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Economic Policy after the Financial Crisis: Keynes

by Kai Burmeister and Till von Treeck Wednesday, Aug. 19, 2009 at 1:26 AM

Keynes saw political control of markets and a distribution and social policy in favor of lower income groups as essential prerequisites of a stable long-term macro-economic development.. Three-hour workdays or a 15-hour week would be enough.


On the Actuality of John Maynard Keynes

By Kai Burmeister and Till von Treeck

[This article published in: spw-Zeitschrift für sozialistische Politik und Wirtschaft

spw 1/2009 is translated from the German on the World Wide Web,

Kai Burmeister is an IG Metal unionist in Frankfurt and Till von Treeck graduated from the Institute for Macroeconomics and is an economics researcher at the Hans Bockler foundation in Dusseldorf.]

The economic-political debate at the beginning of 2009 was marked by the shocks on the international financial markets and the dramatic negative consequences for the real economy. The financial- and economic crisis reveals a need for action that goes far beyond the necessity of a stronger regulation of the international financial system. Many observers speak of the most grievous economic crisis since the Great Crash of 1929.

Not only the stock markets crashed. The dominance of the economic theory of neoclassicism ended (temporarily). The discrepancy between the theoretically derived trust in the self-healing powers of the market and the mass unemployment observed in reality was too great. On this historical background, John Maynard Keynes developed his comprehensive economic theory that cleared away central assumptions of neoclassicism and recommended concrete instruments to reduce the crisis susceptibility of capitalist economies.

Keynes saw political control of markets (not only the financial markets) and a distribution- and social policy in favor of lower income groups as essential prerequisites for a stable long-term macro-economic development. Here he created an empirical foundation for the “New Deal” of US President Franklin D. Roosevelt and inspired the economic policy and construction of the welfare state in many countries of Western Europe after the Second World War.

Even if Keynesian ideas were only applied very imperfectly in the post-war decades, the model of deregulated markets in the political and academic “counter-revolution” in the 1970s was largely discredited. With the current crisis, this model now again reveals its weaknesses under changed conditions. This should be an occasion to rediscover Keynesian theory as an orientation for present challenges.

The debates about its theoretically “correct” interpretation and its political possibilities and limits are as old as Keynesianism itself. These continuing controversies cannot be discussed in detail here. Several core statements of John Maynard Keynes will be emphasized, which are very burning given the current financial crisis although they are hardly noticed in the political debate in the center-left camp.


A Renaissance of macro-economic thinking does not happen automatically in center-left camp in the background of the present crisis. A glance at the debates of the last years shows the appeal to Keynes often provoked a spontaneous defensiveness until recently. Keynesianism was simply equated with short-term economic programs and escalating state indebtedness and frequently not seen in immediate connection with a pre-eminent social-political orientation. In 2006, Erhard Eppler asked:

“Is George W. Bush a Keynesian because he permanently finances enormous armaments through debts? Is he therefore a leftist? Economic theories may chiefly serve the right or the left. We cannot define what is left and right.”

Keynes himself in fact had little interest in political labels and believed the persuasiveness of his ideas would prevail against political interests. This rightly brought him the reproach of political naivety. On the other hand, the exclusive focus on an “anti-cyclical economic policy” and “deficit spending” does not do justice to Keynes’ ideas for an overall economic-political strategy. The demand for social justice is not moral but is derived from macro-economic efficiency and stability considerations. This is the special political attractiveness of Keynesian ideas. Thus the Keynesian recommendations for a short-term stabilization of capitalism should be connected with a longer-term perspective for an efficient and socially just economic model.

This was very clear in the “Final Reflections on Social Philosophy” from the last chapter of Keynes’ “General Theory.” He named four long-term goals here:

· A more even distribution of income,

· International cooperation instead of mercantilism,

· A democratic control of investment activity, and finally

· The use of productivity advances to overcome material scarcity and make possible individual development outside the free enterprise production of goods.

What did all this have to do with the current financial- and economic crisis? In the following, the conversion of demands for a more balanced income distribution, international cooperation and state investment control indispensable for a stable overall economic development today and avoidance of financial- and economic crises. The fourth goal formulated by Keynes may sound utopian in our current situation. However times of grievous crisis make possible fundamental reflection on the longer-term purpose and goal of the economy.

For a long time, neither an end of the economic crisis situation could be foreseen nor an adequate consensus about collective lessons from the current crisis. The nation states are now outdoing one another with active economic policy. One banks bailout follows another. However the “great narrative” that will be told in several years about these times is unclear. The battle over interpretation sovereignty has not been won.

Several things indicate that the phase of deregulation on the economic plane has ended with the current financial crisis. But who has to answer for this crisis and how a cooperative solution of solidarity can occur are still not decided. This general uncertainty is reflected in the political center-left camp in the large-scale absence of macro-economic Keynesian thinking. One part of this camp long uncritically accepted deregulation policy while another part wanted to fight the economy in itself in a hardly constructive way. On both sides of this axis, the ability to formulate a clear conception of the overall economic goals for the next ten to twenty years is lost.

The widely-discussed changes of macro-economic framing conditions (financialization of the economy, rise of threshold countries), technical innovations and ecological restrictions (climate change and resource scarcity) make clear the impossibility of a one-to-one transfer of old book learning. Beyond this truism, core Keynesian statements remain functionally and politically attractive.



Keynes saw some social justification for income differences between individuals. Income inequality in the 1920s was so drastic that the tremendous expansion of mass income in the US was only possible on the basis of real estate bubbles and increasing indebtedness of the lower income sectors. Therefore Keynes advocated the concept of the “New Deal” of President Roosevelt. This included a double strategy of strict financial market regulation and labor market and social policy to strengthen lower income groups. Like Germany, the US will face this challenge after the current crisis.

In the US, the real income of wide parts of the popualtion has largely stagnated in the last three decades. The income inequality is as great as in the 1920s. However a long-lasting consumer boom occurred in the US in recent times. Real estate bubbles and financial innovations could partly compensate for the stagnation of mass income and produce a growing credit flow for consumption. The indebtedness of private households rose from 60 percent of disposable income in the early 1980s to over 130 percent. After the bursting of the latest real estate bubbles, payment problems were pre-programmed in the lower income groups and corresponding dislocations in the financial system.

In Germany, on the other hand, many private households react to their long falling real wages and social-political cuts with alarm and consumer restraint. The upper income groups that profited from the increase of profits and assets and from tax relief have a very high savings rate. A continuing domestic demand weakness was the consequence. Real economic production activity was increasingly oriented to export to countries with stronger domestic demand. Given the weak credit demand at home, the banking sector increasingly turned to speculation with foreign investments and consequently was especially hard hit by the international financial crisis.

Balanced growth with stronger domestic demand is not possible in the long run without a corresponding increase of real wage income. Only through a double strategy of re-regulating the financial markets and promoting more even income distribution can a strong domestic growth development occur in the future without real estate bubbles and dangers of over-indebtedness.


In light of current developments in international trade, one is reminded of Keynesian criticism of mercantilism. Keynes warned of an inefficient national growth strategy to the burden of foreign countries. In the 1920s, international trade battles were waged. For Keynes in 1936, this was a desperate expedient or stop-gap with the goal of securing domestic employment by forcing exports on foreign markets or limiting exports that – if successful – merely transfers the problem of unemployment to neighbors…

The current crisis may not lead to a further devaluation competition in labor market-, welfare- and tax policy. This would be a breeding-ground for international conflicts – as Keynes recognized in the 1930s – not a perspective for a solidarity Europe. A coordinated macro-policy is needed in Europe and a harmonized financial market regulation. In a similar way, the potential for trade conflict between the US and China must be solved. During the Bretton Woods negotiations in the Second World War, Keynes insisted countries with export surpluses must help reduce international imbalances by stimulating domestic economic demand.

“When countries learn to reach full employment through their own policy, no economic powers would have to be applied any more to enforce the interests of one country against the interests of its neighbors.” (Keynes 1936)

For the future, this means Germany must contribute through an employee-friendly distribution policy and a pragmatic economic policy as the largest country of the monetary union to a strong structural demand development domestically and in Europe. Since the US may fail as an economic locomotive after the current crisis, Germany or Europe together with Asia has a special responsibility now. Ultimately a cooperative reorganization of the world trading system is necessary that prevents both an extreme export orientation (as in Germany) and a one-sided consumer-driven growth development with excessive indebtedness and massive balance of payments deficits (as in the US).


Measured by its gross domestic product, public investment in Germany is regularly below the average of OECD countries. Many private businesses come under a considerable profit pressure with their investment activity through far-reaching reforms in the financial system.

Keynes pleaded for a stronger democratic control of aggregate economic investment. He understood democratic control as a means for anti-cyclical “economic programs.” He had in mind – according to contemporary usage – a strategy of constant “qualitative growth.” In his notes on the “Long-Term Problem of Full Employment” (1943), he remarked:

“A long-term systematic program should keep economic fluctuations within narrower limits than when a smaller part of the investment volume was under public control…”

For Keynes, decisions about the substance and extent of investment activity could not be completely left to the market and an unregulated financial market. In the twelfth chapter of “General Theory,” he emphasized the basic asymmetry between financial market logic and real economic logic. While a financial investor can divide and rearrange his “investments” at any time according to the short-term profit situation, real investments are always illiquid and worthwhile over a longer time period. But if a business must orient itself in short-term financial market numbers, hardly any room remains for long-term investment activity.

Democratic investment control can assume different concrete forms. In the current situation in Germany, a minimum demand would be protecting private businesses from excessive profit demands and from short-term orientation of financial markets (through a financial transactions tax, rules on management compensation and stock voting rights and proper payment of the tax of profiteers). Keynes proposed that a larger part of investments should be carried out or influenced by democratically legitimated institutions. These could be today the areas of public infrastructure and vital services, the public banking sector, renewable energy, education, culture, the public health system and science. Beyond the current economic-political measures, there should be a permanent turning away from privatization- and tax-cutting policy in Germany. Through commitment to a medium-term public expenditure path, businesses could count on a more stable demand development and be less dependent on mood fluctuations on the financial markets.


The idea that quantitative growth is not an end-in-itself and that “the economic problem,” the satisfaction of material desires, can be solved in principle in the course of technological progress are central threads throu9gh Keynes’ whole work. In the midst of the worldwide economic crisis, he had an optimistic view of the “economic possibilities of our grandchildren” (1930):

“A point may soon be reached when these needs are satisfied in the sense that we prefer to devote our5 strength to non-economic goals… Three-hour workdays or a 15-hour week would be enough to satisfy the old Adam in most of us!… For the first time since his creation, the person faces his true challenge – how should he use his freedom from oppressive economic worries and how should he spend his leisure time made possible by science to live wisely, pleasantly and well?”

Whether Keynes rightly defined the “real” needs of people can be disputed. In view of the present material situation of many private households, a strong economic growth seems necessary to strengthen the lower income groups. But the current crisis also offers us the chance to redefine the rank of goals like economic growth, reducing working hours and environment protection. In the words of economic ethicist Peter Ulrich (2005):

“Keynes stressed that (national) policy should ensure sensible dealing with rising productivity. The fruits of increased (national) economic productivity can only be harvested politically in another form than more-from-the-status quo.” In other words, breaking out of the economy of poverty is always only a “result of its consciously cultivated and justly organized social utilization” and never occurs automatically as a “natural” result of advanced productivity and economic growth.


In an historical crisis situation, John Maynard Keynes worked out a comprehensive concept for a more stable efficient and socially just economic model. The current crisis in the global financial system encourages reflection on core statements of Keynesian theory. An entangled debate over several new regulations in the financial system or about abnormal moral conduct of managers or “grasshoppers” should not be conducted now. Rather several general Keynesian rules should be underlined without which macro-economic stability cannot be permanently achieved. From Keynes’ perspective, economic theory must look “beyond the plate” of short-term crisis management and offer a long-term development perspective.

The political conversion of economic re-regulation is not simple. Still there are concrete concepts for realizing elements of Keynesian policy under the advanced conditions of the 21st century. In the successful case, the way to a long-lasting and stable growth phase could be opened up here and social division counter-acted. The fixation of economic- and social-political debates on “structural reforms” could be overcome and the real future questions brought more intensely into the limelight.

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