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Think Globally

We diminish the work of John Maynard Keynes by oversimplifying his analysis of government spending.
October 21, 2014

John Maynard Keynes is known for his foundational work in macroeconomics and its many implications—such as the idea, voiced in his 1936 book The General Theory of Employment, Interest, and Money, that government spending can reduce unemployment by boosting aggregate demand.

By Peter Temin, PhD ’64, and David Vines
MIT PRESS, 2014, $24.95

Although The General Theory framed the problem in terms of a single country, Keynes reached his conclusions by pondering international economics, asserts Peter Temin, PhD ’64, a professor emeritus of economic history at MIT; by ignoring this fact, we ignore Keynes’s valuable international contributions. Now Temin is coauthor of a new book on the subject, Keynes: Useful Economics for the World Economy, written with David Vines, a professor of economics at the University of Oxford.

Keynes was always thinking globally, Temin and Vines argue. In 1919, at the Treaty of Versailles negotiations after World War I, he angrily resigned his position representing Britain, believing the reparations imposed on Germany would be too harsh. Because Britain benefited from export-driven growth, as Keynes described in his prescient 1919 book The Economic Consequences of the Peace, forcing the Germans to pay back debt would keep them from buying British products, slow global growth, and hurt everyone.

Temin and Vines think the single-country policy framework of Keynes’s General Theory was a necessary simplification of his globally oriented ideas. From early in his career, and certainly by 1919, he had developed an explanation of growth in which technical progress leads to greater productive capacity. This leads businesses in advanced countries to search for international markets, where they sell products and lend capital, eventually producing greater growth worldwide.

But as late as 1930, the authors believe, Keynes adhered to the idea that all markets reach equilibrium, which implies that when unemployment is high, wages decline until employers can afford to pay more workers, and eventually more people become employed. He ultimately came to realize that this was wrong: wages could be “sticky,” remaining at certain levels. If wages don’t drop, how does employment increase? Keynes felt that the whole economy had to grow through aggregate demand; if private employers didn’t spend more money on workers, the government should.

“Keynes is very common-sense,” Temin says, in that “if you put people to work building roads and bridges, then those people spend money, and that promotes aggregate demand.” Temin also contends, despite what the opponents of Keynes’s ideas might say, that such public spending will not reduce private spending when there is high unemployment.

Indeed, the authors would like their new work to convince people that ­Keynesian deficit spending by governments is necessary to reignite global growth today. “The hope David and I have is that our simple little book might change people’s minds,” Temin says.

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Please submit titles of books and papers published in 2014 and 2015 to be considered for this column.

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