Keynes & the Reincarnation of Adam Smith

Dr. Paul Krugman has a great take of how classical macroeconomic theory (al-a-Kenyes) can, and has described, as well as prescribed our current economic problems since 2008. He uses models from Irving Fisher (1933) and Keynes (1936). However, I think we can go back further, to John Stuart Mill and Adam Smith on the “social” side.

There are some forgotten tenants to Adam Smith that you don’t often here from the “Free Marketers”. Here are just a few:

  1. Free markets cannot function if they are not accessible to everyone
  2. The Gluttony of the rich is “unproductive labor”
  3. Free Markets mean that all people have the ability to voluntarily engage the market free of fraud, deceit, or misrepresentation
  4. The interests of merchants is always opposite that of the public interest

Essentially, a “Free Market” does not mean that the markets can do what ever they want. It meant for Smith that the Markets have to be free of bullshit that creates bubbles, traps and inequality. In combatting some of these problems, Smith absolutely stated that there needed to be some sort of government intervention.

One of Mill’s issues was how to reconcile capitalism with the idea of a “social contract”. He developed an idea of “Economic Democracy”, which never flew well or held a lot of water in the Macro world. But he did make great inroads into the idea that any economy had to allocate resources (as economies do) in an equal manner. What made Mill different from (later) Karl Marx was that Mill did not necessarily see Capitalism as “bad” (as Marx did) for its inequality, but rather Mill saw that it needed a little “tweaking”, largely through government intervention.

Wha-la! Keynes said the same thing, in a different model. Keynes simply had the idea that government intervention had to come in relation to labor markets. Aggregate demand determined wages and labor demand. He knew that slumps would require government intervention so that people wouldn’t starve while they waited for jobs. Keynes saw that Capitalism needed some “tweaking”. The difference with Keynes was that he proposed that governments could go into debt for that intervention, and there would be little consequence. Keynes was right (in hindsight), and Keynesian Economists have been proven right in every recession since 1946.

When ever I think of the obstacles, and problems with creating an economically equal world, I’m not just led back to Keynes, but to Adam Smith himself.

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