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The enduring legacy of Keynes John Maynard Keynes: Fighting for Britain 1937-1946. Robert Skidelsky. Macmillan. £25 http://www.internetional.se/econusabub.htm#hitler
With the publication of the third volume, Robert Skidelsky has come to the end of his monumental biography of John Maynard Keynes, the great British economist*. The work is illuminating for its contribution to British social and cultural as well as economic history, for its insight into the evolution of economic doctrines, and as a fascinating personal portrait. I have to admit that I did not find the details of haggling with the Americans about how to finance the second world war, or about the postwar loan that Keynes negotiated at the end of his life, as riveting as the cultural and philosophical material in the first volume or the economics in the second. Should the same be said about the other main negotiation detailed in the book - namely the Anglo-US tussle over the shape of postwar economic institutions, out of which the International Monetary Fund and the World Bank developed? Some people would like to go back to these arguments for insight into the ”new financial architecture”, which is said to be required following the recent series of debt crises in the emerging countries, but which is now stalled at the level of the highest common platitude. There is no very direct application. Keynes and his antagonist, Harry Dexter White of the US Treasury, had in mind a world in which the fate of currencies depended mainly on the current balance of payments, in which capital movements were to be strictly controlled and exchange rates semi-fixed. Above all, it was a period still dominated by the US and the UK. There is not a great deal to be learned about the contemporary world in which currencies float and the foreign exchanges are dominated by huge capital movements. Perhaps one idea can be salvaged from Keynes’s wartime contributions, which found a faint echo in the IMF ”scarce currency” clause, which has never been invoked. This was the responsibility of creditors as well as debtors to take corrective action against imbalances. By creditors, Keynes had in mind governments of countries running a chronic current payments surplus. No one then envisaged today’s huge private capital movements that can support developing countries, but that can easily be withdrawn and where contagion is liable to infect country after country. Keynes always emphasised that if a country’s money costs went out of line with its trading partners, deflation and unemployment must never again be used to make that country competitive. Is the euro-zone an example of trying to force countries’ cost levels upwards or downwards to fit an arbitrary standard? Not necessarily. A successful monetary union presupposes that its members form a single economy whose costs are prevented from getting out of line by the day-to-day working of market competition. But it does not necessarily involve a European federation. In my view, Keynes’s most important contribution to economic thought was in the domestic area, in his doctrine of oversaving, outlined in his General Theory of 1936. There he explained how an attempt to save more could in some circumstances lead not to increased investment and faster growth, but to lower output and employment. Keynes did not see economic management merely as a matter of smoothing out the business cycle. He believed that it was quite easy for an economy to get stuck in a state of underemployment that would take a long time to cure itself. The idea of long-term employment stagnation lives on today under the ungainly name of hysteresis, a term drawn from physics, which suggests that once unemployment has risen to high levels it tends to perpetuate itself. The long gap between Margaret Thatcher’s supply-side reforms of the 1980s and the return to high level of employment in the UK in the late 1990s, suggests the phenomenon is real enough. If I have a disagreement with Skidelsky, it is his tendency to gently downplay the General Theory in favour of other works of Keynes. But without this giant theoretical contribution Keynes would mainly be remembered for his attack on the Treaty of Versailles and as a financial statesman in two world wars. This would be enough achievement for most humans, but would not place him among the immortals. The fact that Keynes was not a consistent Keynesian is not the remarkable discovery that some commentators suppose. Intellectual innovators do not always see the implications of their own ideas and tend moreover to fire off in all directions. It is nevertheless their main ideas not their personality quirks that establish their place in history. Keynes was reluctant to advocate budget deficits; and he saw the maintenance of full employment in terms of public investment programmes that would be in accounting terms, ”off budget”. Indeed, he could be hailed as the precursor of UK finance minster Gordon Brown’s doctrine that the current budget should be in balance or in surplus but that the finance minister can borrow for capital spending up to a prudent limit. This is all good, clean fun, but has little to do with Keynes’s theoretical contributions. His preference for investment over consumption as a stabiliser was based partly on a political judgment about the acceptability of budget deficits, and partly on a belief that after a few more decades of high investment, the economic problem would be more or less solved and that human beings could concentrate on more fundamental matters such as personal relationships and the cultivation of the arts. One specific idea that Keynes used to explain why the economy could not easily correct itself if savings were too high or investment too low was the liquidity trap. Because the real rate of interest cannot fall below zero in a non-inflationary economy, it could not be relied upon to equate savings and investment at a high level of employment. It seems pretty apparent that Japan has been in a liquidity trap. Less convincing, in the light of Japanese experience, is Keynes’s belief that public investment schemes could readily be used as a cure. Finally, the hankering for a ”new Keynes” is not healthy. It reflects a belief that some kind of clever juggling will enable governments to avoid difficult political decisions or confront interest groups, and also allow economists a short cut from the difficult process of testing hypotheses against evidence. None of this would have really appealed to Keynes who espoused reason, mixed with flair and bold hypotheses, but certainly not black magic of any kind. |