Keynes: Stimulus Follows Stability and Not Vice Versa

by Mario Rizzo


I have been arguing for some time, both here and elsewhere, that the ideas of John Maynard Keynes after the mid-1930s and into the 1940s are more sophisticated that the prime-the-pump notions of many modern day economists who call themselves Keynesians. Keynes, himself, evolved away from those simple ideas he advocated in earlier years.


The mature Keynes diagnosed the fundamental problem of market economies as the instability of private investment associated with radical uncertainty. Because the future is uncertain, in the sense that investors cannot envisage all of the possible outcomes of their courses of action, including the behavior of other people, they are subject to changes in expectations. This can result in sudden, unpredictable changes in investment behavior. Periodically, for reasons that are not entirely clear in Keynes writings, investor confidence will collapse in part because some investors fear that other investors will be discouraged by future state of the economy. Perhaps the bursting of a bubble will set things off.


In any event, the problem is uncertainty. And the main remedy is the restoration of confidence, not by sweet or inspiring talk, but by ensuring the stability of investment. Keynes thought it would take some form of government control or influence over the majority of investment to stabilize the investment sector and thus the economy. Therefore, the way to avoid slumps (and later inflation) is to stabilize investment through government management. The stimulus that would be generated if private investors were, for some reason, to lose confidence would be derived from the stability the government investment behavior. This behavior would have to be regular, predictable and substantial to be effective. In fact, Keynes believed that this kind of policy would prevent slumps and not cure them once they occurred.


The upshot is that Keynes’s “solution” requires taking at least a medium term point of view. Discretionary start-stop fiscal stimulus tends to create uncertainty and hence is not really stimulative. The mature Keynes was, ironically, concerned about the long-run: the institutional reform of the way investment takes place in a market economy.  I do not advocate what he called the “socialization of investment.” But that is Keynes.


My article in the American Enterprise Institute’s online magazine The American deals with this issue.

6 thoughts on “Keynes: Stimulus Follows Stability and Not Vice Versa

  1. Keynes was a market socialist, is what you’re saying. I think this is true. This is also why the post-Keynesian crowd of earlier years also overlapped considerably with the socialist and market socialist crowd, especially in the UK (e.g. Joan Robinson).

  2. Contrary to Keynes, speculation does not lead to a low (or lowered) level of confidence in financial markets. It’s like blaming the business cycle on greed, which is another non-starter.
    What causes the cluster of entrepreneurial error that characterizes recessions/depressions? That is the key question that Keynes and his modern epigones (how’s that for a Misesian word?) didn’t come to grips with.
    What causes the boom that leads to the bust? Another question the Keynesians don’t give a satisfactory answer to.
    A big cause of increased uncertainty and lower confidence in recessions/despressions is caused by the effects of government intervention on expected profits and cash flows, not to mention minor details like property rights and the rule of law. The problem is worsened by gyrating government policies, as we’ve seen recently.
    Keynes might have been more sophisticated than his modern followers, but that’s not necessarily saying much.

  3. rizzo . . . not bad, though leaving out ch. 17 of the GT still leaves any interpretation of Keynes incomplete. Closer than Keynesians get, though, as you said

    stepp . . . respectfully, see Minsky, and not the popularized Minsky that rears its head in the financial press whenever there is a financial crisis, but the true Minsky that blended Keynes with his own studies under Simons at U Chicago and Schumpeter at Harvard.

  4. In a phrase, what Keynes advocated could be called Investment Management, as opposed to the Demand Management theories of Keynesianism. This distinction is now largely forgotten or ignored.

    As you point out, it’s not quite clear how Keynes determines that collapses in investor confidence can occur, or why indeed this inherent uncertainty only afflicts industrial investors, and not any other socio-economic group (e.g. bankers, asset speculators, home mortgage holders).

    Keynes’ story is…

    Uncertainty facing individual investor -> Sudden and radical changes in outlook -> Group psychology -> Collapse of investment -> Recession/depression.

    Keynes proves way too much.

  5. “Keynes was a market socialist, is what you’re saying. I think this is true.”

    Remember that Keynes’ wanted the ‘Socialization of Investment’ – that is, the state direction and control of investment expenditure, not the Socialization of ownership of the means of production and exchange per se.

    The difference is the difference between Socialism and Fascism.

    From the preface of the German edition to the General Theory (1936):

    “Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.”

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