Actually, Keynes Cared a Lot About the Long Run

Niall Ferguson’s claim that John Maynard Keynes only focused on the short run because he was gay and childless is ludicrous and completely wrong.

Niall Ferguson, a British historian, addresses the financial collapse of 2008 at the Newseum in Washington, October 1, 2009.
Niall Ferguson

Photo by Jonathan Ernst/Reuters

Niall Ferguson, the distinguished historian who for the past several years has increasingly abandoned his trade in favor of inept conservative punditry, stepped in it over the weekend when he told an investors’ conference that John Maynard Keynes’ allegedly misguided ideas stemmed from the fact that he was gay and had no intention of having children, and was thus blinded to the importance of long-run considerations.

When an uproar ensued, Ferguson, to his credit, offered a full and complete apology on his website. But both the controversy and the apology primarily reflect the welcome fact that gay-bashing is increasingly frowned upon in polite society. They don’t confront the larger smear, which is against Keynes’ ideas. The fact of the matter is that both Keynes personally and “Keynesian” thinkers about macroeconomics in general care deeply about long-term issues. In fact, Keynes is one of the deepest thinkers about the long-term economic trajectory of all time.

The assumption that Keynes only cared about the short run stems from Keynes’ too-often quoted line that “in the long-term we are all dead.” This is, obviously, true. But while it’s often taken to be something like a 1930s version of YOLO, that kind of carpe diem economics has nothing to do with what Keynes was actually writing about.

The line appears not in the General Theory of Employment, Interest, and Money but in 1923’s Tract on Monetary Reform. Most countries, including Great Britain, had abandoned the gold standard during World War I. After the war, the major powers sought to return to gold and the British authorities wanted to return their currency to its pre-war peg, a step Keynes thought would be disastrous. The question of the long run arose in response to the claim that overvaluing a currency relative to the currencies of its trade partners can’t make a difference since in the long-run domestic prices will adjust to any exchange rate.

Keynes says that this is true. If after the conclusion of the American Civil War “the American dollar had been stabilized and defined by law at 10 percent below its present value” that would have had no implications for the world economy of the 1920s, 60 years later. Nominal prices would have adjusted. “But this long run is a misleading guide to current affairs,” he wrote, “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

To extend the metaphor, Keynes’ point wasn’t that the long-term is unimportant—it’s crucial that a ship eventually arrive at the correct port. But in the middle of the storm an expert sailor needs to be able to say something useful about how to weather what’s actually happening. Economics will not be a useful or interesting discipline if all it can say about exchange rates is that eventually things will work themselves out. In the short run, it makes quite a bit of difference what happens to exchange rates: It can make the difference between prosperity and recession. Policymakers and the public should demand that economists have something to say about it. Consider, for example, Iceland which was hit by an economic storm at least as severe as what’s happened to southern Europe back in 2008 but which now has an unemployment rate below 6 percent. The secret to its success has been currency devaluation, which spread the negative shock to Icelandic wealth evenly across society. That hasn’t let Iceland recapture its halcyon days, but it has helped ensure that nearly everyone is employed doing something. In Spain, by contrast, euro membership prevents exchange-rate adjustment and the unemployment rate is 27 percent and rising.

In the long run, domestic prices in Spain will adjust and the storm will pass. But a lot can happen in the meantime. In fact, the very interwar gold standard Keynes bemoaned turned out to have far worse consequences than anyone could have imagined. It helped spawn a worldwide depression. The Great Depression led to surging votes for Adolf Hitler’s Nazis and after they seized power they finally applied fiscal and monetary stimulus to the German economy and consolidated their gains. Keynes lived to see millions perish in World War II as a consequence, but not to see tens of millions of Poles, Czechs, Hungarians, and other Eastern Europeans to live under decades of Soviet oppression as a direct consequence of the war. In the long run, Europe recovered from the war and even the Iron Curtain eventually fell, but it was a heck of a bumpy storm.

Even absent such a visible cataclysm, the long-term impact of short-term mismanagement is very real. In a short recession, people lose jobs and then get new ones. But in a long recession, many workers end up jobless for over six months, at which point they become nearly unemployable. A weak labor market has prevented many young people from getting their first job, leaving them permanently behind the curve in terms of skill-acquisition and building sound work habits. Ever since the recession began, it’s been fashionable among elites to dismiss stimulative measures as palliatives or band-aids—Treasury Secretary Tim Geithner made an unfortunate reference to a “sugar high.” Serious people are supposed to furrow their brows over long-term issues like the projected debt:GDP ratio in 2053 and alleged skills mismatches. But the truth is that in a dynamic modern economy and a world full of unquantifiable uncertainty, the best thing we can do for the long-term is to try to make sure that people are gainfully employed rather than idle. It’s under conditions of full employment that skills will be learned and investments made that build the foundations for long-term growth. And the question of how to get there is the key one for economists—whether gay or straight, childless or otherwise—to answer.