If you use the word “Keynesian” as a synonym for “socialist,” “progressive,” or “liberal,” well my friend, you’re doing it wrong.
If you’ve been involved in Internet arguments about economics, then you must have heard the term “Keynesian” being applied this way. And it seems to make sense. After all, many of the bloggers and writers who describe themselves as “Keynesian” are also of a liberal bent. And more importantly, John Maynard Keynes himself was in favor of some amount of wealth redistribution and government intervention in the economy. So why am I saying it doesn’t make sense to use the word “Keynesian” in this way?
One reason is because this isn’t how academic economists use it. In academia, there is a class of models called “New Keynesian” models that try to describe how monetary policy might affect the economy. But the thing is, despite the name, these models aren’t actually very close to anything Keynes ever conceived. In fact, they’re very close to the ideas of Milton Friedman, who was a rhetorical and political opponent of Keynes. My doctoral adviser, Miles Kimball, actually tried to change the name of the models to “Neomonetarist,” to be more faithful to Friedman’s legacy, but no one went along with it, and the “New Keynesian” label stuck.
In fact, many of the people who invented New Keynesian economics were politically conservative, and deeply opposed to wealth redistribution and to government intervention. The New Keynesians included Greg Mankiw and John Taylor, who are among the most prominent conservative economists writing in the popular media today.
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OK, so why should you care about the arcane jargon of academia? Well, because there’s a good reason Taylor and Mankiw chose to name their theory after Keynes.
New Keynesian economics says that monetary policy – and even fiscal policy – is all about stabilization. It’s about smoothing out the fluctuations in the economy, reducing risk for everyone concerned. When the economy is doing well, raise interest rates to slow things down; when it’s doing badly, lower interest rates to give it a boost.
And that’s it. No wealth redistribution, no regulation, no command economy. Stabilization theory says that you can smooth out the wrinkles of the business cycle without messing with the deep structure of how the economy works. The expectation is that if the government does just that – just that one small, minor intervention – then recessions won’t be a big problem, and angry unemployed people won’t demand more lasting government interventions.
In other words, stabilization policy is supposed to guard against socialism. This, in fact, is what Keynes intended. Keynes lived during a time when communism and socialism were considered real, viable alternatives to capitalism. He devised his theories as an alternative to socialism – a way to save capitalism with the smallest possible intervention.
Now, it is true that stabilization policies do inevitably involve some redistribution. Boosting inflation to fight recessions will benefit those who are in debt – companies, for example, that borrow to invest, or people with mortgages – while hurting people living on a fixed income. But the expectation is that this redistribution will be reversed in the good times, when the Federal Reserve hikes interest rates to put on the brakes. Fiscal stimulus is a bit of a different story, since the unemployed reap the benefits while taxpayers pick up the bill. But the point here is that Keynesian policies are fundamentally not about redistribution – they’re about economic stability.
So why do people think Keynesianism is socialism-lite? It might be the fault of Keynes’ main intellectual opponent, Friedrich Hayek.
Friedrich Hayek tried to argue against Keynes’ theories, but for whatever reason, he lost the debate among economists in the 1930s. But Hayek would have the last laugh, because in his book, “The Road to Serfdom,” he attacked Keynes from a very different angle. Instead of saying Keynes’ theories were wrong, Hayek prophesied that Keynesian stabilization policies would lead down the slippery slope to totalitarianism.
Hayek’s warning was dead wrong. Most rich countries tried some form of Keynes’ policies in the 1950s, ‘60s, and ‘70s, and while they didn’t always work as advertised, they most definitely did not lead to totalitarianism. Yet somehow Hayek’s meme entered our collective consciousness. On blogs and in the financial media, where politics and economics mix freely, self-described “Austrians” kept using the word “Keynesian” as a political epithet, the way National Review writers or Fox News anchors use the word “liberal.”
In this way, bloggers and writers have managed to discredit Keynes’ ideas, and the modern theories that bear his name. There ought to be room in our society for the idea that the government can smooth out the business cycle without resorting to socialist intervention. But thanks to the power of politicized rhetoric, that idea has been unfairly shoved into the closet.
Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion.