No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seventeen: A Short History of Macroeconomics 434 “If theTreasurywere tofill oldbottleswithbanknotes, bury themat suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. - John M. Keynes, General Theory For Keynes, the imperative was to stimulate spending and boost effective (or aggregate) demand. To be sure, Keynes said it would be wiser to build roads or houses or the like, but if necessary, just spend on anything! To limit the “hoarders” in the economy, Keynes advocated the “Euthanasia of the Rentier” class (the rich) by having the government lower interest rates to take away any reward to save as well as to encourage private sector investment. Many of the early general glut theorists were advocates of inflation as the solution to depression, and thus were often called “monetary cranks,” since their prescriptions involved printing more currency as the solution to depression. Keynesian economics falls squarely in the camp of the under-consumption theories, and Keynes’ solution of inflation groups him with the monetary cranks of the eighteenth and nineteenth centuries, albeit his theory was more sophisticated. Low interest rates and the attendant monetary inflation would also have the desirable attribute of a lower cost of servicing the public debt necessary to fund public works. Finally, if all this didn’t do the trick, Keynes called for moderate “socialization of investment,” where the government would invest in public works that would improve infrastructure. With this Keynesian theoretical backdrop, imagine you were a politician in the early ‘30s with unemployment at 30%, and one of the world’s leading economists suggests the solution is for you to spend on public works that will benefit your constituents and help you win reelection! You shouldn’t need our previous public choice chapter to know that this would be popular. You can almost hear the politicians say, “go ahead, twist my arm. If I really have to, I’ll vote to spend on my constituents. After all, it is my duty to fix the economy!” World War II only seemed to confirm the theory. Everyone went back to work for the war economy, either as a soldier or a factory armament worker— indeed, the real problem now was how to get enough workers to meet war production. For a new generation of young economists, Keynesian theory seemed to be the magic elixir. Paul Samuelson in America and Sir John Hicks in England quickly worked to systematize Keynes’ theory, as well as to reconcile and integrate it with standard economic theory—resulting in what economists call the Neoclassical Synthesis, which dominates most economic thinking to this day. Thus macroeconomics was born. General microeconomic theory was powerful to explain individual and firm behavior