07 Nov 2010
|
History
Economic Thinkers - John Maynard Keynes
In the penultimate of our series on great economic thinkers, Edward Russell-Walling looks at John Maynard Keynes, a man of conscience and capitalism.
The dominant economic figure of the last 100 years was undoubtedly John Maynard Keynes (1883-1946), in his eclipse as much as in his ascendancy. He was a hugely innovative force in the creation of the international financial system and of modern economics itself, as admired in the first half of the 20th century as he was debunked in the second. Today, many are belatedly reaffirming the merit of his ideas.
Keynesianism has become shorthand for state intervention in the economy, which is unfair to the man on at least two counts. He was anything but a single concept theorist, and that particular encapsulation is a distortion of his theory of employment.
Keynes was larger than life in every sense. He stood six feet, six inches tall and imposed himself and his unflinching opinions on public debate in every conceivable sphere – economics, politics, culture and academia. Witty and mischievously articulate, he had the robust confidence that comes from being born into a highly intelligent, self-assured family.
HIGH EXPECTATIONS
His father lectured in economics at Cambridge University, where his mother was one of the earliest female graduates, later becoming mayor of the city. She also did a considerable amount of charitable work for the less privileged.
At Eton and King’s College, Cambridge, Keynes’ path was strewn with prizes, for English essays as well as maths. At university he studied under the influential neoclassical economist, Alfred Marshall, who popularised the idea of supply and demand as price setters and introduced the notion of price elasticity of demand. Impressed, the young Keynes determined to become an economist, sat his civil service exams and entered the India Office in 1906. His first serious book on economics (1913) was about Indian currency and finance.
When war broke out a year later he joined the Treasury. His ‘quick wit and inexhaustible capacity for work’ were noted and he rose rapidly to take charge of inter-allied finance, developing the system of allied war loans, adopted by the US Treasury when America entered the war.
His mood darkened with the peace, however, as he objected to the punitive reparations that were to be imposed on Germany. No one listened, and Keynes stumped out of the Treasury in 1919 to write The Economic Consequences of the Peace in which he warned that the impoverishment of central Europe would have devastating consequences for civilisation and was subsequently proved right in Germany. The book attracted considerable attention and made him a public figure, although it made many in the establishment mistrust him.
He also began speculating in financial markets. “Successful investing”, he would say, “is anticipating the anticipations of others.” Although he had some disastrous losses, investment made him a wealthy man and adviser to friends including members of the Bloomsbury Group of which he was a leading light.
DRASTIC REMEDIES
By 1923, Keynes believed that sterling was overvalued and argued that an end to the gold standard and devaluation were preferable to deflation. His famous ideas on unemployment began to take shape the following year in the essay Does Unemployment Need a Drastic Remedy? He called for government spending of £100m a year on housing, roads and electricity distribution to stimulate the economy.
The Wall Street Crash of 1929 and the following depression threw his ideas into sharp relief. He believed passionately that the prevailing laissez-faire thinking was misguided and that downturns, without intervention, would not necessarily self-correct eventually. “In the long run,” as his most famous dictum had it, “we are all dead.”
In A Treatise on Money in 1930, he distinguished between investments and saving, saying controversially that if investment exceeds saving, you get inflation – but if saving exceeds investment, you get recession.
These works were forerunners of Keynes’ great work in 1936, The General Theory of Employment, Interest and Money, which underscored the link between economic growth and expenditure and in which Keynes argued that if people or governments (funded, if necessary, by borrowing) do not spend enough money, the result is unemployment.
With the onset of the Second World War, he returned to the Treasury as an economic adviser, liaising with the Americans on issues like Lend-Lease, the US-allied supply programme. Thinking ahead, he began drawing up ideas for a post-war, non-political institution that would support world economic development and stability. The result, which he played a front-line role in negotiating, was the World Bank and the International Monetary Fund, launched in 1946, the year he died.
Keynes was a life-long Liberal and a believer, with some reservations, in capitalism. But “Keynesianism” fell distinctly out of favour as the post-war half century unfolded and the free market ethos – the belief that markets know best – triumphed.
Faced with a possible repeat of the 1930s crisis, many governments have now been turning to Keynesian remedies, such as borrowing to increase public support for the economy. No longer does Keynes seem quite such a yesterday’s man. And as he once put it: “It is better to be roughly right than precisely wrong.”
Author: Edward Russell-Walling
Edward Russell-Walling writes on financial economic affairs for titles including The Financial Times, New Statesman and The Banker. His book, The House of Money: A History of the Great Banks, from Medici to Goldman Sachs, will be published by Atlantic Books in 2011.