The Economy: We Are All Keynesians Now

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it had more influence in a shorter time than any other book ever written on economics, including Smith's The Wealth of Nations and Marx's Das Kapital.

Permanent Quasi-Boom. Keynes perceived that the prime goal of any economy was to achieve "full employment." By that, he meant full employment of materials and machines as well as of men. Before Keynes, classical economists had presumed that the economy was naturally regulated by what Adam Smith had called the "invisible hand," which brought all forces into balance and used them fully. Smith argued, for example, that if wages rose too fast, employers would lay off so many workers that wages would fall until they reached the point at which employers would start rehiring. French Economist Jean Baptiste Say embroidered that idea by theorizing that production always creates just enough income to consume whatever it produces, thus permitting any excesses of demand to correct themselves quickly.

Keynes showed that the hard facts of history contradicted these unrealistic assumptions. For centuries, he pointed out, the economic cycle had gyrated from giddy boom to violent bust; periods of inflated prosperity induced a speculative rise, which then disrupted commerce and led inexorably to impoverished deflation. The climax came during the depression of the 1930s. Wages plummeted and unemployment rocketed, but neither the laissez-faire classicists nor the sullen and angry Communists adequately diagnosed the disease or offered any reasonable remedies.

By applying both logic and historical example to economic cycles, Keynes showed that the automatic stabilizers that economists had long banked on could actually aggravate rather than prevent a depression. If employers responded to a fall-off in demand by slicing wages and dumping workers, said Keynes, that would only reduce incomes and demand, and plunge production still deeper. If bankers responded to a fall-off in sayings by raising interest rates, that would not tempt penniless people to save more—but it would move hard-pressed industrialists to borrow less for capital investment. Yet Keynes did not despair of capitalism as so many other economists did. Said he: "The right remedy for the trade cycle is not to be found in abolishing booms and keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."

Management of Demand. The key to achieving that, Keynes perceived, is to maintain constantly a high level of what he called "aggregate demand." To him, that meant the total of all demand in the economy—demand for consumption and for investment, for both private and public purposes. His inescapable conclusion was that, if private demand should flag and falter, then it had to be revived and stimulated by the only force strong enough to lift consumption: the government.

The pre-Keynesian "classical" economists had thought of the government too. But almost all of them had contended that, in times of depression, the government should raise taxes and reduce spending in order to balance the budget. In the early 1930s, Keynes cried out that the only way to revive aggregate demand was for the government to cut taxes, reduce interest rates, spend heavily—and deficits be damned. Said Keynes: "The State will have to exercise a guiding influence on the