John Maynard Keynes · Economics
How Keynes’s ideas remade economic policy, were overthrown by the crises of the 1970s, and came roaring back in the crash of 2008 - a verdict still unsettled.
For roughly three decades after the Second World War, Keynes ruled economic policy across the Western world. Governments accepted responsibility for managing demand to maintain full employment, using fiscal and monetary policy to smooth the business cycle. This era - the ‘post-war consensus’ - saw the longest sustained boom in the history of capitalism, with rapid growth, low unemployment, and rising living standards broadly shared. ‘We are all Keynesians now,’ even a conservative American president would say. Keynes seemed to have tamed the business cycle.
Into the breach stepped Milton Friedman and the monetarists, leading a counter-revolution. Inflation, Friedman argued, is ‘always and everywhere a monetary phenomenon’ - caused by governments expanding the money supply too fast, not by the mysterious forces Keynesians invoked. He argued that activist demand-management was destabilising: governments lacked the knowledge and the discipline to fine-tune the economy, and their interventions, hampered by lags and politics, often amplified the cycles they meant to smooth. Better, he said, to set stable rules - steady money growth - and let markets work. For a generation, this view, and the broader free-market revival it fed, displaced Keynes.
To understand the rise and fall of Keynesianism, it helps to see concretely what the ‘post-war consensus’ actually consisted of - the cluster of institutions and commitments, built across the Western democracies after 1945, that together constituted the practical reign of Keynes. At its heart was a new and historically unprecedented commitment: governments now accepted responsibility for the overall level of employment and economic activity. Before Keynes, no government considered it its job to ensure full employment; the business cycle was treated as a force of nature to be endured. After Keynes, maintaining high and stable employment became a central, openly declared goal of policy - enshrined in legislation like the U.S. Employment Act of 1946 and Britain’s wartime commitment to ‘a high and stable level of employment’ - and governments stood ready to use fiscal and monetary policy to manage aggregate demand and smooth the cycle. This was the core Keynesian inheritance: the state as active manager of the macroeconomy.
This is the opening of the lesson. The rest — the dialogue, the primary source, and the recall — is in the app.
You learned that Keynesianism rose, fell, and revived. Reconstruct why it was overthrown in the 1970s and why it returned in 2008, in your own words.
Leads to Milton Friedman.
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