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Keynes

National economist and radical reformer

by Michael Newland

Bertrand Russell said of John Maynard Keynes (later Lord Keynes) that one took one�s life in one�s hands in entering into any debate with him, such was the keenness of his intellect. Keynes knew this very well and fully expected to change the world by the force of his economic ideas - as indeed he did, changing how we view the workings of the modern economy.

When his mark was poor in an examination he characteristically attributed the result to the ignorance of the examiners. Suffering fools gladly was not his strong suit, where he believed that those concerned had enjoyed every opportunity to know better. He was a man of exceptional independence of mind and very wide interests, whose capacities as an economist were nurtured from both ends by practical business experience in the City and by the creativity of his theoretical talents. After a youthful homosexual affair with the painter Duncan Grant, out of which decadence he appears to have matured, he married a ballerina from the Diaghilev Company. He was a member of the free-thinking Bloomsbury Group, collected art and became the first chairman of the Arts Council.

Keynes was born into a high-minded intellectual world, the son of a Cambridge academic and followed his father into the university with a fellowship at King�s College in 1909. A major work of his early years was The Economic Consequences of the Peace (1920), in which Keynes predicted that the harsh measures imposed upon Germany by the victorious powers at Versailles would prove unsustainable. Unfortunately, Keynes�s arguments in favour of a more conciliatory approach to the defeated Germans went unheeded, with tragic consequences.

The core of Keynes�s life work was to challenge the orthodoxy which dominated economics throughout the nineteenth century and up to the Great Depression. Economists taught that the market system had inbuilt self-healing properties. Substantial unemployment might appear from time to time, as during the regular trade cycles familiar throughout the nineteenth century, but economic activity would soon return to the level at which resources were fully employed - according to the dictum known as Say�s Law. It was impossible for prolonged downturns to occur. Of course, Marx, the Reverend Malthus, and many lesser figures had argued otherwise, but none was able to offer a fully worked-out and convincing explanation of the mechanics of continued economic depression.

During the earlier part of his professional life Keynes�s central economic interest was in the monetary system and its capacity both to prevent full employment and to sustain business cycles. Many economists of the time believed that the erratic behaviour of economies was caused by erratic money supply. The nub of the problem was that alterations in the money supply required the general price level to change in proportion if they were not to affect economic life. This was only the case in the long run: a rather unhelpful circumstance in view of the fact that, as Keynes put it, �in the long run we are all dead�.

Under the system of fixed exchange rates known as the Gold Standard, the money supply of countries whose rates of exchange were at too high a level would contract. If the price level did not compensate by downwards adjustment, in the manner which most text books suggested, prolonged depression was often the outcome. For this reason, Keynes was opposed to Britain�s rejoining the Gold Standard in 1925 under Churchill�s direction, and he was proved right. His principal practical concern at that time was thus that of the individual country and in particular his own country, forced to run too high rates of interest as a result of external pressures.

By the time of the great economic collapse of the 1920s, Keynes had become dissatisfied with monetary explanations of economic depression on their own. Whatever prolonged difficulties a particular country might suffer as a result of the wrong exchange rate, the international economy as a whole was not supposed to slide into a seemingly endless catastrophe in the way that it did after 1929. Keynes began to grope his way in largely uncharted waters towards the prime tenet of what was to become known as Keynesian economics, that economic life can settle for very long periods into a condition of subnormal activity and mass unemployment.

The Great Depression flummoxed orthodox economists. The hour of Keynes, who had puzzled over the problem for years and begun to attract a sympathetic following - notably from those Cambridge economists known as �the circus� - had now arrived. Keynes�s great work, The General Theory of Employment, Interest and Money appeared in 1936. The old economics was junked as the message spread worldwide - there was no particular reason why economies should operate at full employment.

Like most ideas of genius, the basics of Keynes�s message were all too easy to see once they had been spelt out. People wish to save part of their incomes to provide for the future and do so largely regardless of whether they can get a good or poor return on their money. If the portion of their incomes saved at full employment is not matched by an equal amount of borrowing and investment then the level of demand in the economy will collapse. Savings and investment would be equalised by changes in overall output.

Unfortunately investment, unlike saving, depends on the �animal spirits� of businessmen, which are apt to collapse from time to time. This is far from unreasonable, in view of the fact that the future for businessmen is no more certain than for the rest of us and that failure in their case can be a great deal more expensive. In any event, there is nothing inherent within economies to ensure that the level of investment is calculated nicely to be at just the level needed to preserve full employment.

Keynes�s remedy was to raise economies out of slump by governments doing the job that business had failed to do. Governments must borrow and spend until the recovering economy again wins the confidence of businessmen, who will then get on with the job themselves. This was the answer to those who wanted the replacement of the market system with the tyranny of a communism abhorred by Keynes.

During the 1930s, Keynes also wrestled with the problems of international trade as a whole and the tendency for countries to try to expand their own output at others� expense, by selling more than they bought, inviting a cycle of mutual retaliation. One answer was for countries to make as much as possible of what they needed themselves. But Keynes, who recognised the benefits of trade, later played a key role in the Bretton Woods agreement of 1944, under which the leading nations made new arrangements to permit increasingly open trade and stable exchange rates. This was designed to prevent a breakdown into repetition of the beggar-thy-neighbour spiral of the 1930s.

After Keynes�s death, it was thought that his recipe of government borrowing and spending to avoid deficient demand could be so finely judged that economies might be run permanently at full output. The problem of inflation, which became central to most governments� economic policies in the post-war years, was scarcely a difficulty during the 1930s. Keynes�s purpose was to relieve unemployment, not inflation, and the increasing inflationary difficulties faced by post-war governments were somewhat unfairly blamed on Keynes.

Another source of later misunderstanding was the false belief that Keynes was unaware of the level of wages as a barrier to employment and that attempts to lower the levels of joblessness too far would simply lead to inflation. The Keynesian unemployment situation was one in which joblessness was at a level above the minimum - above what is now known as the �natural rate of unemployment�. Keynes�s posthumous opponents, the Monetarists (for example Milton Friedman and Friedrich Hayek - advocates of the classical theory of demand), denied that such a situation could exist for long and argued that attempts to shorten the period would only make matters worse. Yet further misunderstandings grew from the discovery that political parties could bribe people with their own money, misusing Keynes�s ideas to justify public spending for other purposes than solely to raise the level of demand.

The last ten years of Keynes�s life were dogged by ill-health, which he took pains to hide. Lord Keynes died of a heart attack in 1946 at his home in Sussex, now owned by his biographer, the distinguished economist Lord Skidelsky. His legacy lives on in the force of ideas expressed often in a manner both memorable and timeless - sometimes eclipsed for a while by fashion, but always pushing up new green shoots before long.

�A humane man, genuinely devoted to the cause of the common good�, as his obituary in The Times put it, Keynes�s central message was that we are forced to lay our plans in ignorance of what the future might bring and the impact of that uncertainty on economic life.

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