A few years ago the present director-general of NEDO, Mr Walter Eltis, told me that in due course Keynes would simply be a footnote in the history of economic theory. If so, it will be a stupendously long footnote, for additions to the already vast Keynesian literature mount by the day, not least from Mr Eltis himself.The reason why the literature mounts is obvious enough. Keynes stands as a reproach to a society which, not once but twice, has permitted (and indeed partly created) large-scale unemployment and everything that accompanies it – poverty, waste, unearned privilege – and which has justified these things by recourse to the commonsense maxims of bourgeois life. Keynes has earned his enduring power to irritate because his economics were designed to subvert these maxims: but, unlike Marx, who inhabited ‘the underworld’ and whose economics were too flawed anyway, he did so from within the house. While there is any room for guilt or shame in our society Keynes will remain central to our public life, however much some would wish it otherwise.
There is thus nothing untimely in the publication of Peter Clarke’s elegant and absorbing book. Dr Clarke writes it consciously as a historian, and though he generously acknowledges the work of those students of Keynes who are economists, his approach is primarily historical. He works on two assumptions: first, that the intellectual basis of Keynes’s economics was, a priori, dependent upon prejudice or intuition; second, that what became of Keynesian economics was the result of a marriage between his academic and public life. Therefore, a ‘doctrine-historical’ analysis can only be partial or misleading. There is nothing surprising in the first of these assumptions. Presumably all economists (and historians) discover their conclusions before their argument: it is the process by which the argument is perfected (and the conclusion modified) which Dr Clarke insists we treat historically. Thus much of the book is (necessarily) as concerned with the views of those with whom Keynes engaged in public life as it is with Keynes’s own: the two relate dialectically. As a piece of intellectual archaeology, it sets out to explain why Keynes out of any number of ‘solutions’ should finally have lighted upon ‘home development’ (state-financed capital development), how an apparent ‘gap’ between savings and investment could satisfactorily be explained, and how wage-stickiness, which had originally been seen as a kind of social maladjustment, became in The General Theory a ‘problem’ which it was neither practically nor in principle desirable to ‘solve’. The book begins in 1924 because that is when, Dr Clarke argues, Keynes first approached unemployment in a potentially radical way – in an article in the Nation (August 1924) proposing ‘a reorientation which amounted to hardly less than a revolution in economic policy’ – and substantively ends with the publication of The General Theory.
The book is largely chronological and leads us to The General Theory via the more important stations on the way: the battle against the return to gold at par in 1925 (though Dr Clarke wisely refrains from rehearsing that), Keynes’s involvement with Lloyd George in 1928-1929 (We can conquer unemployment), his part in the Macmillan Committee and the simultaneous writing and publication of the Treatise on Money, and 1932-1936, when all the blocks were assembled and The General Theory finally constructed. The last station is different from the others: it is ‘doctrine-historical’ and though Dr Clarke has done some important re-dating it is, in fact, a careful adjudication of the existing literature. We start when Keynes supported almost anything that was not the status quo and end up with the highly specific (or seemingly specific) conclusion of The General Theory.
This course is not always easy to pursue since the stations did not lie in a straight path. Keynes was notoriously in favour of making the best of the situation (and light of the situation), and this gave him a reputation for inconsistency and frivolity. Thus he could advocate devaluation, tariffs, bounties, cheap-money and home development indiscriminately. But, although contemporaries were reluctant to recognise it, these were for Keynes second-best or tactical solutions, and, furthermore, solutions (with the exception of home development) entirely acceptable to the kind of neoclassical economics he was increasingly coming to reject, not in detail but as a system. This rejection, according to Dr Clarke, took place between 1928 and 1931, via the disputes with the Treasury over Lloyd George’s proposals for the 1929 elections and the long discussions which preceded the writing of the Macmillan Report. It was as a result of his defence of the Lloyd George proposals against the Treasury’s response that Keynes ‘recognised a coherent economic justification for policy initiatives which he had supported through a mixture of political prejudice and sheer intuition’. It was also a result of this that the first drafts of the Treatise on Money ‘came apart in his hands’.
But it is the Macmillan Committee which is at the heart of the story. It occupies 114 pages of the text and is central to Dr Clarke’s analysis. The published evidence of the Macmillan Committee is well-known; less well-known are the minutes of the Committee’s private sessions. Yet this is a remarkable document and no historian of economic theory can read it without excitement. Nothing else better illustrates Keynes’s intellectual and rhetorical qualities, nor his capacity to dominate an argument and suborn his colleagues, even those who had no intention of being suborned. (But they also illustrate the rhetorical defects: the often inappropriate playfulness and the inability to resist what were frequently wounding jests – what Lord Macmillan called those ‘observations in lighter vein with which Mr Keynes entertains us’.) I fully share Dr Clarke’s fascination with this record and admire the way he has exploited it. His conclusion that it was Keynes’s work on the Committee which, by tearing apart the Treatise on Money for the second time, cleared the way for The General Theory, is very persuasive. It made it clear to Keynes that trade losses could not explain the ‘difference’ between savings and investment while the emerging notion of liquidity preference made it possible for him to sweep away the neoclassical theory of interest which was still embedded in the Treatise on Money. Simultaneously Kahn’s work on the multiplier (which Keynes himself, like others, had earlier adumbrated without understanding its intellectual significance) allowed him to explain (at least to his satisfaction) what was the relationship between savings and investment.
It would be wrong to say that the last stage of Dr Clarke’s argument is anti-climactic, but it inevitably lacks the drive of the earlier chapters, the sense of things falling into place. This is so largely because Keynes dropped out of public-political life with the formation of the National Government. The work on the argument of The General Theory was thereafter confined to himself and a number of his colleagues. Furthermore, it was introduced to a public which by then had a pretty fair idea of what to expect.
Dr Clarke presents his argument with aplomb and fits it together with great deftness. I wonder only whether he could have carried a historian’s approach even further. A historical reading of Keynes and the implications of Dr Clarke’s own argument suggest that his analysis could have been broadened and in specifically historical ways. First, it is possible that he has chosen his dates too narrowly. While he of course does not argue that nothing happened before 1924, and nothing after 1936, there is a temporal over-neatness to his case. He dismisses, for example, Schumpeter’s well-known view that the seeds of The General Theory can be found in The Economic Consequences of the Peace (1919). But is he right to do so? In The Economic Consequences Keynes clearly argues that the experience of late 19th-century capitalism was a special case, that the usual historical condition of capitalism was fragile and unstable; that men had learnt that governments could now spend hundreds of millions of pounds ‘and apparently not suffer for it’, discovering on the way that they had not exploited ‘to the utmost the possibilities of our economic life’; that inflation could enrich and enliven entrepreneurs – and while it is true that in 1919 he thought this presaged violence and possibly revolution, it followed logically that in conditions of severe deflation ‘inflation’ could be just what the doctor ordered; there is the first hint that ‘saving’ as a bourgeois virtue had passed its moment; and the first sign of his later preoccupation with the effects of speculation and gambling in modern capitalism. All of these were, in fact, essential elements in the structure of The General Theory.
Over-neatness, similarly, has distorted the treatment of Keynes’s critics. He argues, for instance, that R.G. Hawtrey’s ‘highly academic specification of the relationship between public expenditure and unemployment became the corner-stone of the Treasury’s argument that public works meant inflation.’ It might be true that Hawtry was wheeled in to give a plausible economic rationale for this view, but this surely is to overrate its significance. The notion that the state might ameliorate unemployment by public works, but that the result would necessarily be inflation, had long been part of the stock in trade of conventional economics. That such expenditure would be inflationary was used by Baldwin in 1923 to support the case for tariffs as an alternative employment policy. And the marvellous defacement of the Treasury copy of We can conquer unemployment which Dr Clarke has unearthed and reproduced as a frontispiece, ‘Extravagance, Inflation, Bankruptcy’, strongly suggests that the Treasury at least never needed Hawtry to convince them that state-financed public works were inflationary.
Equally, the existence of the critics is rather fitful when they move out of Keynes’s earshot. Dr Clarke argues (I am sure correctly) that between its response to We can conquer unemployment and Richard Hopkins’s evidence to the Macmillan Committee the Treasury shifted the ground of its opposition to state-financed capital works from an economic-ideological one to a ‘practical’ one. He seems to suggest (though I may have misunderstood him) that this was more than just tactical: it represented an important intellectual modification of the Treasury View. But Hopkins’s later evidence to the Royal Commission on Unemployment Insurance was a full-blooded statement of what we understand to be the Treasury View and was thought at the time to be so. Thus R.H. Brand, a director of Lazards and a fellow member of the Macmillan Committee, wrote to Keynes on 3 January 1931:
I have no doubt you read Hopkins’s statement before the Dole commission ... The situation might easily develop in an unpleasant manner as you are well aware, and it doesn’t seem to me that our political leaders have any idea of it. This is the reason why I, personally, am all for economy – both in municipal and govt affairs. The trouble is that democracies seem unable constitutionally to make budgets balance.
My second reservation lies in Dr Clarke’s treatment of the politics of Keynes’s economics. He is fully aware that the Keynesian revolution was not made with the publication of The General Theory. But while he has a few pages in the penultimate chapter and the conclusion on what we can call its politics, the great bulk of those chapters is concerned with its economics. To a considerable extent, it is right that they should. That is what the book is about. But the politics of The General Theory are not extrinsic or marginal to its theses. Arguably, what most undermined it as a classic work of political economy was Keynes’s persistent refusal to devise a theory of knowledge or action. Throughout his career Keynes brought himself to the point of asking ‘Why do we think and act the way we do?’ – only to retreat as he was about to answer. Compare him with Marx, with whom he had much in common: both believed capitalism was dynamically unstable; both believed that a capitalist society was inhabited by classes whose interests were irreconcilable; both believed that the ordinary precepts of political economy were ‘false’ when universalised. Marx had no doubt that these precepts served the interests of those who devised them: but Keynes was unable to make up his mind. Furthermore, he was aware of this. He was, as Dr Clarke points out, no political naif, and he conceded that he should construct some sort of theory of political action but (understandably) complained that that would require another book of a different character. It may be unfortunate for Keynes that he landed himself where he did: but he did.
Why did people adhere to the ‘classical economies’? There are two answers implied in Keynes’s writings. The first (the weakest) was the force of habit. People had been taught to believe in the classical canon and they continued to believe in it although circumstances no longer supported such a belief. They had (as he suggested to the Macmillan Committee) got into a ‘muddle’. The role of the political economist, therefore, was to assist them in that ‘long struggle of escape ... from habitual modes of thought and expression’. In practice, this meant assisting the élites, since the ordinary man, though puzzled and uninformed, was, unlike the élites, instinctively sceptical of the commands of the old economics. Thus The General Theory, whatever its longer-term political consequences, was, he said, written primarily for his profession.
There is, however, another, stronger interpretation. Keynes, if pushed, had to argue that society consisted of two classes, lenders and borrowers – which in practice meant finance and industry, though in the parlance of the time lenders also were ‘rentiers’. In Keynes’s opinion, Britain had been governed since 1918 (mostly) in the interest of the rentier. It was as well his view that industry and finance had different ‘ideas’. He told the Macmillan Committee that ‘industry has no orthodoxies’: it is ‘not governed by wise sayings and traditions ... but the extraordinary character of finance is the extent to which it is governed by orthodoxy.’ If this is true, then only finance was in a muddle. But if it is also true (as Keynes thought) that the interests of the rentier were served by the wise sayings of finance, and if the state disproportionately favoured those interests, then there was no muddle at all. Rather the orthodoxy of finance had become an ideological justification for the class rule (or something like it) of the rentier. So Keynes moves even closer to Marx. It becomes further problematical if we remember that the most remarkable of all The General Theory’s prescriptions were in the broadest sense political, even though they followed naturally from the economics: the ‘euthanasia of the rentier’ and the ‘socialisation of investment’ – that is, the elimination of a powerful social class and the replacement of its functions by an ill-defined state. But how was this achieved? And was it to be supposed that the rentier would allow himself to be gently put to death? Keynes suggested that this would not be procured by revolution, merely by the continuation of a process long happening. But this was no answer at all. Yet to give intellectual completeness to The General Theory an answer was required. Its major intellectual weakness lies (as I think) not in its economics but in its politics, and that is why the Keynesian revolution has been such a doubtful affair.
Dr Clarke would probably dispute this. Yet these kinds of problem are central to our understanding of Keynes as a political economist (which he was) and historians – none more so than Dr Clarke himself – are probably better-equipped to handle them than economists. Furthermore, these objections are only extensions of his own argument, prompted by it, and do not in any way (even if they are right) diminish the quality of this distinguished book. It is skilfully constructed, utterly lucid, and therefore accessible to all students of Keynes, for whom it will be necessary reading.
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