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John Maynard Keynes who attended the Versailles Conference (1919) as a delegate of the
British treasury had argued that the treaty was a Carthaginian. Many discerning writers
believe that the unusually harsh peace terms led to the specter of hyper inflation and rise of
Hitler. The Economic Consequences of Peace which
Keynes wrote in 1919 is a relatively lesser known book
but perhaps his most prescient. The General Theory of
Employment, Interest and Money, his magnum opus
debunked the classical myth of automatic economic
equilibrium when an economy is in acute depression.
Keynesian prescription of “Dig the hole and fill them
up” convinced Franklin Roosevelt to launch his New
Deal programmes of massive public investment which
primed the pump of private investment and ensured
that the US economy was near full employment and
contributed 50% of the world output in 1944.
Thus Keynes eschewed the dogmatic market economics
of Adam Smith who had written in ‘The Wealth of
Nation’ (1776) that “the private pursuit of self interest
would lead, as if by an invisible hand, to the wellbeing
of all”. Joseph Stiglitz wryly observes in his book The
Price of Equality that in the aftermath of the global financial crisis 2008 no one would argue
that the banker’s pursuit of their self interest has led to the well being of all. At the most
it led to the banker’s wellbeing with the rest of the society bearing the cost. While a large
number of countries like USSR, China, Cuba, Eastern Europe and East Germany followed the
socialist model of centrally planned economy, USA, and most of Western Europe followed a
cocktail of a Smith and Keynes – a kind of liberal free market economy. Most governments
provided merit goods like education, health and social security; and quite appropriately as
late as 1965 the Time magazine put Keynes on the cover declaring “We are all Keynesians
In the mid 1970s USA had to navigate through stagflation, a phenomena Keynes had never
envisioned. Milton Freidman became thus the presiding deity of Monetary Economics with
control of money supply as the key for countering America’s prolonged recession. Volker,
the Federal Reserve Bank Governor became the executioner through incredible repo rate
hike. From the heady pedestal of an infallible economist Keynes became a pariah in
economics with Macro Economics being divided into two great factions viz. Salt Water
Economics who are essentially Keynesians and Fresh Water Economics who considered
that vision as nonsense.
Paul Krugman is therefore understandably thrilled that after the global financial crisis in 2008
there is a rediscovery of Keynes & resurgence of his ideas when public policy puts a
premium on public investment as the most effective antidote to prolonged depression.
The book under review: ‘Keynesian Reflections- Effective Demand, Money, Finance and
Policies in the Crisis’ by three economists Toshiaki Hirai, Maria Cristina Marcuzzo and
Perry Mehrling is therefore a timely contribution to the present debate on the relevance of
Keynes to our troubled times. Naguchy, in a seminal essay in this book argues that the
old Keynesian orthodoxy of the IS-LM variety would need to give way to rational
expectation and real business cycle approaches into the model. Cardim and Carvalho
argue that liquidity preference may be thought of as a theory of asset pricing rather
than merely a theory of money demand. Fantacci observes that Keynesian proposition of
a clearing union can substantially reform financial institutions today. It may be recalled,
Keynes who attended the Bretten Wood conference 1944, had differed with his American
counterparts who wanted the dollar to be the dominant currency. Keynesian suggestion for a
neutral currency “Bancor” perhaps would have been a better recipe to the turbulent globalised
world that we now witnessed.
Keynes always believed that economics has to be seen as an extension of human
possibility which should be directed to safeguard prosperity and harmony. He firmly
believed that capitalism needs to be purged from its inherent shortcomings of leaving
common man unprotected. In this backdrop India’s pursuit of bolstering infrastructural
investment has a Keynesian ring about it. However, the tendency to downscale social sector
spending in programs like MNREGA which put a premium of employment of
vulnerable sections like SC/ST & women, can’t be more un-Keynes like. The Social
Security Legislation (1935) by Franklin D Roosevelt remains by far the most politically
uncontested piece of social welfare programme. The recent moves to acquire land without
consent and making political capital out of farmer’s suicide are travesty to the enduring
legacy of Keynes and FDR.