Keynes

An e-mail from Mark Bahnisch reminded me a few days ago that this week is the seventieth anniversary of the publication of Keynes’ General Theory of Employment Interest and Money. Keynes is a magnetic character perhaps as much to read about as to know personally. That’s because his life reads like a kind of intellectual’s fantasy in which the author showed himself uninterested in the convention that the fantasy was believable. Apart from constant activity over myriad areas of human endeavour of which more in a moment from Brad DeLong Keynes intervened perhaps decisively in momentous world events in the twentieth century, not once, not twice but three times between 1919 and 1946. It’s hard to think of a parallel in the life of any other intellectual.

In writing The Economic Consequences of the Peace he established the narrative by which the rise of Nazism was read by the liberal intelligentsia both at the time and subsequently. In writing The General Theory he revolutionised economics as he’d boasted to his friend George Bernard Shaw he would. And then in World War Two he directed the British war economy and led the negotiations which gave us the Bretton Woods financial architecture, which survived in tact for twenty five years giving us the long boom and which created the IMF and the WTO (then the GATT) which are still with us.

Below is a fragment from something I was writing which may be of interest to Troppodillians. The purpose of the piece was to set the scene for a return to what I call in the piece the ‘dismal virtues’. It’s a bit ridiculous to portray Keynes as a prophet of profligacy as he’s so often portrayed. One of the things that distinguished Keynes from many economists before and since is his sensitivity to context. It’s true that living through the 1920s and 30s in Britain Keynes came to see the propensity to save as a dangerous thing, and as something that stalked economic life. It’s not clear that he was right in that but it’s way too early to conclude that he was wrong for the simple reason that the Western world has lowered its savings rates to (perhaps) unhealthy levels in the presence of countercyclical policies which have made consumption safer. In any event his speculations about the spectre of excessive savings and an absence of ‘animal spirits’ haunting economic life in a general sense was usually presented as speculation. What he had no doubt about was that it haunted the global economy of the inter-war years.

Keynes’ intuition, and his sensitivity to context were demonstrated shortly after the publication of the General Theory when he used the theory not to expand demand but to curtail it, to control inflation in managing Britain’s war economy. As Brad deLong writes Keynes’ 1924 Tract on Monetary Reform “may well be Keynes’s best book. It is certainly the best monetarist economics book ever written.” As Skidelski has brought out in his magnificent biography, Keynes was also a rather deeper seeker after a ‘third way’ than the stuff that circulates under that label today. As he wrote of Hayek of the latter’s The Road to Serfdom “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement”. Milton

Brad deLong provides us with a good introduction to Keynes’ extra-ordinary life.

The place to start is with the observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted.

Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician–trying to advance the chances of Britain’s Liberal Party between the wars–but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the “Bloomsbury Group” of artists and intellectuals that did so much to shape interwar culture.

For the litterati it is Keynes of Bloomsbury–his loves, enthusiasms, acts of patronage, and wit–who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world–whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith’s “system of natural liberty” but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.

How did this man come to be?

DeLong notwithstanding, Keynes, saw himself as practicing economics very much in the tradition of Adam Smith as a ‘moral science’ that strove to deliver the ‘good life’ for society at large whilst minimising demands on the goodness of the players in the economic drama. The corpus of economics as Keynes inherited it had embraced what I’d call the ‘dismal’ virtues. These were thrift, competition, and hard work. Keynes stupendous achievement was not just to revolutionise economists’ policy prescriptions, but to transform the mood of the ‘dismal science’ in his own image. Oscar Wilde, with whom Keynes is sometimes likened, once boasted that he put his talent into his work, but his genius into his life. With Keynes it is hard to see any demarcation. He was a man of prodigious intelligence, energy, versatility and achievement.

In 1919 Keynes quit his job within the UK Treasury to publish a dire warning against the folly of Versailles which made him an international figure. “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.” Indeed. Nor did it. In the last six years of his life while he battled ill health, Keynes led the UK Treasury in its management of the economics of the British war effort and led the British delegation in negotiating the post war financial architecture which underpinned the longest boom in world history: All this having been a trenchant and exuberant critic of the economic establishment between the wars and without a formal senior position in the Treasury! On February 4th 1936 he published the most influential economic work of the century. The night before he attended the opening of the Arts Theatre in Cambridge, the construction of which he had conceived, supervised and financed.

During economic times that ranged from difficult to disastrous Keynes gradually fashioned a new kind of economics. Smith had penned The Wealth of Nations after Newton’s method. With customary hubris, Keynes titled his revolutionary book in imitation of Einstein: The General Theory. Economists had typically seen the economy as a system of ‘negative feedback’ like a thermostat. The thermostat maintains an equilibrium band of temperature by heating whenever the temperature falls below a certain level. The ‘law’ of supply and demand in a perfectly competitive market is a system of negative feedback with price and output each adjusting to each other until equilibrium is reached. With ‘positive feedback’ however, a signal is intensified by feeding back on itself destabilising equilibrium. A microphone picks up the hint of a sound from speakers. It magnifies this sound which feeds back through the speakers, feeding back into the microphone as a louder sound and on it goes. Life is full of positive feedback. Some people cannot sleep if they are too tired, making them more tired still. Someone under pressure makes mistakes and so intensifies the pressure they feel.

The economics Keynes inherited told the story of ‘macro-markets’ like the labour market or the money market as one of negative feedback. And each macro-market was generally considered in isolation or ‘partial equilibrium’. Keynes suspected the real story was one of positive feedback between and within macro-markets. In what he called ‘Classical Economics’ the labour market ‘cleared’ according to the price of labour wages, like the market for oranges: Likewise the markets for savings and investment. Interest rates were the price paid to savers for saving by entrepreneurs wishing to invest the money. If savings rose, then as in any other market, there would be surplus funds for investors, which would reduce interest rates and, by stimulating investment re-establish balance. This story underpinned what I call (somewhat unfairly) the dismal virtues thrift, competition and hard work.

Keynes’ intellect, his temperament and his values coalesced in his subversion of the dismal virtues and the macro-economics of his day. Accepting that the classical adjustment mechanisms had some role, he argued that they acted weakly and slowly and that they were swamped by positive feedback within and between the markets for money and for labour. Though he understood the importance of saving to fund investment well enough, his instinctive distaste for the Victorian ‘miser’ found increasing expression in his economics. “Were the seven wonders of the world built by thrift? I doubt it”. Keynes came to argue that the fearful psychology of the miser constantly threatened to over-stimulate the instinct for thrift and inhibit the ‘animal spirits’ of investors, creating a perennial threat of excessive savings and slump. Savers and investors were in what today we call a ‘prisoner’s dilemma’. For individual decisions to invest or to consume made sense in a prosperous economy, but the economy would not prosper if others gave in to fear.

Keynes stormed the citadel of orthodoxy with compelling paradoxes and Wildean reversals in which the virtues went punished and sinners were blessed. Where investment was inadequate, virtue was a vice. “The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall”. Observing that thrift might or might not be the handmaiden of enterprise, he mused characteristically “perhaps, even usually she is not”, suggesting that (provided it was not ruinous) economic prosperity had been accompanied through history as for instance in ancient Athens with public profligacy. Keynes illustrates his broader sympathies defending at least in part the vision of mercantilists like William Petty who predated Adam Smith and supported the doctrine of a strong wealth building state.

Petty’s “entertainments, magnificent shews, triumphal arches, etc.” gave place to the penny-wisdom of Gladstonian finance and to a state system which “could not afford” hospitals, open spaces, noble buildings, even the preservation of its ancient monuments, far less the splendours of music and the drama, all of which were consigned to the private charity or magnanimity of improvident individuals.

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21 Responses to Keynes

  1. Rafe Champion says:

    Actually the first love of Keynes’ intellectual life was (probably) probability theory.
    As to the revolutionary General Theory, I think that was fundamentally wrong and one of the great challenges of the history of ideas is to work out how it managed to capture so many people for such a long time.
    And so to bed, tired but happy after an afernoon at the Zoo.

  2. James Farrell says:

    An enjoyable essay, Nicholas. The link between JMK’s rejection of Victorian attitudes and his macroeconomics is always a good discussion point, not least among modern day upholders of Victorian values.

    What were you going to say about Friedman? That he, like many others, was struck by Keynes’s extravagant praise for Hayek’s book, given the depth of their substantive disagreements? (In JQ’s recent thread on Orwell, the libertarians were claiming Orwell for their team on the basis of his comments on The Road to Serfdom., which are similarly brief and generous. It seems they draw the line at Keynes, though.)

  3. Don Arthur says:

    Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.

    Now that’s a cutting compliment from another economist. Keynes seems to be saying that Hayek’s heart was in the right place but that his economic analysis is askew. I wouldn’t be surprised if Keynes had been in deeply moved agreement with his grocer on moral and philosophical issues.

    Surely the most important economic argument Hayek made was about the consequences of state planning. But this is exactly where Keynes disagreed. In his letter to Hayek he wrote:

    I should therefore conclude your theme rather differently. I should say that what we want is not no planning, ore even less planning, indeed I should say that we almost certainly want more. But the planning should take place in a community in which as many people as possible, both leaders and followers, wholly share your moral position. Moderate planning will be safe if those carrying it out are rightly oriented in their own minds and hearts to the moral issue.

    Nicholas, you say that:

    Keynes, saw himself as practicing economics very much in the tradition of Adam Smith – as a ‘moral science’ that strove to deliver the ‘good life’ for society at large whilst minimising demands on the goodness of the players in the economic drama.

    I wonder about how much Keynes minimised the demands on the goodness of political leaders.

    Naturally I’m in deeply moved agreement with you on the moral and philosophical issues.

  4. Jason Soon says:

    you’re trivialising as is your occasional wont, Don. I don’t believe Keynes was being insincere nor had he any reason to. His Marshall kept him an economic liberal in the micro world. His agreement with Hayek would not be surprising. As for who was more realistic, well Keynes’ view was that as long as the right people with the right intentions did the planning, everything would be alright. It’s Keynes who had his heart in the right place but whose head was askew, not Hayek.

  5. cs says:

    I also find it odd that Nicholas has signalled out a rare piece of (perhaps) praise from JMK for Hayek, when there is such an extensive record of rivalry and criticism (including criticism JMK tasked to his contemporary sock puppets). JMK was very kind to Freddie Hayek personally, which always tended to disarm him, but I tend to agree with Don’s reading. With someone so completely deliberate as JMK, the word not chosen is always material.

  6. Jason Soon says:

    you calling Sraffa a sock puppet, cs???

  7. CS, Don,

    Where is there a reckord of Keynes’ being so deliberate as to barb his comments in the way you’ve intimated he has? Keynes was direct and indeed rather gung ho in his criticisms – of Hayek and of others. So what’s wrong with taking them at their face value?

    As Skidelski brings out, Keynes was a conservative – as well as being a liberal and a social democrat. Like us all perhaps in differing degrees. He was also a generous man, and so generous with his praise. It was in his conservatism and liberalism that he felt in strongly moved agreement with Hayek’s Road to Serfdom.

    He thought Hayek’s economic explanations of the Great Depression were idiotic, as their one time adherent Lionel Robbins ultimately did. Mitlon Friedman also agreed with this interprettation. Keynes also thought Hayek’s interpretation of The General Theory was nit picking rather than a genuine attempt to appreciate where he was coming from and he said so.

    CS, I don’t really get your point that you find it ‘odd’ that I quoted Keynes in support of Hayek when (it may be the case) that Keynes expressed himself more frequently in opposition to Hayek. I was trying to bring out a way in which his perspective and Hayek’s were quite close – because for me that’s one of the central values of Keynes. Not as some champion of the left but as a giant of a man who made a giant effort at synthesis. Today political syntheses’ tend to take place more at the level of spin than anything else.

    Here’s a thought – when you’re finding ideology to be losing its power the connections you make between ideological camps will be more imoprtant than all the nit picking that goes on within and between them.

  8. Rafe,

    Don’t tantalise us so. What WAS Keynes’ General Theory and why was it “fundamentally wrong”?

  9. Don Arthur says:

    Nicholas – I thought I was taking Keynes’ comment at face value.

    You will not expect me to accept quite all the economic dicta in it. But morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement.

    As I understand it, Hayek’s most important arguments for classical liberalism don’t rest on philosophical theory but on economic theory. It all comes back to the calculation debate. Keynes seems to be saying that he and Hayek are both political liberals but they disagree about the practical results of state planning. This isn’t a minor point of disagreement.

    To say that Keynes was"a generous man" only strengthens my point. He plays up the points where he agrees with Hayek’s work and plays down the points where he disagrees. A less generous man might have cut to the chase.

    Here’s what Hayek had to say.

  10. cs says:

    Jason, never – just a throwaway, in ‘sphere talk, so to speak. Piero took up the cudgels on behalf of Maynard, but the demolition job was all his own, of course.

    Nicholas, there are many ways of reading Keynes, so many that it is almost impossible not to be selective. That’s the trouble with ordinary people trying to measure giants. I don’t really subscribe to your usage of ideology, a usage which in my book would just mean someone’s general political philosophical predisposition (as distinct from ‘ideology’ – which is a more complex term: you, for instance, sometimes strike me as having something of a technocratic-economistic ideology). I don’t understand what your ‘thought’ means, unless it is merely that political similarities can be more important than differences, to which I would say ‘maybe, huh? and so what?’

    With time, I would, as I have elsewhere, argue at length and with extensive references that there were very deep and profound differences between Keynes and Hayek in many crucial respects; but instead, I will be content to thank you for your essay, and leave you with another JMK:

    I am sure that I am less conservative in my inclination than the average Labour voter; I fancy that I have played in my mind with the possibilities of greater social changes than come within the present philosophies of, let us say, Mr Sidney Webb, Mr Thomas, or Mr Wheatley. The republic of my imagination lies on the extreme left of celestial space.

  11. CS,

    I’m not trying to argue that Keynes and Hayek were very similar. Obviously they are not. I did suggest that Keynes was in deeply moved agreement with certain conservative/liberal aspects of Hayek’s thinking. He said so himself.

    Remember also that at around this time – in the 50s I think – Hayek was pretty relaxed about tax rates and more interested in avoiding state ownership. He reckoned Sweden which had high taxes even then was OK. This changed as time wore on.

    What do you fancy Keynes had in mind with the comment you quote?

  12. cs says:

    Nicholas, if I am to assume you really don’t know, that was written as part of a specific JMK intervention, aimed at disarming liberals of prejudices against Labour to encourage a united front against the Tories. He was painting Labour as conservative (i.e. in the sense of being harmless) by comparison with his own radical thinking, which he nonetheless always claimed to be within the ancient sympathies and traditons of progressive liberalism.

  13. cs says:

    Re JMK on Hayek’s tract, I think you should read his comments in light of his standard of objection to Freddie’s earlier criticism of his Treatise: “Hayek has not read my book with that measure of ‘good will’ which an author is entitled to expect of a reader. Until he can do so, he will not see what I mean or whether I am right.”

    JMK would not have enjoyed the blogosphere.

  14. Yes CS, I was referring to that comment by Keynes when I wrote this above.

    Keynes also thought Hayek’s interpretation of The General Theory was nit picking rather than a genuine attempt to appreciate where he was coming from and he said so.

    What is your point in referring to it?

  15. cs says:

    Merely that I think readers must be very careful not to jump to conclusions based on selections of JMK. He strikes me as a man who would always go well out of his way to look for something to praise in another’s work, while also quite possibly objecting to its remaining thrust (as, for example, in being almost – ie “virtually” – “morally and philosophically” in agreement with Fred’s tract, while quite possibly also thinking most of his economics was complete shite – or at least a “frightful muddle” as he wrote of an earlier Hayek effort).

    Keynes’ view of TRTS was, I think, probably best expressed in his 1944 letter to Fred, where he noted his exceptions to state intervention, concluding that “as soon as you admit that the extremes are not possible, and that a line has to be drawn, you are, on your own argument, done for.” The couplet “done for”, incidentally, could not possibly have been chosen lightly, since Maynard never ever forgot that these were the very two words that D H Lawrence used to dismiss him and his friends in 1914; two (very hurtful) words about which he wrote a full essay in 1938.

  16. James Farrell says:

    Keynes might alternatively have said: ‘We have established what you are, sir. We are now merely haggling over the degree of regulation.’

  17. cs says:

    James, do you want to buy a short argument or a long agument?

  18. James Farrell says:

    For the long argument on TRTS, I recommend Alvin Hansen’s review (originally in The New Republic, republished in Economic Policy and Full Employment, I think, but unfortunately not to be found on the web). It’s what Keynes would have said if he hadn’t been busy designing the global financial system, which is not to say that Hansen was a sock puppet.

  19. Don Arthur says:

    I think James wants the full half hour.

  20. cs says:

    One of the (so many) interesting things about JMK is that his critics oscillate between refighting lost battles against him and claiming that, had he lived, he would have come round to agree with them.

  21. I am looking for the book in which Keynes wrote “It is much more important how to be rather than how to do.”

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