The recent experience of the Great Recession 2007-2009, the ensuing fiscal stimulus package from government around the world, and the Fed's unprecedented monetary policy response, reminds me how much intellectually in debt we are to Keynes. There is no doubt in my mind that without these government effort the world would have plunged into a prolonged depression. Living standard around the world would have fallen so much that hardship and poverty would have been everywhere. This was what happened in the Great Depression. The amazing thing to me is the lack of opposition to these fiscal and monetary policies, other than a few rare but notable exception such as Robert Barro of Harvard. Economic policymakers around the world understand that in a severe financial crisis government should err on the side of doing too much, not doing too little. The mainstream laissez-faire attitude toward market evaporated in a short period of time. Governments around the world coordinated their effort. Policymakers know government directed investment will not be optimal or efficient, but if they don't reverse the tide of the confidence crisis, the loss in output and employment will be huge and ten times more wasteful than the relative inefficiency of public investment over private investment.
What changed the mind of policymakers since the Great Depression of 1930s? Over the past 80 years there is an onslaught of attack on Keynesian thinking. Friedrich Hayek called Keynesian thinking as “the road to serfdom”. Milton Friedman once said: “the great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.” Politician on the right is always calling for a smaller government. But I think deep down they understand Keynes is right on the cause of the Great Depression. They know Keynes is right on government response to financial crisis. Keynes wasn't advocating a central planning government in the sense of communism. He is saying, when you have massive unemployment as high as 25 percent of the population and rampant poverty, it is less wasteful to use the government investment on whatever endeavor than do nothing. Infrastructure building creates job. Scientific research creates job. Even pyramid building creates job. And after that pyramid or monument is built, private consumption and investment will return to normal. Isn't this what just happened since the last quarter of 2007?
Standing today in 2011 when economy is on path to full recovery, we are all in debt to Keynes. Without his insight and compelling argument policymakers around the world might have the wrong action and we would have been doomed for a generation. We shall never forget this important lesson.