Keynes’s Vision: Why the Great Depression Did Not Return

John Maynard Keynes was raised by a family of academics to be an academic. The son of economist John Neville Keynes, the young Keynes spent his childhood years learning Latin and Greek before being educated at Eton and spending his university years at Cambridge. Reared for success, he was also born with uncommon brilliance.

Keynes displayed the optimism one would expect to see in someone born with exceptional talent and to whom professional success came easily. And his economics reflected that optimism. A philosophical liberal who believed that the path of humanity was progress, he saw no reason modern societies should spend years—let alone decades—mired in poverty and high unemployment.

Keynes produced his most influential works during the 1920s and 1930s, the bleak interwar years when European civilization lost faith in the nineteenth-century belief in ever-expanding prosperity and individual freedom. The mood only worsened after 1929, when the Wall Street crash plunged economies in North America and Europe into what would be a decade of recession.

Keynes’s intellectual response to the Great Depression is the subject of John Philip Jones’s book Keynes’s Vision: Why the Great Depression Did Not Return. A professor at Syracuse University, Jones opens with a strong statement, calling Keynes “the most influential economist of the twentieth century.”

Let’s be clear: this is an academic tome, not a biography. Jones’s objective is to see how well Keynes’s doctrines stand up against the US economy’s actual performance during the postwar years, a time when his work guided American policy. The bulk of this book is an analysis of Keynes’ most influential work, The General Theory of Employment, Interest and Money. It was published in 1936 while Europe was still in the throes of the Depression, and the public were crying out for a solution.

The effect of the “General Theory” was immediate and game-changing. “Keynes’s most obvious and striking theoretical contribution is that he opened up economic theory in a most sweeping and powerful way to the study of the total economy,” Jones writes. “This field of investigation became known as ‘macroeconomics.’”

Jones offers a rigorous analysis of Keynes’s macroeconomics, which he boils down to three main principles. The first is that of aggregation, the method of analyzing the economy in total. This was a serious departure from the microeconomics of Keynes’s forebears, men like Adam Smith, David Ricardo and Alfred Marshall, who observed the economy only at the individual and firm level.

The next point emphasized by Jones is that of demand, which according to Keynes meant purchasing power. This was particularly pertinent during the 1930s. The 1929 stock market crash caused a fall in demand for goods and services, which in turn forced firms to lay off workers. The economy became trapped in a downward spiral: “decreases in aggregate demand create unemployment, and increases in unemployment reduce aggregate demand.”

Thirdly, we’re presented with Keynes’s views on expectations, which were central to his analysis of the Depression years. Negative expectations after the 1929 stock market crash were instrumental in preventing a speedy recovery. Expectations are also closely tied to demand: pessimistic individuals don’t buy things, and pessimistic firms don’t increase production or hire new workers. Thus expectations, whether optimistic or pessimistic, tend to be a self-fulfilling prophecy.

According to Jones, these three principles dovetail into Keynes’s belief that full employment was a goal that should and could be pursued by policymakers. By engaging in fiscal stimulus—Keynes’s version of it meant deficit spending during a recession and balancing the budget in good times—government’s could dull the blade of recession, maintaining employment levels and preventing the kind of downward spiral that made the 1930s a lost decade.

Jones’s assessment of Keynesianism is positive. Not only does it rest on strong philosophical foundations, Jones says, but the facts also prove it got results. The US unemployment rate hit 25 percent in 1933 and remained high throughout the 1930s. Once policymakers started listening to Keynes, economic performance improved markedly. Jones presents reams of statistics; most notable is that even during the recession years of 1974-1983 unemployment stood at an annual average of only 7.5 percent. (Note: this book was published in 2007, prior to the 2008 financial crash and subsequent recession.)

After establishing the validity of Keynes’s work, Jones sets out to answer another question: how did Keynesianism prevent the United States from suffering another economic downturn of severity comparable to that of the Great Depression?

The author’s answer is straightforward: “The overarching factor is business confidence: a culture of positive expectations since World War Two.” And this culture of optimism was undergirded by Keynesian fiscal policy. Businesses knew that if a recession hit, they could count on the state to use fiscal stimulus to dull its effects. This kept investment and new hirings stable, thereby preventing a return to mass-scale unemployment.

Jones views Keynesianism positively. He argues against the monetarists—ideological opponents of Keynesianism who argue that monetary, not fiscal, policy is the only appropriate tool for governments: “as a general rule fiscal policy, if it is applied boldly, is more effective than monetary policy in stimulating aggregate demand.”

This book isn’t a celebration of the man or his work, however. Its analysis is rigorous and critical, and the author points out several apparent flaws in Keynes’s work. For example, Jones is critical of the fact that Keynes’s “arguments are based on logic much more than on facts,” and he finds “Keynes’s attitude to empiricism difficult to swallow.”

If this book has a main weakness, it’s the lack of accessibility. Jones is an academic economist writing for an audience whom he assumes to have prior knowledge of economics. His writing is long-winded and jargon-heavy at times. Overall, this book provides a useful overview of Keynes’s economics while making a fresh contribution to the academic debate. But the reader would be advised to dust off their Econ 101 textbook before making a go of it.

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