Saturday, July 21, 2012

A Point of View: What would Keynes do?

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.
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.

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.
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."
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.

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.

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

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