‘The question what Keynes would be advocating today is, of course, a nonsense question.’ So Lord Kahn warned us in a brilliant lecture in 1974, invoking Keynes’s propensity – ‘apart from the fact that he would be 91 years old’ – to develop new answers for new questions, rather than to make a fetish of consistency. The impact of Keynes’s thought has nonetheless suffered many attempts to encapsulate it within a cut-and-dried formula. In the 1950s and 1960s it was usually the redeemer theory, whereby Keynes was held to have supplied us with a box of tricks uniquely guaranteed to ensure permanent prosperity. When the long post-war boom, of which he was allegedly the ‘onlie begetter’, was succeeded in the 1970s by the disconcerting phenomenon of stagflation, the devil theory caught on, whereby Keynes was in turn arraigned as the architect of our misfortunes. A further variant was to say God is Dead, suggesting that the Keynesian revolution was a comprehensively over-inflated promise of general salvation from what turned out to be the peculiar and transient difficulties of one offshore island at an awkward corner in its history.
It may be time for another spin of the wheel in the 1980s, with the revival of doctrines of sound money and good housekeeping under Reagan and Thatcher. Now Keynes has admittedly not been getting any younger in the meantime, so the hypothetical views upon economic conditions in 1983 of a centenarian, who would have rivalled the longevity of other members of his immediate family, are hardly the real point. Yet, in his writings of the interwar period, the resonance for our present concerns is inescapable. Many of the positions he was attacking, so far from being evacuated dug-outs of purely historical interest, have been confidently reoccupied in our own day by fresh troops with an unimpaired confidence in the traditional weapons and ammunition.
The Collected Writings of John Maynard Keynes, produced under the auspices of the Royal Economic Society, is among the glories of modern publishing. Printed at the Cambridge University Press, these handsome volumes maintain aesthetic standards in book production which are in themselves a fitting memorial to a notable bibliophile, the more so since they enhance the functional attributes of accuracy, legibility and ease of reference. Volumes XIX to XXI cover Keynes’s activities in the period from the fall of the Lloyd George Coalition in 1922 to the outbreak of war. They are edited with exemplary authority and lack of fuss by Donald Moggridge, who has joined Sir Austin Robinson as joint managing editor of the project. The internal distribution of material is by no means arbitrary since Keynes’s thinking falls into three phases, each represented by a different volume.
In Volume XIX the focus is on the significance of Britain’s return to the Gold Standard. Keynes took a prominent role here, both in public and in private, in urging the folly of this step. It made British prices even more uncompetitive in a world which had already shown itself less accommodating to British amour-propre than the lost era of normalcy before 1914. Keynes was strongly moved by his fear of deflation, and felt that the deflationary consequences of a return to Gold were perversely neglected by those who advocated it. In particular, he thought that they refused to assess the costs and benefits in a rational and dispassionate way. Keynes had already written, in his Tract on Monetary Reform,‘that many conservative bankers regard it as more consonant with their cloth, and also as economising thought, to shift public discussion of financial topics off the logical on to an alleged “moral” plane, which means a realm of thought where vested interest can be triumphant over the common good without further debate.’
The return to Gold under Churchill in 1925 exemplified a process whereby the ends were willed without any due account for the means that were entailed. This was Keynes’s point when he called his pamphlet ‘The Economic Consequences of Mr Churchill’. The attitude of mind that supported the Gold Standard, for all its ostensible claims to respect and respectability, stood ‘for what is jejune and intellectually sterile; and since it has prejudice on its side, it can use claptrap with impunity.’ Over and over again, Keynes sought to establish the existence of a necessary chain of causality, showing that the Chancellor’s policy now depended upon forcing down money wages, with appalling dangers to both profits and industrial relations. Keynes set himself the task, moreover, of seeking some means of escape from this trap. The trouble was that defence of sterling at the new parity ruled out cheap money. This was the ideally desirable policy, as Keynes’s academic work on various drafts of his Treatise on Money served continually to remind him. Yet general apophthegms of this character lacked a cutting edge when practical decisions had to be taken, here and now. Keynes wrote in 1925, in reproach of one respected city editor: ‘He stands firm on the past; I am trying to grapple with the future.’ Believing it was no longer enough to follow the good old rules, he explained: ‘I am trying with all my wits, now in this direction and now in that, to face up to the new problems, theoretically and practically, too.’ So while his work on the Treatise was maturing, he launched numerous forays into the world of affairs, armed with more urgent suggestions. It was, above all, proposals for public works with which his name became associated, culminating in the Liberal plan to ‘conquer unemployment’, presented before the 1929 Election. In response, the Conservative Government took the unusual step of issuing a White Paper, outlining the Treasury’s objections. When Keynes in turn reviewed this publication, he took particular exception to the way it concluded with the bland contention that the root cause of unemployment lay in the high money costs of production. ‘This is too much – for the Treasury to tell this to me,’ he expostulated. ‘Have they forgotten how four years ago, when they were restoring the gold standard, I told them that excessive money-costs of production and consequent unemployment were the inevitable result of their policy?’
The way Keynes rounded off his denunciation had a fine ring to it. ‘They have taken four years to find out this elementary fact. But I have spent the four years trying to find the remedy for the transitional period and to persuade the country of its efficacy.’ There was, however, a significant and suggestive fault in his chronology here. For his advocacy of schemes of national development had not, in fact, begun in 1925, as a further economic consequence of Mr Churchill: his new departure had come a full year previously and looks more like a political consequence of Mr Lloyd George. It was in May 1924 that Keynes published his article, ‘Does unemployment need a drastic remedy?’ He did so in response to a discussion inaugurated by Lloyd George in the pages of the Liberal weekly, the Nation, which Keynes had recently helped to acquire, and of which his colleague, Hubert Henderson, was editor. The road seems fairly clear from this article to the pamphlet which Keynes wrote with Henderson in 1929, ‘Can Lloyd George do it?’ Thus Keynes first contended in 1924 that ‘we must look for succour to the principle that prosperity is cumulative,’ which became one of the postulates of ‘Can Lloyd George do it?’, and – as a hunch rather than a theory – can be called the origin of the multiplier. In 1924 he challenged his critics with the premiss: ‘Surely they cannot maintain that England is a finished job, and that there is nothing in it worth doing on a 5 per cent basis.’ He was to start from the same question – ‘is this country a completed proposition incapable of further development or improvement?’ – in defending Lloyd George’s pledge in 1929.
The cast of his thinking was set from 1924 to 1929: or so his public utterances might suggest. For it is by no means clear that Keynes could as yet produce any theoretical breakthrough to back his novel practical proposals. His driving force, indeed, seems to have been as much political as economic; and this period saw the high point of his direct involvement in party politics. As the éminence grise of the Nation, as an active supporter of the Liberal Summer Schools, as the leading economist behind the Liberal Industrial Inquiry, he was investing his energies and expertise in Lloyd George’s campaign to revitalise the Liberal Party. Keynes seems to have known all along that, as he put it privately in 1928, ‘if one regards the existence and activities of a Liberal party as a route to power, I agree that one is probably wasting one’s time.’ The sort of party he thought it was can be gauged from a Nation article after the Liberal debacle in the 1924 Election. He claimed about 10 per cent of the electorate as ‘natural Radicals’, distinct from the Labour Party in mentality, feelings and class sympathies. ‘No important reforms will ever be carried in this country without their intellectual, moral and numerical support.’
Keynes’s political involvement in these years should surely be understood neither as that of an opportunist seeking the levers of power, nor as that of a backroom expert processing theory into policy statements. Instead, his role as a publicist impelled him to reformulate his economic analysis, but in the first instance at a common-sense rather than a professional level. He was happy to operate at this level, and became increasingly outspoken about the sort of theory that needed the cover of the emperor’s new clothes, or, worse still, old clothes. Thus he wrote with confidence in the Evening Standard in 1928 on ‘How to organise a wave of prosperity’. ‘To have labour and cement and steel and machinery and transport lying by, and to say that you cannot afford to embark on harbour works or whatever it may be is the delirium of mental confusion,’ he complained. Moreover, he charged Churchill as Chancellor with succumbing ‘to the timidities and mental confusions of the so-called “sound” finance, which establishes as an end to be worshipped what should only be pursued so long as it is successful as a means to the creation of wealth and the useful employment of men and things’.
The ‘Treasury View’ was what Keynes identified as the core of the issue; and, looking at the argument in context, it is hard to believe that he was mistaken. In an article on the Lloyd George scheme in March 1929 he called it ‘the most searching question of all’, and framed it thus: ‘Will the financing of this programme merely divert capital from other uses, and thereby cause just as much unemployment in other directions?’ Though rejecting his answer, Churchill in effect endorsed the way Keynes had posed the question when he made his Budget statement the next month. ‘It is the orthodox Treasury dogma, steadfastly held,’ Churchill declared, ‘that whatever might be the political or social advantages, very little additional and no permanent additional employment can, in fact, and as a general rule, be created by state borrowing and state expenditure.’ No doubt Keynes needed the Treasury View in the same way that Adam Smith needed the Mercantile System: as a received theoretical account of an erroneous prevalent practice, to be coherently expounded as a preliminary to its comprehensive refutation. But to dismiss it as a construct seems hard on Keynes when his adumbration of its essential features received such prompt and authoritative reaffirmation.
The Treasury View claimed that government expenditure could not produce real jobs and that financing it merely crowded out potentially more productive borrowers. ‘Certainly this dogma is not derived from common sense,’ Keynes claimed. ‘On the contrary, it is a highly sophisticated theory.’ He held that the theory was fallacious, and denied that it derived any justification from modern economists. Thus he described the White Paper of May 1929, which enshrined it, as ‘obviously the work of persons who are not familiar with modern economic thought’. The Treasury View was ‘the natural result of standing half-way between common sense and sound theory; it is the result of having abandoned the one without having reached the other.’ Keynes felt himself justified not only in offering an academic critique of it but also in making a public joke of it. He parodied its reasoning – ‘You must not do anything, because this will only mean that you can’t do something else’ – in an inspired appeal to intuition in ‘Can Lloyd George do it?’ As the 1929 Election approached, Keynes’s career as a publicist reached its climax – or anti-climax, once the votes had been counted.
A new phase therefore opened in 1929-31, with Lloyd George and the Liberal Party now in the shadows and a minority Labour government in office. But they were crowded years for Keynes, as Volume XX demonstrates ‘ what with his membership of the Macmillan Committee on Trade and Industry, the publication of the Treatise in 1930, and his involvement with the new Economic Advisory Council. This meant that Keynes was generally fighting on the ground of theory rather than common sense. In this battle his chief weapon was the distinction, which he had developed in writing the Treatise, between saving and investment, as different functions of different groups in the economy. It followed that enterprise, not thrift, needed encouragement if recovery were to be stimulated. In his evidence before the Macmillan Committee in the early part of 1930, we see Keynes tirelessly elaborating this point, and appealing to the Treatise (then in the press) for justification. Challenged to admit ‘that the whole of your case depends upon whether this relationship that you said existed between savings and investment is actually true,’ Keynes simply responded: ‘Yes.’
The Treatise analysis gave Keynes’s propositions the sort of theoretical cogency which his common-sense advocacy of public works had previously lacked. But it did so by focusing attention on one aspect of the case: namely, the sources of new capital. In part, the thinking followed the lines of controversy of the 1929 Election campaign, when Keynes was already edging towards the Treatise position, but a full exposition awaited his Macmillan Committee evidence in the following year. Keynes really had two answers as to how his proposals could be financed. One was the immediate practical point, that compensating economies on the dole would provide some offset in revenue terms. The other point was that additional home investment would close the savings gap, using resources which would otherwise run to waste in the form of business losses. Since Keynes maintained that the fundamental error of the Treasury View lay in its failure to make the necessary distinction between saving and investment, the presentation of the Treasury evidence by Sir Richard Hopkins on 22 May 1930 assumed particular significance.
The exchanges between Hopkins and Keynes constitute a drama of ideas of which Shaw would not have been ashamed. The tension of the occasion suffuses the bald transcription of question and answer. But if it is, in the chairman’s concluding comment, ‘a drawn battle’, this is a tribute as much to Hopkins’s adroitness in picking his ground as to his tenacity in defending it. For whereas Keynes wishes to debate the doctrine enunciated in the Treasury White Paper, Hopkins prefers to dwell on the pragmatic difficulties which prudent civil servants might justifiably suppose to beset schemes of major capital investment. Keynes is left stabbing at the air in seeking a well-defined target. ‘That was a misunderstanding on my part of what the Treasury intended, was it?’ asks Keynes – but in what tone, for want of stage directions, we cannot be sure. ‘Yes,’ Hopkins replies. ‘Certainly in the case which we have been discussing, the main case, the Treasury view does come back to that. It is not a rigid dogma.’ We find Keynes bemused – ‘it bends so much that I find difficulty in getting hold of it’ – in face of this bland equivocation. One result of Hopkins’s insistence on the need to maintain confidence, however, may have been to reinforce Keynes’s readiness at this juncture to consider the merits of protection, to which he declared his conversion privately in 1930 and publicly in 1931.
The analysis of the Treatise was an admirable means of indicating how a shortfall of investment could be made good by putting otherwise superfluous savings to work. It answered the question: how can public works be afforded? Within weeks of its publication, however, Keynes’s mind had turned, or been turned, in another direction; and from 1931-39, as Volume XXI illustrates, he was concerned less with the sources than with the effects of investment. What made the difference was Kahn’s development of the concept of the multiplier, at Keynes’s suggestion, from the aphorisms about cumulative prosperity in ‘Can Lloyd George do it?’ Once seized with this new idea, which Kahn communicated in the autumn of 1930, Keynes fastened upon the dynamic effects of secondary as well as primary employment in setting the economy upon a rising spiral of prosperity. Increasingly, in the 1930s, Keynes identified the overall level of demand in the economy as what really mattered. Because of secondary effects, increases in consumption were as welcome as increases in investment. Indeed, they amounted to the same thing once the chain of causation was traced backward. ‘If we are allowed to spend, our spending will create new incomes, which can in turn be taxed, and will employ new men whose dole is now burdening the Exchequer.’ The notes for one of Keynes’s speeches in 1933 epitomise this injunction: ‘Putting more purchasing power into circulation should be the central theme of the economist to the statesman.’ Conversely, organised attempts to cut back spending were to be deplored. ‘For one man’s expenditure is another man’s income’ was how Keynes now put it. ‘Thus whenever we refrain from expenditure, whilst we undoubtedly increase our own margin, we diminish that of someone else; and if the practice is universally followed, everyone will be worse off.’
Keynes thus found himself continually grappling with the assertion that a regime of economy was the natural remedy for the slump. The plausibility of this diagnosis depended very largely upon the persuasive metaphor of good housekeeping. First, the state was depicted in an analogous position to the prudent citizen, who exercised economy to keep his outgoings below his income. Secondly, there was the supposition that if each individual pursued his own interests through the exercise of rationality and foresight, the aggregate effect was bound to be beneficial for all. This homely reasoning had long been implicitly rejected by Keynes: but from the early months of 1931 he came to formulate his objections more sharply and explicitly.
In summarising the thrust of the Treatise in February 1931, he wrote that ‘unluckily each individual is impelled by his paper losses or profits to do precisely the opposite of what is desirable in the general interest; that is to say, he saves too little in the boom and too much in the slump.’ In the next couple of months he repeatedly turned this point against a policy of wage cuts, arguing that the advantages to an individual employer could not become universal. ‘For each employer perceives quite clearly the advantages he would gain if the wages he himself pays were to be reduced, but not so clearly the disadvantages he will suffer if the money incomes of his customers are reduced.’ Likewise, in the Addendum to the Macmillan Report, Keynes attacked the notion that it was feasible to ‘accumulate’ an overall surplus of liquid savings. ‘These ideas,’ he noted, ‘are probably derived from a false analogy between the position of a particular individual or firm and that of the community as a whole.’
The fallacy was to argue that what each could do with advantage, all could do with even greater advantage. Keynes now fixed his attention on the aggregate effects that were entailed. In the conditions of the 1930s, this led him to the contention that attempts to save more than was warranted by the real resources of the economy, though individually rational in each case, were collectively futile if all attempted it at once. The analogy of the prudent citizen was therefore a poor guide to national economic management. The urgent need, on the contrary, was for the state to exercise its initiative to unwind the spiral of self-reinforcing market trends. Does Keynes’s insight hold good in the 1980s? It was developed to explain the flaw at the heart of a general attempt to pile up excessive savings. It pointed to the necessary role for the state in correcting the anomalies of the market. Is an attempt to secure excessive earnings, which becomes self-defeating as soon as everyone tries it, susceptible to the same analysis? This is not a question about what Keynes would be advocating today, but it is one to which consideration of his writings during the last slump nonetheless quite properly gives rise.