Free Market

Keynesianism Redux

The Free Market

The Free Market 7, no. 1 (January 1989)


One of the ironic but unfortunately enduring legacies of eight years of Reaganism has been the resurrection of Keynesianism. From the late 1930s until the early 1970s, Keynesianism rode high in the economics profession and in the corridors of power in Washington, promising that, so long as Keynesian economists continued at the helm, the blessings of modern macroeconomics would surely bring us permanent prosperity without inflation. Then something happened on the way to Eden: the mighty inflationary recession of 1973–74.

Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending. Of the two major categories of spending, consumption is passive and determined, almost robotically, by income; hopes for the proper amount of spending, therefore, rest on investment, but private investors, while active and decidedly non-robotic, are erratic and volatile, unreliably dependent on fluctuations in what Keynes called their “animal spirits.”

Fortunately for all of us, there is another group in the economy that is just as active and decisive as investors, but who are also—if guided by Keynesian economists—scientific and rational, able to act in the interests of all: Big Daddy government. When investors and consumers underspend, government can and should step in and increase social spending via deficits, thereby lifting the economy out of recession. When private animal spirits get too wild, government is supposed to step in and reduce private spending by what the Keynesians revealingly call “sopping up excess purchasing power” (that’s ours).

In strict theory, by the way, the Keynesians could just as well have called for lowering government spending during inflationary booms rather than sopping up our spending. But the very idea of cutting government budgets (and I mean actual cut-cuts, not cuts in the rate of increase) is nowadays just as unthinkable, as, for example, adhering to a Jeffersonian strict construction of the Constitution of the United States, and for similar reasons.

Originally, Keynesians vowed that they, too, were in favor of a “balanced budget,” just as much as the fuddy-duddy reactionaries who opposed them. It’s just that they were not, like the fuddy-duddies, tied to the year as an accounting period; they would balance the budget, too, but over the business cycle. Thus, if there are four years of recession followed by four years of boom, the federal deficits during the recession would be compensated for by the surpluses piled up during the boom; over the eight years of cycle, it would all balance out.

Evidently, the “cyclically balanced budget” was the first Keynesian concept to be poured down the Orwellian memory hole, as it became clear that there weren’t going to be any surpluses, just smaller or larger deficits. A subtle but important corrective came into Keynesianism: larger deficits during recessians, smaller ones during booms.

But the real slayer of Keynesianism came with the double-digit inflationary recession of 1973–74, followed soon by the even more intense inflationary recessions of 1979–80 and 1981–82. For if the government were supposed to step on the spending accelerator during recessions, and step on the brakes during booms, what in blazes is it going to do if there is a steep recession (with unemployment and bankruptcies) and a sharp inflation at the same time? What can Keynesianism say? Step on both accelerator and brake at the same time? The stark fact of inflationary recession violates the fundamental assumptions of Keynesian theory and the crucial program of Keynesian policy. Since 1973–74, Keynesianism has been intellectually finished, dead from the neck up.

But very often the corpse refuses to lie down, particularly an elite which would have to give up their power positions in the academy and in government. One crucial law of politics or sociology is: no one ever resigns. And so, the Keynesians have clung to their power positions as tightly as possible, never resigning, although a bit less addicted to grandiose promises.

A bit chastened, they now only promise to do the best they can, and to keep the system going. Essentially, then, shorn of its intellectual groundwork, Keynesianism has become the pure economics of power, committed only to keeping the Establishment-system going, making marginal adjustments, babying things along through yet one more election, and hoping that by tinkering with the controls, shifting rapidly back and forth between accelerator and brake, something will work, at least to preserve their cushy positions for a few more years.

Amidst the intellectual confusion, however, a few dominant tendencies, legacies from their glory days, remain among Keynesians: (1) a penchant for continuing deficits, (2) a devotion to fiat paper money and at least moderate inflation, (3) adherence to increased government spending, and (4) an eternal fondness for higher taxes, to lower deficits a wee bit, but more importantly, to inflict some bracing pain on the greedy, selfish, and short-sighted American public.

The Reagan Administration has managed to institutionalize these goodies, seemingly permanently on the American scene. Deficits are far greater and apparently forever; the difference now is that formerly free-market Reaganomists are out-Keynesianing their liberal forebears in coming up with ever more ingenious apologetics for huge deficits. The only dispute now is within the Keynesian camp, with the allegedly “conservative” supply-siders enthusiastically joining Keynesians in devotion to inflation and cheap money, and differing only on their call for moderate tax cuts as against tax increases.

The triumph of Keynesianism within the Reagan Administration stems from the rapid demise of the monetarists, the main competitors to the Keynesians within respectable academia. Having made a series of disastrously bad predictions, they who kept trumpeting that “science is prediction,” the monetarists have retreated in confusion, trying desperately to figure out what went wrong and which of the many “M”s they should fasten on as being the money supply. The collapse of monetarism was symbolized by Keynesian James Baker’s takeover as Secretary of the Treasury from monetarist-sympathizer Donald Regan. With Keynesians dominant during the second Reagan term, the transition to a Keynesian Bush team—Bush having always had strong Keynesian leanings—will be so smooth as to be almost invisible.

Perhaps it is understandable that an Administration and a campaign that has reduced important issues to sound bites and TV images should also be responsible for the restoration to dominance of an intellectually bankrupt economic creed, the very same creed that brought us the political economics of every Administration since the second term of Franklin D. Roosevelt.

It is no accident that the same Administration that managed to combine the rhetoric of “getting government off our back” with the reality of enormously escalating Big Government, should also bring back a failed and statist Keynesianism in the name of prosperity and free enterprise.


Rothbard, Murray N. “Keynesianism Redux.” The Free Market 7, no. 1 (January 1989): 1 and 4.

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