Keynesianism arose out of an attempt to explain the Great Depression of the 1920s, an event that has so many parallels with the present-day recession.
Most of us nowadays assume that people understood that the Depression was causally linked to the Wall Street crash that preceded it, but apparently Chicago School monetarist theory sees no such connection between these 2 events, and in fact, has no explanation at all for the crash. This is because the Chicago school of neo-classical liberalist economics is based on a belief that markets are automatically self-correcting and stable. It has no explanation for financial crises or mass unemployment. In fact, this school of economics believes that unemployment is a choice, and that market prices always correct themselves in accordance with laws of supply and demand, and that, when high levels of unemployment occur, the price of labour simply has to fall to its correct level, and the prices of commodities will also fall to meet the market condition of lower incomes. This school of economics concerns itself solely with so-called supply and demand, (a concept that goes back to a medieval economist called Ricardo) and does not even take into account the behaviour of the stock market in the economy. It is based primarily on abstract numerical models which have no relation to actual reality.
Keynes, on the other hand, believed that if economics could not explain what happens in the real world, then it has no value. All his work was an attempt to understand, predict and ultimately regulate how economies actually work in reality, not as some pure mathematical model. He realised that the way people behave when investing on the stock market has a profound effect on the macro-economy, and makes it inherently liable to crisis and crash if left unregulated.
To look back at the Depression of the 1920s again, 2 other causes were, first a private property market that was based on market speculation, rather than actual demand for housing, which ultimately caused the building industry to implode, and take a large part of the economy down in a crash. This in turn caused people to stop spending money or investing money at all, which triggered a downward spiral in the rest of the economy, which turned into a depression. The property market played a huge part in the present-day recession, and although it’s worked in a different way today, there are startling similarities in the triggering of the banking crash.
Secondly, in the 20s, as in the present-day, a massive gap grew between the wealthy few and the poorer many – with the top 24,000 families in the 20s having 3 times the income of the bottom 6 million. (I believe the disparity is far greater today) This is not a moral issue- although that is also in there - it is a problem because it is bad for the economy. The money gets directed away from the wider economy into financial speculation and conspicuous consumption – none of which actually help any economy. Easy money on the stock market creates a momentum which is inherently liable to boom and bust. It was therefore inevitable that there would be a major crash. If you factor in that most of the super-wealthy are not even paying taxes to their host countries, then we can see that virtually none of their money is doing anything useful in the economy as a whole. Monetarists tell us that these super-rich are helping to keep the economy going through the “trickle-down effect”, but most of their money is being taken out of the effective economy by being invested back into the stock market or in property, rather than doing anything useful to create jobs and wealth in society as a whole.
Keynes pointed out that the less money people spend, the less demand there is, output falls and unemployment rises, which then causes less money to be spent, and so on, spiralling down. So we are being told that tightening our belts and creating mass unemployment is a necessary step to getting the economy back into a healthy state, when it is precisely the opposite of what is needed. He called this ‘the paradox of thrift’.
Keynes’ argument that the best way to bring an economy out of a depression was to create public projects which would give jobs to people, has been derided in recent decades. “Spend your way out of a crisis” is one of those phrases that is spoken with a scornful curl of the lip as typical left-wing, economic mismanagement. What he actually advocated was that if key areas of the economy were in public ownership, then they would be run for the purposes for which they were created, rather than simply as a means to make a profit. This would have a stabilizing effect on the economy and make it less liable to shocks and crashes. Hence, public utilities and infrastructure should be in public ownership, primarily to provide specific services - railways, postal systems, gas, electricity, water etc – and secondarily, to provide employment. They are NOT there to make a profit. Any profits are ploughed back into the business, not hived off for investment in the stock market or for paying grossly large salaries to a minority of executives. This in turn helps to protect the economy from instability. Publicly owned services are a vital part of any healthy, stable economy and selling them off to private companies not only makes important resources, like health and education, dependent on the ability to pay for them, it brings them into the same instability–generating sphere as the private sector. It is not just morally wrong – although it is that too- it just plain bad economics. If we don’t reverse the trend to privatize everything in the public sector, the economy will become more and more unstable and the so-called recovery will continue to be an illusion for the majority of the population.
This government is one of the most irresponsible in its management of the economy that we have had since the Famine in Ireland in the 19th century and the infamous Corn Laws. And yet they have conned everyone so successfully into accepting their childishly deluded austerity argument that even Labour felt it had to join them in that. Just because something makes sense and feels right does not make it true. You cannot run the economy on the same principles as a household budget - the concept is childish drivel. Austerity is not just immoral- it is factually untrue.