The Essence of Keynesian Thinking
[This article originally appeared as "Keynesian Thinking" in Newsweek, August 11, 1954.]
Arthur F. Burns, now chairman of the Council of Economic Advisers, is one of the country's outstanding statisticians. Yet there is in his implied economic philosophy much to cause misgivings. He has, it is true, several times criticized "Keynesian thinking" (see "The Frontiers of Economic Knowledge," Princeton University Press). Yet in this very criticism he seems to me to accept the four principal assumptions, so far as practical policy is concerned, of Keynesian doctrine:
That "full employment" is the paramount economic goal;
that a private competitive economy, left to itself, tends to generate from mysterious inner forces a perpetual cycle of boom and bust;
that it is the "responsibility" of government — tacitly assumed to be wise, disinterested, and benevolent — to pursue "contracyclical" policies to eliminate or mitigate these otherwise inherent booms and slumps; and
that the basic contracyclical policy is deficit spending.
Let us look at these assumptions more closely.
The Goal of Full Employment
In "The Frontiers of Economic Knowledge," Dr. Burns declares,
The principal practical problem of our own generation is the maintenance of employment, and it has now become — as it long should have been — the principal problem of economic theory. This transformation of economic theory is due in large part to the writings of John Maynard Keynes.
This surely sums up present fashionable doctrine. But is it true?
The principal practical economic problem of our own, as of preceding generations, is the creation of the maximum material welfare for the great body of the people. This can be mainly achieved through maximizing the production and consumption of the right things (including leisure). Maintaining employment is, of course, one of the necessary means to this end. But to erect it into the "principal" end itself is a hopeless confusion.
And as I wrote in Economics in One Lesson eight years ago,
Nothing is easier to achieve than full employment, once it is … taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved.
The slave-labor camps in Russia today provide full employment.
The Instability of the Free Market
Now in a speech in Detroit a couple of weeks ago — on October 18 — Dr. Burns made what seems to me another disturbing statement. "Since our system of free and competitive enterprise is on trial," he said, "the government cannot stand aloof from the private economy but must be ready to take vigorous steps to help maintain a stable prosperity."
In the last two centuries the system of free and competitive enterprise has shown itself to be the most productive ever known to man. In what sense is it still "on trial" — except in the sense in which every human institution and every human being may be said to be on trial?
Is it more on trial than socialism? Or state planning? Or Dr. Burns's beloved "contracyclical policy"?
The tacit assumptions in Dr. Burns's statement are not only that a free and competitive private economy cannot be trusted to be reasonably stable but that the government — i.e., the politicians in power — can be trusted to know and to do exactly what is needed to keep it stable. Both assumptions are debatable.
"Contracyclical policies" is a fancy and flattering phrase, but I cannot recall any example, historical or contemporary, of their consistently intelligent, disinterested, and successful application. On the contrary, the record of nearly every government in the world, in our time, is one of recurrent or continuous monetary inflation. It is to this monetary inflation that the apparent "successes" of full-employment policies are due.
Dr. Burns seems at one with the Keynesians, in spite of his reservations, in regarding deficit financing as one of the chief "weapons" of "contracyclical policy." But this modern superstition, if persisted in, must lead toward economic and political catastrophe. Largely as a result of its dominance, we have had budget deficits for 22 out of the last 25 years; and the end of the deficit orgy is not in sight.