Cross-posted at Club Troppo.
An e-mail from Mark Bahnisch reminded me a few days ago that this week is the seventieth anniversary of the publication of Keynes’ General Theory of Employment Interest and Money. Keynes is a magnetic character perhaps as much to read about as to know personally. That’s because his life reads like a kind of intellectual’s fantasy in which the author showed himself uninterested in the convention that the fantasy was believable. Apart from constant activity over myriad areas of human endeavour – of which more in a moment from Brad DeLong – Keynes intervened perhaps decisively in momentous world events in the twentieth century, not once, not twice but three times between 1919 and 1946. It’s hard to think of a parallel in the life of any other intellectual.
In writing Economic Consequences of the Peace he established the narrative by which the rise of Nazism was read by the liberal intelligentsia both at the time and subsequently. In writing The General Theory he revolutionised economics as he’d boasted to his friend George Bernard Shaw he would. And then in World War Two he directed the British war economy and led the negotiations which gave us the Bretton Woods financial architecture, which survived in tact for twenty five years giving us the long boom and which created the IMF and the WTO (then the GATT) which are still with us.
Below is a fragment from something I was writing which may be of interest to readers. The purpose of the piece was to set the scene for a return to what I call in the piece the ‘dismal virtues’. It’s a bit ridiculous to portray Keynes as a prophet of profligacy as he’s so often portrayed. One of the things that distinguished Keynes from many economists before and since is his sensitivity to context. It’s true that living through the 1920s and 30s in Britain Keynes came to see the propensity to save as a dangerous thing, and as something that stalked economic life. It’s not clear that he was right in that but it’s way too early to conclude that he was wrong for the simple reason that the Western world has lowered its savings rates to (perhaps) unhealthy levels in the presence of countercyclical policies which have made consumption safer. In any event his speculations about the spectre of excessive savings and an absence of ‘animal spirits’ haunting economic life in a general sense was usually presented as speculation. What he had no doubt about was that it haunted the global economy of the inter-war years.
Keynes’ intuition, and his sensitivity to context were demonstrated shortly after the publication of the General Theory when he used the theory not to expand demand but to curtail it, to control inflation in managing Britain’s war economy. As Brad deLong writes Keynes’ 1924 Tract on Monetary Reform “may well be Keynes’s best book. It is certainly the best monetarist economics book ever written.â€? As Skidelski has brought out in his magnificent biography, Keynes was also a rather deeper seeker after a ‘third way’ than the stuff that circulates under that label today. As he wrote of Hayek of the latter’s The Road to Serfdom “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement”. Milton
Brad deLong provides us with a good introduction to Keynes’ extra-ordinary life.
The place to start is with the observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted.
Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician–trying to advance the chances of Britain’s Liberal Party between the wars–but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the “Bloomsbury Group” of artists and intellectuals that did so much to shape interwar culture.
For the litterati it is Keynes of Bloomsbury–his loves, enthusiasms, acts of patronage, and wit–who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world–whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith’s “system of natural liberty” but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.
How did this man come to be?
DeLong notwithstanding, Keynes, saw himself as practicing economics very much in the tradition of Adam Smith – as a ‘moral science’ that strove to deliver the ‘good life’ for society at large whilst minimising demands on the goodness of the players in the economic drama. The corpus of economics as Keynes inherited it had embraced what I’d call the ‘dismal’ virtues. These were thrift, competition, and hard work. Keynes stupendous achievement was not just to revolutionise economists’ policy prescriptions, but to transform the mood of the ‘dismal science’ in his own image. Oscar Wilde, with whom Keynes is sometimes likened, once boasted that he put his talent into his work, but his genius into his life. With Keynes it is hard to see any demarcation. He was a man of prodigious intelligence, energy, versatility and achievement.
In 1919 Keynes quit his job within the UK Treasury to publish a dire warning against the folly of Versailles which made him an international figure. “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.� Indeed. Nor did it. In the last six years of his life while he battled ill health, Keynes led the UK Treasury in its management of the economics of the British war effort and led the British delegation in negotiating the post war financial architecture which underpinned the longest boom in world history: All this having been a trenchant and exuberant critic of the economic establishment between the wars and without a formal senior position in the Treasury! On February 4th 1936 he published the most influential economic work of the century. The night before he attended the opening of the Arts Theatre in Cambridge, the construction of which he had conceived, supervised and financed.
During economic times that ranged from difficult to disastrous Keynes gradually fashioned a new kind of economics. Smith had penned The Wealth of Nations after Newton’s method. With customary hubris, Keynes titled his revolutionary book in imitation of Einstein: The General Theory. Economists had typically seen the economy as a system of ‘negative feedback’ – like a thermostat. The thermostat maintains an equilibrium band of temperature by heating whenever the temperature falls below a certain level. The ‘law’ of supply and demand in a perfectly competitive market is a system of negative feedback with price and output each adjusting to each other until equilibrium is reached. With ‘positive feedback’ however, a signal is intensified by feeding back on itself – destabilising equilibrium. A microphone picks up the hint of a sound from speakers. It magnifies this sound which feeds back through the speakers, feeding back into the microphone as a louder sound and on it goes. Life is full of positive feedback. Some people cannot sleep if they are too tired, making them more tired still. Someone under pressure makes mistakes and so intensifies the pressure they feel.
The economics Keynes inherited told the story of ‘macro-markets’ like the labour market or the money market as one of negative feedback. And each macro-market was generally considered in isolation or ‘partial equilibrium’. Keynes suspected the real story was one of positive feedback between and within macro-markets. In what he called ‘Classical Economics’ the labour market ‘cleared’ according to the price of labour – wages, like the market for oranges: Likewise the markets for savings and investment. Interest rates were the price paid to savers for saving by entrepreneurs wishing to invest the money. If savings rose, then as in any other market, there would be surplus funds for investors, which would reduce interest rates and, by stimulating investment re-establish balance. This story underpinned what I call (somewhat unfairly) the dismal virtues – thrift, competition and hard work.
Keynes’ intellect, his temperament and his values coalesced in his subversion of the dismal virtues and the macro-economics of his day. Accepting that the classical adjustment mechanisms had some role, he argued that they acted weakly and slowly and that they were swamped by positive feedback within and between the markets for money and for labour. Though he understood the importance of saving to fund investment well enough, his instinctive distaste for the Victorian ‘miser’ found increasing expression in his economics. “Were the seven wonders of the world built by thrift? I doubt it�. Keynes came to argue that the fearful psychology of the miser constantly threatened to over-stimulate the instinct for thrift and inhibit the ‘animal spirits’ of investors, creating a perennial threat of excessive savings and slump. Savers and investors were in what today we call a ‘prisoner’s dilemma’. For individual decisions to invest or to consume made sense in a prosperous economy, but the economy would not prosper if others gave in to fear.
Keynes stormed the citadel of orthodoxy with compelling paradoxes and Wildean reversals in which the virtues went punished and sinners were blessed. Where investment was inadequate, virtue was a vice. “The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall�. Observing that thrift might or might not be the handmaiden of enterprise, he mused characteristically “perhaps, even usually she is not�, suggesting that (provided it was not ruinous) economic prosperity had been accompanied through history – as for instance in ancient Athens – with public profligacy. Keynes illustrates his broader sympathies defending at least in part the vision of mercantilists like William Petty who predated Adam Smith and supported the doctrine of a strong wealth building state.
Petty’s “entertainments, magnificent shews, triumphal arches, etc.� gave place to the penny-wisdom of Gladstonian finance and to a state system which “could not afford� hospitals, open spaces, noble buildings, even the preservation of its ancient monuments, far less the splendours of music and the drama, all of which were consigned to the private charity or magnanimity of improvident individuals.
Nicholas
He was also the man who said that one way of getting out of an economic hole was to dig one. A fascinating concept if there was ever one, leading some people to think he would have had a better, more fruitful life as a mathematician.
One big surprise I read some years ago (1998 maybe) was a long article in the New Yorker telling readers that Keynes was wrong all along while Hayek and Von Mises were right and would remain so forever. the New Yorker of ocourse added a few adjustments so as not to displease the Upper Westside of Manhattan too much (we are creatures of our audience of course).
There are lots of people who would not celebrate his life for his ‘Enduring’ achievements but would acknowledge he did have a big role to play in certain areas of economics for a time after war.
Keynes was a fraud and a monetary crank. His General Theory is a bad joke. Nothing in it is both true and original. The monetary crankery comes from Gesel and others but seems to be spontaneous with a certain mindset. Everything in the General Theory is either wrong or was old hat at the time of writing.
Keynes has been immensely harmful. The way forward to alleviate poverty globally was for the wealthy countries to have massive savings rates, and to export investment capital. Because of Keynes and his policies they (at least the English-Speaking world) instead eat up all the worlds investment capital and run huge balance of trade deficits.
Keynesianism is bad no matter what monetary system it goes with. But it lacks even surface plausibility under fiat currency since the central bank (under fiat) can hit any level of aggregate demand that it wants. And there is no evidence that fiscal policy sans monetary policy can influence demand in any predictable way.
Still to this day, because of the fraud that is Keynesian economics, we have prominent economists insisting that the public should spend its way out of a recession. There is never any cause, or any excuse, for the authorities to rail against thrift.
Keynes is a bad joke. A purveyor of economic fascism. An aristocrat in the worst sense of the word. An accursed millenarian.
On the plus side he had very good ideas on share investment and he apparently wrote a superb introductory text on logic. Which just goes to show the power of the Utopian Millenarian disease. Once it takes hold of a mind then its a time-bomb. No matter how much native intelligence or other great gifts the individual has once he has become addictied to the Utopian vision nothing he writes can ever be considered at face value.
Keyneses work on economics (as opposed to his ideas privately discussed on the subject of shar investment) was so unoriginal that his ideas had already been tried BEFORE the publication of the General Theory. The policies of the American Federal Reserve during the roaring twenties might have been said to be Keynesian. And the interventionism of Hoover and FDR were pretty Keynesian. And what we got was the Great Depression. An event which is no mystery at all but was the logical result of the policies followed.
If any of you out there harbour exciting millenarian ideas for goodness sakes try and be quits with them. Though its hopeless to make such a request since its a harder habit to quit then heroin or so it seems. But these secret fantasies are a threat to us all.
It is the same feeling a young born-again Christian might get upon discovering for the first time the book of revelations. But its worse since it invades the appraisal of one so afflicted in all matters of public life.
“Keynes stormed the citadel of orthodoxy with compelling paradoxes and Wildean reversals in which the virtues went punished and sinners were blessed. Where investment was inadequate, virtue was a vice”.
He may have stormed to building but he left it pretty empty as well. Keynes failed to understand that thrift was to spend* and that expansions and contractions are purely a function of a central bank mismanaging the money supply. Certain that people are still behaving as though his views ought to be listened to they ignore the enomormous damage a central bank can do to an econmy. As ar as I can tell not one newspaper based economist has even mentioned the huge expansion of the money supply since 1996- about 120%. Like Keynes they think money is neutral and you can do anything to manipulate the monetary structure at will. Ha!
*Thrift is to spend because there must be savings before someone can borrow or issue stock to purchase equipment etc.
Fellow Utopians will twist everything in order to present Keynes in the most glowing terms. And conservatives and libertarians may then find themselves adding to the praise in what amounts to a cult of personality.
But go back the the General Theory. Once all these hagiographies are thrust aside and we find where the North Star was for Keynes… Once you go back to the General Theory you find that ‘Keynes was a Keynesian’.
Well, that was a good laugh Graeme. Now hold your breath and see how long it takes you to turn blue.
I’m already blue in the face about Keynes. Or more correctly the lack of courage within the economics proffession which allows this tragedy of unreason to continue.
But what’s funny about it Central Scrutinizer?
Tell me fella?
Where did I come off the beam?
Oh that’s right. You don’t have an argument do you. They must mass-produce fools like you and Trotsky on some printing-press somewhere. In keeping with the practical implications of what Keynes has wrought.
Now do you have an argument or not. The acceptance of this fraud is not the least bit funny. It is one of the many tragedies of the 20th century.
Heh. What colour comes after blue? Have you tried anger-management?
Well there you go showing the typical chilling leftist lack of concern for something that has indirectly led to the deaths through poverty of countless millions.
But other then the argument from snideness what other argument do you have?
Do you really add anything to this forum CS? I just make it that you’re a speedbump on the information superhighway.
I’m not sure why this forum continues to tolerate Graeme Bird’s wierd rantings.
He has made sexist remarks eg. criticising fat bottomed women, homophobic remarks eg calling Brokeback Mountain ‘buggery hill’. He regularly disparages lying leftists.
Isn’t it time to debeak the Bird and put him back in his cage?
p.s. Graeme, ‘bizzare” is actually spelt “bizarre”. Since it is one of your favourite words I thought I better let you know.
I wonder at the frothing hate that Keynes generates in some commentators, particularly when his real intellectual opponents are not nearly so critical.
Milton Friedman had to say (amongst some cricitisms) (link thanks to Catallaxy):
Graeme seems to have no appreciation that Keynes was an economic liberal trying to SAVE capitalism.
He did. Ironically the only country to get out of the Depression was Germany who did so by projects such as the autobahns.
Before Keynes Depressions were the norm.
After Keynes they weren’t.
The problems Graeme alludes to can be thrown at the bastard Keynesian’s. Keynes always said deficits in bad times, surpluses in good times and no increase in debt over the cycle.
The Fed did NOT follow Keynesian ‘instructions.
Read or reread Friedman and Schwartz’s book
Steve Munn
Pedantic is spelt M U N N .
Just thought I’d let you know seeing you use it so often.
Alright. It’s the leftist thought Police again.
“Steve Munn”
“I’m not sure why this forum continues to tolerate Graeme Bird’s wierd rantings.”
Stop projecting your own lameness onto the forum.
“He has made sexist remarks eg. criticising fat bottomed women”
I did not.
” homophobic remarks eg calling Brokeback Mountain ‘buggery hill’. He regularly disparages lying leftists.”
I’m not scared of homos. If they are going to name a film after slang for sodomy then what do you expect?
“Isn’t it time to debeak the Bird and put him back in his cage?”
You could instead try actually debating with me.
“p.s. Graeme, ‘bizzareâ€? is actually spelt “bizarreâ€?. Since it is one of your favourite words I thought I better let you know.”
Debating with me instead of the weak habit of correcting spelling.
Mr Edney. It is truly ghastly to see Friedman having to lay out the fullsome praise of this fraud as a prelude to being able to systematically undo all his false assumptions. But Keynes had been elevated to such a Godlike status that you could not refute him and stay within the mainstream. For a very long time Friedman was considered a crank DESPITE going to such humiliating lengths.
This is the same with the overturning of all paradigms. You need people on the outside and the inside to do it. The job is incomplete.
“Graeme seems to have no appreciation that Keynes was an economic liberal trying to SAVE capitalism.”
I’ve heard this excuse for Keynes and believed it I think at some stage but it turns out to be bollocks.
“He did. Ironically the only country to get out of the Depression was Germany who did so by projects such as the autobahns.”
That’s bollocks also. What happened is that the prior Weimar administration took the traditional approach ala Harding and Van Buren and everyone else up until that date. They went into contraction. They went into contraction harder then everyone else and so they emerged from the depression earlier (but under Hitler) then everyone else. They did so blaming the reparations the whole time. Bitching constantly about something that was all their doing much like Saddam starving the children and blaming it on sanctions.
“Before Keynes Depressions were the norm.
After Keynes they weren’t.”
That was merely coming off Gold. As I pointed out there was indeed problems with fractional reserve Gold that needed to be addressed. What you said is a massive exaggeration though. The business cyce remained intact. And only really was banished to some extent since Volcker/Greenspan. And recessions prior to Keynes were usually short-lived. Now we have other problems looming. The post-Keynesian era has been one of constantly kicking the can down the road.
“The problems Graeme alludes to can(’t) be thrown at the bastard Keynesian’s. Keynes always said deficits in bad times, surpluses in good times and no increase in debt over the cycle.”
Sure they can. Since it was bad tendentious theory. And there is no demand management excuse to run deficits ever.
“Read or reread Friedman and Schwartz’s book.”
Why? I’ll just come to the same conclusion.
On a lighter, and wholly more interesting note: The Keynsian financephalograph!
From New Scientist:
He was, naturally enough, a Kiwi and there’s more at the NZ Institute for Economic Research: http://www.nzier.org.nz/SITE_Default/SITE_about/NZIER_Moniac.asp
Yeah it just gets sillier when you build on fraudulent theory. But the Phillips curve was holy writ up until the 70’s.
Graeme Bird squawks: “I’m not scared of homos. If they are going to name a film after slang for sodomy then what do you expect?”
Now now Birdy. Why do I get the feelin’ you’ve bit the carpet more than once in your feathered life?
Play nice, kids, please. Though it’s a pity this thread turned into a sandpit.
Dear Mr Roosevelt
what do you think of this Keynes chap? Did you invent Keynesianism before Keynes?
Await the forthcoming post, Mr Soon, ask President Roosevelt…
Darryl Rosin - there’s a Phillips machine (an original of some kind) at Melbourne University Dept of Economics.
Jeepers! between the Phillips machine and CSIRAC in the Melbourne Museum, Melbs must be the old computer capital of Australia! Any others lying around that I should know about?
d
“Dear Mr Roosevelt
what do you think of this Keynes chap? Did you invent Keynesianism before Keynes?”
What are you driving at Jason?
This hints at part of the reason for his success. His theory was complete bollocks. But he was telling THE MAN what he wanted to hear. Governments always want to spend money that is not theirs. No-one had to invent Keynesianism. Its more or less spontaneous. But prior to Keynes we had economists acting as party poopers. Economists encouraging economy in government.
Doesn’t anyone else thing it weird? That there never is any reason to believe that fiscal policy can be used for demand management and yet Keynes contention that it can is still out there in the laity and Keynes himself, who made such a glaring error, is still thought to be this great economist. Far as I can see no-one has met my challenge in finding something that Keynes gave us that was both true and original.
JC wrote:
*Thrift is to spend because there must be savings before someone can borrow or issue stock to purchase equipment etc.
end excerpt.
Actually, banks create money when they make a loan, the money conjured from thin air, subject to a small capital reserve requirement for some loans (0% in Canada as per the 1991? BIS guidelines for loans to governments of ‘developed’ countries). The loan is at compound interest.
“As a result of fractional reserve banking over 90% of our money
supply is loaned into existence by commercial banks and thus must
grow by enough to at least pay the interest on the loan by which
it was created. This gives a basic growth bias to the economy.
Fractional reserve banking also transfer to private hands the
state’s traditional right to issue money, and does so in a way
that increases the cyclical instability of the economy.�
Prof. Herman Daly, co-author of For the Common Good, former economist World Bank.
He should of said compound interest, there being a world, or infinite universes, of difference between simple interest and compound interest.
I ordered the book with the following quote through the local library system, as it seemed somewhat suspect. However, it turned out to be legit. Makea bet to donate to a worthy cause, and I’ll forward the photocopied sheets.
John Maynard Keynes’ Essays in Persuasion (Norton & Co., New York, 1963). See also Polygraphic Company of America, 1932 p.371 - 372). Keynes writes in the last essay,
The Future - Economic Possibilities for Our Grandchildren, 1930:
In using lies as his foundation (i.e. in ignoring the obvious math of most money created as debt under the exponentialism of compound interest), Keynes undercut and ultimately destroyed his good concepts regarding such things as locally produced consumption wherever possible, the fact that technology now makes possible his dream, yet people in poor countries die by the thousands for no good economic reason, his post WWII clearing system etc.
There must be a good dozen movies out there about a protagonist throwing in with a gangster or bankster as the case may be, with the best of intentions, and ending up in a field of hubris. Keynes is a real life example.
Regards
Dan Parker
“Actually, banks create money when they make a loan, the money conjured from thin air…..”
Yes yes yes Parker. JC knows all that. But how is that any argument against what JC is saying about thrift?
That extra money creation doesn’t create new real resources. One way or another the resources must be diverted from current consumption to defferred consumption. That is to say from consumption to investment.
How does new money creation do this. New money creation won’t change the proportion of the resources devoted for the demand for capital goods in comparison to consumer goods.
It might do so for the shortest of short short times. Then its going to create a blow-out in the prices of capital goods since there is no consumer goods spending being diverted to the capital goods.
So JC is right.
“Keynes undercut and ultimately destroyed his good concepts regarding such things as locally produced consumption wherever possible….”
Thats not a good concept. Sounds like crazy-talk. Sounds like some sort of JIVE that Gandhi might have tried on.
“Keynes undercut and ultimately destroyed his good concepts regarding such things as locally produced consumption wherever possible….�
PanelbeaterBird wrote:
Thats not a good concept. Sounds like crazy-talk. Sounds like some sort of JIVE that Gandhi might have tried on.
Dan Parker here:
Locally produced consumption wherever *viable* would have been a better statement. There are a lot of false ideas out there on the relationship of money as a symbol of wealth, and the reality of wealth. For example, Alaska had a great year in regards to GDP (money-wise) one year, simply because the Exxon Valdez created huge clean-up costs.
It comes down to thermodynamics, in that much of what is shipped long distances (as opposed to locally produced) is much more expensive, in real resource terms.
Ravi Batra is one economist who did some preliminary studies on the costs of fuel, ships, truck carriers etc to show a Toyota, in real weath terms — not the bag of gold or dollars that you would starve to death with on a dessert isle — that was manufactured in Japan cost a lot more than a North American product, although it was priced less. Currency exchange was part of, but not the main problem.
As for the comment on thift, besides the added expense of unnecessary non-local production (which is done in favour of spurring a needed world governance structure imo), there is often more real wealth burnt up in the search for savings or thift, than that actual dollar saved after the drive for Walmart.
How *compound interest* affects thift and *resources* and the “fair is foul” statement is something else again. The senseless destruction of real wealth is terrible. Lietaer and Daly are a couple of accredited economists who have spoke on this.
This is a long post already and I hope you will excuse me if I do not address the rationale of your statement that something must be CRAZY because a particular Gandhi (no first name given) said it. Please excuse me if this logic escapes me for some time and I don’t carry on this thread if you choose to do so.
Regards
Dan Parker