The process of British John Keynes gave the birth of macroeconomics

Frank (Hongde) Li, Mar. 26. 2023 , Waterloo, Canada

This is a adding-revised excerpt from Mar. 1, 2008 article To Make Possible from Impossible by Breaking the Shackles of Dogmatic.

China's acient governing thoughts enlighted birth of modern economics; the doctrine laissez-faire enlightened John Keynes to propose the theory of macroeconomics.

British submarine lieutenant-commander Gavin Menzies, as career life, once visited many countries and shocked by the ancient monuments that left by Zheng He Fleet of China. After retirement, on own spending, he cost 14 years to have researched on Ming treasure Voyages by visiting historic sites of 120 countries and more than 900 libraries, museums and archives. Then accordingly wrote books 1421: The Year China Discovered the World (2002) and 1434: The Year a Magnificent Chinese Fleet Sailed to Italy and Ignited the Renaissance (2008).

In the book, Mr. Gavin Menzies appreciated the practice of Zheng He Fleet with 7 times around the world, besides fair trade, did not carry out colonial ruling. He wrote that, in 1434, a Chinese fleet arrived in Tuscany Italy and presented the pope with a large amount books, from a diverse range of fields: geography, astronomy, mathematics, art, printing, architecture, steel manufacturing, civil engineering, military weaponry, surveying, cartography, and more. The knowledge of China sparked the inventiveness of the Renaissance to have formed the basis of European civilisation. From that date onward, Europeans embraced Chinese ideas, discoveries, and inventions.

Also since 1400s, European missionaries continuously enter China and they translate the culture of China back home to have triggered great response and discussion throughout the Europe and enlightened the development of modern economics; also triggered Renaissance, Enlightenment and French Revolution of a bloody killing to push Europe entered the new Dark Ages with new type of beast play. 

In 1750s, French Physiocrat François Quesnay coined the phrases laissez-faire according to the term wu wei of Tao Te Ching, then laissez-faire inspired British classical economist Adam Smith writing economic bible the Wealth of Nations to publish in 1776 and proposed the term of Invisible Hand, and later the Invisible Hand was further advocated as lawless Neoliberalism that advocates to cut off all of the supervisions of Government.

The word wu means none, and wei means ability, capability or the accomplishment from action; so that the term wu wei means that government must reduce the excessive harassment on the livelihood of people, for example, reduce excessive taxation, avoid arbitrary assignment of labor and so on; which was a government could do in the ancient backward agricultural economy. This was not as complicated as the West clamoring in today.

Then the doctrine laissez-faire as enlightenment begets macroeconomist British John Keynes to have written The end of laissez-faire in 1926; and the ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Keynes advocates that government must be intervention in market or economy by regulating interest rates and investments stimulate economic development.

There were people, who have questioned that Keynes did not contribute to the Roosevelt’s New Deal, because of his The General Theory of Employment, Interest and Money (General Theory) published in 1936, at that time, the New Deal has primarily saved the economy already. If we go on this way of thinking, it was that seems the achievements of New Deal to have fully contributed to the General Theory. Therefore, Keynes was certainly a copycat that is not only lack of talent, but also lack of moral.

This phenomenon shows that people are accustomed going into the dogmatic trap. They can only see the surface of things, but can not make deep research into the substances. I firmly believed that lthough Keynes had no direct suggestion for New Deal, however, he was the father of New Deal actually. The reason is that long before the New Deal put into practice, he had put forward the recommendations that Government should intervene in economy. Such as:

In 1919  in Economic Consequences of the Peace he started to publish his theories. After WWI, Keynes tried to reduce the huge reparations demanded by the Allies against Germany; he argues that Europe could not prosper without an equitable, effective and integrated economic system, which was impossible by the economic terms of the treaty.

In 1924  in Monetary Reform he advocated the Government to control the economy by currency, which was through suitable inflation to stabilize prices and production levels.

In 1926 he published The end of laissez-faire to have publicly rejected the Laissez-faire principle for the free market. His view should be considered as theoretical foundation of New Deal in some extent, especially ideological preparation.

In 1929 he suggested British Liberal Party to run the election campaign by advocating the government-run public works (such as, roads, residential construction, the implementation of electrification, land reclamation, etc.) to overcome the problem in unemployment.

In 1930, in Treatise on money he proposed to control the economy by regulating the interest rates.

His above ideas were partially appeared in the New Deal.

In my view, the greatest contribution of Keynes was not the General Theory but The end of laissez-faire (The End), because it was the ideological foundation for General Theory. Though his former recommendations were far away from detailed steps that applied in the New Deal, however they acted as the pharos to show the correct direction that Government must intervene of the economy directly rather than let it unbridled free developing.

In past 154 years before New Deal, the market was controlled by Invisible Hand that advocated by Adam Smith in his famous book The Wealth of Nations published in 1776 firstly. This doctrine has been strongly advocated by some interest groups under greedy purpose, the government had to have abandoned the effective regulation on market. Laissez-faire market has led to many insurmountable economical problems. In this context, Keynes wrote The End.

In The General Theory of Employment, Interest and Money (General Theory) 1936, John Keynes introduced the planned economy into the free market economy of Adam Smith.

Keynesian theory helped the United States to have gotten out of the Great Depression and refreshed the economic strength, thereby to accelerate the end of World War II. But after decades of development, there some new economic problems were emerged and accumulated up again. Then United States and Britain took the new reforms by reducing the share of planned economy under the lead of Ronald Reagan and Margaret Thatcher.

In Britain, the home county of Keynes and Adam Smith has suffered the processes from original private ownership to be nationalized, and then from state-owned ownership to be privatized again. As a veteran of the capitalist countries, although, in the stage of nationalized, the United Kingdom should belong to the socialist country, however, it seemed no one to doubt its nature of capitalism until now.

They have early established a social welfare system that seems a part of the communist society. However, things will develop in the opposite direction when they become extreme. Abundant social welfare seems to have bred people to love ease and detest work; idleness can deplete any amount of fortune. Once to be envied social welfare now is developed too heavy to burden. Then Prime Minister David Cameron is wisely ongoing new reforms to save Britain by cutting down the public expenditure, including the social welfare.

Many facts have showed that some of politicians were acting as dogmatists, only follow outdated doctrine or the old ruts from one extreme to another, and cannot flexibly adjust the direction according to the practical circumstances.

Here, there is necessary to talk a little more about Keynes because he was less dogmatic thinking with the spirit of bold questioning - why and how to fight against outdated doctrines, it could help us to advance the way of thinking, and avoid to fall into the trap of dogmatism, it is the prerequisite to do anything correctly.

Keynes is widely considered to be the father of modern macroeconomics.

“In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century, commenting that; "His radical idea that governments should spend money they don't have may have saved capitalism.”

In the annual American Economic Association meetings 1999, Keynes won the greatest economist of the 20th century. Because that he “revolutionized the economics profession by contending that the free-market economy is inherently unstable and requires government intervention (through deficit spending, progressive taxation and monetary inflation) to keep it on the path of full employment.”

There is a comment in Mandarin on a Website of China, said that, Western capitalist countries have taken Keynesian macro economics as a general policy. The history has stepped into the Keynesian era. The macroeconomics created by Keynes has developed into an independent discipline. Moreover, Keynes also contributed to the establishment of the International Monetary Fund and the World Bank.

Now, let us join with the Keynes to experience his anxious concern that happened in so far away but feel as happened in yesterday by reading some of his comments in <The End>.

“These many elements have contributed to the current intellectual bias, the mental make-up, the orthodoxy of the day. The compelling force of many of the original reasons has disappeared but, as usual, the vitality of the conclusions outlasts them. To suggest social action for the public good to the City of London is like discussing the Origin of Species with a bishop sixty years ago. The first reaction is not intellectual, but moral. An orthodoxy is in question, and the more persuasive the arguments the graver the offence. Nevertheless, venturing into the den of the lethargic monster, at any rate I have traced his claims and pedigree so as to show that he has ruled over us rather by hereditary right than by personal merit.”

“The average man averts his attention from the problem, and has no clear idea what he really thinks and feels about the whole confounded matter.” “Confusion of thought and feeling leads to confusion of speech.”

Above, Keynes pointed out the absurd phenomena in 80 years ago, the public were being impacted by something without reasonable ground or something that legitimacy have been lost long time ago.

Clearly, the intention of Keynes was toward broad scope beyond economics. In fact, it still is the common phenomenon even more severe in today, in the 80 years later. Please look around, there are many things have lost the real reasons of existence, the reasons have solemnly entered their graves after completed their missions in long time ago, but they are still alive and still a strong influence on our daily life, or even determine our destiny. For example, today, the original motivations of some constitutions’ establishing were gone away for a long time, and the objective circumstances for making those constitutions have entirely changed already, however, those constitutions have still been used to suppress public will and even harm public interest without any modification.

We should question that whether we are too ignorant or stupid, so that we honestly accepts the control of some thing died already. Why do those dead doctrines not rot and still alive triumphantly? How do their vitality being well maintained? The only reason is that some people need them and continue to make them in fancy-dressing to deceive us believing those doctrines still alive. All in all, although the lives of those doctrines had long been ended, but they can not sleep in their grave as they should be. They are being used to control public, both spiritual and material with achieving the conspiring objectives of the small group people.

Although the has been guiding our economic life and to have greatly contributed to human material civilization since it was born, however, some of economic problems we are facing today seem to be out of Keynes’ foreseen, so that we can not find pre-designed formula for solving all of today’s economical problems, which is being expected by the people who could only follow in a old rut rigidly because they are neither the talent nor the courage to deviate from a road that is increasingly narrowing, such as, an economic formula that could help us to control the fiscal deficit into a reasonable level in the process of stimulating the economic growth by increasing the budget deficit endlessly. It has reached terrible level in many countries not only in U.S... Facing the Financial Crisis of 2007–2010, it said that it was only next to Great Depression in severity, the economic tools that Keynes left to us seem to have all been used, but the effect seems less obvious than that of in solving the Great Depression. So, some people may ask that, is the brilliant of Keynes’ thought fading?

It is absolutely not. Today, the development of economy has far exceeded the expectations of Keynes. Compared with that of in 1930, the volume of world economy and stock market has increased great many times with many uncontrollable and although are controllable but not well controlled factors are acting as terrible specter in harming with the economy.

On the other hand, the instruments of Government intervention in the economy proposed by Keynes was mainly by guidance and stimulus without the restrictions, it is not enough for the unreasonable components in nowadays market, such as, huge amount of international hot money that was considered to had triggered 1997 Asian financial crisis, and the newly developed irrational financial instruments – derivatives that was considered to be an important trigger of the Financial Crisis of 2007–2010. They are the terrible threats to trigger more economic disaster and are what we must properly regulate but hardly strive in today.

Although Keynes did not left formulas that are suitable for solving the problems in today’s economy, but he left us with a universal formula that is his most shining part of his thought – the shining core, a core that implied but clearly being indicated in , that is to play to the score by boldly questioning the old orthodoxy and doctrines to explore new effective solution. Therefore, the most precious legacy he left to us is <The End> rather than the <General Theory> or any of others, because that in the <The End> he presented us a most significant thought with the potential of Golden touch, or the Midas touch.

Keynes’ spirit of doubt and question against old doctrines possesses universal significance. Only after breaking the shackles of traditional, the wings of imagination could be expanded to fly freely in the expanse of the sky. Only after breaking the constraint of dogmatism, the gate of free thinking could be opened; the effective solutions would be produced and any thorny problems could be solved at present and in future.

The progress of human civilization in the wealth of ideological and spiritual is important than that of in the wealth of material. Without the guidance of the correct philosophy, human being would never be able to enjoy true material civilization. Human would never get rid of the fatuity or the nature of the beast, looting and killing, endlessly making the disasters with advanced skill to do these indirectly in bloodless but more powerful. Therefore, in , Keynes was concentrating on the ideology rather than the material.

Keynes is very different with us ordinary people. He is sober and methodical when most of us are drowsy or panic. He has seemed to stand on the height of three-dimensional with the eyes as eagle’s to observe us who like ants to strive for essential daily livings, even fighting each other in a two-dimensional world. His main concern was how to protect us to be able to long-term enjoy life without disturbing.

Compared with Keynes, we would be aware the reason, the reasons that we are just blindly being believed rather than brainy self-convinced, the reason that we always blindly follow others and being manipulated, the reason that we can not control self destiny, and always act as a victim exposed to the front of any disasters that most of them were man-made.

Keynes might have foreseen that the market running under entirely free does not work, sooner or later would make trouble. When people are still scheming, with a variety of sounds reasonable grounds to maintain the free market economy, Keynes had prepared ahead. He was doing preparation in public ideology. Perhaps because of his early thoughts on the government intervention of the economy was not being ideally implemented, or there are necessary to intensify. Because he was clearly aware that, in the most of cases, for doing some things, the greatest resistance comes from the public conservative consciousness, from the shackles of traditional，blind faith, blind worship, blind superstition and some dogmatic bias. The most difficult task firstly is to break down those bondages. Therefore, it is the choice that should do or should not do? Dared do or dared not do? It is the why rather than the how. It is just like Keynes indicated in the last paragraph, “The next step forward must come, not from political agitation or premature experiments, but from thought.”

The review for Keynes will stop here. You may ask that what the contribution of President Roosevelt is? So next I must clarify the relationship between him and Keynes.

5.2. Franklin D. Roosevelt

No one would doubt that, as a politician, Roosevelt was excellent. He dared bravely intervene in the economy with state apparatus by taking the risk of breaking the iron rule that Government should not intervene in economy, which was his predecessors strictly adhered. The success of New Deal has showed that he was outstanding in personality. His relationship with Keynes, I think, should be that, Keynes put forward a rough idea of Government should intervene in the economy, then Roosevelt and his copartners to make the vision into action. Also they made some expansion and refinement according to the actual problems that were continuously emerging. In turn, their successful experiences from practical trial and error gave Keynes inspiration to make his macroeconomics perfect. 

Maybe you would continuously ask that why does people so respect Keynes. This needs to review Adam Smith.