Keynes and Neo-Keynes Jude Wanniski November 25, 1996

Memo To: Polyconomics prospects
From: Jude Wanniski
Re: John Maynard Keynes

Last week in Toronto I spoke before investment professionals at a conference sponsored by the Association for Investment Management and Research which is based in Charlottesville, Virginia.

After my talk to the assembly on Tuesday morning, one of the audience came up and complained that I was rather hard on Keynes. I told him I did not want to leave that impression, which was more due to the remarks of the speaker who preceded me, Bob Genetski. I actually believe Keynes was a great economist and that his contribution to the art (not science) of political economy will be lasting. It is his students and grand-students who are hopelessly inept, those who style themselves "neo-Keynesians," which is another way of saying they believe in different things than Keynes. I pointed out that the real problem with economics began after WWII, when political economy was separated into "political science" and "economic science." Keynes had nothing to do with any of this, as the "scientists" at the London School of Economics waited until he had died before transposing his ideas of behavioral economics into mathematical economics.

What Keynes confronted at the time he developed his General Theory was the massive, global economic contraction we now call the Great Depression. Because he did not have a good hypothesis on why it occurred, his best guess was that there suddenly occurred a surplus of savings — stagnant pools of capital — and that classical economics had somehow failed in its dictum that supply creates its own demand. When individuals refuse to put capital at risk and the economy stagnates, the government has the responsibility to take control of this capital -- either by taxing it away from those who have it and will not invest it or spend it, or by borrowing it from them, and then taking a collective risk in putting it to use. This all makes eminent sense. Socialism becomes necessary when there is a breakdown in capitalism.

Bob Mundell and Art Laffer revived the classical model to give those who would hear them a greater understanding of why the financial and economic turbulence of the 1970s occurred. I was one of those who heard and understood. My contribution was to go back and discover the cause of the Great Depression, which had eluded Keynes. I discovered it in the Wall Street Crash of 1929, which grew out of the weaknesses of our political system. The Crash, I discovered, was caused by the forces behind the Smoot-Hawley Tariff Act of 1930, the key decisions of which were made on the floor of the U.S. Senate in that last week of October 1929. I made this momentous discovery in 1977, while researching The Way the World Works. If Keynes could only have known in 1929 what I discovered in 1977 --  inspired by two economists who were his grand-students (Mundell studied under Paul Samuelson at MIT, Laffer under James Tobin at Yale) — he would not have been forced to theorize on the demand-side causes of the Great Depression. There is much we have learned from his theorizing.