Ever since British economist John Maynard Keynes introduced his economic theories in the 1930s, there has been an ongoing debate in the West as to whether or not those theories are legitimate. Those who believe Keynesian economics work site the success of Roosevelt’s post-World War II recovery plan that allegedly brought the U.S. out of recession. Those who disagree with Keynesian economics have plenty of their own examples they can cite. However, ask any citizen in Russia today what he/she thinks, and he/she is likely to tell you that Keynes’ ideas are hogwash.
Keynesian theory rests on the idea that an economy is made or broken by the total amount of spending going on within it. The more money being spent, by the government and consumers combined, the healthier the economy is. Neoclassic theory says that the strength of the economy is a free market determined solely by supply and demand.
One could make the case that post-Soviet Russia enjoyed a modicum of financial success based on economic reform plans that was more neoclassic than Keynesian. Nevertheless, ever since sanctions were placed on Russia last year, its economy has fallen through the floor while the ruble continues to lose value against the dollar with every passing day. And how are Russians responding? By spending as much money as they can.
Since last fall, Russians have been making major purchases — of things such as cars and homes — as soon as they can. They realize that every day they wait their money is worth less. The result has been a spending spree among consumers over the last four months even as the government has injected extra money into the economy to prevent an interest rate spike. They are doing exactly what Keynes said should be done. Nonetheless, the Russian economy continues to tank because they cannot sell their most precious resource: oil.
Russia’s economy is failing because of supply and demand issues. Until the world lifts the sanctions, nothing is likely to change. Unfortunately, John Maynard Keynes is not around to observe it.