Even Keynes Acknowledged Tax Cuts Can Increase Revenues
Let me now publicly reveal my long love affair with John Maynard Keynes. On June 5th, stationed on a barrier island in the Gulf of Mexico, I raised my annual toast to the memory of this great man on the anniversary of his birth.
This year there is something extra to celebrate: the publication, by Basic Books, of Richard Davenport-Hines’s lovely Universal Man: the Lives of John Maynard Keynes. It is about Keynes the man rather than Keynes the economist. According to the publisher:
Previous biographies have explored Keynes economic thought at great length and often in the jargon of the discipline. Universal Man is the first accessible biography of Keynes, and reveals Keynes as much more than an economist. … Accordingly, Davenport-Hines views Keynes through multiple windows, as a youthful prodigy, a powerful government official, an influential public man, a bisexual living in the shadow of Oscar Wilde’s persecution, a devotee of the arts, and an international statesman of great renown. … Davenport-Hines is the first to argue that Keynesian economics has an aesthetic basis.
It may seem perverse for me, a veteran, die-hard, supply-sider, to extol Keynes. It is not. I claim him as our own.
Supply-side economics derived chiefly from theories of the great Nobel Prize winning economist Prof. Robert Mundell (with a critical assist from Dr. Arthur Laffer). As the IMF wrote of Mundell in 2006, in a piece entitled Ahead of His Time: “Mundell doesn’t see himself as a maverick economist, insisting that his work has stayed steadfastly in the tradition of the great economists from Adam Smith through the founders of the IMF, including Keynes, who believed in fixed exchange rates based either on gold or on a world currency.”
Keynes often is misunderstood. So was, and is, supply-side economics.
Supply-side was pilloried from the right as “voodoo economics.” This was in part because of its proposition that by lowering counter-productively high tax rates the government can realize more revenue. Lowering tax rates to raise revenues, “the Laffer Curve,” may superficially seems paradoxical. On a moment’s thought, it is obvious. (A tax rate of 100% will snuff out the underlying tax base, yielding no revenue. One can debate the optimal rate. That there is a rate that optimizes tax revenue by enhancing the tax base is axiomatic.)
Supply-side was (and is) pilloried from the left as “trickle-down.” This neglects — or studiously ignores — the fact that Reagan’s Kemp-Roth tax rate cut was across-the-board and generated a massive wave of economic flourishing for working families. Even the farther reaches of the left really ought to reconcile itself — Bernie Sanders call your office! – to letting the rich get richer as acceptable collateral damage in letting working families flourish.
So why is the raven of supply-side economics like the writing desk of John Maynard Keynes? Both share a passionate dedication to high employment and the flourishing of workers. Both are grounded in pragmatism rather than stale dogmas. Both have a pragmatically friendly stance toward the state (with supply-side demonstrating, of course, a greater skepticism toward the powers of government to do good, although not the hostility evidenced by harder core libertarians… much to the horror of said libertarians.) Both supply-side and Keynes have in common inquisitive pragmatism.
Significant differences? Yes. That said, let’s not overlook our commonalities.
I first began to doubt the conventional picture of Keynes-as-Statist upon encountering a line from a letter he, as a young man, wrote to the artist, his lover, Duncan Grant. Keynes wrote “I work for a government that I despise for ends I think criminal.” This is a sentiment quite worthy of a hardest core libertarian.
Davenport-Hines paints a picture of Keynes that brings Keynes, the man, vividly to life. Before praising Davenport-Hines, however, a quibble, first, with Basic Books is in order. The American publisher’s promotional copy at Amazon makes the risible claim that:
Keynes’s brilliant ideas made possible 35 years of prosperity after the Second World War, the most sustained period of rapid expansion in history. … Indeed, with the thorough discrediting of his opponents—Friedrich Hayek, Milton Friedman, Alan Greenspan, and other supporters of the notion that capitalism is self-regulating, and needs no government intervention—nations across the world are turning to Keynes’s signature innovations: above all that governments must involve themselves in their economies to stave off financial collapse.
This is a grotesque misrepresentation of Davenport-Hines’s excellent work (and an offhandedly gratuitous insult to many potential readers). Surely Keynes himself would have scoffed at seeing his inquisitive pragmatism elevated to the dogma that “governments must involve themselves in their economies to stave off financial collapse.” It was, after all, a fundamentally Neo-Keynesian regime that caused the financial collapse of 2008, the Great Recession and sluggish recovery.
Moreover, this claim confusedly attributes the 35-years of good growth directly after WWII to “Keynes’s brilliant ideas.” The reality was far more complex. This claim slyly ignores the defects in Neo-Keynesianism that vividly emerged in the ensuing 40 years.
As for those defects, Hayek once observed: “It would be unfair to blame Lord Keynes too much for the undoubted harm his theories have done, for I am convinced from personal knowledge that had he lived he would have been one of the leaders in the fight against the postwar inflation.”
Quibble time over. Davenport-Hines shrewdly observes:
‘No-one ever became an economist through an uncontrollable impulse,’ Robert Bootheby declared at the London School of Economics in 1933. ‘No-one, looking at an economist, ever said: “there, but for the grace of God stand I.” Keynes began studying economics as a diversion from philosophy, with its thorny investigations of ethics, aesthetics, and logic, but had only eight weeks’ training in the subject. He was taught by his father’s early mentor, Alfred Marshall…. Marshall urged that if booms and slumps were to be understood, monetary economics must be treated as a distinct specialty, and convinced him to specialize in money and banking. ‘I find Economics increasingly satisfactory, and I think I am rather good at it,’ Keynes told Lytton Strachey in 1905. ‘I want to manage a railroad or organize a Trust or at least swindle the investing public. It is so easy and fascinating to master the principles of these things.’ He never sat an examination in economics: his knowledge came from pondering problems and discussing them as much as from book-learning.
“Or at least swindle the investing public”? Davenport-Hines has an eagle eye for the gems of Keynes’s enchanting wit.
Most policy — from both left and right, — is derived through “cognitive heuristics” rather than straight-up logic. Davenport-Hines shrewdly nods to this:
[Keynes’s] delving into Newton’s papers led him to deliver a thrilling talk to the Royal Society in 1942 from which one extract can be quoted: ‘He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. Isaac Newton, a posthumous child born with no father on Christmas Day, 1642, was the last wonder-child to whom the Magi could do sincere and appropriate homage.’ This pioneer of the Enlightenment was sunk in occult and esoteric ideas, said Keynes, and thus simultaneously the first of the scientists and the last of the magicians.’
There is an element of self-description in this summary.
Keynes as magician-scientist has a ring of truth. It could be argued (although is not, quite, in Universal Man) that Keynes’s most defining genius was his early grasp of postmodernism. Postmodernism has most succinctly been defined by Jean-Francois Lyotard, as “incredulity toward metanarratives.” Incredulity toward his own metanarrative, as well as those of others, is a trait that Keynes brilliantly displayed. There is a strong argument to be made that Keynes’s greatest contribution to the culture, still not fully assimilated, is that of proto-postmodernist rather than economist.
Davenport-Hines portrays Keynes, above all, as militant foe of “impractical stupidity:”
For a time Keynes gave vitality and even militancy to the Liberals: he saw himself as a lancer riding into the thick of the fight against impractical stupidity. Asked in 1926 to define the three groups of non-revolutionary reformers, Keynes had his answer pat. ‘A whig is a perfectly sensible Conservative. A radical is a perfectly sensible Labourite. A Liberal is anyone who is perfectly sensible.’
Keynes, notwithstanding his own errors and ongoing revisions of his own prescriptions (including about the gold standard, on which he held various positions over time), fundamentally was a champion for the “perfectly sensible.” Keynes assuredly was right in describing the interwar “gold-exchange standard” as a barbarous relic.
This is Keynes’s world. We just live in it. It really is of great value to understand Keynes, whether to emulate his best characteristics or to help dismantle the “impractical stupidity” of our current policy elites.
Richard Davenport-Hines has given us an internationally acclaimed book that will reward its readers both in pleasure and in virtue. While reading it, tonight, join me in raising a toast to John Maynard Keynes, the Universal Man.
Originating at Forbes.com