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.