Millennial Keynes

The Origins, Development and Future of Keynesian Economics

Bruno Ventelou, Gregory P. Nowell

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317464716
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Both a grounding in the origins and development of Keynesian economics, this study also looks at the ongoing significance of his work. It examines the different interpretations of Keynsian thought on economics as a discipline and the schools of thought that provided these interpretations.

1

Keynes

An Activist’s Life

J.M. Keynes was the most significant theorist of twentieth century economics, and his ideas continue to be the basis for influential developments in the field: in government and in academe, income, employment, health, trade, finance, and environmental policies have all been touched by Keynesian theory. Keynes also played key roles in major international economic policy events of the twentieth century, including World War I, the Great Depression, and World War II. This book focuses on the development of Keynes’s economic ideas, their immediate predecessors, and their development after Keynes’s death. The varied and immensely influential contributions that became “Keynesian economics” were linked to his personal life, his professional development, and his political commitments. This chapter briefly surveys these different sides of Keynes as a foundation for understanding his economic theory.

Keynes’s Childhood, His Studies, His Clubs

John Maynard Keynes was born on June 6, 1883, in Cambridge, England. His family and social environment were highly conducive to his education and intellectual development. His mother, Florence Ada Keynes, was “modern” for the time. She was one of the first women students at Cambridge, and she later became actively engaged in politics, winning election to Cambridge’s Town Council. She was known for her progressive ideas and advocacy of feminist causes.

Keynes’s father, John Neville Keynes, was also highly accomplished. A professor of political economy and logic at Cambridge, he taught Marshallian economics and was best known for a book on the discipline’s methodology titled The Scope and Method of Political Economy.

The young Keynes therefore grew up in an extremely stimulating environment. His family lived and moved in sophisticated intellectual circles. Their ideas and beliefs were cutting edge. Very early in his life, Keynes forged friendships with a number of intellectuals and artists. From his childhood he retained a solid friendship with the Stephen sisters. The two women are better known as Vanessa Bell (1879–1961), a renowned painter whose works hang today in London’s Tate Gallery, and Virginia Woolf (1882–1941), the celebrated novelist.

Keynes’s first chosen field of study was not political economy. As a student at Eton and then, in 1902, at King’s College in Cambridge, he studied mathematics. His other interests included philosophy and medieval poetry. In 1903, he became a member of a club entirely devoted to philosophy, the Apostles. This group was heavily influenced by a young professor at Trinity College, G.E. Moore, author of the Principia Ethica. The Apostles’ creed emphasized the pursuit of truth through a mix of intellectual austerity, moral rigor, and precise language that often contrasted with members’ personal hedonism. Mathematical logic was a veritable dogma, even though Moore’s philosophy also emphasized the role of intuition. Through the Apostles’ club, Keynes became friends with men who represented a wide range of philosophical thought and literary interests. His social circle included Lytton Strachey and Leonard Woolf, who would eventually form the Bloomsbury group (see below). This “mathematical-philosophical period” gave Keynes the chance to shine in the eyes of illustrious figures such as Bertrand Russell and Alfred North Whitehead, who were then preparing their Principia Mathematica, a work that revolutionized philosophy in the English-speaking world. In 1909, Keynes defended a thesis on the logic of probability, written under Whitehead’s supervision. The defense of this thesis was Keynes’s first major intellectual contest. He proposed new and unconventional ideas. This thesis was published much later, in 1921, after extensive rewriting, under the title A Treatise on Probability. The probability theorists of the time were a bit shocked by the young Keynes.

Nonconformism was also evident in Keynes’s London life from 1910 to 1920, as a member of the Bloomsbury group. The Stephen sisters, now married, sponsored two clubs devoted to the arts, literature, and philosophy. Duncan Grant, a painter with whom Keynes shared an apartment in London, introduced him into these circles in 1909. In 1916, he even shared a residence with Vanessa Bell at 46 Goidon Square. The Bloomsbury group was scandalous. Known for its freedom of spirit, it shocked an England that was barely out of the Victorian era. The Bloomsbury group discussed everything, without taboo. Keynes kept company with people noted for their intellectual passions. He met the philosopher Wittgenstein (1889–1951), who was staying at that time in Great Britain.

World War I, however, put our economist at odds with the pacifists of the Bloomsbury group. Keynes served as an economic advisor to the Treasury. The Bloomsbury group considered Keynes’s participation in the war effort incompatible with their own views. In the 1920s, Keynes distanced himself from the group. In 1925, he married Lydia Lopokova, a classical ballerina who was not well received by the close-knit Bloomsbury group. Though he now was less involved in the literary scene, his interest in the arts did not weaken. Throughout his life, he sponsored a wide array of artistic shows and works; for example, in 1936, he helped found the Cambridge Arts Theater.

Keynes’s Professional Life

Keynes’s life was not limited to pure aesthetic consumption. His professional life overflowed with activity. In 1905, he seemed focused on a government career, seriously studying political economy as part of the entrance examination for the civil service. He studied with Alfred Marshall and Arthur C. Pigou. In 1906, he received a position at the India Office. His time in the India Office (1906–1908) was marked by profound boredom. Keynes later would say that his greatest deed at the India Office was to export a pureblood bull to Bombay. He nonetheless acquired sufficient knowledge of India’s economy to publish, in 1913, Indian Currency and Finance. In it, he argued against basing the Indian currency on the gold standard and proposed, to the chagrin of “the city” (Britain’s center of banking and finance), an independent central bank for India. Following his controversial probability thesis by four years, this proposal marked Keynes’s second major intellectual engagement.

Having lost his taste for life as a public servant, Keynes returned to Cambridge in 1909. His thesis and Marshall’s support won him a teaching position at King’s College. For the rest of his life he remained affiliated with the university community.

Yet he also was kept a distance from academe: starting in 1920, he no longer received a regular salary for his teaching activity. He would spend Fridays and weekends at Cambridge and the rest of the week in London. He contributed regularly to the major economic journals and reviews. His courses and other works earned him respect at the university, as testified by a number of opportunities that came his way. He became editor of the Economic Journal in 1911, and, in 1913, secretary of the Royal Economic Society. The latter position allowed him to host a number of foreign visitors at Cambridge, some of whom came to stay, such as the economist Piero Sraffa. Keynes sponsored a political economy club on campus and participated in the great theoretical debates of the 1920s and 1930s, involving major economists such as Friedrich Hayek, Bertil Ohlin, and Jacques Rueff.

Keynes did not limit himself to academic pursuits. He was not only a theoretician, but also a pragmatic speculator in financial markets. He earned the wherewithal to pay for his multiple interests. Unlike most academic economists, many of whom have tried to do the same thing, he earned a fortune of £500,000 on the stock market. As bursar of King’s College and secretary of the Royal Economic Society, he also enriched the endowments of the institutions he dearly loved. His success as a financial adviser, and also as a founder and director of several investment companies, earned him recognition in British banking and finance circles. He helped direct the investments of a number of insurance companies, including the National Mutual Life Insurance Company and the Provincial Insurance Company. From the 1920s till his death in 1946, Keynes had total financial independence, which proved a useful resource in his public battles against official positions.

Government Posts and Feckless Negotiations

Keynes’s efforts in the 1920s to enhance his personal independence are explained by a stormy relationship with the government that was evident right at the beginning of his career. Aside from his short stint at the India Office, Keynes had official government jobs only during the two world wars. He joined the Treasury in 1915. In 1918 and 1919 he took part in the Versailles peace negotiations that brought World War I to a rather poor conclusion. In 1940, he was again a member of the Treasury staff, as an adviser who remained apart from the official internal hierarchy. He led the British delegation at the Bretton Woods conference (1943–1944), which established the new international monetary order that emerged in the aftermath of World War II. His disputes over the proper terms for concluding peace in 1919 and for establishing a new monetary system in 1945 were major public controversies, and he lost both times.

Keynes saw the punitive measures of the Treaty of Versailles as a scandal, and his protest against the treaty put him in the public spotlight. His intellectual independence was fully evident as he took on the job of championing a better peace. He had been assigned the job of calculating German reparations, using two criteria. The first was an appropriate indemnity for damages the Allies suffered during the war. The second was Germany’s transfer capacity: the country’s ability to earn a surplus of currencies necessary to make reparations payments. Keynes arrived at a moderate figure of £2 billion. The Bank of England disagreed, emphasizing reparations for damages rather than Germany’s ability to pay, and advanced the figure of £24 billion. This was twelve times more than Germany’s gross domestic product at the time. The Treaty of Versailles, as signed in June 1919, did not stipulate a definite amount to be paid. Instead, it created a reparations committee, which later fixed the amount due at £6.6 billion. The unyielding demands of the conquerors, who apparently wanted to crush Germany with a heavy reparations burden, convinced Keynes that his analysis would not be taken into consideration. On June 7, 1919, Keynes resigned from the Treasury and published The Economic Consequences of the Peace, one of the great polemical works in British history. Foreseeing that reparations would not be paid, Keynes somberly predicted new wars and revolutions in Europe. The book, written in only a few weeks with the aim of taking the policy debate to the public, enjoyed an immediate, worldwide impact. It earned Keynes a reputation as an ardent polemicist and visionary. History would vindicate his arguments.

Keynes’s second spell at the Treasury, during World War II, did not bring him much more success in convincing the people in power. Although Keynes dominated the British delegation at the Bretton Woods conference, he was not, this time, up against his own government. His opponent was Harry Dexter, who had been director of monetary research and was then assistant secretary of the U.S. Treasury. The American “White Plan,” in its final form, reflected the conservatism of the American Congress and sought to establish the new international monetary system on the basis of the gold standard.

Keynes opposed the gold standard as a “barbarous relic,” as he had derisively referred to gold in 1923. His plan called for breaking with the gold standard and proposed instead an international monetary unit of account, the bancor, that would be issued by an international central bank. The International Clearing Union’s bankers’ currency would circulate among nations and substitute for gold as a unit of account. Keynes’s proposal had two objectives: to erase the asymmetry in the distribution of gold among nations and, even more important, to create overdraft accounts, or emergency credit, that would help countries maintain the stability of their currencies over long periods of time. The idea was to eliminate a situation where trade deficits or surpluses led almost immediately to currency fluctuations.

Keynes’s vigorous, well-thought-out arguments earned him the respect of the American delegation, but failed to convince its members. Even so, Keynes’s experience in the.Treasury this time around was not entirely negative. As a key adviser to the Treasury, he helped organize the British war economy. He helped develop principles of national accounting that were influential in other countries. The Depression economies of the 1930s had motivated Keynes’s investigation of unemployment in the General Theory. The key features of the Depression were stagnant or falling demand, high unemployment, low investment, falling wages, and falling prices. In How to Pay for the War (1940, CW 9:367–439), written during his Treasury years, Keynes developed tools for analyzing, within the framework of his General Theory, the problem of an “overheated economy.” The symptoms of an overheated economy were exactly the reverse of the Depression: high warinduced demand for weapons and goods of all sorts, high levels of employment, increasing investment, rising wages, and rising prices.

Keynes’s Political Engagements: The Manifestos, the Pamphlets, and the Economic History of the 1920s and 1930s

This brief biographical account would not be complete without mentioning Keynes’s longest-running policy engagement: his battle against the Conservative Party and its anachronistic economic views. Keynes thought that the entrenched orthodoxy of the Conservatives, especially when it came to gold and the return to prewar parity, was responsible for Britain’s deep, long-lasting economic crisis of the 1920s. The Conservatives sought to restore the value of the British pound, relative to gold, to its level of 1914, before the inflation of World War I. In his battle against this orthodoxy, Keynes resorted to what we might call short-range but effective weapons: short essays and pamphlets. He also developed what we might call, by analogy, long-range intercontinental missiles: his major theoretical works. A discussion of these works will occupy several of the following chapters. Here, we will mention them briefly, as well as his shorter works.

In addition to his academic output, Keynes had a knack for powerfully argued, rapid-fire responses to the economic, social, and political issues of his day. The most celebrated was his Economic Consequences of the Peace (1919), discussed above. However, foreign policy was not his only concern, and his essays on domestic policy issues show the same technique: rapid-fire responses, followed often by the political equivalent of hand-to-hand combat. He praised some policies and heaped scorn on others. Keynes’s short articles and pamphlets were designed to influence public opinion and government officials, not economic theorists. Two of his well-known works of this kind are The Economic Consequences of Mr. Churchill (1925) and Can Lloyd George Do It? (1929). Many of these essays were collected and edited by Keynes under the title of Essays in Persuasion (1931). This book included a number of his articles that had appeared in The Nation and Athenaeum, an influential publication in which Keynes’s articles enjoyed the company of contributions from other well-known political and literary names. These included socialists such as H.N. Brailsford and G.D.H. Cole; the political scientist Harold Laski; writers such David Garnett and Leonard Woolf; and J. A. Hobson, the maverick economic theorist of underconsumption. The periodical was at the time controlled by the Liberal Party, with which Keynes often sided in his public policy debates.

Keynes’s message can be stated in a few words. The principal economic policies adopted by the Conservatives and implemented by Mr. Churchill starting in 1924 were wrong. The strategy of returning the pound to its prewar parity with gold had put a brake on Britain’s economic dynamism. British products were losing market share abroad because of the overvaluation of the British pound, which also led to a trade deficit. Moreover, the burden of artificially maintaining the old parity level of the pound was causing the Bank of England to set its discount rate (the rate at which it made money available to other banks, influencing other commercial rates) at an onerously high level. The high interest rate thwarted private investment and slowed down the economy. In Great Britain, high levels ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgments
• Introduction: Keynesian Economics and the American Polity
• Chapter 1. Keynes: An Activist’s Life
• Chapter 2. Economic Thought on the Eve of the General Theory
• Chapter 3. Keynes Before the General Theory
• Chapter 4. The General Theory (1): A Reader’s Guide
• Chapter 5. The General Theory (2): Macroeconomics
• Chapter 6. Five Readings of Keynes
• Chapter 7. Keynes: Daring in Policy and Intellect
• Bibliography
• Index
• About the Author and Translator