Creating full employment
Before the Great Depression of 1929, economic theories said the free market automatically eliminates unemployment
The writer is vice-chancellor of the Pakistan Institute of Development Economics. He holds a PhD in Economics from Stanford University
We are used to thinking that there is progress in knowledge. As we gain experience, the collective wisdom of mankind increases. The story of economics in the 20th century provides the most amazing example of the opposite: how precious knowledge of vital importance for the welfare of humanity was gained and then lost. Many studies show that a meaningful job is the most important determinant of life satisfaction, and among the thing most desired by the general public. Economists learned how to create full employment, leading to a period of tremendous prosperity. How and why these lessons were forgotten provides a perfect illustration of the thesis that knowledge is shaped to protect the interests of the powerful.
Before the Great Depression of 1929, dominant economic theories stated that the free market automatically eliminates unemployment. Obviously, a theory which does not recognise the existence of a problem cannot provide solutions. Before the Great Depression, the economy was booming, with jobs for all, and high levels of production. After 1929, factories lay idle; there was massive and persistent unemployment, and correspondingly, a high level of general misery. Why did unemployment persist, and how could we get the economy back to full employment of all the resources now lying idle? The revolutionary accomplishment of Keynes was to recognise the source of the problem, and provide an effective remedy.
Keynes argued that the key to the problem was depressed investor expectations about the future. Investors were afraid to produce goods because they did not foresee any demand. If they did take a risk and start producing, the demand would be created, because they would provide jobs to people in the process of production. People with jobs would have income and demand goods. Thus a favourable future forecast would create a self-fulfilling prophecy. People were not demanding goods because they did not have jobs. Producers were not providing jobs because they did not see any demand. This deadlock could be broken by the government in several ways. Lowering interest rates and making money cheaply available would reduce the costs of production, and might induce producers to take a risk on starting investments and production. Indeed, just printing a lot of money and throwing it from helicopters would be enough — people with money would demand goods, and producers would start hiring people to fulfill the demand for goods. The “Helicopter Money” scheme could fail for a number of reasons. The alternative was for government to step into the gap, and start hiring people itself. Even meaningless jobs like digging ditches and filling them up again would be enough to start off a chain reaction which would lead to full employment. Using the secrets of Keynesian demand management, Western governments managed to achieve near full employment, and widespread prosperity for fifty years.
Unfortunately, general prosperity of the 99 per cent does not suit the interests of the one per cent. Full employment leads to an unruly labour class, who can walk out of unsatisfactory jobs to find a better one. Secondly, direct government investment can interfere with business profits. Thirdly, before the Keynesian era, politicians understood that business confidence was essential to economic prosperity and votes. Keynes freed the government from this dependence, much to the annoyance of business leaders.
The story of how Keynesian theories were ridiculed and discredited, and completely fallacious pre-Keynesian theories were refurbished to take their place is long and complex, and cannot be detailed here. The punchline is that the remedies to today’s economic ills are known, but they are not being implemented because they go against the interests of the powerful. There has been a huge increase in debt globally; debt forgiveness would remove the heavy weight dragging down aggregate demand which is weighing down the economy. Helicopter money is being dropped but into the vaults of the banks instead of the pockets of the public, and Keynes is being blamed for the lack of effectiveness of this ridiculous policy. Zero interest loans to producers are not working, so negative interest rates are being talked about. Meanwhile, everyone ignores the elephant in the room, a fully effective Keynesian theory which explains exactly how we can stimulate aggregated demand to revive the global economy.
Published in The Express Tribune, May 31st, 2016.
Before the Great Depression of 1929, dominant economic theories stated that the free market automatically eliminates unemployment. Obviously, a theory which does not recognise the existence of a problem cannot provide solutions. Before the Great Depression, the economy was booming, with jobs for all, and high levels of production. After 1929, factories lay idle; there was massive and persistent unemployment, and correspondingly, a high level of general misery. Why did unemployment persist, and how could we get the economy back to full employment of all the resources now lying idle? The revolutionary accomplishment of Keynes was to recognise the source of the problem, and provide an effective remedy.
Keynes argued that the key to the problem was depressed investor expectations about the future. Investors were afraid to produce goods because they did not foresee any demand. If they did take a risk and start producing, the demand would be created, because they would provide jobs to people in the process of production. People with jobs would have income and demand goods. Thus a favourable future forecast would create a self-fulfilling prophecy. People were not demanding goods because they did not have jobs. Producers were not providing jobs because they did not see any demand. This deadlock could be broken by the government in several ways. Lowering interest rates and making money cheaply available would reduce the costs of production, and might induce producers to take a risk on starting investments and production. Indeed, just printing a lot of money and throwing it from helicopters would be enough — people with money would demand goods, and producers would start hiring people to fulfill the demand for goods. The “Helicopter Money” scheme could fail for a number of reasons. The alternative was for government to step into the gap, and start hiring people itself. Even meaningless jobs like digging ditches and filling them up again would be enough to start off a chain reaction which would lead to full employment. Using the secrets of Keynesian demand management, Western governments managed to achieve near full employment, and widespread prosperity for fifty years.
Unfortunately, general prosperity of the 99 per cent does not suit the interests of the one per cent. Full employment leads to an unruly labour class, who can walk out of unsatisfactory jobs to find a better one. Secondly, direct government investment can interfere with business profits. Thirdly, before the Keynesian era, politicians understood that business confidence was essential to economic prosperity and votes. Keynes freed the government from this dependence, much to the annoyance of business leaders.
The story of how Keynesian theories were ridiculed and discredited, and completely fallacious pre-Keynesian theories were refurbished to take their place is long and complex, and cannot be detailed here. The punchline is that the remedies to today’s economic ills are known, but they are not being implemented because they go against the interests of the powerful. There has been a huge increase in debt globally; debt forgiveness would remove the heavy weight dragging down aggregate demand which is weighing down the economy. Helicopter money is being dropped but into the vaults of the banks instead of the pockets of the public, and Keynes is being blamed for the lack of effectiveness of this ridiculous policy. Zero interest loans to producers are not working, so negative interest rates are being talked about. Meanwhile, everyone ignores the elephant in the room, a fully effective Keynesian theory which explains exactly how we can stimulate aggregated demand to revive the global economy.
Published in The Express Tribune, May 31st, 2016.