Not everything John Maynard Keynes said was wrong. Admittedly his General Theory of Employment, Interest and Money became the guidebook for 40 years of big government after it was published in 1936. But Keynes did know something about financial markets (it wasn't by accident he made a fortune on the stockmarket) and he did know something about people and about politicians. For example, what he said in the General Theory about the stockmarket in the 1930s could easily apply to Lehman Brothers in 2008 and their collateralised debt obligations. According to Keynes, for the likes of Lehman Brothers there's only one objective -- to "beat the gun and outwit the crowd".
Keynes had a way with words (which goes a long way towards explaining his massive influence). He described financial speculation as similar to a game of Snap, Old Maid, or Musical Chairs: "A pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated."
History doesn't record whether Prime Minister Kevin Rudd has read the General Theory, although in his now famous essay on the death of neoliberalism from last year he did mention Keynes several times. Even if the PM hasn't read all 384 pages of one of the most important books of the 20th century, it can safely be assumed that the senior officers of the Treasury Department have. Their solution to the global financial crisis was pure Keynesianism, that is, borrow lots of money and spend it, which is exactly what happened.
The government's desire to borrow and spend was as much justified by politics as it was by Keynes' economic theories. The politics of it was simple. What Keynes said about a desire for quick investment returns also applies to politics -- "human nature desires quick results".
The Rudd government needed to be seen to be doing something, and doing it in a hurry. Keynes is well known for his acknowledgement of the role of "animal spirits" in markets, and there's one specific tendency of "animal spirits" upon which he placed great emphasis. That's the inclination to a "spontaneous urge to action rather than inaction". Much of the debate about health reform is about which side of politics wants to make the biggest change to the system.
The size of action is the measure of political success, not the quality of the reform. Rarely do we weigh the benefits of inaction against the costs of action. Which explains things such as the government's home insulation program and its Building the Education Revolution. Politicians and bureaucrats felt themselves urged to action and they betrayed their willingness to hope for the best rather than plan for the worst. Again, as Keynes commented, it is a "characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic".
The campaign Rudd will run to be re-elected later this year contains a paradox, and it is a paradox Keynes would have appreciated. On the one hand Kevin Rudd will claim it was his "urge to action" that created the stimulus package that "saved" Australia from the global financial crisis. But at the same time he'd like the public to forget about how, before he became Prime Minister, he urged action to do a whole host of things, many of which will now not be done. His promise to introduce an emissions trading scheme is the most obvious example.
Everything and anything that gets in the way of an election message based on his response to the economic crisis has been either abandoned, delayed, or neutralised. For example, the bill of rights has been abandoned, action on climate change has been delayed, and the controversy over population growth has been neutralised with the appointment of a special minister to consider the issue.
It's been said Kevin Rudd is "clearing the decks" for an election, which is true. His problem is that he risks clearing the decks of so many things eventually there'll be nothing left. That is precisely the criticism the coalition, and some of his colleagues, are starting to make.
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