A Point of View: What would Keynes do?

Britain"s Chancellor of the Exchequer George Osborne and the Chief Secretary to the Treasury Danny Alexander are given a a tour of a Crossrail construction site in central London In the 1930s, Keynes urged investment in public works to restart growth

What would John Maynard Keynes, one of the most influential economists of the 20th Century, have made of the current economic situation, ponders philosopher John Gray.

"I can see us as water-spiders, gracefully skimming, as light and reasonable as air, the surface of the stream without any contact at all with the eddies and currents underneath."

That was how John Maynard Keynes, speaking in 1938 in a talk later published as his brilliant memoir My Early Beliefs, recalled his younger self and his friends in the Bloomsbury Group as they had been in the years before World War I.

The influential Cambridge economist has figured prominently in the anxious debates that have gone on since the crash of 2007-2008. For most of those invoking his name, he was a kind of social engineer, who urged using the power of government to lift the economy out of the devastating depression of the 30s.

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John Gray
  • John Gray is a political philosopher and author of False Dawn: The Delusions of Global Capitalism

That is how Keynes's disciples view him today. The fashionable cult of austerity, they warn, has forgotten Keynes's most important insight - slashing government spending when credit is scarce only plunges the economy into deeper recession.

What is needed now, they believe, is what Keynes urged in the 30s - governments must be ready to borrow more, print more money and invest in public works in order to restart growth.

But would Keynes be today what is described as a Keynesian? Would this supremely subtle and sceptical mind still believe that policies he formulated long ago - which worked well in the decades after the World War II - can solve our problems now?

The first thing to be said about Maynard Keynes is that he was an astonishingly intelligent man. Bertrand Russell, his contemporary at Cambridge, described the economist as having "the sharpest and clearest intellect" he had ever known.

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Keynes had a depth of culture that few economists could claim today”

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Having transformed the study of logic, Russell was himself one of the great minds of the early 20th Century. Yet when he argued with Keynes, Russell wrote, "I took my life in my hands, and I seldom emerged without feeling something of a fool."

Intimately familiar with the history of economic thought and widely read in many fields, producing a major treatise on the nature of probability alongside his famous General Theory of Employment, Interest and Money and a host of penetrating essays, Keynes had a depth of culture that few economists could claim today.

His brilliant intelligence wasn't exercised only in the realm of theory. Keynes was an outstandingly successful investor, who lost heavily in the 1929 crash, changed his investment methods and recouped his losses, growing the funds of his Cambridge college and leaving a substantial personal fortune. He had a deep understanding of the complex, unpredictable and at times insolubly difficult nature of human events.

Key(nes) facts

John Maynard Keynes in 1938
  • John Maynard Keynes (1883-1946) was educated at Eton and Cambridge University, where he studied mathematics
  • He became friends with members of the Bloomsbury group of intellectuals and artists
  • Keynes joined the Treasury during World War I, and in the wake of the 1919 Versailles peace treaty, published The Economic Consequences of the Peace, criticising exorbitant war reparations demanded from Germany, claiming they would harm the country's economy and could foster a desire for revenge
  • During inter-war years, Keynes became a prominent arts patron
  • His best-known work The General Theory of Employment, Interest and Money, published in 1936, made Keynes Britain's most influential economist
  • Keynes led 1944 British delegation to the Bretton Woods conference in the United States, playing an important role in planning the World Bank and International Monetary Fund

But Keynes didn't start out with this understanding. As he records in his memoir, he and his friends in Cambridge and Bloomsbury believed they already knew what the good life consisted in and were sublimely confident that it could be achieved. Influenced by the Cambridge philosopher GE Moore, they thought the only things that had value in themselves were love, beauty and the pursuit of knowledge.

Some of the most bold of Moore's disciples - Keynes was one of them - ventured to suggest that pleasure might also be worth pursuing, but Moore, who was something of a puritan, would have nothing of this. Despite these disagreements, Moore's was a liberating philosophy for Keynes and his friends.

Keynes viewed his early philosophy as being entirely rational and scientific in character. Yet it was also his religion, he tells us - the faith by which he and his friends lived. And, in many ways, it was not a bad faith to live by. It armed him against idolatry of the market, which he described as "the worm that had been gnawing at the insides of modern civilisation... the over-valuation of the economic criterion". To identify the goods that can be added up in an economic calculus with the good life was for Keynes - young and old - a fundamental error. The market was made for human beings - not human beings to serve the market.

At the same time, Keynes's personal religion immunised him against the faith in central economic planning that bewitched a later generation at Cambridge. He was never tempted by the lure of collectivism, which he dismissed as "the turbid rubbish of the Red bookshop". Firmly believing that nothing had value except the experiences of individuals, he always remained a liberal.

In other respects, Keynes's early philosophy was dangerously shallow. "We were among the last of the Utopians, or meliorists as they are sometimes called", he wrote, "who believe in a continuing moral progress by virtue of which the human race already consists of reliable, rational, decent people, influenced by truth and objective standards... We were not aware that civilisation was a thin and precarious crust... only maintained by rules and conventions skilfully put across and guilefully preserved." Underlying this complacent faith in progress was a naive faith in the power of reason. Inspired by a "thin rationalism", he wrote, "We completely misunderstood human nature, including our own."

The Bloomsbury Group

Cambridge University archives have released photographs featuring the influential Bloomsbury Group, a set of English writers, philosophers, intellectuals and artists of which Keynes was part

Keynes discovered just how deluded this faith in reason was when in 1919 he attended the Versailles Peace Conference as part of the British delegation. The European continent was in ruins, and millions were hungry or actually starving. Yet the victors in World War I, who were supposed to be planning Europe's future, could not escape from squabbling among themselves and plotting revenge on a defeated Germany. In his prophetic book The Economic Consequences of the Peace, Keynes forecast a popular reaction in Germany, born of desperation and hysteria, which would "submerge civilisation itself".

We do not find ourselves today struggling with the aftermath of a catastrophic world war. Yet the situation in Europe poses risks that may be as great as they were in 1919. A deepening slump there would increase the risk of a hard landing in China - on whose growth the world has come to depend. In Europe itself, a downward spiral would energise toxic political movements - such as the neo-Nazi Golden Dawn, which won seats in parliament in the last election in Greece. Facing these dangers, Keynes's disciples insist that the only way forward is through governments stimulating the economy and returning it to growth.

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Keynes's most important lesson is to let go of inherited ideas. If we cling to the panaceas of earlier times, we risk losing the civilisation we have inherited”

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It's hard to imagine Keynes sharing such a simple-minded view. As he would surely recognise, the problem isn't just a deepening recession, however serious. We face a conjunction of three large events - the implosion of the debt-based finance-capitalism that developed over the past twenty years or so, a fracturing of the euro resulting from fatal faults in its design, and the ongoing shift of economic power from the west to the fast-developing countries of the east and south.

Interacting with each other, these crises have created a global crisis that old-fashioned Keynesian policies cannot deal with. Yet it's still Keynes from whom we have most to learn. Not Keynes the economic engineer, who is invoked by his disciples today. But Keynes the sceptic, who understood that markets are as prone to fits of madness as any other human institution and who tried to envisage a more intelligent variety of capitalism.

Keynes condemned Britain's return in 1925 to the gold standard, which famously he described as a barbarous relic. Would he not also condemn the determination of European governments to save the euro? Might he not think they would be better advised to begin a planned dismantlement of this primitive relic of 20th Century utopian thinking?

I suspect Keynes would be just as sceptical about the prospect of returning to growth. With our ageing populations and overhang of debt, there's little prospect of developed societies keeping up with the rapid expansion that is going on in emerging countries. Wouldn't we be better off thinking about how we can enjoy a good life in conditions of low growth?

Keynes's most important lesson is to let go of inherited ideas. If we cling to the panaceas of earlier times, we risk losing the civilisation we have inherited. This is the truly Keynesian insight that our leaders - airily floating above the dangerous undercurrents of popular feeling like the water-spiders of Bloomsbury - have yet to grasp.

Here is a selection of your comments.

An extraordinary article which fails to acknowledge Keynesian economics' significant role in the crisis the world is facing today. Gold, a barbarous relic? Oh well, if Keynes says so, that claim MUST be right. Never mind that if we'd remained on the gold standard this crisis would not (indeed, could not) have eventuated in the first instance.

Dominic Smyth, Brisbane

Something that seems never to be mentioned in debating the pros and cons of Keynsian-style stimuli to stagnating economies is the the relative size then and now of public sector spending compared to GDP. In the early thirties in the advanced economies, this was routinely below 30%; now it is mostly 45% to 55% (France 56%) of GDP. The dangers of crowding out private sector investment anywhere above about 35% are well attested. Keynes' famous propensity to change his mind when circumstances changed would certainly have taken account of this.

Jane Morris-Jones, Hereford

"Keynes's most important lesson is to let go of inherited ideas." Absolutely, and one of those is the notion that it was Keynesian policies that "rescued" the world from the Great Depression. Not only are neo-Keynesian ideas of increasing government spending unlikely to be the panacea for today it is unclear that they were the answer in the 1930s. These policies have been tried to death in the US and each time "stimulus" ends the US economy subsides and the US is deeper in debt. As suggested, we need to consider that the sustainable rate of growth may now be much lower (or non-existent) and have to cut our cloth accordingly.

Francis, Kilburn

When Keynes advocated public works schemes government spending was a much smaller proportion of the economy than it is now and, in any case, it wasn't public works schemes that eventually pulled the world out of recession; it was the massive increase in government spending around the world to fight World War II. It is the size of the budget deficit and not the level of public spending that increases demand and so increases employment. Government spending increases demand with no increase in supply. If deficits were now increased by reducing taxes, in the UK most appropriately by reducing the rate of VAT to 15% or even less, this would increase demand and also supply (production). Public works schemes take far too long to take effect whereas VAT can be reduced at midnight tonight. Demand, wages and employment would pick up tomorrow.

Peter Whipp, Laxey, Isle of Man

Some universal truths remain. Austerity in the midst of a recession makes it worse. Only spending provides any hope of a recovery, and we should by now be wise to taking on ever more debt. Forget national vanity infrastructure projects that only benefit offshore multinational corporations and a handful of cheap migrant workers, what the country needs to put money back in the pockets of the public who will spend it is spending on state institutions to provide the services we need, paid for by effective tax collection from the greedy rich who are hiding £13 trillion or more from the tax authorities.

Des, Exeter

As far as I can tell Keynes had no understanding of the 'limits to growth'. As a result he did not understand why the UK economy could pick up after WWI. Coal production had been in decline since 1913, and with decreasing energy available, a decline in economic activity was inevitable. The economy only recovered after WWII with increasing imports of oil making up for the decline in coal production. We are in the same situation now. The UK's North Sea oil production is in decline and dropped by 17% last year. We are unlikely to be able to afford the necessary imports to compensate for this. We have to accept that 'growth' will not be our salvation, and redirect our economic thinking - better redistributing what wealth we do have.

Roger Button, Bath

The greatest lesson we can learn from our past is that one size rarely fits more than one, especially in complex social and economic situations such as this. This is a unique crisis that requires a unique solution. We need the best minds and leaders of our time to come together, and make difficult, unselfish decisions, that will serve the long-term interests of society. This is not the time for popular opinion, rather those of the qualified and wise. Politicians must listen to experts, and make tough calls even if that means losing popularity, as the right decisions today, will no doubt redeem them tomorrow. Mass society must also play their part, and accept that public spending is only sustainable if there is genuine wealth creation. Cuts are inevitable in a recession. We can't expect things to not be tough in times like this. That is not to say there should be no public spending. Public spending, and borrowing, should be aimed at growth inducing ventures such as infrastructure and new industry. Create jobs, and compensate for losses in welfare. No doubt easier said than done. That is why this is a time for great minds, not popular opinion.

Navin Weeraratne, Auckland

It's important to remember that although Keynes said that government should run deficits in bad times he also said that governments should run surpluses in good times. How many governments ran a surplus between 2003-2008? If they had, would we be in the mess that we are?

Paul Stables, Hong Kong

One point that most economists, past and present, seem to miss is the fact that growth as we define it is by its very nature unsustainable. As long as we insist that consumption must continue at an ever faster pace, depleting natural resources and creating negative externalities, then soon rather than later we will be forced to slow down. Why can't economic success be measured in terms of sustainabilty, or human welfare, or even happiness! While the work of Keynes is important and does hold lessons for us, I feel we need to look deeper and for some serious long run solutions to what are ever worsening problems.

Steely, Jakarta

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