Keynes: The Rise, Fall, and Return of the 20th Century's Most Influential Economist

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KEYNES

BLOOMSBURY PRESS

Introduction

What if the world is in depression - again? Any talk of a 'slowdown' now seems risible. Talk of a possible 'technical recession' has come and gone. Even sound bites about the 'credit crunch' do not measure up. 'Recession' has been officially acknowledged - meaning at least two consecutive quarters of decline - in one after another of the major economies. So we have become accustomed to the phrase, from economists, business leaders and politicians alike, that this looks like the worst scenario 'since the Great Depression of the 1930s'. But what if this is actually a depression of that magnitude? Whatever can we do about it? How on earth can we understand it?

We can start by learning from what happened before. If we are short of ideas ourselves, we may have a new interest in the ideas that came out of the last epoch of depression, unemployment and uncertainty. One name above all keeps on cropping up, not only when economists discuss the situation but in the columns of British and North American newspapers and magazines, and in other media commentary. Often there is a grainy picture of a tall, stooped man with a pasty face, watery eyes, thinninghair and a heavy moustache, a half-familiar figure from a former era of worldwide economic depression - an era that closed when the Second World War peremptorily intervened. It's Keynes, of course. But who was he and why does his thinking matter to us now?

His is an extraordinary reputation. Through nine decades, he has been celebrated, scorned, respected, appropriated, mocked, venerated, derided, rediscovered - but seldom ignored. The name of John Maynard Keynes first came to wide public attention, on both sides of the Atlantic, in 1920. Still under forty, he became famous not as an academic economist but as the author of a sparkling and influential tract, published in London just before Christmas 1919. The Economic Consequences of the Peace focused public opinion on the defects of the recent Versailles Peace Treaty. Its account had an I-was-there immediacy, a magisterial detachment and a compelling plausibility. Had the British war leader Lloyd George, in his wily Welsh way, really 'bamboozled' the upright Presbyterian President Woodrow Wilson about the impossible reparations demanded of the defeated Germans? For when Keynes dramatised the salient issues, this is how he cast the key figures and brought them to life. What he hoped to do for his readers - and what he charged a belatedly penitent Lloyd George with failing to do for the sadly deceived President - was to 'de-bamboozle' them about what had really been going on behind the scenes.

The Economic Consequences of the Peace, a slim and readable volume, rapidly became an international bestseller. By April 1920, 18,500 copies had been sold in Britain. This was extremely good for a hardback by a hitherto unknown author, whose name had only crept into the small print of the London newspapers the previous year as one of Lloyd George's Treasury aides at the Paris peace conference: an obscure Brit with a walk-on role in the negotiations, who appeared for the first time in the New York Times of 27 May 1919 as 'John M. Keynes' - a form of his name that he never used. Yet, within a year, the American edition of The Economic Consequences of the Peace had sold 70,000 copies and the New York Times had given a full-page review to a book that was to be roundly denounced almost as often as it was eagerly purchased: 'in the English-speaking countries it is capable of doing immense mischief by still further clouding the issues of an epoch already sufficiently turbid.'

Keynes's capacity for immense mischief, far from being exhausted by this episode, was only just beginning. He had entered the world stage with a fanfare, prepared to brave the boos and catcalls of a hostile audience if need be, and he subsequently remained in the spotlight, not least in the United States. In London, he was to be mentioned in The Times in about sixty reports or editorials during the 1920s, and in about a hundred during the 1930s. Across the Atlantic, by comparison, his name appeared in the New York Times nearly 300 times in the 1920s - a raft of references to a man whose subsequent career Americans followed with evident attention. Thus when the author of The Economic Consequences of the Peace, later in the 1920s, turned his lively mind and his deadly pen to the problem of unemployment, he already had a platform and an audience on both sides of the Atlantic.

Conditions in the stagnant British industrial system, however, were far different from those in the buoyant American economy, at least until the 1929 crash. As an economist based in the University of Cambridge, Keynes was naturally concerned primarily with the symptoms of depression in his own country. Conservatives liked to claim that protectionism offered a promising alternative, especially if tariffs could be used to bind together the British Empire. Like most economists, Keynes did not take this line, but nor was he happy with an orthodoxy that simply relied on market forces to do the trick. Instead, he boldly entered public debate with the contention that unemployment needed a drastic remedy.

Curiously, the politician whom he was supporting by the mid-1920s was none other than Lloyd George. 'The man who won the war', as propaganda for his coalition government had dubbed him in 1918, was the same man who lost the peace in 1919 - or so The Economic Consequences of the Peace had famously argued. Lloyd George was now attempting a comeback, having himself come back to a reunited Liberal Party, of which Keynes was an active member. 'Has Mr Keynes's opinion of Mr Lloyd George's character changed since 1918?' was the inevitable awkward question at one public meeting. 'The difference between me and some other people,' Keynes suavely replied, 'is that I oppose Mr Lloyd George when he is wrong and support him when he is right.' It was one among many subsequent occasions on which he was challenged for inconsistency. He never apologised for changing his mind when confronted by different facts or persuaded by better arguments.

Still the enfant terrible, then, Keynes made himself the spokesman for administering a stimulus when the economy was underperforming. We can see it as the launch of a Keynesian agenda that is still debated today. He called the prevailing system one of 'individualism and laissez-faire' and attacked it accordingly. Laissez-faire, said Keynes, had done its work. He claimed that it now meant superstitious faith in the market as an end in itself, whereas the actual situation cried out for experimental devices as a means of promoting recovery. In the Britain of the mid-1920s this orthodoxy relied on the self-acting mechanisms of the Gold Standard and Free Trade to do the trick - in the long run.

No, said Keynes, coining one of his most famous phrases: 'In the long run we are all dead.' It was a phrase that he was not to be allowed to forget, if only because opponents have always seized on it to show his alleged preoccupation with the short run. As Margaret Thatcher once commented to the Conservative Party conference: 'Anyone who thought like that would never plant a tree.' Keynes's policies can thus be damned out of his own mouth as short-term expedients that saddle future generations with the inexorable costs of defying the market.

Such arguments came to a head with the decision to put Britain back on the Gold Standard in 1925. Winston Churchill was responsible for this, as Chancellor of the Exchequer. As a layman, he struggled to find his way through a technical argument that he recognised as central to the way that the economy worked. He argued and he listened. Keynes's advice was politely listened to; then politely dismissed. The return to gold meant that the pound sterling was, in effect, shackled to an exchange rate of US$4.86. To Churchill, this meant being shackled to realities. To Keynes, the new parity was both completely unrealistic and perfectly avoidable, as was implied by the title of his polemical pamphlet: 'The Economic Consequences of Mr Churchill' (1925).

As a polemicist, Keynes was already fighting in a big league. His advocacy of public works in Britain, in a campaign where he publicly backed Lloyd George, did not find electoral favour in 1929, but later that year, when depression caught up with the American economy too, his arguments could not be ignored. He seized his opportunities to give copious advice to the British Government. Again he persisted; again the Treasury resisted. One of his own closest collaborators, the Liberal economist Hubert Henderson, turned on Keynes at this juncture, accusing him of minimising budget difficulties, with the icy taunt: 'I suggest that you are in great danger, if you persist in ignoring the latter question, and implying that capital expenditure can put it right, of going down to history as the man who persuaded the British people to ruin themselves by gambling on a greater illusion than any of those which he had shattered.'

Keynes was unabashed. He went from bad to worse in the eyes of such critics when he showed himself ready to question, not just the Gold Standard and the sanctity of a balanced budget, but the good old Liberal doctrine of Free Trade too. He tried many tacks, whether resourcefully or inconsistently. 'Where I've economists are gathered together,' so government officials now told each other, 'there will be six conflicting opinions and two of them will be held by Keynes!' None of his bright ideas appealed to the Treasury, either under the minority Labour Government which took office from 1929, or under its Conservative-dominated successor, the National Government, which replaced it in the crisis of 1931. Neville Chamberlain, first as Chancellor of the Exchequer and later as Prime Minister, was himself an obvious check on the adoption of a Keynesian agenda.

This 'world economic blizzard', as it was aptly termed, knocked Britain off the Gold Standard in September 1931 and swept away Labour and Liberals alike in a subsequent general election. Keynes had thus lost his most sympathetic potential allies in recruiting political support. An expert in losing friends through his own clever remarks, he managed to turn Lloyd George himself into an antagonist by publishing witty passages that he had prudently omitted from The Economic Consequences of the Peace. Hence the inevitable retaliation in Lloyd George's widely read War Memoirs (1933) calling Keynes 'an entertaining economist whose bright but shallow dissertations on finance and political economy, when not taken seriously, always provide a source of innocent merriment to his readers'. When even his most prominent champion spoke in such terms, Keynes's political stock in Britain was evidently not riding high at the end of 1933, any more than the international economy itself.

'Say not, the struggle naught availeth', so we have it on poetic authority, with the final reassurance: 'But westward, look, the land is bright.' It was a moment when a new president had taken office in Washington. It was a moment of hope, a time for audacity. In the early months nobody could be sure if this untried Democratic administration knew what it was doing, still less if the measures that it produced would achieve their desired effect. There was an enormous burden of expectation upon the President himself and upon his ability to communicate the thrust of his policies to an anxious public in dire need of reassurance. And he spoke not just to Americans but to a world mired in depression.

What soon became clear was that Franklin D. Roosevelt opted for an active policy, even when it meant disrupting the deliberations of the world economic conference summoned in the summer of 1933. Following the United States's departure from the Gold Standard, a blunt presidential message rejected the 'old fetishes of so-called international bankers', to the predictable consternation of all those who wanted to resurrect the old system. 'It is a long time since a statesman has cut through the cob-webs as boldly as the President of the United States cut through them yesterday', Keynes proclaimed immediately in a widely reported newspaper article, saying that Roosevelt was 'magnificently right in forcing a decision between two widely divergent policies'.

Little wonder that Keynes's name became associated with the policies of the New Deal. In the New York Times his name was mentioned nearly 400 times in the 1930s and nearly 500 in the 1940s. Such references were not always in flattering terms, with ideological opponents denouncing him as the evil genius of an experiment allegedly heading towards socialism. The way that Keynes put it himself was set out in an open letter to the President, published in the New York Times on the last day of 1933. 'You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system,' Keynes told Roosevelt. 'If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.'

The odd fact is that Keynes was not only more central to the American debates about economic policy than he was in his own country during the 1930s, but also more pivotal than any American economist. This was not because the universities of the United States were lacking in theoretical economists of established reputation, or that their credentials were regarded as inferior to those of Keynes. Almost the reverse is true. Until 1936, when he published The General Theory of Employment, Interest and Money, Keynes's curriculum vitae looked a little thin if measured against the heavyweight academic contributions of some of his international rivals. The explanation surely lies elsewhere.

Take the example of a great economist, born in the same year as Keynes: Joseph Schumpeter, famous subsequently for his influential concept of 'creative destruction' as the means by which capitalism renews itself. Schumpeter was installed at Harvard in the 1930s - yet his own students seemed more fascinated by the theoretical insights that Keynes was now known to be preaching in his lectures in faraway Cambridge. One effect was that the publication of the General Theory was already an event before the event, not least in the other Cambridge, where Harvard students of Schumpeter himself were among those queuing up for their copies. Schumpeter's criticism was that the General Theory 'pleads for a definite policy, and on every page the ghost of that policy looks over the shoulder of the analyst, frames his assumptions, guides his pen'.

That was no impediment to eager students, often thirsty to imbibe new doctrines with immediate tonic effect. 'As with the Bible and Marx,' the young Harvard economist J. K. Galbraith was to comment later, 'obscurity stimulated abstract debate.' Hence the tragic moment in 1939 when Schumpeter had finally published his own two scholarly volumes, Business Cycles, totalling 1,095 pages. At Harvard, a special seminar on this text was organised by his loyal students - or insufficiently loyal, as it turned out. When it met, the ghastly realisation dawned that nobody had read Business Cycles; worse, that they had all read the General Theory; worse still, that everyone was talking about Keynes and not about Schumpeter.

True, the reception of Keynes's thinking depended partly on its context, which needs to be understood. And this context includes 'Bloomsbury' - a district of London that became a code name for the cultural milieu in which Keynes moved. It was known well enough in his lifetime that he was close to Lytton Strachey, whose iconoclastic book Eminent Victorians had taken the literary world by storm in 1918 - though much about their relationship remained unsaid until later. Likewise, Keynes was a friend of two of the most esteemed novelists of their generation, E. M. Forster and Virginia Woolf. The Bloomsbury connection points to the simple fact - to which we shall need to return - that the impact of Keynes's writings reflected his own skills as a writer:

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Excerpted from KEYNES by PETER CLARKE Copyright © 2009 by Peter Clarke. Excerpted by permission.
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