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When I began studying economics in the early 1970s, the term “Keynesian” was already losing its luster. In fact, one can date the precise moment when it became passé: Jan. 4, 1971. On that day, President Richard Nixon gave a joint interview to several television journalists. After the cameras were off, he made an offhand comment to Howard K. Smith of ABC News that he was “now a Keynesian in economics.” The New York Times reported this statement in a brief article on Jan. 7, 1971.
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As it happens, Friedman had said in 1965 that “we’re all Keynesians now” in the Dec. 31 issue of Time magazine. He later complained that his quote had been taken out of context. His full statement was, “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” Friedman said the second half of his quote was as important as the first half.
But it wasn’t only those on the right, such as Friedman, who were abandoning Keynes; so were those on the left such as the Harvard economist John Kenneth Galbraith, an early and energetic supporter of Keynesian economics. In July 1971, he said that Keynes was obsolete because big business and big labor so controlled the economy that Keynesian economics didn’t work.
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On his blog last week, Paul Krugman took me to task for misconstruing the generality of Keynesian theory. My point was that policy makers in the early postwar era routinely accepted the idea that Keynesian stimulus was justified whenever the economy wasn’t doing as well as they wanted.
I acknowledge that this view derived mainly from economists who called themselves Keynesians rather than Keynes himself. He was, in fact, a strong opponent of inflation who would have opposed many “Keynesian policies” of the 1950s and 1960s, which contributed to the problem of stagflation in the 1970s that ultimately discredited those policies.
Economists and policy makers mostly forgot that Keynes prescribed budget surpluses during economic upswings to offset the deficits that he correctly advocated during downturns. In his 1940 book, “How to Pay for the War,” he advocated balancing the budget over the business cycle.
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