13 May The Long Run and Keynes
Readers Question: What did Keynes mean by ‘In the Long Run we are all dead’ – From ‘In the Long Run we are all dead’
For Keynes, the short run was important and due to the instability of the macro economy, government intervention may be necessary to kickstart the economy.
Classical economists tend to be more dismissive of short term falls in output. According to their models, falls in real output below the equilibrium would only be temporary and the economy would return to equilibrium of its own accord. In particular, classical economists argued that if the economy is below full employment, wages should fall and labour markets will clear solving the unemployment.
But, Keynes argued that this was a wrong approach. He stated that the economy may well return to full employment, but, without government intervention this could take a long time.
This is why he quipped in the long run we are all dead. Why wait 10 years for a reduction in unemployment when the reduction could be achieved much quicker?
He argued that what happened in the short run could influence the long run. High unemployment created a negative multiplier effect which reduces output even further. When resources are idle, it may be difficult to get them re-employed. He also highlighted the fact labour markets may not clear. For example, wages are sticky downwards (in other words trades unions resist nominal wage cuts). But, also even if wages did fall, this could be damaging because workers would have less income and so spending would continue to fall.
This analysis provided the justification for government intervention – increased government spending financed by borrowing to kick start the economy and make use of passing saving.