Keynes, laissez-faire and coming out of lockdown

This was put up at the Societies for the History of Economics discussion thread:

The Wall Street Journal has a review by Ben Steil of Zachary Carter’s upcoming book, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes:

The review is behind a paywall, but I thought many on this list would be interested and would have access to it through a library or other provider.

And behind a paywall it remains, so this is all I could read, but it was quite enough:

“The more troublous the times, the worse does a laissez-faire system work.” Spoken in London in 1923, these words, among the lesser known of the most quotable economist of the 20th century, are perhaps his most important for these, our most troublous of times. For it is now, in the midst of a global pandemic the likes of which we have not seen since 1918, that the importance to life and livelihood of bold, informed and competent government becomes apparent. And no one wrote as originally and forcefully about what such a government does, faced with the prospect of economic collapse, than did John Maynard Keynes.

So let me draw your attention to a pamphlet published in 1926 by that self-same John Maynard Keynes: The End of Laissez-Faire where we find this passage:

From the time of John Stuart Mill, economists of authority have been in strong reaction against all such ideas. ‘Scarcely a single English economist of repute’, as Professor Cannan has expressed it, ‘will join in a frontal attack upon Socialism in general,’ though, as he also adds, ‘nearly every economist, whether of repute or not, is always ready to pick holes in most socialistic proposals’. (Theories of Production and Distribution, p. 494). Economists no longer have any link with the theological or political philosophies out of which the dogma of social harmony was born, and their scientific analysis leads them to no such conclusions.

Cairnes, in the introductory lecture on ‘Political Economy and Laissez-faire’, which he delivered at University College, London, in 1870, was perhaps the first orthodox economist to deliver a frontal attack upon laissez-faire in general. ‘The maxim of laissez-faire’, he declared, ‘has no scientific basis whatever, but is at best a mere handy rule of practice.’

I have noted before that the least understood grouping of economists in history are the later-classical economists from John Stuart Mill through to the end of the nineteenth century, from around 1848 with the publication of Mill’s Principles of Political Economy till around 1890 with the publication of Marshall’s Principles of Economics. I will just mention here that I hope to have at least in part remedied this major deficiency with a book that will be published by Elgar in June, Classical Economic Theory and the Modern Economy [ ]. That an economist can still get away with suggesting that economic theory prior to Keynes was rife with notions of laissez-faire shows so little awareness of the history of economics even among historians of economics is a scandal.

Just to focus on Mill, his Principles runs for almost 1000 pages, with the last 200 on the role of government, at the end of which he declares that the role is so extensive and the circumstances of the world so diverse, that even after those 200 pages he could not cover everything a government might find itself in need of doing so that no definitive limitations can be introduced. The only addition to the scope of economic policy introduced by Keynes was the notion of demand deficiency and with it the utility of public spending during recessions to lower unemployment, a policy universally opposed by classical economists but almost universally endorsed today. The historical record since the publication of The General Theory seems to show that the classics were completely right on that score. I cannot think of a single thing written by Keynes that would provide the slightest insight into how to bring our economies out of the lockdowns we have all experienced across the world.

I will also add that I have read the whole review and I will let you judge the book by this one quote from the review:

Mr. Carter seems to believe that Keynes, were he alive today, would be advising Sen. Bernie Sanders. But if we want to know what Keynes would do, we cannot simply extrapolate from his most radical writings.

If it is not immediately obvious how off the planet such an observation is, then I cannot help you further. Nothing I have ever written on Keynes is as discrediting as those words, since Keynes, if nothing else, was a serious scholar who tried to make sense of how an economy worked from a small-l liberal, that is from a classical liberal perspective. I believe he was wrong in his economic theories, but I would never have placed Keynes on the far left of the political spectrum, not only in his own time, never mind today.


The Price of Peace
By Zachary D. Carter
Random House, 628 pages, $35

“The more troublous the times, the worse does a laissez-faire system work.” Spoken in London in 1923, these words, among the lesser known of the most quotable economist of the 20th century, are perhaps his most important for these, our most troublous of times. For it is now, in the midst of a global pandemic the likes of which we have not seen since 1918, that the importance to life and livelihood of bold, informed and competent government becomes apparent. And no one wrote as originally and forcefully about what such a government does, faced with the prospect of economic collapse, than did John Maynard Keynes.

With the U.S. Congress having authorized $3.5 trillion in new spending over the past five weeks, it is tempting simply to conclude that we are all Keynesians now. Yet Keynes was hardly the crude advocate of deficit spending that he is too often made out to be. His writings on how to pay for World War II, and how Britain could avoid financial dependence on the U.S. in its aftermath, for example, reflect the careful workings of a brilliant and subtle mind, with the fullest appreciation for detail and circumstance. Were Keynes alive today, he would have much to say not just about what to spend on what but about how to manage the financial burden efficiently and fairly.

Timing, paradoxically, can be critical to a history book, and “The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes” couldn’t have appeared at a more opportune moment. Journalist Zachary Carter has crafted a timely, lucid and compelling portrait of a man whose enduring relevance is always heightened when crisis strikes. If there is a conspicuous blemish in the book, it is the polemical turn of its last third, which goes well beyond the life of his subject. Still, readers of all political persuasions will, in the biographical material at least, find plenty of insight for our time.

As Mr. Carter makes clear, Keynes’s life mission was to find the keys to sustaining democracy and economic liberty in the face of challenges from authoritarians of the left and the right—and not when times were easy but when they were most troublous. Now, with economies around the world struggling to emerge from a devastating, unprecedented shutdown, we who have been blessed to live in liberty will need to reflect on what will be needed to preserve it once the present crisis passes (assuming we are wise enough to surmount it).

Like it or loathe it, we are not going back to globalization as we knew it—the globalization that emerged with the rise of China and the internet after the end of the Cold War. Five years after the end of World War I and the start of the Spanish flu epidemic, Keynes was similarly aware that Britons were not going back to the glorious globalization of the late 19th century and the heyday of the British Empire. The task as he saw it, then, was to create a less glorious but more durable regime.

Born in Cambridge in 1883, Keynes had followed in the footsteps of his academic parents, securing, at age 26, a prestigious life fellowship at Cambridge’s King’s College. There he was regarded with awe by some of the greatest minds of the early 20th century. “Keynes’s intellect was the sharpest and clearest that I have ever known,” wrote Bertrand Russell. “When I argued with him, I felt I took my life in my hands.”

Keynes did not, however, make his name as a scholar until relatively late in life. He published his first major economics work (“A Tract on Monetary Reform”) in 1923, at age 40. He initially came to prominence as a British government financial adviser during World War I, accompanying Prime Minister David Lloyd George to the Paris peace talks. His scathing account of those talks (“The Economic Consequences of the Peace”) and his premonitions of political disaster to come, however, instantly transformed him into a major public intellectual. Mr. Carter ably weaves the narrative of Keynes’s personal life—his association with the Bloomsbury set, his male relationships before marrying a Russian ballerina in 1925—into that of his rise to professional fame during these years.

It is as an economic thinker, of course, that we primarily know Keynes today. Yet Keynes, a polymath with an abiding interest in philosophy, art and politics, would have had difficulty even gaining admission into today’s math-obsessed Ph.D. programs. Though an able mathematician himself, he had only disdain for those who sought precise solutions to big, imprecise problems. As an economics major in college, I learned “Keynesian” methods, yet was never asked to read Keynes. Those methods had been formulated by later American disciples and would mostly have been dismissed by the master as misleading and factitious.

It is difficult to overstate the effect that Keynes’s 1936 masterwork, “The General Theory of Employment, Interest and Money,” had on the economics profession, particularly in the U.S. The book—his effort to unearth the deeper causes of, and solutions to, Britain’s stubbornly high unemployment—virtually established macroeconomics as a discipline, both in the academy and in government. But the unusual style of “The General Theory” made it hard for even expert readers to separate out its “true” substance. It is only slightly outlandish to liken this work to the Bible. It is full of memorable, mellifluous passages. It is also, at times, obscure, tedious and tendentious. It is a work of passion driven by intuition, with tenuous logic and observation offered as placeholders until faithful adherents could unearth the proofs.

The central contention of “The General Theory” was revolutionary (at least to economists): that the economy had no natural tendency toward full employment. If governments did not intervene forcefully to boost consumption demand, Keynes argued, high unemployment could persist indefinitely. Cheap money provided by the central bank would not suffice to alter the circumstances decisively. This contention was wholly contrary to classical economics, which held that protracted involuntary unemployment was a result of some interference in the workings of the price mechanism. In classical economics, full employment required flexible wages; Keynes showed why, with different assumptions, falling wages could actually worsen unemployment. These different assumptions were related to the nature of money, to human psychology and to the conventions of contemporary society. Each of these on its own would do to support Keynes’s argument, and he was not that particular about which he credited at any time.

There is also much contradiction in Keynes’s thought, and between his thought and his behavior—contradiction that provides endless opportunity for fans to claim him as their own, or for detractors to dismiss him entirely. He was “too mercurial and impulsive a counsellor for a great emergency,” groused Lloyd George. “He dashed at conclusions with acrobatic ease [and] rushed into opposite conclusions with the same agility.” He eagerly speculated in securities, for himself and his college, particularly abroad, while calling for a policy to limit speculating in securities, particularly abroad. He further expressed biting disdain for those who supported both the orthodoxies and the heresies he himself had espoused in earlier times.

Yet it was not fickleness but a keen sensitivity to political contexts that typically drove Keynes’s shifts in economic thought. “When the facts change,” he famously told a critic of his volatile views on monetary policy, “I change my mind. What do you do, sir?” Unusually for an economist, he took the shifting mores of society seriously when prescribing policy and didn’t seek to mold humanity to his models or preferences. He was also more an internationalist Englishman than an English internationalist, so that the trajectory of his thinking tracked the trials and tribulations of his country as it struggled, from 1914 to his death in 1946, with war, inflation, deflation, unemployment, indebtedness and the growing demands of the masses for greater voice and security.

As a government adviser and diplomat, he was perspicacious and farsighted, yet rarely converted an intellectual adversary. In Washington, where he represented the U.K. during both world wars, he was all too often “dogmatic and disobliging,” making “a terrible impression for his rudeness”—and this according to his own British colleague. At the 44-nation Bretton Woods conference in 1944, which established the International Monetary Fund, the World Bank and the dollar-based global monetary system, he became the first celebrity economist, captivating the American press—yet infuriating the U.S. Treasury, which sidelined and outmaneuvered him. It is a testament to the influence of Keynes’s ideas, however, that so many policy thinkers around the world still want to create a legitimate supranational currency, modeled after his “bancor” proposal at Bretton Woods, to supplant the international role of the dollar.

Robert Skidelsky’s renowned biography of Keynes ran to three volumes, the last of which was published in 2001. As Mr. Carter notes in his acknowledgments, “all modern Keynes scholars begin their journey” from this foundational work. But wholly apart from his auspicious timing, Mr. Carter has, with this fresh reappraisal, made an outstanding authorial debut. The financial and economic questions with which Keynes wrestled, both as scholar and adviser, were complex, and it is tempting for an author writing for a wide audience to gloss superficially over the more difficult ones. But whether the subject is war reparations or interest-rate policy, Mr. Carter leaves no reader behind, and he writes with wit and clarity. Capturing in a single sentence why Keynes persisted with abstruse theoretical writing long after becoming a major public intellectual, Mr. Carter explains that “if Keynes wanted to reach the sovereigns, he would first have to convert the priesthood.” Keynes had set out to change the very foundations of economic policy-making. And to do that he had to change economists themselves. By any reasonable measure, he succeeded.

This book covers considerably more than the life and labors of his subject, however. Keynes expires on page 368, but his legacy, or Mr. Carter’s version of it, carries on for a further 166 pages. For this reader, at least, the later material constitutes a mixed blessing. Mr. Carter nicely narrates the story of the bitter and consequential split between the “left” Keynesians, led by Joan Robinson in Britain and John Kenneth Galbraith in the U.S., and the “right” Keynesians, led by Paul Samuelson and his fellow mathematical economists. But Keynes and Keynesianism disappear for long stretches of text, as the discussion devolves into an ever-angrier assault on “neoliberal” trade and market-liberalization policies, which Mr. Carter blames for growing inequality. The author reserves his harshest treatment for Democrats, with Bill Clinton bearing the brunt of his wrath for championing the North American Free Trade Agreement, the World Trade Organization and greater economic ties with China.

Mr. Carter seems to believe that Keynes, were he alive today, would be advising Sen. Bernie Sanders. But if we want to know what Keynes would do, we cannot simply extrapolate from his most radical writings. Keynes as diplomat—at Bretton Woods and in Washington the year following, begging for a loan—didn’t choose splendid isolation. Instead, he adapted his policy positions to the reality of America’s rise to economic dominance, however repugnant he found it. He would, today, surely not spit into the winds gusting from a rising China. He would get his country the best deal he could, understanding that China was going to reshape the world, peacefully or otherwise, with or without his cooperation. Mr. Carter himself, in the end, believes that Washington should engage in “cooperative economic diplomacy.” But what was China’s WTO accession if not “cooperative economic diplomacy”?

Mr. Carter is also too dismissive of contributions to economic policy thinking from the center and the right, particularly from Nobel Prize winners Friedrich Hayek and Milton Friedman—both of whom he paints, in his more charitable moments, as tools of reactionary and moneyed interests. During the present economic crisis—as during the financial crisis a decade ago—unprecedentedly bold monetary interventions have been more important in preventing economic collapse than fiscal ones. And it was Friedman’s analysis, not Keynes’s, that stimulated this reaction from the Fed and other central banks. It was Friedman to whom Ben Bernanke, the former Fed chair (and Great Depression scholar) paid homage for his seminal analysis of the monetary causes of the Depression and to Friedman’s work that Bernanke turned for guidance when faced with the challenge of preventing another one. Current Fed Chairman Jay Powell is following the same script, but with even more gusto.

In the end, readers who admire the anti-“market fundamentalism” of Nobel economist Joseph Stiglitz, whom Mr. Carter quotes approvingly, will delight in this book’s extended epilogue; those who don’t, won’t. In any case, Mr. Carter might have been wiser to write two books, letting his fine and eloquent analysis of Keynes’s life and thought stand alone as the best single-volume biography of this intellectual giant.

—Mr. Steil is director of international economics at the Council on Foreign Relations and the author of “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.”

2 thoughts on “Keynes, laissez-faire and coming out of lockdown

  1. Pingback: Keynes, laissez-faire and coming out of lockdown - The Rabbit Hole

  2. I am a Keynes interpretor. I’d like to lend my services to y’all.
    Keynes: “I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment” (GT, 1936, p. 238).
    Interpretation: Keynes finds it too difficult to start a business and employ people, so he thought ‘bugger it, just get government’s to do it’.
    Keynes: “Keynes, … it rhymes with brains”
    Interpretation: Keynes knows he is sexually confused and economically challenged but tries to convince people otherwise.

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