Capitalism is not for the faint of heart. It is a system of supply and demand that reduces real workingmen and workingwomen into graphs and equations subject to "aggregate" observations devoid of any real human factors. If left to regulate itself, the economy should remain in check and avoid dangerously radical changes in productivity, orthodox economists maintain. How then do we explain terrible recessions such as the Great Depression, where unemployment figures were seen as high as 25% with still more underemployed and working far below their experience and capability? Shouldn't the system have corrected itself before such dire circumstances were created? Economists reply simply: workers are unwilling to accept lower wages during times of decline, and would rather quit thus jeopardizing the beautifully constructed, but apparently fragile, classical theory of economics. And if these arguments were not effective, there was always the fallback plan of declaring "Social Darwinism," with the Great Depression serving as a perfect opportunity to weed out the worst employees and only the best would emerge victorious at some unforeseeable future date.
In the first few months following an explosion of depressed economic data in 1929, perhaps the population would nervously accept these postulates. Treasury Secretary Andrew Mellon even insisted that "values will be adjusted, and enterprising people will pick up the wreck from less-competent people." But as the Depression deepened by 1932, and food lines grew, such disregard for the well being of average working Americans would no longer be tolerated. Other economic systems such as socialism and Marxism became attractive. Politicians like Hughie P. Long rose to power with popular slogans that advocated "Share our Wealth" and "Every Man a King."
As he watched revolutions in both Germany and Russia, John Maynard Keynes was ready for drastic action to rescue capitalism from the stubborn hands of classical economists who refused to intervene. He set aside deeply rooted beliefs that "supply creates its own demand" and simply states, "the postulates of the classical theory are applicable to a special case only and not to the general case." More radical ideas were put forward as well, including a bold challenge to David Ricardo and Adam Smith. Where Ricardo had once stated "Like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature," Keynes took a more reasoned approach and replied that such hopes for a fair and balanced equilibrium in the real wage "presumes that labour itself is in a position to decide the real wage for which it works, though not the quantity of employment forthcoming at this wage."
Keynes encouraged government spending and short-term deficits during recessions to alleviate the pressures of a contracting economy. His theories established the field of "macroeconomics" and his influence is felt by every nation on earth. New transformations in this field have since emerged, such as policy disputes over how and where the government multiplier effect should be used, but in general his beliefs have laid a strong foundation for a different sort of government which does not see itself so far removed from the daily operations of the economy. Perhaps Keynes truly did save capitalism - the variables are too great to ever know for sure - but without a doubt since the introduction of his theories the business cycle has smoothed and recessions are less severe. While it would be nice to say he underestimated himself and modestly assumed his contribution to be "a voice in a choir", Keynes was fully aware of the impact he and his fellow economists had on the world: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."
February 16, 2003
Steven is Editor-in-Chief of Standard Profit.com, an economics analysis company