Keynes’ claim about how animal spirits drive the economy brings us to the role of government. His view of the government’s role in the economy was very much like what we are told in the parenting advice books. On the one hand, they warn us not to be too authoritarian. The children will be superficially obedient, but when they become teenagers they will rebel. On the other hand, these books tell us not to be too permissive. In this case they have not been taught to set proper limits for themselves. The advice books then tell us that appropriate child rearing involves a middle road between these two extremes. The proper role of the parent is to set the limits so that the child does not overindulge her animal spirits. But those limits should also allow the child the independence to learn and to be creative. The role of the parent is to create a happy home, which gives the child freedom but also protects him from his animal spirits.

This happy home corresponds exactly to Keynes’ position (and also our own) regarding the proper role of government. Capitalist societies, as correctly seen by the old economics, can be tremendously creative. Government should interfere as little as possible with that creativity. On the other hand, left to their own devices, capitalist economies will pursue excess, as current times bear witness. There will be manias. The manias will be followed by panics. There will be joblessness. People will consume too much and save too little. Minorities will be mistreated and will suffer. House prices, stock prices, and even the price of oil will boom and then bust. The proper role of the government, like the proper role of the advice-book parent, is to set the stage. The stage should give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.

Speaking of excesses, the current economic crisis has been astutely explained by George W. Bush: ‘Wall Street got drunk.’ But an explanation of why Wall Street got drunk, why our government set the preconditions that allowed it to get drunk and then sat idly by while it overindulged, must come from a theory of the economy and of how it operates. It comes from the steady emasculation of Keynes’ General Theory — which began soon after its first publication and then was intensified in the 1960s and 1970s.

Following the publication of The General Theory, Keynes’ followers rooted out almost all of the animal spirits — the noneconomic motives and irrational behaviours — that lay at the heart of his explanation for the Great Depression. They left just enough animal spirits to yield a Least-Common-Denominator theory that minimised the intellectual distance between The General Theory and the standard classical economics of the day. In this standard economic theory there are no animal spirits. People act only for economic motives, and they act only rationally.

Keynes’ followers adopted this ‘banality’ (as it has been described by Hyman Minsky) for two good reasons. The first was that the Depression was still raging, and they wished to make converts as rapidly as possible to his message about the role of fiscal policy. They would make the maximum number of converts by coming as close as possible to the existing theory. And such minimal deviation was useful for another reason. It enabled the economists of the time to understand the new theory in terms of the old.

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