General Keynes

One of the astonishing and little-examined aberrations of academic, professional, and business life is the prestige that is accorded without thought to the specialist. A highly practical design by which a person of everyday energy or competence is enabled to make a useful or anyhow identifiable contribution to intellectual, scientific, or economic pursuits emerges as something intrinsically superior to more diverse, broader knowledge, or greater effort. In medicine the specialist is considered much superior professionally and socially to the general practitioner; one notes, these days, the effort to show that the family doctor—the general practitioner—can really be quite a reputable fellow in his or her own way. In academic life one hears fleeting praise for breadth of scholarship, but no one doubts that scholarly depth is much better. The businessman has long been advised to take care of his own business. One of our more improbable metaphors holds that a shoemaker should stick to his last. I have never encountered anyone who knew what a last was.

Whatever the case in other disciplines, there can be no doubt that, in economics, specialization is the parent not only of boredom but also of irrelevance and error. Certainly, this is so in all practical matters. Widespread influences, many of them from far outside the “field” as it is commonly defined for classroom convenience, bear on every important economic decision. So it is in monetary policy, tax policy, prices and wages policy, trade policy, and all other government and private decision. The specialist, by his or her training, righteously excludes what it is convenient not to know. The specialized economist is thus spared the relatively modest expenditure of energy and intelligence that would bring most of economics and much of the relevant politics, social relations, and psychology within his grasp.

The question of specialization in intellectual matters, and its mind-saving role, is central to an appreciation of John Maynard Keynes, by far the most influential economist of this century and, with Smith, Marx, and possibly Ricardo, one of the three or four greatest economists who ever lived.

Keynes rejected specialization. His life and effort were guided by perhaps the most diverse thought and experience of any person in modern times. Passing into the British civil service in 1906, with not the highest distinction in mathematics and economics—“I evidently knew more about economics than my examiners”—he became concerned with the trivial intricacies of currency and banking in India. On this he wrote a monograph, Indian Currency and Finance, and then immediately broke with professional practice. Anyone of moderate capacity could have learned all that it was useful to know about the subject in around three months, perhaps less. In the modern professional mode, Keynes would have remained with it for most of his life and been celebrated in a modest way as its leading international authority. But his genius, many would now feel his eccentricity, led him quickly to other matters, and no one ever went so far into so many. In each he was to find something that improved or expanded his knowledge of other subjects.

In no necessary order of importance his pursuits included the following: his public career in the treasury during two wars; his long association with King’s College, Cambridge, of which he was the highly successful and, as a speculator one must believe exceptionally lucky, bursar; speculation with his own money, at first disastrous, then remunerative; the chairmanship of a major insurance company; journalism; support for the arts, leading to the establishment of the Cambridge Arts Theatre and the British Arts Council; his much-celebrated association with Lytton Strachey, Vanessa Bell, Virginia Woolf, Duncan Grant, Leonard Woolf—the Bloomsbury group; his equally celebrated love, first for men and then for Lydia Lopokova, whom he married (“Was there ever such a union of beauty and brains / As when Lydia Lopokova married John Maynard Keynes?”); his interest in agriculture and particularly pigfarming, a subject on which he submitted a thoughtful paper to me on our first meeting when I was in charge of price control in the early days of World War II.

Finally, though much else might be mentioned, there were his books—his polemic against the Versailles Treaty and his volumes on economics, including, most especially, The General Theory of Employment Interest and Money, published in 1936. (His title eschews commas.) No one contemplating all this will think that Keynes denied himself knowledge from the full range of life and work. Bertrand Russell once thought he was spreading himself a bit thin, but he soon retreated from this position. Keynes’s intellect, he said, was the “sharpest and clearest” he had ever known; he could run the risk.

That Keynes overspecialized will not occur to anyone contemplating the twenty-nine volumes of his writings now published, an enterprise of vast proportions accomplished with skill, imagination, and great editorial conscience and fortitude. The first fourteen volumes reprint his major works and the discussion and defense that these provoked. The rest, labeled Activities, consist of letters, papers, public documents, and published articles concerning and in support of his public, academic, and personal preoccupations, including the letters, documents, and editorials of others that elicited Keynes’s comment or response.

I do not suppose that anyone will ever sit down and read all of these books unless, God forbid, it is for yet another life of Keynes, of which, for the time being at least, we have had or are having enough. Many of my generation have the advantage of having read most of them, A Treatise on Probability generally apart. Some, like Keynes’s two-volume A Treatise on Money, must now be read again with the knowledge that Keynes himself extensively abandoned the conclusions he reached there—few scholars have ever so jealously guarded the right to change their minds when argument or experience told them they were wrong. Some, particularly his Essays in Biography and Essays in Persuasion, are small works of art; his memoir of Mary Paley Marshall, wife of Alfred Marshall, in Essays in Biography, is one of the most engaging and affectionate pieces one is ever likely to read. He tells of Mary Marshall as the first woman lecturer ever in economics at Cambridge and how, after Alfred Marshall’s death, she became the “tutelory goddess” of her husband’s book and “of the rising generation of students.” “So,” Keynes continues, “in her seventy-fifth year, defying the University Regulations, by which it is now thought proper that we should all be deemed to be deceased at sixty-five, she was appointed Honorary Assistant Librarian of the Marshall Library of Economics; and so she continued for nearly twenty years.” He goes on to tell how she was induced to give up the bicycle which all these years with a blithe contempt for Cambridge traffic she had ridden daily to work. (In Cambridge at the time it was known that Keynes himself had confiscated the machine.)

Finally there is The General Theory, to which I shall return.

The volumes of Activities cannot be so easily characterized. Some are fascinating; some are of purely historical interest, which is the nonhistorian’s way of saying they are of very little interest to virtually anyone. Keynes was much in Washington in the war years, and to an American reader there are passages here that rank with Isaiah Berlin’s brilliant reports on the contemporary scene and still others that are rich in interest for survivors among the younger economists who were in Washington at the time. These young men were then locked in a struggle with their older professional colleagues and especially with the business executives who had descended on the capital with a passionate commitment to business and economic policy as usual. There was a war, but that should not be the reason for any undue extension of government controls or the source of other inconveniences. Keynes was not so disposed; here is part of a 1941 letter to Walter Salant, then in the government and long thereafter a leading figure in the Brookings Institution:

There is too wide a gap here in Washington between the intellectual outlook of the older people and that of the younger. But I have been greatly struck during my visit by the quality of the younger economists and civil servants in the Administration…. The war will be a great sifter and will bring the right people to the top. We have a few good people in London, but nothing like the numbers whom you can produce here.

Other letters and reports in Activities have to do with currency balances, payments problems, and the personalities and attitudes of wartime Washington officials, many of whom are now, mercifully, forever forgotten. In writing to some of the dimmer stars in this constellation, Edward Stettinius being a prominent example, Keynes, abandoning the sterling truth of the Salant letter as my generation would have seen it, could, as needed, be repellently flattering. In these years some squalid hack had written a book about Lend-Lease on which Stettinius placed his name, and Keynes wrote admiringly, but fulsomely, to the alleged author. He cannot have supposed that his note would ever be published.

But one should not dwell on such aberrations. The letters and documents detailing Keynes’s positions over the years are in wonderfully forthright and clear-headed prose, with few concessions to political thimblerigging. On such matters as Britain’s return to gold in the 1920s or the effort to escape devaluation in 1931, he refutes with unrelenting vigor the fashionable (and disastrous) beliefs, so-called, of the grave members of the financial establishment in London. These were the men who, in pursuit of high principle, were willing to risk the social and political effects of severe deflation in order to keep the pound on the gold standard at its old parity. Here, and powerfully, Keynes’s wider perspective on social and political consequences led him into dissent. One sometimes wonders, on reading these volumes, if anyone of opposing views escaped his correction. Certainly Winston Churchill as Chancellor of the Exchequer in 1925 did not. Speaking of Churchill’s decision to return to gold Keynes asks, “Why did he do such a silly thing?” and then answers his own question. “Partly, perhaps, because he has no instinctive judgement to prevent him from making mistakes; partly because, lacking this instinctive judgement, he was deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts.” That rather takes care of everyone. It is now known, incidentally, that Churchill did doubt the wisdom of the action. It was indeed the clamorous error of the financial establishment and the experts.

Because there is so much of Keynes (including quite a bit that is peripheral), anyone trying to cover the entire range is tempted away from his central contributions—the matters on which he changed both economic and political thought and the course of history. In any consideration of Keynes, three achievements, two of major and one of less durable effect, stand out.

The first chronologically was his powerful tract against the reparations clauses of the Versailles Treaty, The Economic Consequences of the Peace. Its argument that Germany could not, within the frame of the then-existing international monetary and exchange relationships, meet the claims made upon it is at least debatable. Etienne Mantoux, the son of Paul Mantoux, the great French economic historian, published a persuasive case against Keynes in 1944, a few months before his own death in World War II. If Germany had lowered its living standards—by what is now so casually and amiably called, by the financial establishment, a resort to “austerity”—the requisite trade balance might have been developed. The decisive question then, as in the debtor countries now, was whether the political structure of the new republic could take the strain. (It was also necessary then, as now, that other countries take the goods.)

What is less in doubt is the effect of Keynes’s book on public and political attitudes emerging from the war and the peace. Germany, partly and perhaps primarily as a consequence of Keynes’s book, ceased to be regarded as the offender in the 1914–1918 conflict and became the unfairly abused victim. In contrast, after 1945, Germany, not least among the Germans themselves, was held responsible for the devastation and death.

A further consequence of Keynes’s book was that reparations after World War II were taken not in monetary claims but in kind. Perhaps—it was certainly my view at the time—this was worse. One had to know the reaction of the workers of a German industrial town to the removal of the industrial equipment that accorded them their livelihood to see how depressingly cruel this escape from Keynes could be.

The second, but more important, effect on history came seventeen years after The Economic Consequences. This was The General Theory. Unlike nearly all of Keynes’s other writing, this volume is deeply obscure; perhaps had it been otherwise and had economists not been called upon to debate his meaning and intentions, it would not have been so influential. Economists respond well to obscurity and associated puzzlement. But the essential point in The General Theory, though intricately disguised, is wholly clear: the modern economy does not, as the then-accepted theology held, tend automatically to optimal performance.

This, coming as it did after six years of depression and an even longer period of economic desuetude in Britain, cannot now seem an altogether astonishing point. Nonetheless, it broke in on the established structure of economic thought, as it was termed, with a glass-shattering effect. Not some recurrent and self-correcting aberration of the business cycle was here involved; in the absence of corrective action by the state, grave unemployment would be the norm. Production did not create its own sufficient demand; holding on to money—liquidity preference—could intervene to reduce demand. Then output would spiral down until privation forced a spending of revenue that was in balance with the supply of goods. Here equilibrium—the underemployment equilibrium—was reestablished. There was much more than this, but this is the hard core.

It was again Keynes’s eclecticism—the greatly questionable rejection of specialization—that helped him to this conclusion. Had he been a serious specialist, he would have excluded wage behavior, investment behavior, and the business cycle from his analysis as being the business of other people. Given the flexible prices and costs of the competitive firm as commonly assumed, the equilibrium would still have been optimal.

It was also the paradoxical consequence of Keynes that he led to a new specialization in economics, one falling between microeconomics and macroeconomics—“micro” and “macro” in the inner jargon of the economics profession. Microeconomics deals with the presumptively still-optimal performance of the firm, macroeconomics with the presumptively nonoptimal tendencies of the economy as a whole to underemployment or inflation. Specialization again disguises the high certainty that nonoptimal macroeconomic performance reflects, in part, the institutional and bureaucratic failures of the business firm—all micro-economic behavior. The Keynesian lesson that all economic life is of a piece was quickly lost in the new accommodation to professional simplification and classroom convenience. But the notion of optimal overall performance died forever. Nowhere has its death been celebrated so dramatically as in our own time by the Reagan administration, with its huge and stolidly defended Keynesian deficits. Keynes, from wherever he is watching, must be entranced.

The third of Keynes’s great contributions was to the Bretton Woods system, specifically the International Monetary Fund and (as it is called) the World Bank. The volumes about them contain a truly phenomenal discussion of postwar trade, employment, commodity, financial, and other policies. There is also extended discussion of the policy toward Germany after the defeat, including a strenuous objection to the Morgenthau plan for the deindustrialization of the Reich. All this is richly documented and supported by vigorous and lucid argument and much forthright common sense.

These volumes were written during the years after Keynes had suffered his first severe heart attack and was threatened by the recurrence that eventually killed him. One cannot believe that he ever spared himself. A marked contrast can here be observed between Keynes’s publicly expressed arguments and opinions and his confidentially conveyed comments on the people with whom he was doing business. Central to both is Keynes’s hope for a stable, internationally managed monetary system after the war, with stable exchange rates providing a secure and predictable basis for international trade—the Bretton Woods system.

In anything like its original form and intent, the monetary system envisaged at Bretton Woods did not survive. What was hoped would be a stable relationship between currencies gave way to the reality of increasingly diverse internal economic policies or nonpolicies, some of them reflecting the freedom from fiscal orthodoxy that was allowed by Keynes and his general case that internal economic well-being and employment should not be sacrificed to external exchange stability. The conflict between the two is still not fully accepted, certainly not by those who talk glibly about creating a new international monetary system: stable or predictable exchange rates will never be possible so long as individual countries have different rates of inflation (or, more improbably, deflation) based on different monetary, fiscal, and wage/price policies. This is in some degree recognized with respect to the poor countries of the world; they get instructions, however damaging the implementation, from the IMF on what their fiscal and monetary policies should be. Without compatible internal policies and resulting price behavior, a stable or even a predictable exchange relationship is a mirage. The surprising thing is how well international trade survives instability—it would be surprising to Keynes.

What emerged from Bretton Woods differed in substantial, though not—as it would have turned out—decisive, measure from Keynes’s proposals; but these too would have been a casualty of the diverse policies of economic sovereignty. This diminishes but by no means excludes interest in the discussion of prospective international monetary arrangements in these volumes; one is reminded, along with much else, how concerned and responsible such discussion was at the time. Keynes and Bretton Woods raised false hopes; but these hopes were, nonetheless, the product of an intense concern for the entire international community. It is a mood that seems all but archaic now.