Keynes view on deficits and spending


I have received a request from an old friend. He asked for passages that would be considered a compact summary of Keynes view on deficits and spending in Keynes’ own words. The following encompasses my efforts to put this request into effect.


Here’s an article that I have run across, from The Guardian: Keynesian economics: is it time for the theory to rise from the dead? No direct quotes, however, but this is just the beginning of my hunt. It’s the standard nonsense you see everywhere today. Deficit spending assumes the existence of saleable goods and services that are not being bought because everyone prefers to save their money rather than spend it. 

Imagine this. In late 1936, shortly after the publication of his classic General Theory, John Maynard Keynes is cryogenically frozen so he can return 80 years later.

Things were looking grim when Keynes went into cold storage. The Spanish civil war had just begun, Stalin’s purges were in full swing, and Hitler had flouted the Treaty of Versailles by remilitarising the Rhineland. The recovery from the Great Depression was fragile. It was the year of the Jarrow march and Franklin Roosevelt’s second presidential election victory.

Waking up in 2016, Keynes wants to know what’s happened in the past eight decades. He’s told that the mass unemployment of the 1930s finally came to an end but only because military production was ramped up by the great powers as they came to blows for the second time in a quarter of a century.

The good news, Keynes hears, is that lessons were learned from the 1930s. Governments committed themselves to maintaining demand at a high enough level to secure full employment. They recycled the tax revenues that accrued from robust growth into higher spending on public infrastructure. They took steps to ensure that there was a narrowing of the gap between rich and poor.

The bad news was that the lessons were eventually forgotten. The period between FDR’s second win and Donald Trump’s arrival in the White House can be divided into two halves: the 40 years up until 1976 and the 40 years since.

Keynes discovers that governments deviate from his ideas. Instead of running budget surpluses in the good times and deficits in the bad times, they run deficits all the time. They fail to draw the proper distinction between day-to-day spending and investment. In Britain, December 1976 was the pivotal moment. Matters came to a head in early December when a divided and fractious cabinet agreed that austerity was a price that had to be paid for a loan from the International Monetary Fund, which was needed to prop up the crashing pound….

His General Theory says that the desire of the private sector to invest is affected by “animal spirits”. When animal spirits are low, governments should step in with public investment. They should do this even at the cost of a higher budget deficit, because the higher growth that will result will mean the investment more than pays for itself.

He is aghast to hear that apart from during a brief period of collective stimulus in 2009, this approach has not been followed. Governments quickly grew concerned about the size of their budget deficits and cut public investment. 

But weak growth meant deficit reduction took longer than expected. Ultra-low interest rates for the best part of a decade have led to asset-price bubbles. Measures of private indebtedness are rising again. All depressingly predictable, Keynes says. Time to return to 1936.

Before you go, he is asked, what advice do you have for policymakers in 2016. Keynes outlines three alternatives to the status quo. The tax-cutting and infrastructure spending plan proposed by Trump will lead to stronger growth in the short term, but Keynes says he is not especially impressed. He fears that there will be little extra investment in the public infrastructure that the US actually needs and that the stimulus will be poorly focused.

The second option would be to exploit exceptionally low interest rates by borrowing for long-term investment projects. Governments could do this without alarming the markets, Keynes says, if they followed his teachings and borrowed solely to invest.

Option number three would involve being more creative with quantitative easing, Keynes says. Instead of the newly created money being used for speculative plays, why shouldn’t governments use it to finance infrastructure? Building homes with QE makes sense; inflating house prices with QE does not.

There is, he adds, another escape route. We were building up to it in 1936 and it arrived three years later. Not recommended.



What Keynes really said about deficit spending

What Keynes Really Said about Deficit Spending Author(s): Elba K. Brown-Collier and Bruce E. Collier Source: Journal of Post Keynesian Economics, Vol. 17, No. 3 (Spring, 1995), pp. 341-355 Published by: M.E. Sharpe, Inc. Stable URL: .

First para:

It is commonly believed that Keynes’ primary policy prescription for economic stabilization and full employment is federal govenment deficit spending. As will be developed below, Keynes’ policy for promoting full employment or reducing economic fluctuations was the socialization of investment. Any connection between his policy proposal and deficit spending was related to the choice of financing such social investment. The policies pursued in the United States over the last forty years have not been consistent with Keynes’ proposals for economic stabilization and have caused ever increasing deficits and financial instability.

Quotes from the article.

Keynes believed the following three phases would develop at the end of the war. (i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls; (ii) when the urgently necessary investment is no longer greater than the indicated level of saving in conditions of freedom, but is still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment; (iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises. [CW, vol. XXVII, p. 321]

But not a quote from Keynes although very on the money.

In summary, Keynes’ budget policies and stabilization policies call for the following: 1. As the normal circumstance of a capitalist system would result in insufficient private investment, 2 where total investment is less than the amount of saving that would be generated at full employment, social investnent would be necessary to maintain full employment. Further, since fluctuations in private investment are likely to occur, the investment plans of public and quasi-public entities should be designed so that they could be varied in a countercyclical pattern.

2. Countercyclical variation in incomes via taxes and, therefore, spending should not be relied on to maintain full employment and thestimulation of private investment by lowering interest rates is not likely to be sufficient to maintain the level of investment necessary for full employment.

3. Public investment should consist of those projects that provide a real return over time, either in cash retums such as public enterprises, or indirect returnsuch as school buildings. Such investment should be done from the point of view of the public good rather than private return. The shortage of private investment is likely to be so large that required public investment could range from 7.5 percento 20 percent of net national product.

4. The government should not deficit finance current expenditures. Public investment expenditures should be financed by borrowed funds that are repaid over the service life of the project. Tax revenueshould be budgeted so as to meet these payments.

5. There should be no deficit in the current or ordinary budget. In economic downtums the automatic variation in the collection of social security contributions might result in a deficit in that fund. However, in prosperous times, the fund should automatically run a suTplus. No other type of deficit should be incurred in the current budget. It is possible, however, to reduce contributions to the sinking fund for repayment of outstanding nonproductive debt in periods of economic downturn.

6. The borrowing from the public for financing public investment is best done by the central government. This would reduce credit costs to local governmental entities. 


Most famously and this is a quote. From The Economic Consequences of the Peace (Keynes 1920)

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

We read this passage today with our definition of the term “inflation” understood in relation to Keynesian theory, which means more or less all economic theory following the publication of The General Theory in 1936. Before 1936, inflation was not something that passively occurred to the price level as we think of it today. Prior to 1936, inflation was an act of policy in which the money stock was artificially inflated at a rate of growth that exceeded the growth in the real level of output. A frequent consequence was a rise in the price level, but the inflation was the policy levers that were pulled prior to the rise in the price level, not the rise in the price level itself.


From A Glossary of Political Economy Terms – the definition of “inflation”

In contemporary usage, a sustained rise over time in the general level of prices, normally measured by a weighted index of prices of a large and representative sample of goods and services (both consumers’ goods and producers’ goods) regularly traded in the economy under consideration.

(In 19th century usage, the term referred more specifically to any sustained expansion in the stock of money available within the economy under consideration — the eventual consequence of which would normally be a generalized increase in prices.)


This is taken from Chapter 7 of Classical Economic Theory and the Modern Economy by Steven Kates (Elgar 2020). Chapter 7 is titled: “Keynesian Theory Overruns the Classics”. This is the link to the Elgar website on the book:

An Unexpected Critic: Keynes on the “Classical Medicine” (1946)

Lastly, this from Keynes himself. He has notoriously been quoted as saying, “I am not a Keynesian”. That this may be in fact true, as his last, posthumous, article from The Economic Journal, may make clear. Keynes, by 1946, may have been the last of the classical economists. By the time this was published, Keynes had passed away which may be why it is not found in the thirty volume Collected Writings of John Maynard Keynes. He is discussing the forces at work that help bring economies towards an international equilibrium that will occur by leaving things to the market.

“I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable to-day to over-look because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past….

“We have here sincere and thoroughgoing proposals, advanced on behalf of the United States, expressly directed towards creating a system which allows the classical medicine to do its work. It shows how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems, with age-old poisons, that we should have given so doubtful a welcome to this magnificent, objective approach which a few years ago we should have regarded as offering incredible promise of a better scheme of things.

“I must not be misunderstood. I do not suppose that the classical medicine will work by itself or that we can depend on it. We need quicker and less painful aids of which exchange variation and overall import control are the most important. But in the long run these expedients will work better and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never get really fit again. The great virtue of the Bretton Woods and Washington proposals, taken in conjunction, is that they marry the use of the necessary expedients to the wholesome long-run doctrine. It is for this reason that, speaking in the House of Lords, I claimed that ‘Here is an attempt to use what we have learnt from modern experience and modern analysis, not to defeat, but to implement the wisdom of Adam Smith.’” (Keynes 1946: 185-186)

 One cannot walk away from a text such as this without wondering what Keynes’s own judgement may have been on what “Keynesians” had done with his arguments.

“It shows how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems, with age-old poisons

Nor what did he mean when he wrote:

“I must not be misunderstood. I do not suppose that the classical medicine will work by itself or that we can depend on it. We need quicker and less painful aids of which exchange variation and overall import control are the most important. But in the long run these expedients will work better and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never get really fit again.”

This is no idle speculation given how badly the modern prescriptions of that Keynesian medicine have left our economies. Economies never get really fit again, using Keynes’s words, until the “Keynesian” prescriptions are reversed. Keynes seems to have recognised just how badly those who had supposedly carried his message forward had mangled the policy mix. Unfortunately, in the immediate post-War period, he was no longer there to explain just what those errors were.

1 thought on “Keynes view on deficits and spending

  1. Great article.
    In 1970 dictionaries started changing inflation to general rise of PRICES
    For 200 yrs inflation was money stock.
    Central Banks no longer want us discussing their bloated balance sheets!

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