The Age of Keynes
The subtitle of this book is The Life, times, thought and triumph of the greatest economist of our age. The story leads up to the tax cuts of 1965 and ends with the suggestion that the United States will live happily ever afterwards in Keynesian full employment.
The life is pieced together from Harrod’s biography and other memoirs and reminiscences; the development of Keynes’s thought from quotations from his works up to the time of the General Theory. Already at this stage in the book a kind of mollifying process is at work, smoothing out contradictions. Keynes had a high degree of intellectual detachment but he frankly admits to an emotional ambivalence. Morally and aesthetically, capitalism disgusted him, while at the same time he felt that the system was the “best in sight” and must be defended. Robert Lekachman quotes only the defensive passages. From the analysis of the pre-1914 world in Economic Consequences of the Peace he gives us (p. 62) the description of the capitalists: “Like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect” but not:
the labouring classes accepted from ignorance or powerlessness, or were compelled, persuaded or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake, that they and Nature and the capitalists were co-operating to produce.1
From the Short View of Russia he gives us (p. 47) the oft-quoted phrase about “preferring the mud to the fish” but not the analysis of Communism as a new religion:
At any rate to me it seems clearer every day that the moral problem of our age is concerned with the love of money, with the habitual appeal to the money motive in nine-tenths of the activities of life, with the universal striving after individual economic security as the prime object of endeavor, with the social approbation of money as the measure of constructive success, and with the social appeal to the hoarding instinct as the foundation of the necessary provision for the family and for the future.2
What appealed to Keynes in Russia (in spite of the mud) was the hope of a society built on other motives.
This ambivalence runs through the General Theory itself. The hard argument demolishes the orthodox defense of the private-enterprise system and the bravura passages are full of devastating irony; yet at the end the “social philosophy towards which the General Theory might lead” turns out to be “moderately conservative.”3 It is the end that our author finds appealing; he does not have much to say about the rest.
THE MOLLIFYING TREATMENT is most marked in the account of Keynes’s relations with the United States at the end of his life. Even respectable opinion is now coming round to the view that Keynes’s Clearing Union was a more intelligent conception than the International Monetary Fund advocated by the U.S. and finally adopted after much debate. The situation today, when the trading world is threatened by a totally unnecessary crisis because of the inadequate and unreliable supply of international liquidity, underlines the advantages of Keynes’s conception of a super-central bank which could regulate the world’s monetary system on the same principles as a national central bank manages its own currency. In any case, no one could deny that his argument was clearer and his style more persuasive than Harry White’s. But England (without yet noticing it) had finally come to the end of her age of dominance. Keynes had no force behind him to oppose the weight of American wealth and power. His wit only irritated slower thinkers. He had to be careful what he said, which he was not used to at home. Moreover, a loyal public servant, he had to defend the botched-up agreement at home as though he really believed in it. (He had submitted himself to the sarcasm of his old Bloomsbury friends by accepting a peerage the better to play the part of a respected national figure, but his old role of enfant terrible still suited him best.) Finally, when lend-lease was abruptly cut off, he had to return to Washington to beg and was obliged to accept the humiliation of agreeing to terms—an early return to convertibility of sterling—which he knew to be impossible to fulfill.
“What should this mean?”
“It is the god Hercules, whom Anthony loved, now leaving him.”
This great historical scene naturally has a different emotional color when viewed from different sides of the Atlantic, but, either way, it was a historical scene: it is a shame to smooth it over with complacent phrases.
THE MAJOR PART OF THE BOOK is concerned with the influence of Keynesian ideas on American economic policy. Lekachman points out that the New Deal was a mixed bag, containing restrictive as well as expansionary elements. The halting recovery from 1933 to 1937 gave little evidence, either way, of the effectiveness of deficit spending as a remedy for unemployment. The sharp slump of 1937 due to a return to “sound finance,” however, was an experimental test, providing a dramatic illustration of the main thesis of the General Theory, which made many converts (p. 124). After this experience, it could no longer be argued that a budget deficit was necessarily inflationary, or that cutting outlay and increasing taxes, when there was already unemployment, would not make the situation worse.
The most influential popularizer of Keynes in the US was Alvin Hansen, who put the new doctrine out in the form of the stagnation thesis (p. 131), according to which the cessation of population growth and the “closing of the frontier” had dried up the outlet for investment and would lead to chronic depression because of a lack of market demand to make production profitable. There is a great difference between Keynes’s version of the long-term implications of the General Theory and the moral that was drawn from it by Hansen. Keynes maintained that, with peace and a more or less constant population, it would be possible for the industrial nations (he did not look beyond) to saturate the need for capital accumulation within thirty years, so that, from then on, saving would cease to be necessary, and the resources released could be used to cultivate the arts of agreeable living. (He did not distinguish between public and private investment so that he did not have to distinguish between useful and profitable capital equipment.) This held out the promise for a genuinely civilized life in the future, but it would require great changes in our institutions and ideas if it was not to run to waste in unemployment and stagnation. The social justification for inequality of income, as a restraint on mass consumption, would have disappeared and the anarchy of private enterprise would have to give way to the planned use of resources for the benefit of society as a whole.4 The thirty years was one of Keynes’s wild guesses, but we cannot tell how far out it was, for we have had neither peace, constant numbers, nor full employment maintained by useful investment, since he spoke.
For Hansen, a decline in outlets for profitable investment appeared not as a glorious opportunity but as a threatening disaster. He did not conceive, or preferred not to utter, dangerous thoughts about the need to change our institutions and ideas.
The war, which expanded civilian consumption in the US 50 per cent, was a crude lesson in the principles of the General Theory (p. 149). The devotees of private enterprise, sensing danger, put up a great resistance to the Keynesians after the war; the Employment Act of 1946 was a vague and feeble remnant of the Bill that they had proposed (pp. 170-174). All the same, for fifteen years stagnation was fended off; recessions were relatively mild. Keynes seemed unnecessary.
THREE PROBLEMS were emerging under the surface of near-enough stability. The first was inflation. Lekachman implies that this was an unforeseen danger that lay outside the scope of Keynes’s argument. But the English Keynesians deduced from the General Theory, even while the slump was still with us, that a successful employment policy would lead to a chronic spiral of wages and prices. (Lekachman associates this phenomenon with the growth of large oligopolistic businesses, but it would be even more marked in a regime of unrestricted competition.) The incompatibility of continuous full employment with stable prices they saw as the unsolved problem of the future as, indeed, it still is.
Keynes did not maintain that everything would be easy once the principles of employment policy were understood, or that simple automatic regulators could be fitted into the system of a private enterprise economy that would dispense with the need for wise judgment. The main message of the General Theory was negative. It struck off the shackles of laissez-faire ideology. Keynes knew that new freedom would raise fresh problems and require fresh solutions. He certainly did not see himself as a quack peddling a panacea.
The second problem, which Lekachman touches upon only lightly (p. 193), was the disequilibrium in the balance of payments. The huge surplus of income in the US balance of payments (arising from an excess of exports over imports and from receipts of interest and profits from overseas investments) was gradually proving insufficient to support both the overseas expenditure of the Government and the outflow of profit-seeking capital which laissez-faire permits.
The third problem of the Fifties in the US was the growth of “non-Keynesian” unemployment lasting for long periods. The stabilization of the economy kept total output more or less constant, or slowly growing. Technical progress, including automation, was raising output per head. Consequently the demand for labor failed to keep up with the growth of the labor force. The growth of small-scale service businesses provided “disguised unemployment” for many, while open unemployment drifted up from 4 per cent to nearly 6 per cent of the available labor force. The concentration of unemployment upon the young, particularly young Negroes, created horrifying social dislocation.
Lekachman opens the discussion of automation with the question
Even after it is conceded that Republican programs administered less stimulus than the economy required, there remains a crucial question: Why did the economy require the stimulus in the first place? Why weren’t the impulses of private spending strong enough to employ men and machines fully? (p. 226)
To put the question this way seems to betray a lingering belief in laissez-faire equilibrium. Why should we expect private spending to be at the right level? And if it were, is private spending the best use for the resources that technical progress releases? Does not the present scene reveal a disastrous failure in public spending, particularly on education. Lekachman refers somewhat patronizingly to Galbraith (p. 272 and p. 287); he fails to remark that Galbraith alone has drawn the moral from the General Theory—once we accept the idea that there ought to be full employment, the question follows what should employment be for.
But in the Sixties in the US the argument was still at the primitive stage. The Idea whose triumph Lekachman celebrates (Chapter 11) was the idea that massive unemployment ought not to be allowed. He describes how the economists converted President Kennedy to the view that budget deficits were not only permissible but actually advantageous to an under-employed economy, how the idea of tax cuts was resisted by public opinion (to the amazement of the rest of the world), and how, taken over by President Johnson, they suddenly became respectable.
Lekachman is well aware of the limitations of the new policies, but he believes, as Keynes did in his day, that once the primitive stage of the argument has been won, unbounded possibilities open up.
What can be achieved by the concensus of the major interest groups in the United States is very substantial. The flood of legislation in 1965 verified the possibility of moderate improvement within the fiscal limits set by business predominance in the administration coalition. In short, conservative expansionism is really capable of making American society tolerable for most Americans. Nevertheless, its limitations are such, its powerful tendencies to favor the prosperous are so dominant, and its suspicion of the public sector is still so strong that it will take a more vigorous path of government action, the road of liberal intervention, to convert even an enlightened commercial community into a Great Society—to move from Keynesian fiscal policy to the Keynesian vision of a rational community. (p. 301)
IN ALL THIS there is one very striking omission. I could find only two or three passing references in the whole book to armaments expenditure (cold or hot) as a booster to employment and profits.
Theoretically, however, it is just as possible to stimulate a sluggish economy by reducing taxes as by enlarging social welfare programs, or, for that matter, military spending. (p. 272)
What would happen to the economy if peace broke out and military expenditure declined from $50 billion to $5 billion per year? (p. 195)
And it is shown that the Republican regime, in spite of a doctrinal belief in sound finance, ran budget deficits to maintain outlays required by “the exigences of cold war diplomacy” (p. 222).
Many well-meaning US citizens become extremely indignant (though others are cheerfully cynical) when the dependence of prosperity in the United States upon armaments is remarked on. There is no need, however, to inquire whether the cold war, the “missile gap” and the crusade against Communism in Asia were conceived, deliberately or unconsciously, as a means of fending off depression without drastic political or social change. Attribute them to whatever noble motives you please—that has clearly been their effect. Even while this book was in the press, tax cuts were proved unnecessary and visions of the Great Society were bundled into storage while the “exegencies” of a hot war provided more than sufficient stimulus to the economy.
In a well-known passage, Keynes sarcastically maintains that useless expenditure is even more effective for maintaining demand than productive investment. “Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.” Two stocks of bombs, two little nations blitzed, are twice as good as one. We are indeed living in the age of Keynes, but it is not turning out so well as he expected.
Economic Consequences of the Peace, p. 17↩
Essays in Persuasion, p. 308↩
General Theory of Employment, Interest and Money, Chapter 24↩
The clearest statement of this point of view is in Keynes's Galton Lecture. Eugenics Review, 1937.↩