Why Keynes is indeed the answer

My parrot Maynard hasn’t stopped smiling for weeks. I assume he doesn’t have any money invested in the stock market.

Actually, I think I know the real reason why Maynard is smiling. It’s because he’s back in fashion. Well, not Maynard himself, or even parrots for that matter. But someone with the same name.

Regular readers may remember that I named my pet parrot after John Maynard Keynes, Britain’s most famous economist. They may also remember that Maynard (my parrot, that is) usually limits his comments to three words: “supply and demand”.

Keynes is back in fashion because the world is going through a financial crisis and is heading for a serious recession. This was precisely the situation that led Keynes to publish his most famous book, The General Theory of Employment, Interest and Money in 1936.

Among the main points Keynes made were the following:

• Free-market economies will not automatically produce full-employment.
• Cutting interest rates won’t increase private sector investment if people prefer to hoard money and if entrepreneurs have negative expectations of future demand.
  
• Increasing demand through fiscal policy — that is, raising government spending or reducing taxes — is the only way out of a serious recession.

This was pretty radical at the time. Economic orthodoxy said that the way out of a recession was to save more, so that funds would be available to invest. Keynes instead highlighted the importance of increasing consumption and the role of psychology (“animal spirits”) in investment decisions.

In the 1970s, “Keynesian” economics went out of fashion. His ideas were abused by governments that ignored the importance of keeping inflation and budget deficits under control. Keynes was no longer around to defend himself. He died aged 62 in 1946.

Many economists drew the wrong conclusion from the 1970s. They argued that Keynes’s theory itself was wrong. Some still hold this belief, including The Daily Telegraph in Britain. We shouldn’t be too surprised: some people still believe the earth is flat.

Maynard the parrot is squawking only one word at the moment: “demand, demand, demand”. He knows that, in times of recession, higher government spending or lower taxes are essential (one can argue about which is preferable). An increasing number of experts now agree. More will follow in the weeks to come.

No wonder Maynard’s smiling.