What did John Maynard Keynes get right about economics?

My answer on Quora:

Two things:

1) Fiscal Policy

Very simply (and very broadly), Keynes established that fiscal policy can play a role in managing aggregate demand.

In plain English: government spending (whether it’s increasing or decreasing) can help the economy from getting too hot or too cold. When it is too hot (resources (capital and labor) are being over-utilized), the government can reduce spending or raise taxes to help keep the economy in check (i.e. slow down aggregate demand). When it is too cold (resources are under-utilized), it can do the opposite to stimulate demand.

How active should fiscal policy be? When does it crowd out the private sector? Those are legitimate questions that vary by country. Fiscal policy plays different roles in resource rich countries, in countries with weak central banks, or in countries with high debt – just to name a few examples.

The fact that fiscal policy has a role, however, is something Keynes got right.

2) Technological Unemployment

He also got right that we won’t know what to do with ourselves when society has solved the “economic problem.”

One of his famous essays reads almost as if it was written this year. In Economic Possibilities for our Grandchildren (1930), he talks of “technological unemployment”. I’d say his prediction that we will need to work less to satisfy the “economic problem” of scarce resources, but not quite know what to do with ourselves, is something else he got right (p. 5):

Yet there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy. It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional society.

To judge from the behaviour and the achievements of the wealthy classes to-day in any quarter of the world, the outlook is very depressing! For these are, so to speak, our advance guard-those who are spying out the promised land for the rest of us and pitching their camp there. For they have most of them failed disastrously, so it seems to me-those who have an independent income but no associations or duties or ties-to solve the problem which has been set them.

For further reading: What Is Keynesian Economics? (IMF)

 

 

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