economics was ditched back in the 1970s the rich since then have been getting richer and the poor, poorer.

Criticism of Keynesian economics

One of the complaints about Keynesian economics is that it creates high inflation. Some economists will tell you that is terrible for the economy. It isn't true. I lived through times of high inflation back in the 1950s and 60s and it wasn't bad for the working class. At that time, as I've mentioned before, workers had the power to look for better paying jobs. Admittedly, this was the cause of inflation then but it seemed to do no harm.

As another British PM, Harold Wilson once said, "One man's pay rise is another man's price increase". So when workers successfully got a pay rise it increased the price of the goods they made. It is this that pushes up inflation. The rich don't like this type of inflation as it reduces their profits. This is why Monetarists say, "We need to squeeze inflation out of the economy". They don't tell you that the way to squeeze out inflation is to increase unemployment. Today, what drives inflation is not the wages of working people but the very high salaries, bonuses and profits of the wealthy.

Inflation is only bad for the working class if you have hyper-inflation, and that only happens when governments attempt to pay large debts by printing very large amounts of money. This is what Germany did in 1923 to pay the outrageous debt imposed on them by the Allies after World War One. Doing this destroyed the German economy and later allowed the extreme right wing party, the Nazis, to gain power. This is also what governments are doing today in an attempt to pay back all the bad debts created by the banks. Some commentators have the nerve to call this Keynesian economics, forgetting to tell the public that Keynsianism only works through full employment. Today we still have high unemployment, so it's clear that governments are not practising Keynesian economics. What these commentators are referring to is in fact, 'trickledown' economics. The theory is that you print a lot of money and give it to the rich, (how convenient!), the rich then spend this money on big mansions, expensive cars, private jets etc, etc, and it is the workers who have to make these things. This means some of the money ends up in the workers’ pockets but not enough to stimulate the economy. When they used the word 'trickle' they weren't kidding! It's this type of economic thinking that justifies the large salaries and bonuses for bank and business executives.

Another criticism of Keynesian economics is the claim that if it was used today by governments, workers would only use the extra money they have to buy goods from the Far East, and so it wouldn't generate growth in North American or European countries. This problem is not really about workers’ wages, but concerns currency exchange rates and incompetent managements in Western countries. Germany has no problem in competing with China, Japan and Korea's manufactured goods, simply because it has far better management and a more manufacturing-friendly environment. If banks refuse to lend to small and medium size businesses, as they do in the UK and USA, it's no wonder that manufacturing suffers badly in these countries. Business bankruptcy directly caused by banks is far too common to allow the manufacturing base of both countries to grow.

Another point is that countries like China have one big advantage, a Communist government with a Capitalist economy. This allows the Chinese government to have total control over its banks and currency. China has the power to set its exchange rate at whatever it likes and the rest of the world can do nothing about it. So it can easily set its exchange rates at less than Western countries, making it easier to export cheap goods. The Chinese government also has the power to stop banks from using short-sighted policies which sabotage its economy and destroy business, just what is happening today in many Western countries.

Another graph showing how the rich great benefited from the ditching of Keynesian economics.
Another graph showing how the rich great benefited from the ditching of Keynesian economics.

Nelson Mandela

A politician who told the truth
A politician who told the truth

Why We need Keynesian Economics today

Imposing high unemployment onto a society is a heartless thing to do. It means we now have children leaving school who find it very hard to find jobs, and most are condemned to a life on the dole or poorly-paid work. It's even affecting university graduates. At one time, a university degree guaranteed a job for life, but today this is no longer true. Many university graduates are either unemployed or in unskilled jobs

It's also an open secret that high unemployment and poverty are the main cause of crime as well as leading to an increase in alcoholism and drug taking. The unemployed, or those in dead-end jobs, are more likely to turn to crime to get more money. Others try to escape the reality of living in poverty through drink and drugs and are forced into crime and prostitution to pay for their addictions.

It doesn't have to be like this. We don't have to live in an economy of high unemployment and widespread poverty. With the modern technology that exists today, like computers and manufacturing robots, everyone should be having a high standard of living. But the benefits of modern technology are only going to the rich and not to ordinary people, who are losing out because of the callousness and incompetence of the people who rule our world. I have nothing against people who want to be rich, but you have to be totally callous and ignorant, if you believe that to be rich and wealthy, you have to impose poverty onto other people.

Under a Keynesian economy, successful business people not only make themselves rich but increase the wealth of their employees. Under Monetarism, businesses force down the wages and living standards of their employees so they can make bigger profits. They become rich by making others poor.

Very wealthy people can get away with this because ordinary people don't understand Keynesian economics. As I said before, I was taught this at school so I'm surprised that few other people of my age can remember what they learned when they were young. It's hard now when nearly the whole media has a blanket ban on any information on Keynesian economics. What information is available is distorted by a misinformation campaign. But if people want to restore their standard of living to what it should be, then they need to inform everyone about Keynesian economics.

The media today has convinced people that the austerity measures imposed by governments are necessary to pay for the bad debts created by banks. I've heard it all before. In the 1980s, we were told that austerity was needed to get the economy back into shape. It never happened. The economy never got better, except when an election was due. What was needed was a wide- ranging public spending programme, improving public services and employing those who couldn't find jobs, but instead we were told to tighten our belts and wait for recovery.

Austerity will become 'normal' if people do not wake up to the fact they are being conned by the media, government and banks. If the rich and powerful can convince us that it is perfectly ok to have very low wages and that public services should be cut, then it will continue to happen. Keynesian economics, as practised in the thirty years after WW2, showed us how to eliminate poverty from our world. Now, governments seem to be in the pockets of the rich and uninterested in taking us back to those times. So it's up to ordinary people to learn about Keynesian economics and demand governments bring it back, so we can all prosper.

Another graph showing how Keynesian economics helps the majority of people, but not the rich and wealthy.  That is why governments ditched it in the 1970s.
Another graph showing how Keynesian economics helps the majority of people, but not the rich and wealthy. That is why governments ditched it in the 1970s.

Wealth Inequality in America

© 2013 William Bond

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Comments 9 comments

patchofearth profile image

patchofearth 3 years ago from somewhere in the appalachian foothills

I will admit I have heard the term but had no idea what Keynesian economics were. This has been a very informative hub which clearly took a lot of work. Thank you for sharing this.


wabond profile image

wabond 3 years ago from England Author

Thanks a lot Bard, and thanks for promoting it.


wabond profile image

wabond 3 years ago from England Author

I'm afraid very few people know about Keynesian economics today, PatchofEarth the whole subject has been censored for more than thirty years now. I only know about it because was taught about it at school in the 1950s. Thank you for the support.


HSchneider 3 years ago from Parsippany, New Jersey

Keynesian economics helped save our economy in the 1930s. It has been a very effective though imperfect tool in stabilizing economies since then. Lately conservative schools of economic thought such as Milton Friedman's have been in ascent. The results are depressed growth and huge wealth gaps. I believe Keynes will have a strong renaissance in the coming years for these very reasons. Excellent Hub, Wabond.


wabond profile image

wabond 3 years ago from England Author

Thank you HSchneider


SilentReed profile image

SilentReed 3 years ago from Philippines

These intellectuals of economic theories, people from the academe who advice the government on economic policies should get down from their ivory towers. Instead of relying on charts, theories and statistics, they should try shopping for the daily needs of their family with the wages of an ordinary worker.

One thing I remember from a class in economics I took in college is that economics is base on supply and demand.

Before Keynes, the economists focus on the supply side of the macro economy while neglecting the demand side. They were more concern with inflation than unemployment. J.B.Say, one of the leading economist at that time theorize that supply creates demand. Maynard Keynes turned Says law around and argued that demand creates it's own supply (which makes more sense). He also argued for government intervention in the market economy during times of economic recession or depression to stimulate demand. The rationale behind government budget deficit spending; to prime-pump the economy.

However, President Roosevelt opted to avoid inflation and maintain a balance government budget. Ignoring Keynes's theory, he imposed an income tax raise in 1934,1935 and 1937. This further aggravated the great depression. It wasn't the "new deal" but WWII that saved the U.S. economy. The government was force to adopt deficit budgets in order to spend for war armaments. Factories retooled to make weapons, demand for labor increase and unemployment disappeared.(Proving the correctness of Keynes' theory) After the war, most of the economy of western countries and Japan lay in ruins. The Marshall plan to help rebuild Europe was possible because American industries were intact. The factories went back to making cars and sewing machines and since there wasn't any competition, the U.S. economy thrive and grew. The U.S. dollar became the world's standard currency of exchange.

Keynes argued for massive government intervention to fight depression not unemployment. But like all good ideas, this has been abused by followers of Keynes, who argued for fiscal and monetary easing (overprinting of dollars) whenever joblessness rose in the economy. Monetarism is an offshoot of Keynesian economics; government trying to balance unemployment and inflation by controlling the supply of money.

If the U.S. economy is in the doldrums, it's because of the advocacy of "free trade." Cheap goods from low wage paying countries flood the market. (Read the labels of origin on products displayed at Walmart). This kills off manufacturing, the lifeblood of any economy. Investors would prefer to put up plants in countries paying low wages and less labor union problems. Pumping more dollars into the system (QE1,QE2....) does not encourage the putting up of factories. The excess money supply only end up in the hands of investment bankers and Wall street stock speculation. Another reason for the economic hardship of the majority is the bias in the tax system. While the rich and affluent get tax breaks (corporate taxes), the ordinary employee is saddled with regressive payroll and social security taxes by the Federal government.

But is the ordinary citizen blameless? Try freeganing in the garbage disposal bins behind supermarkets and restaurants. Not only has over consumption become a way of life, it is estimated that over 40% of agricultural produce goes to waste while millions starve in underdeveloped and third world countries. "You never had it so good." The culture of the good life of wasteful and excessive use of resources can't simply continue without any dire consequence, both to society and nature.


wabond profile image

wabond 3 years ago from England Author

Thank you Silent Reed, for your reply. Yes, I agree that President Roosevelt's New Deal didn't work like it should because he didn't fully implement Keynesian.

The key to all of this is unemployment. There is too much 'smoke and mirrors' going on where politicians use economist theories as excuses to keep unemployment high. This is because they know that if unemployment is high then the employers have the advantage and if we have full employment as advocated by Keynes then the workers have the advantage and their living standards rise.

As for cheap imports from aboard, this is more to do with exchange rates than anything else. We seem to be in an exchange rate war which China is winning.


Leo Walsh profile image

Leo Walsh 3 years ago from North East Ohio

Nicely stated and cogent case for Keynes. Who took a bashing beginning in the Reaganomics "trickle down" years, and continues on today in the rehetori of tax cut/ austerity advocates. Despite overwhelming evidence that Supply Side solutions really do not work.

Cheers,

Leo (http://www.leo-walsh.com/)


wabond profile image

wabond 3 years ago from England Author

Thank You Leo.

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