1Acunningpurchase:thelifeand workofMaynardKeynes
430620
YetIglory
Moreinthecunningpurchaseofmywealth
Thaninthegladpossession
BenJonson, Volpone
PORTRAITOFTHEECONOMISTASAYOUNGMAN
On 21 June 1921,MaynardKeynesdeliveredthepresidentialaddress totheannualreunionoftheApostles–asecretsocietyofthe CambridgeUniversitystudentsandalumniwhichincludedsuch luminariesasAlfredNorthWhitehead,BertrandRussell,G.E. MooreandHenrySidgwick.1 WhathadunitedtheApostlesof Keynes’sowngenerationweretheircommitments,learnedfrom G.E.Moore,toabsolutetruthandtothesearchforfriendshipand beauty.TheidealcareerforKeynes’scohortofApostleswould havebeentobecomeanartist,creatingbeautyandlivingina communityofotherartistswithwhomonehadclosebondsof friendship.Butwhatshouldonedoifonesimplydidnothavethe talenttobecomeanartist?Inhisaddress,Keynesseemstosuggestthatthebestoptionforthosewholackartistictalentmaybe tousetheirtalentstopursueacareerinfinanceorbusiness. QuotingBenJonson,Keynesarguedthatthetruerewardofsuch activitylaynotinwealthitselfsomuchasinthe‘thecunning purchaseof...wealth’.
Itishardtoknowwhyhepickedoutfinanceandbusinessrather than,say,engineering.However,incitingJonson’s Volpone tomake hisargument,Keynesdemonstratesthathehasnotcompletely severedhisMooreanroots.Forthe stateofmind thatoneachieves
inthepursuitofmoneyisallimportant.Keynesspurnsthemoneymakingmotiveasitiscommonlyunderstood(thedesireformoney foritsownsake)andembracessomethingmoresubtleandcomplex: theenjoymentobtainedinusingone’stalentstopursueanend.
By 1921,whenhedeliveredhisaddress,Keyneshadcomethrough Eton(wherehehadwonnumerousprizes)andKing’sCollege Cambridge,graduatingwithfirst-classhonoursinmathematics (twelfthwrangler,thetwelfthpersononthefirst-classhonourslist, aplacehehadforecastprecisely).Hehadthenlearnedeconomics studyingfortheCivilServiceexaminations,inwhichhecamein secondplaceoverall.Secondplacemeantthathehadmissedouton theonepositionopenthatyearattheTreasuryandthathehadto becontent,instead,withapositionintheIndiaOffice.There,he hadwrittenhisfirstbookoneconomics, IndianCurrencyandFinance,whilecontinuingtoworkonhisstudyofthephilosophical foundationsofthetheoryofprobability,workwhichgainedhima FellowshipatKing’sin 1909 (andwaslaterpublishedinanexpandedformasthe TreatiseonProbability).Eventuallyhehadbeen abletomovetotheTreasury(1915),whichhadsenthimwiththe BritishnegotiatingteamtotheVersaillesPeaceConference.His resignationinprotest,thereasonsforwhichhadbeenwrittenup in TheEconomicConsequencesofthePeace (1919),turnedhim intoaninstantcelebrity,andthebook’sroyalties(itwasabestseller onbothsidesoftheAtlantic)hadgivenhimfinancialsecurity. However,despitehavingexperiencedwhatmanywouldhaveconsideredameteoricrisetoprominenceasaneconomist,hewasstill experiencingdoubtsabouthisvocation.
Hisoutlookin 1921 canprofitablybejuxtaposedalongsidethe retrospectiveviewexpressedinthemuchbetter-known‘Myearly beliefs’(1938).Bythetimehewrotethisessay,hehadestablished hisreputationasaneconomistwithhisgreattrilogy: ATracton MonetaryReform (1923), ATreatiseonMoney (1930)and TheGeneralTheoryofEmployment,InterestandMoney (1936).Thefirst ofthese,originallypublishedasarticlesinthe ManchesterGuardianCommercial,usedthemonetarytheoryofhisteacher,Alfred Marshall,tolaunchasharpattackongovernmentpolicyofreturningtotheGoldStandardatthepre-warexchangerate.Itmarkeda furtherstageinthemarriageofeconomicswithapolemicalcritiqueofeconomicpolicythathadstartedwith TheEconomic
ConsequencesofthePeace andthatcontinued,in TheEconomic ConsequencesofMr.Churchill (1925),hissupportfortheLiberal Party’spublicworkspoliciesinsuchpamphletsas‘CanLloyd Georgedoit?’(1929),‘Proposalsforarevenuetariff’(1931)and ‘Themeanstoprosperity’(1933).By 1938,hehadalsobeenheavily involvedinadvisinggovernment,asamemberoftheMacmillan CommitteeandthenewlyformedEconomicAdvisoryCouncil.2 His TreatiseonMoney markedachangeinaudience:itwasatwovolumeworkaimedatacademiceconomists,anditinvolvedtheoreticalinnovationsinthefieldofmonetaryeconomicsthatwent beyondanythingfoundinhisearlierwork.Thoughanalyzingpolicy undertherestoredGoldStandard,hewasturninghisattentionto thetheoreticalfoundationsinawayhehadnotdonebefore.However,thoughthiswastohavebeenhis magnumopus,hesoon becamedisillusionedwithitandembarkedonthechangeofdirectionthatledtothe GeneralTheory.Inthepresentvolume,Maria CristinaMarcuzzo’sessayonKeynes’scorrespondencewithother Cambridgeeconomistsshowshowheusedtheintricatewebof economistsatCambridgeasasounding-boardfordevelopinghis lastgreatworkineconomics.
BythetimeKeyneshadfinishedthe GeneralTheory andturned hisattention,in‘Myearlybeliefs’,backtohisearlierworkin philosophy,henolongerfelttheneedtoapologizeforhispursuit ofmoney-makingandacareerinfinance,ashehadwhenhehad givenhisaddresstotheApostlessixteenyearsearlier.Hedid,however,wanttoreflectuponhowfarheandtheothershadcomefrom theirearlierfoundationintheworkofG.E.Moore.Hehadbythis timeservedformanyyearsasthebursarofKing’s,hewasthe portfoliomanagerfortwolargeinsurancecompaniesandhehad servedasthepersonalfinancialadvisertoanumberofpeople.He hadgivengenerouslytothearts,includinghisworkonestablishingtheArtsCouncilandtheCambridgeArtsTheatre.AsDonald Moggridge’sessayhereshows,hisacademicworkandhisbusiness lifecametogetherinthewayhemanagedhisintellectualproperty, negotiatingcontractswithhispublishersthatgavehimadegreeof involvement(andconsequentfinancialrewards)thatwereentirely atypicalofmostauthor–publisherrelationships.Money-making might,indeed,involveadegreeofcunningandbrilliancethatwas worthyofanApostle,butbynowitwas also clearthatitwasa
necessaryactivityforsupportingthegoodthingsinlife,including thearts.
Inhistheoreticalworkandhispolicy-makingexperience,hehad learnedtomakethelivesofworkingpeoplemorestableandsoto createabettermateriallifeforthem.Thelonggenesisofhistrilogy, culminatinginthe GeneralTheory,nolongerrequiredanapologia. Keynes’sroleasaneconomicproblem-solverandapatronofthe artswouldcontinuethroughhislastdecade,despitehispoorhealth. Tragically,heneverreachedoldage,dyingattheageof 63 in 1946. However,bythenhecouldalreadylookbackonacareerthat includedmorethanmosteconomistsmanage,quiteapartfromhis otherroles.By 1946,hecouldseeKeynesianismemergingandhis disciplesusinghistheoriestoargueforpoliciesthatwentbeyond anythinghehadenvisaged.Bythetimeofhisdeath,his General Theory hadalreadyachieveditsdominantplaceineconomics,and theprocessofconstructingthenewKeynesianorthodoxythatdominatedeconomicthinkingforthenextthirtyyearswaswellunder way.Hisideashadsuccessfullybeenusedtosolvetheproblemof findingnon-inflationarywaystofinancetheSecondWorldWar.The constructionofnationalincomestatistics(alonglinesinspiredby histheory)hadbecomefirmlyestablishedasaresponsibilityof governmentandwasabouttobetakenupbythenewlyformed UnitedNations.Andhehadservedasdiplomat,economistand negotiatorasheadoftheBritishteamsthathadnegotiatedwith theUnitedStatesoverwartimefinanceandthepostwareconomic order.
KEYNESTHEPHILOSOPHER
Inthelasttwodecades,arichliteraturehasdevelopedinthestudy ofKeynes’sphilosophicalwork.3 Theprimaryfocusofthismaterial hasbeenonexplicatinghistheoryofprobability.Butnotsurprisingly,giventheweightofKeynes’sname,therehasbeencontroversyoverthenatureofhisearlyworkinphilosophy.Theofficial biographybyRoyHarrod(1951),althoughanindispensableaccount ofKeynes’slife,minimizedtheconnectionbetweenKeynes’sphilosophyandhiseconomics.DiscussionofKeynes’searlybeliefs mighthaveledtoopendiscussionsofhishomosexualityandso, forHarrod’siconographicpurposes,theearlyinterestinphilosophy
hadtobedismissedasayouthfulenthusiasmthatthemature Keynes,theeconomist,hadleftbehind.Muchofthe‘Keynesand philosophy’literaturestartswiththeearlylife.Itexploresthe beliefsofKeynesandhisfriendsastheywereformedunderMoore’s tutelage;itexploreshisrelationshipswithBertrandRussell,Ludwig WittgensteinandFrankRamsey.4 Thisisaliteratureinwhich ethicsiscentral,thoughtiedupwithepistemologyandinduction. AmajorstrandinitisKeynes’sworkonuncertaintywhichcame outofthesamecontext,hisideasonuncertaintyarisingaspartof hiscritiqueofMoore’sethics.Thisispotentiallyofgreatimportancebecauseofhisclaimsabouttheroleplayedbyuncertaintyin hismatureeconomics;whendefendinghis GeneralTheory in 1937, hebrushedasidethetechnicalpointsmadebyhiscriticstoargue thathismainpointwasthatweknowverylittleaboutthefuture,in awaythatappearstoconnectveryeasilywithhis Treatiseon
Probability.
OnewayintothesecontroversiesistoconsiderRamsey’sdevastatingcritiqueofKeynes’s Probability,whichlevelledKeynes’s attempttobuildatheoryofprobabilityonPlatonicfoundations. Untilthepasttwentyyears,philosophersalwaystookatfacevalue Keynes’scapitulationtoRamseyinhisreviewofRamsey’scritique (1931),publishedafterRamsey’sdeath.However,duringthe 1980s, twoCambridgedoctoraldissertationsarguedthatKeyneshadnot,in fact,capitulatedtoRamsey.Oneofthese,byAnnaCarabelli,argued thatKeyneshadalwaysheldthesubjectivistpositiontraditionally attributedtohim after hiscapitulation.Theother,byRoderick O’Donnell,arguedthatKeynescontinuedtoholdwhathastraditionallybeentakentobehis earlier objectivistpositionandsothathe nevercapitulated.Inthepresentvolume,TizianoRaffaelliand DonaldGilliestakethemoretraditionalposition,carefullyexplaininghowKeynesformedhisearlyobjectivistpositionandhowRamsey’scritiquechangedthisinfundamentalways.5 Raffaellialso showshowKeynes’sargumentforanewunderstandingofprobabilitydrewonseveralstrandsofCambridgephilosophy.Intryingtoact well,justasmuchasintryingtomakemoney,oneisalwaysforcedto makedecisionsthatwillplayoutinaworldthatonecannotforesee perfectly.Gilliesshowsconvincinglythatwhilethisconcernwithan uncertainfutureneverdisappeared,Keynes’sunderstandingofprobabilityitselfchangedconsiderablyovertime.Whereashehadstarted
inhisearlyworkwithaPlatonicideaofprobabilityinwhichonecan actonthebasisofthefuturethroughknowledgeoftheseobjectively definedprobabilities,histhinkingevolved,inresponsetoRamsey’s criticism,toencompassanideaofprobabilitybasedontheideathat peopletendtofollowtheherdandtomaketheirestimatesofthe futureinthehopethatwhatthecrowdisthinkingcanprotectthem.
AnotherwaytoframeKeynes’sinterestinphilosophyistolook athisinterestinethicaltheoryandtheinfluencesonthisconcern ofhis.ThomasBaldwin’sessaytakesadispassionatelookatoneof theideasinG.E.MoorethatmostfascinatedKeynesandhiscontemporariesintheApostles,theconceptofthenaturalisticfallacy. Moorearguesin PrincipiaEthica (1903)thatvirtuallyallprevious ethicaltheorieshavebeenerroneouslybaseduponthefallacythat thereissomethingintheworld(e.g.utility)thatalwaysentailsthe good.Inplaceofthisview,Moorearguesthatgoodisanindefinable entitythatcannotalwaysbeattachedtosomethingintheworld. Utilitymaybegood,oritmaybebad.Onlygoodisalwaysgood. ThisreductionismhadtheperverseeffectofbothfreeingtheApostlestoexamineeverythingintheworldafresh,todetermineifit was,indeed,good,andalsoofreleasingthemfromthetraditional demandsofethicalinquiry.‘Bycontrastifoneadoptsthetraditional viewthatethicalvaluesconnectwithpossibilitiesforhumanfulfillment,thequestionofthevalueofloveandbeautyshouldbe,in principle,susceptibleofexplicationandsensiblediscussion’(see p. 239).
ButthereismuchmoretoKeynes’searlyworkinphilosophyand theinfluencesthatshapedhimduringhisundergraduateyears. KeynesalsowroteonEdmundBurkeduringhisphilosophical apprenticeship,andthisinfluenceshapedhislaterworkineconomics.ThomasBaldwinwritesinhisessayonKeynes’sethicalconcerns ofhowtheywerealsoshapedbyFranzBrentano,whileTiziano RaffaelliinhisessaydiscussesBurke’sconservativeinfluence.
CraufurdGoodwin’sessaybreaksnewgroundinshowing howKeynes’seconomicthinkingwasinfluencedbytheideas ofhisfellowBloomsburys,especiallyRogerFryandLeonard Woolf.GoodwinshowsthatafterleavingCambridge,Keynescontinuedtodevelophisethicalthinkingandarrivedatapositionthat positslevelsofethicalconcern.First,onemustmeetthematerial concernsthatsustainlife(theactuallife);butthen,oncethese
concernsaremet,oneisobligedtoconsideralargersetofhuman needsandactivities(theimaginativelife).Thesericherschemata mustcertainlyhaveinfluencedKeynes’sevolutionfromseeing money-makingandfinancialknowledgeasagoodexerciseofthe mindtohismorematurepositioninwhichhecouldappreciateit asameanstohelpworkersachievemorestablelivesandtosupportthearts.ItalsoechoestheobservationmadeinBaldwin’s essaythatKeyneswasinfluencedbyMooretolookbeyondthe simplecalculusofutilitarianism.
THEPHILOSOPHERASECONOMIST
ThequestionofhowKeynes’sworkinphilosophyinfluencedhis workineconomicshasbeencomplicatedinrecentyearsbythe discoverythatduringthecentralyearsofhiscareerasaneconomist, heexplicitlyeschewedthekindofrhetoricaboutuncertaintyand expectationsthatsoclearlyinfluencedhis GeneralTheory.Earlyin hiscareer,KeyneswasacloseadherentoftheCambridgetheoryof thetradecycle,whichdependedcruciallyontherolesofuncertainty andexpectations.Butasheprogressedthroughthe Tract andthe Treatise,heturnedagainstthisearlierinheritanceandbecamea sharpcriticoftheargumentthateitheruncertaintyorexpectations haveanyimportantroleinmacroeconomicphenomena.Bythetime thathebecameamemberoftheMacmillanCommitteein 1930,his commitmenttoamechanisticmodelofthebusinesscycle(driven bychangesintheinterestrate)wassostrongthatheengagedhis fellowCambridgeeconomistA.C.Pigouinanacerbicexchange beforetheCommittee,andtriedtoforcehimtoadmitthatuncertaintyandexpectationswerenopartofaproperunderstandingof thecurrentenvironment.6 Pigou,however,refusedtogiveuponthe olderCambridgeargumentsthatexpectationswereacentralcause ofthebusinesscycle.Keyneswasrunninganargumentthatthe levelofinterestrateswastheonlyfactornecessarytounderstanding thebusinesscycle,butPigouwouldhavenoneofit,believingthat profitexpectationsofentrepreneurswereasimportantasinterest rates.
Keynesheldontohismechanisticexplanationsofthebusiness cycleuntillate 1933,ayearintothecompositionofthe General Theory.Duringthistime,theyledhimintoanotherdisagreement,
thistimewithHubertHenderson.In 1929,thetwohadcollaborated on‘CanLloydGeorgedoit?’,butby 1932 theywerediametrically opposedabouttheefficacyofloan-financedpublicworksprojects. Hendersonhadcomeroundtothepositionthatrunninglargebudget deficitswouldfrighteninvestors,dampeningtheirexpectationsof futureprofitsandcausinginvestmenttofalloff.Thiswasanathema toKeynes,whostatedinhisletterstoHendersonthatarguments abouttheimportanceofexpectationstothebusinesscyclewere ridiculous.PerhapsinresponsetohisexchangeswithHenderson, however,Keynessuddenlystartedtoreclaimhisyouthfulheritage inCambridgebusinesscycletheory,introducingexpectationsinto severalofhisfunctionsinthelectureshegaveatCambridgeinthe autumnof 1933.HehadnotthenacceptedHenderson’spointabout frighteninginvestorswithhispolicyinitiatives,buthedidcome roundtoacknowledgingthepossibilityinhisfinalargumentsin 1936,andhereiteratedthemintheyearimmediatelyfollowingthe publicationofthe GeneralTheory 7
THEPOLITICALPHILOSOPHYOFKEYNESIANISM
KeyneswroteatatimewhentheBritishpoliticalsystemwasundergoingprofoundchanges.InKeynes’schildhood,governmentalternatedbetweentheLiberalandConservativeParties,thisperiod culminatinginthegreatLiberaladministrationof 1906.This administrationmarkedasignificantchange,withtheLiberalParty adoptingmoreradicalstancestowardssocialreform,breakingaway fromGladstonianLiberalismtointroduceprogressiveincometaxation,oldagepensions,unemploymentinsuranceandaraftofother measures.Theintellectualcounterparttothiswastheso-called NewLiberalism,representedbysuchthinkersasL.T.Hobhouse andJ.A.Hobson,offeringanalternativetothesocialismofthe emergingLabourParty.TheinterwarperiodwasoneofConservativedominance,theleftbeingdividedbetweentheLiberals,who werefatallysplitbetweenOldandNewLiberals,andtherising LabourParty.
KeyneswasaLiberal,sidingwiththeradicalex-PrimeMinister DavidLloydGeorgewhentheAsquithandLloydGeorgewingsof thepartysplit.Heisfamousforsayingthat‘whentherevolution comes,youwillfindmeonthesideoftheeducatedbourgeoisie’.He
describedhisownpoliticsasfirmlytotheleft:‘IfancythatIhave playedinmymindwiththepossibilityofgreatersocialchanges thancomewithinthepresentphilosophiesof,letussay,MrSidney Webb,MrThomas,orMrWheatley.8 Therepublicofmyimaginationliesontheextremeleftofcelestialspace’(JMKIX: 309).However,hishomelayinLiberalism.ReferringtoSocialists(‘who believetheeconomicfoundationsofmodernsocietyareevil,yet mightbegood’, ibid.),9 hecontendedthat‘theirhistoriccreedof StateSocialism,anditsnewerglossofGuildSocialism’nolonger interestedthemanymorethanitinterestedLiberals.Bothpartiesof theleftshouldcontinue,andshouldworktogether.Hisphilosophicaldefenceofthisconclusionisworthquotinginfull.
Thepoliticalproblemofmankindistocombinethreethings:economic efficiency,socialjustice,andindividualliberty.Thefirstneedscriticism, precaution,andtechnicalknowledge;thesecond,anunselfishandenthusiasticspirit,whichlovestheordinaryman;thethird,tolerance,breadth, appreciationoftheexcellenciesofvarietyandindependence,whichprefers, aboveeverything,togiveunhinderedopportunitytotheexceptionalandthe aspiring.Thesecondingredientisthebestpossessionofthegreatpartyof theproletariat.Butthefirstandthirdrequirethequalitiesofapartywhich, byitstraditionsandancientsympathies,hasbeenthehomeofeconomic individualismandsocialliberty.
(JMKIX: 311)
ButifwecantraceKeynes’sconcernswithsocialism,theexact natureofhiscommitmenttocapitalismhasneverbeenwellunderstood.CraufurdGoodwin’sessay,however,wouldseemtosuggesta broadBloomsburyframeworkforunderstandinghiscommitmentto capitalismthatwouldalsoconnecthiscommitmentwithhisearliestconcernsinG.E.Moore’swork.Eventually,Keynesseemedto havecometoamatureunderstandingofcapitalismthatsawitas thesystemmostlikelytosustainthe‘actuallife’ofbasiceconomic existenceaswellastheonemostapttocreateanadequatesurplus forsustainingthe‘imaginativelife’.AsGoodwinshows,theseschematareflecttheartcriticRogerFry’svisionofmodernlife,andalso allowedKeynestoargueforcapitalismasthebestmeanstoMoore’s endsofartandfriendship.
Likewise,theproblemsofcapitalismthatbecameleitmotifsin Keynes’swritingsdrew,atleastinpart,fromhisexperienceasa
mainfigureinBloomsbury.Asthechaptersonbothhisaesthetics (Goodwin)andhiseconomics(LeijonhufvudandHoover)show,one ofhiscentralconcernsregardingcapitalismwasthatinformation wasnotwellco-ordinated,andthatthisledtoinevitabledisruptions inoutputandemployment.Ashisoutlookmaturedduringthe creationofthe GeneralTheory,Keynescametoseethebehaviours fosteredbythislackofco-ordinationasthesourceofadditional economicproblems.Facedwiththeuncertainfuturecausedbyrepeatedco-ordinationfailures,investorsandfinancierswerereduced tobehavinginwaysthatseemedtoresemblethoseofgamblersata casino.Keynescametobelievethattheoutcomesofinvestments restedlargelyonluck:onwhetherotherinvestorsmakingthesame gamblestuckwithit.Ifone’sfellowinvestorslostconfidence,this couldeasilycauseacollapseinthevalueofone’sowninvestments.
Keynesdidnotbelievethatthispotentialforthesystemto collapsenecessarilymeantthatthesystemwasliabletocontinual, unpredictableswings.Whileswingsinbehaviour could leadto swingsinoutputandemploymentinhisbasicmodel,theproblem onwhichhefocusedmostintenselywasthepossibilitythatthe wholesystemmightswingintoastateoflowoutputandlow employmentfromwhichitwouldbecomedifficulttoliftpeople’s expectations.Shouldthishappen,thewholesystemcouldgetstuck nearthislowpointandstaythereindefinitely.Keynessawthisas thebestexplanationoftheback-breakingstagnationthatcharacterizedthelate 1920sandthe 1930sinBritain.Thebiggestproblem wasnotswingingupanddownbutbecomingstuckatalowpoint.
Keynes’sconcernwiththepossibilityofbeingstuckforlong periodsinalow-employmentequilibriumpositionledtooneof hisbest-knowndepictionsofcapitalists,asbeingdrivenby‘animal spirits’.Hesawthecollapsedexpectationsandtheconsequenteconomicdepressionasunnecessaryaspectsofmoderncapitalism,an unreasonableresponsetotheabundanceandpossibilitiesavailable toentrepreneurs.Helikewisesawtheoptimismandsanguineexpectationsnecessarytoanupswingasessentiallyamatterofoutlookand‘animalspirits’:whatwasreallynecessaryforprosperity wasnotpublicworksprojectsandgovernmentbudgetdeficits,but hopeandoptimismonthepartofcapitalists.Thus,inanewsbroadcastontheoccasionofBritain’sdeparturefromtheGoldStandard in 1931,hefocusedonthepsychologicalimportanceofthechange:
‘Itisawonderfulthingforourbusinessmenandourmanufacturers andourunemployedtotastehopeagain.Buttheymustnotallow anyonetoputthembackinthegoldcage,wheretheyhavebeen piningtheirheartsoutalltheseyears.’10 Intheend,publicworks anddeficitsweremerelyshort-termpalliativesthatmightbesuccessfulinhelpingtobolster‘animalspirits’.BradleyBatemanargues inhisessaythatmuchofthefocusondemandmanagementinthe KeynesianliteratureproducedafterKeynes’sdeathdistortsthis focusinKeynes’sownwritings.
PerhapsbecauseKeynessawthatimproved‘animalspirits’could solvetheproblemofeconomicdepressionandunemployment,he argued,laterinhislife,thatitwouldbepossibletoeliminate scarcitywithintheforeseeablefuture.Today,whenweareconsciousofthedreamsandaspirationsofanentireglobalcommunity toeverhigherlevelsofmaterialwealth,suchaspirationsseem quixotic;however,Keyneslivedinanagewhenitwaspossiblefor himtobelievethatitwouldtakenomorethanacenturytoeliminatetheworstpovertyintheindustrialworld.Thispositionwas almostcertainlyinfluencedbytheschematahehaddrawnfrom RogerFry.Sincehebelievedthattherewasalreadysomesurplus beyondthemostbasicneedsoftheBritishpopulation–theactual life–andthatthissurplussupportedtheimportantexperiencesin theimaginativelife,itcannothavebeentoohardtobelievethatall theneedswithintheactualspheremightbemetwhentheregular downturnsofthebusinesscyclehadbeenamelioratedand‘animal spirits’hadbeenheldatahighlevelforseveralgenerations.Hislove forartandliteraturemusthavemadehimhopeferventlyforsucha world,despitethedifficultythatothershadwithenvisagingit. Onemightthinkthatthiswouldhaveplacedhimwithinthe orbitoftheNewLiberals,butheremainedoutsidethatgroup. Socially,culturallyandintellectually,therewasamarkedgap betweenthemandtheBloomsburysettowhichKeynesbelonged. ThoughKeynesattachedgreatimportancetoremedyingthedefects ofcapitalism,hedidnotsharetheNewLiberals’keenconcernfor socialjusticeandregardedtheso-calledNewLiberalismas‘atypical exampleofOxfordIdealistmuddle’(Skidelsky 1992: 134).He becamebrieflyinvolvedintheSummerSchools,whichwereestablishedbytheNewLiberalstoformulateasetofpoliciesforthe 1920s,butthisservedonlytomakeclearhisdifferencesfromthem.
In 1922 hebecameinvolvedinthetakeoverofthejournal Nation andAthenaeum,ruthlesslypushingouttherepresentativesofthe SummerSchoolmovementandinstallinghisCambridgecolleague HubertHendersonaseditorandLeonardWoolfasliteraryeditor.In placeoftheOxfordandManchesterNewLiberalism,Keynesmade itanorganofCambridgeeconomics(includingmanyofhispieces onpolicy)andBloomsbury.11
ThoughelementsofKeynes’svisionweresharedbymanyofthe ‘Keynesians’whotookuphisideasinthe 1940sandafter,theywere takenupselectively.SamuelBrittan’sessayquestionsthedegreeto whichKeyneshadavisionthatiscompatiblewiththesubsequent socialdemocraticbentofmuchofKeynesianeconomics.But clearly,Keynes’svisionofcapitalisminfluencedhiseconomictheory.However,itisnecessarytobecarefulhere,forhisvisionwas largelyreflectedinthe interpretation heplacedonthemathematicalapparatushehelpedtocreate, not inthemathematicalapparatus itself.His‘model’ could beinterpretedintermsofhisvision,but therewasnonecessitytodoso.Moreover,certainpartsofhisvision couldberepresentedinthemodelbetterthanothers.Hisideas aboutthewayspendinggeneratedfurtherdemandwerefairlyfaithfullyrepresentedbythemathematicaldeviceofthemultiplier,but hisideasabout‘animalspirits’andinvestmentwereall‘offstage’, foruncertaintydidnotappearanywhereinhismathematics.
KEYNES ’ SSCIENTIFICMETHODOLOGY
KevinHoover’sessaydrawsonadistinctionbetweenaimingfora comprehensivetheoryandworkingwiththeoriesthatarepurposebuilttosolveparticularproblems,seeingthelatterasthehallmark ofadiagnosticscience.ThiswasKeynes’smethod,histheories beingmadeoutofbuilding-blocks(theconsumptionfunction, liquiditypreference)thathadbeencreatedforthepurpose.This wasthemethodofhisteacherAlfredMarshall.AxelLeijonhufvud’s essaymakesthepointthatonereasonforsuchamethodologywas thatbothKeynesandMarshallwereanalyzingsystemsinmotion: equilibriumwasbutapointattractorinsuchaprocess.Whensystemsareinmotioninthisway,providingacomprehensivemodelof theirdynamicsisalmostimpossible,somethingofwhichMarshall hadbeenwellaware;systemshavetobecutintopieces,using
simplifications.Thusthecapitalstockmaybetakenasconstant, onthegroundsthatitchangestooslowlyforsuchchangestobea significantfactorinvariationsinemployment.Similarly,othervariablesmaybetakentoadjustsufficientlyfastthattheiradjustment canbetakentobeinstantaneous.
However,wheneconomistscametomakesenseofthe General Theory,theyinterpreteditinadifferentway–intermsoftheories thataimedatcomprehensiveness,asisexplainedinRogerBackhouse’sessay.Generalequilibriumtheory,interestinwhichwas revivedbyJohnHicks,PaulSamuelsonandothersinthe 1940s,was suchatheoryand,fromthe 1940s,wasincreasinglytheframework withinwhichKeynesianideasweredeveloped.Thiswasknownas theprojectofprovidingmicroeconomicfoundationsforKeynesian economics,anditinvolvedmanyofthemostprominentpostwar macroeconomictheorists.DavidLaidler’sessayexplainstheconnectionsbetweenKeynes’sownwork,thatofhispredecessorsin macroeconomictheorizingandhismanysuccessors’.Thoughhis successorswereconcernedwithpolicy,theysoughttofindpolicy prescriptionswithinatypeoftheorythatwasverydifferentfrom thatusedbyKeynes.Asthistheorybecamethegenerallyaccepted waytodoeconomics,Keynescametobeseen,notashavinghada differenttypeoftheory,butasnothavinghadatheoryatall.Frank HahnhasgonesofarastosaythatKeynesdidnotknowhowto theorizerigorously(Blaug 1990: 74).Thisisthechangethathasbeen called‘theformalistrevolution’,andsomeeconomistshavebeen verycriticalofit(Blaug 1999).Itisnodoubtthecasethatthe demandforgeneraltheories,andareluctancetoengageinwhat Hoovercallsdiagnosticscience,hasbeenanimportantfactor behindcertainKeynesianthemes(‘animalspirits’andco-ordination failures)beingpushedoutofmacroeconomics.
AnotherdimensiontothisisKeynes’streatmentofindividual behaviour.Inmoderneconomicsithasbecomestandardpracticeto modelagentsasutilitymaximizers.Consumptionismodelledby assumingthatagentsmaximizeutilityovertheirlifetimes,oreven overaninfinitehorizonthatincludesthelifetimesoftheirdescendants.Demandformoneyistheresultofselectinganoptimal portfolioofassetsgiventheneedtofinancetransactionsandexpectationsofthefuture.Keynes,however,didnotviewthingsthis way;butcontemporaryeconomistsarewrongtoclaimthathe
hadnomicrofoundationsforhismacroeconomics.Herejectedutilitarianism,andwithitthenotionofrationalbehaviourthatin moderneconomicsisconsideredvirtuallysynonymouswithmicrofoundations,butthatwasbecausehehadhisownmicrofoundations,thatwerebuiltonaverydifferentfoundation,perhapscloser tothatofmodernbehaviouraleconomics.Histheoriesofconsumerbehaviourandofbehaviourinsecuritiesmarketswereboth basedonamixtureofintuitionsabouthowsensiblepeoplewould behavewhenfacedwiththesituationshebelievedthemtoface(no doubtinformedbyhisowninvolvementinsuchactivities),and whathehadlearnedthroughobservingbehaviourcloseathand.It wasanalmostcasualuseofevidence,reminiscentofhisteacher, Marshall.Thoughhepaidgreatattentiontothecollectionand compilationofstatistics,hedidnotbelievethattherewasmuch scopeforformalstatisticalmethods,suchaswerebeginningtobe usedineconomicsinthe 1930sandwhichdominatedthesubjectin thepostwarperiod.
In 1939,theDutchphysicist-turned-economistJanTinbergen published,fortheLeagueofNations,aneconometricmodel.This turnedouttobetheforerunnerofmanysuchmodels,builtusing moresophisticatedtechniquesandbecominglargerandlargerfrom thelate 1940stotheearly 1970s.Duringthisperiod,suchmodels werealmostalwaysstructuredalongKeynesianlines,tosuchan extentthatlarge-scalemacroeconometricmodellingseemedthe naturalempiricalextensionofKeynesianeconomics.Keynes’sresponsetoTinbergen’searlyworkisofgreatinterestbecauseitisthe onlypublishedexampleofhisreactiontothetypeofempiricalwork thatlatercametobelinkedtohisname.12
AtonelevelthiswasadisputebetweenKeynesandTinbergen overthespecifictechniquesusedbyTinbergen.Keynesofferedwhat couldbeseenastechnicalcriticismsofcertainstatisticaltechniques,whetherdataadmittedtheinterpretationsTinbergenplaced onthem,andsoon.However,beneaththislayphilosophicaldifferences.ThoughKeynesbelievedstatisticaldatawereimportant(he hadbeenresponsibleforencouragingwartimeworkontheconstructionofthenationalaccounts),hewaswaryofplacingtoomuch weightonthemandattimeswouldchoosetorely,instead,onhis ownintuition.Thereisroomfordebateoverwhatepistemology
underlayKeynes’sthinking:whateveritwas,itwascertainly neithertheempiricismassociatedwiththeCowlesCommisionin the 1940snorthepositivismpropagatedbyMiltonFriedmanduringthe 1950s.KeyneswasaMarshallianinhisuseofformaltechniquesasameansforhandlingideasthatweretoocomplexto becapturedcompletelywithinthemathematics.Heusedformal theory,buttheneedtokeepthecomplicationscontinuallyinthe backofone’smindseverelyconstrainedhowsuchtheorycouldbe used.
Thereareclearparallelsherebetweenwhatwashappeningin economictheoryandinappliedeconomics.Duringthe 1930sand 1940s,thereweremovestowardsmoreformalmethodsinboth fields.Attheriskofoversimplification,theycouldbesummedup asthemovementawayfromMarshall.Marshallusedformaltheory, butbecausehisideaswererootedinanevolutionaryunderstanding ofhumannatureandofsocialorganization,heremainedsceptical aboutit,holdingthattheworldwastoocomplexformathematical models,whichwerenecessarilysimple,toencompassitsramifications.Hisknowledgeofthiscomplexityderivednotfromstatistical evidencesomuchasfromcarefulobservation;itwaswhatmight nowadaysbeconsidered,atbest,historicalmethodsor,atworst, casualempiricism.Keynesoccupiesaparadoxicalpositionhere:his ideasfuelledtheformalizationofbothmacroeconomictheoryand econometrics,butatthesametimeheremainedprofoundlyscepticalofbothdevelopments.Methodologicallyheremainedcloserto Marshall(asbothHooverandLeijonhufvudargue)thantothose contemporarieswhoseworkhewasinspiring.
WHOWASKEYNES ?
OnlywhenweseeKeynesinthislight,assomeonewhoseethical, philosophicalandeconomicthinkingwasshapedfullybyhisencounterswithlife,canweunderstandwhathewroteandtheorized. Itisabrittlevictorytoexplicatehisscholarlyworkinisolationfrom hisengagementwiththeworld.Asayoungman,Keyneshadtried toliveonthetheoreticallevelanddescribessomeoftheseearly effortsinahumorouslightin‘Myearlybeliefs’;butwithexperience andmaturityhewasabletobuildasetofmoralcommitmentsout
ofthoseearlyexperimentsthathebelievedheldthepotentialto improvetheworld.
Keynesisoneofahandfulofeconomistswhoselifewasrich enoughtowarranttheextensivebiographicaltreatmenthehas received.Theofficialbiography,byRoyHarrod(1951),hasalready beenmentioned.HarrodwasafriendandcolleagueofKeynes,and hadbeenprominentinthepropagationofKeynesianeconomics.His biography,asmentionedearlier,conformedtotheVictorianideas aboutbiography,perhapsironicallygivenBloomsbury’sattackon suchvalues.TheKeyneswhoemergedfromHarrod’sbiography wasabrilliantfigurewhoroseabovehisVictorianoriginstosave Britainfromthedarkforcesofeconomicignorance,butwhoretained ameasureofVictoriandedicationtodutyinhisworktofashionthe postwarfinancialworld–ataskinwhich,giventheweaknessof hisbargainingposition visa ` vis theAmericans,hewasremarkablysuccessful.RobertSkidelsky’sthree-volumebiography(1983, 1992, 2000)13 attemptedtooffera‘BloomsburyKeynes’whohad completelyescapedHarrod’sVictorian‘taint’.Skidelsky’sKeynes isbothbrilliantandcivilized,humaneandcomplex.Inrevealing Keynes’shomosexualityandtakingseriouslyhiscommitmentsto art,SkidelskyofferedafullerandrichervisionthanHarrod’s.But Skidelskyalsosoughtto‘saveKeynesfromtheeconomists’,believing thatsuchabrilliantandcomplexmanwasabovethemundaneness ofcontemporaryeconomics.ThisleftspaceforDonaldMoggridge’s (1992 )insightfulexploration,withthebenefitoffortymoreyearsof hindsightthanwereavailabletoHarrod,ofKeynesasfullyapartof theworldofmid-centuryeconomics,shapingittheoreticallyand morally.EachpicturecontainsapieceofKeynes,andeachreminds usofhowmuchhedidtotemperandshapehisunderstandingof ethics,economicsandfinance,andofhowhardheworkedtobring themintotheserviceofwhatisreallyimportantinlife.14 Keynes’s involvementinBloomsburygoesfurtherthanbeinginfluencedby Bloomsbury:hewashimselfamajorpartofthegroup.Assuchitis reasonabletoimaginethatKeyneswasamodernist.Andyethis writingonuncertaintyhasoftenbeenusedtodescribehimasa post-modernist.MatthiasKlaesexplorestheimplicationthat Keynesmustbeseenaslyingsomewherebetweenmodernismand post-modernism.
ThepresentvolumedoesnotclaimtooffereitheracomprehensivesurveyofthesestudiesofKeynes’sintellectualdevelopmentor analternativetothem.Ratherittakesupanumberofthemesfrom thisliterature,takingstockincertainareas,anditintroducessome newones.ItspansKeynes’sintellectualdevelopmentandthecontext(economicandsocialaswellasphilosophical)inwhichthat developmenttookplace,anditexploresthewaypeoplerespondedto Keynes’sideas.
CONCLUSIONS
Keynesisoneofthefewpeopleofthetwentiethcenturywhohad influenceacrossmanyspheres.Hemadeimportantcontributionsto thetheoreticalunderstandingofhowtoliftaneconomyoutofmass unemployment.Evenmoreimportantly,hehelpedshapeacommitmentwithintheBritishgovernmenttoacknowledgingtheterrible dislocationsandwastefulnessofmassunemployment.Andhe helpedtoshapeanascentpubliccommitmenttothesupportof the‘imaginativelife’.Hedidnotsimplyexercisehistalents–he sawandunderstoodthepotentialforbuildingabetterworld.Keynes alwayssawthispotentialhumblyandwithdetachment–‘Economistsarenotthemakersofcivilization,butthecustodiansofthe possibilitiesofcivilization’–buthewasferventlycommittedtothe principleofmakingcivilizationpossible.Withoutpretendingto offeradefinitivebiographicaltreatment,eventohavethelastword onwhichKeyneswastherealKeynes,ourpointisthatitispossible tosee,inthecomplexityofhislife,theforcesthatshapedamanand hismoralcommitments,whichinturnmotivatedhiseconomics.
NOTES
1 ThisoccasionisdiscussedinmoredetailintheProloguetoSkidelsky (1992),entitled‘Whatisonetodowithone’sbrains?’
2 ThemostcompleteaccountofKeynes’sworkontheEconomicAdvisoryCouncilisHowsonandWinch(1977).Clarke(1988)providesthe bestaccountofthecutandthrustofhisworkinadvisinggovernment.
3 GilliesandIetto-Gillies(1991),Davis(1994b),O’Donnell(1989), Carabelli(1988),Bateman(1988),Andrews(2000),RundeandMizuhara (2003),Bateman(1996),BatemanandDavis(1991),Coates(1996).
4 Thisliteratureisdiscussedbelow.
5 Bateman(1987)isthefirstdefenceintheliteratureofthetraditional positionthatKeyneshad,infact,capitulatedtoRamsey.
6 SeeBateman(1996)forafullexplanationofKeynes’schangingattitudes touncertaintyandthebusinesscycle.
7 JMKVII: 162
8 JamesHenryThomas(1874–1949)andJohnWheatley(1869–1930)were bothLabourMPs.SidneyWebb(1859–1947)wasalsoaLabourMPand isperhapsbestknownforfoundingtheFabianSocietywithhiswife, Beatrice.
9 Communists,socalled,wentfurther,believingthatevilhadtobe createdsothatgoodmightcomeoutofit.
10 BritishMovietoneNews;extractincludedinvideo,JohnMaynard Keynes,editedbyMarkBlaug.
11 Skidelsky(1992: 134ff).
12 JMKXIV: 306–20;Tinbergen(1940).SeePatinkin(1982),Lawsonand Pesaran(1989)andBateman(1990).
13 AbridgedasSkidelsky(2003).
14 Itisalsoworthdrawingattentiontoseveralstudiesofthedevelopment ofKeynes’seconomicideasthat,thoughtheyarenotbiographies, exploreanimportantpartofhisintellectualdevelopmentindetail. ThreeofthebestarePatinkin(1976)andClarke(1988, 1998).Dostaler (2005)isaveryrecentstudythatprovidesmuchbackgroundinformationandanintroductiontoFrench-languageliteratureonKeynes.
2TheKeynesianrevolution
Ibelievemyselftobewritingabookoneconomictheory, whichwilllargelyrevolutionise–not,Isuppose,atonce, butinthecourseofthenexttenyears–thewaytheworld thinksabouteconomicproblems.
KeynestoGeorgeBernardShaw (quotedinSkidelsky 1992: 520)
[A]nelementofmyth-makingisinvolvedwheneverthe phrase‘Keynesianrevolution’isdeployed...therearrangementofideastowhichitreferswasneitherrevolutionaryintheusualsenseofthewordnorbyanymeans uniquelyKeynesianinorigin.
(Laidler 1999: 3)
INTRODUCTION
TheKeynesianrevolutionisthecentralfeatureoftwentiethcenturymacroeconomics.Ithasbeenpraised,condemnedandsubjectedtoextensivehistoricalanalysis,sometimesbeingusedasa casestudyinthephilosophyofscience.Theaimofthisessayisnot toaskwhattheKeynesianrevolution‘really’was,forthatwouldbe toaddbutonemoreturntoadebatethathascontinuedforseven decades,buttoexplorehowandwhyeconomists’understandingof theKeynesianrevolutionhaschangedintheseventyyearssincethe publicationofthe GeneralTheory.Thisisimportantforatleast threereasons.Itdemonstratessomeofthemanywaysinwhich Keynesianeconomicshasbeenunderstood,forthoughtheremaybe nearuniversalagreementthattherewas,forgoodorill,aKeynesian
revolution,therehasbeenlittleagreementoverpreciselywhatit comprised.IthelpsdistinguishKeynes’seconomicsfromthe‘Keynesianeconomics’ofhissuccessors;andithelpsexplainwhyitis superficiallyeasytouseKeynestoillustratepropositionsaboutthe philosophyofsciencebutverydifficulttomakesuchapplications convincing.
BeforemovingontodiscusstheKeynesianrevolution,itis importanttoclarifywhatisbeingdiscussedinthischapter.The termKeynesianeconomics(andbyimplicationtheKeynesian revolution)hasbeenusedtorefertothreeverydifferentthings. Thefirstisanapproachtogovernmentpolicy–theuseofmonetary andfiscalpolicytocontrolthelevelofaggregatedemandandhence thelevelofunemployment.Thesecondisapoliticalphilosophy towhichbothMarxistsanddevoteesoffreemarketsobjected equallystrongly.Thethirdisatypeofeconomictheory.Keynes, inhis GeneralTheory,wasconcernedwithchangingeconomic theory.Thischapterisconcernedwiththelastofthese.Ofcourse, Keynesianeconomictheoryhadimplicationsforpolicyand,arguably,forpoliticalphilosophy,butitishelpfultoconsiderthesethree revolutionsseparately,forunderstandingthemrequiresdifferent typesofanalysis.
FROM ‘ NEWECONOMICS ’ TOAKEYNESIANORTHODOXY
Keynesmadeapointofemphasizingtherevolutionarynatureofhis owntheoryandhisbattlewithorthodoxeconomics,describinghis bookastheresultofalongstruggletoescapefromsuchbeliefs(JMK VII:xxiii).Inadoptingthisstrategy,Keyneswastakingupatheme thathadbecomeestablishedduringtheearly 1930s(theyearsofthe GreatDepression).By 1936,thephrasethe‘NewEconomics’had cometomeantheoriesbasedontheideathatmonetaryexpansion couldcuredepression.Kitson,SoddyandMajorDouglaswere referredtoas‘theneweconomicsschool’(Bradford 1935).Thiswas notthefirsttimetherehadbeenasearchfora‘NewEconomics’. Referringtothe 1880s,Ely(1936: 144–5)hadwritten:
Themostfundamentalthingsinourunderstandingweretheideasofevolutionandofrelativism...Anewworldwascomingintoexistenceandifthis worldwastobeabetterworld,webelievedwemusthaveaneweconomics
togoalongwithit.Theoldeconomists,however,heldtheideaofabodyof establishedtruthsarrivedatchieflybydeduction,baseduponcertaintraits ofhumannatureandfamiliarobservations.
ThoughKeynesandhiscontemporariesmaynothavesharedeither Ely’srelativismorhisbeliefinevolution,theysharedhisbeliefs thattheworldrequiredafresheconomics;thatorthodoxywas abstractandbasedonpremisesthatwereirrelevanttothemodern world;andthatthenewtheorywouldmaketheworldabetterplace. However,thoughtheideaofa‘NewEconomics’wasestablished before 1936,Keynesrapidlycametobeseenasitsleader–ashaving provideditstheoreticalfoundations.Withinadecade,the‘New Economics’hadcometobesynonymouswithKeynesianeconomics (Haberler 1946: 187;Dillard 1948:viii).
Atthesametimeastalkingofthe‘NewEconomics’,economists alsobegantotalkofaKeynesianrevolution.ThebookthatpopularizedthistermwasLawrenceKlein’s TheKeynesianRevolution (1944),originallyaPhDthesissubmittedtoMIT,wherehehadbeen influencedbyPaulSamuelson.Inthisbook,Kleinlaidoutmuchof whatwastobecomethestandardinterpretationoftheKeynesian revolution.Startinghiscareerasaclassicaleconomist,Keynes developedpracticalpoliciestocureunemployment,eventhough hedidnothaveasatisfactorytheoreticalaccountofwhythese policieswouldwork.Theresultinginconsistencybetweenhistheoryandhispolicyrecommendationswasresolvedwhen,sometime in 1933,hedevelopedanewtheoreticalframeworkthatbrokewith theclassicaltradition.Kleindatedthetransitionbycomparingtwo articlesthatJoanRobinson(aclosecolleagueofKeynes)published in 1933:thefirstwasintheclassicalframeworkofKeynes’s Treatise onMoney (1930),butthesecondcontainedaclearstatementofhow savingandinvestmentdeterminedthelevelofoutput,asinthe GeneralTheory.
Kleinthenjustifieddescribingthischangeasarevolution:he reviewedthepre-Keynesianliteraturelookingforevidenceofthe classicalviewthattherecouldnotbeaprolongedperiodofdeficient aggregatedemandandthatfiscalpolicywouldnotraisethelevel ofemployment;hereviewedthecontroversiesoverthe General Theory toshowthattherewasafundamentaldifferencebetween theKeynesianoutlookandthatofclassicaleconomics;hereviewed
theextenttowhichvarious‘heretics’identifiedbyKeyneshad anticipatedthe GeneralTheory;herebuttedthechargethatthe GeneralTheory wasrelevantonlytotimesofdepression;andhe discussedtheimplicationsofthebookforsocialreform.Klein offeredaviewoftheKeynesianrevolutionthatwasverycloseto Keynes’sown,andinwhichKeyneshimselfplayedtheleadingrole.
Inthe GeneralTheory,Keynesofferedtwoaccountsoftherelationshipbetweenhiseconomicsandthatoftheclassics,bothof whichhadaprofoundeffectonthesubsequentliterature.Heidentifiedwhatheclaimedwerethekeyclassicalpostulates,thedenial ofwhichledtohisown,moregeneraltheory;andhearguedthat,if governmentpolicycouldachievefullemployment,theclassical theorywouldcomeintoitsown.Therewerethreeclassicalpostulates,anyoneofwhichimpliedtheothertwo:(1)thewage rateequalsthevalueoftheoutputproducedbyaday’sextralabour; (2)thereisnosuchthingasinvoluntaryunemployment(everyone whowantsworkatthegoingwagecangetit);(3)whentheeconomy istakenasawhole,thereisnoshortageofdemandforgoodsand services.Hethenconstructedatheory,basedoncertainassumptionsaboutconsumers’expenditure,investmentandthedemand formoneyinwhichtheremightbeanequilibriumwherepeople wereinvoluntarilyunemployed.
Thiswayofformulatingthedifferencebetweenhisworkand previoustheoriesledeconomiststoaskwhatwerethekeyassumptionsthatcausedKeynestoreachdifferentconclusions.Toidentify thesewouldbetoidentifytherevolutionaryelementinKeynes’s theory.Almostimmediatelythe GeneralTheory hadbeenpublished,economistsstartedformulatingmathematicalmodelsof therelationshipbetweensaving,investment,therateofinterest, wagesandthelevelofemployment,workingoutwhentheyyielded classicalresultsandwhentheyyieldedKeynesianones.Themost successfulofthesemodelswasproducedbyJohnHicks(1937),who reducedittoapairofcurves;thesewerelaterdevelopedbyAlvin Hansen(1953),wholabelledthemtheISandLMcurves,giving themodelanamethatstuck(thisstoryistoldinYoung 1987.In thiscontext,theKeynesianrevolutioninvolvedmakingdifferent (andarguablymorerealistic)assumptionsabouttheslopesofthese curves,andhenceabouttheunderlyingrelationships.Ofthese,the
mainonesweretheresponsivenessofinvestment(inphysicalcapital goods)andofthedemandformoneytotherateofinterest.
Duringthe 1940s,therewasarevivalofinterestingeneralequilibriumtheory.Thiswasatheoryofhowpriceswouldadjustto bringaboutequilibrium(wheredemandandsupplywereequal)ina largenumberofmarketssimultaneously.Essentiallythemechanismwasthatifdemandforonegoodweregreaterthanthequantity firmswishedtosupply,itspricewouldrise;thiswouldaffect demandsforandsuppliesofothergoods,affectingtheirprices;this processofadjustmentwouldcontinueuntil,assumingallwent well,allmarketswereinequilibrium.Thiswasbecomingthestandardwaytothinkabouteconomicproblems,soitwasnaturaltoask howKeynesianeconomicscouldbefittedintothisframework.The mostdirectwaywastoseetheIS-LMmodelasaminiaturegeneral equilibriummodel,inwhichtherewerefourmarkets(goods, labour,moneyandbonds)andthreeprices(thewage,thepriceof goodsandtherateofinterest)(seeModigliani 1944).Theproblem forKeynesianeconomicswasthatinequilibriumtherewasfull employment,soinordertoexplainKeynesianphenomenaitwas necessarytoexplainwhymarketsdidnotachieveequilibrium. Economistshadalwaysacceptedthatifthewageratewasinflexible, theresultmightbeunemployment,soeconomistssoughtother explanations.PossibilitiesconsideredbyHicks,Hansen,Modigliani andothersincludedafloortotherateofinterest(theliquiditytrap) andalimittotheamountofinvestmentthatfirmswerewillingto undertake,howeverlowtherateofinterest.
AnimportantstepintheinterpretationofKeynescamein Patinkin(1948)withtheintroductionoftheso-calledrealbalance effect.Thiswasahighlytechnicalpoint,butwithimportantimplicationsforthewayKeynesianeconomicswasconceived.The‘classical’mechanism(quotationmarksareneeded,becauseitwasa mechanismpostulatedbyKeynes,followingHawtrey,andwasnot tobefoundinMarshallorPigou)foreliminatingunemployment wasthattheexistenceofunemploymentwouldcausewages(and henceprices)tofall,raisingtherealvalueofthemoneysupplyand pushingdowntherateofinterest.Thisfallintherateofinterest wouldstimulatespending,especiallyinvestment,therebyraising demandandhenceemployment.Iftherewerealiquiditytrap,orif firmsweresimplyunwillingtoinvest,thismechanismwouldnot
work.Patinkin’sobservationwasthatasdeflationraisedthereal valueofmoneybalances,itwouldmakepeoplewealthier;evenif therateofinterestdidnotfall,thiswouldcausethemtospend more.Thisledtotheconclusionthat,providedwagescouldfall, unemploymentwouldnotoccurinequilibrium.Unemployment mustbeadisequilibriumphenomenon.Thiscontrastedwith Keynes’sclaim,thoughtbymanytobecentraltotheKeynesian revolution,thattherecouldbeanequilibriuminwhichthere wasunemployment.Theseideasweremostfullydevelopedin Patinkin’s Money,InterestandPrices (1956, 1965)whichbecame theleadinggraduatetextbookonmacroeconomicsinthe 1960sand early 1970s.Patinkindidnotminimizetheimportanceofunemployment:farfromit.Thoughtheremightexistforcesthatwould bringtheeconomybacktofull-employmentequilibrium,these mightbeveryweakoroperateveryslowly.Asaresult,unemploymentmightpersistforsociallyunacceptableperiodsoftimeandit mightbenecessarytotakecorrectiveaction.Keynesianpolicies mightbejustifiabletoeliminateunemploymentthatpersistedfor toolong.ThisledtotheconsensusviewthatthoughKeynesmay havebeenwrongtoarguethathistheoryrepresentedthegeneral case,itwastheonethatwasrelevantforpolicy.
ThisinterpretationofKeynesianeconomics,thoughitmayseem alongwayfromKeynes(itcertainlyconflictswithmuchthat hesaidaboutunemploymentequilibrium)fitsinwellwiththe secondofKeynes’sstatementsabouttherelationshipbetween histheoryandtheclassical.Attheendofthe GeneralTheory (JMKVII: 377–81),Keynesspeculatedthatifgovernmentpolicy couldensurethatresourceswerefullyemployed,theclassicaltheorywouldcomeintoitsown.Themechanismofsupplyanddemand wasanefficientwayofallocatingresourcesbetweendifferentactivities(itcouldensurethattherightmixofgoodswasproduced):its defectwassimplythatitcouldnotensurefullemployment.This distinctionformedthebasisofwhatSamuelson,whohaddoneas muchasanyonetopropagateKeynesianeconomics,termed‘the neoclassicalsynthesis’inthethird(1955)editionofthetextbook Economics,thebookthathaddonemorethananyothertopopularizeKeynesianeconomics.Bythe 1960s,thougheconomists mightdisagreeoversuchpointsastheimportanceoftherealbalanceeffectortheliquiditytrap,andhencewhetheritwasrightto
talkabout‘equilibrium’unemployment,thiswasthestandardway tothinkaboutKeynesianeconomicsandhencetheKeynesianrevolution.Keynesianeconomicshadbecomeassimilatedintothenew orthodoxy.
DISSENTINGINTERPRETATIONSOFTHE KEYNESIANREVOLUTION
Shortlyafterthe GeneralTheory waspublished,the Quarterly JournalofEconomics publishedasymposiumonthebook,containingcritiquesbyseveraldistinguishedeconomists.Theseoffered longanddetailedcriticisms,butratherthangetembroiledin details,Keyneschosetorespondbysayingwhatheconsideredthe mostimportantpointabouthistheory.Hewrote:
Iammoreattachedtothecomparativelysimplefundamentalideaswhich underliemytheorythantotheparticularformsinwhichIhaveembodied them...[Fortheclassicaleconomists]factsandexpectationswereassumed tobegiveninadefiniteandcalculableform...Thecalculusofprobability... wassupposedtobecapableofreducinguncertaintytothesamecalculable statusasthatofcertaintyitself...Actually,however,wehave,asarule,only thevaguestideaofanybutthemostdirectconsequencesofouracts... Iaccusetheclassicaltheoryofbeingitselfoneofthosepretty,politetechniqueswhichtriestodealwiththepresentbyabstractingfromthefactthatwe knowverylittleaboutthefuture.
(JMKXIV: 112–13, 115)
Inthesepassageshewastakinguptheideasoninvestmenthehad proposedinchapter 12 ofthe GeneralTheory.Therehehadargued thatinvestmentdependedonwhathecalledthestateoflong-term expectations–expectationsaboutwhattheworldwouldbelikein twentyorthirtyyears’time.Thisdependedonthingssuchas whethertherewasaEuropeanwar,towhichitwasimpossibleto attachprobabilities.Peoplesimplydidnotknow.
Keynes’sclaimthattheexistenceofuncertainty,inthe senseofuncertaintythatcannotbereducedtoprobability,has providedthejustificationforamoreradicalinterpretationofthe Keynesianrevolution,whichhasbeendescribedinsuchterms as‘fundamentalist’or‘chapter 12’Keynesianism(cf.Coddington 1983:ch. 6).WhereHicks,Samuelson,Modigliani,Patinkinand theotherarchitectsoftheneo-classicalsynthesisinterpretedthe
Keynesianeconomicsusingstandardpricetheory,inwhich supplyanddemanddependontheactionsofrational,maximizing agents,fundamentalistKeynesianismclaimedthatKeyneswas challengingthefoundationsoftheorthodoxpricetheory;orthodox KeynesianswerethereforemissingthepointofKeynes’srevolution.Fullyspecified,determinatemodelssuchastheIS-LM modelorPatinkin’smodelmissthepointofthe GeneralTheory, forKeynes’sargumentisthatnomodelcanbespecified(Loasby 1976: 167).
ThefirstfundamentalistinterpretationoftheKeynesianrevolutioncamefromHughTownshend(1937).HestartedfromKeynes’s theoryofliquiditypreference,makingthecasethatitappliedtoall goods.Allvaluationsdependedonexpectationsandwerethereforeconventional.Themostelegant,andperhapsfurthest-reaching, exponentofthisview,however,wasGeorgeShackle.Inaseries ofbooks(e.g. 1967, 1973)ShacklearguedthattheKeynesian revolutionconcernedtime.Theessenceoftimeisthatitisirreversibleandthatwecanknownothingaboutthefuture.Furthermore, humancreativityandfreewillimplythatindeterminacyisinherent inhumanbehaviour,providingatheoreticalexplanationofwhy thefuturecannotbeknown.However,themostwidelycitedexponentofthisviewwasprobablyJoanRobinson(1974),whodrewa distinctionbetweenhistoryandequilibrium,orhistoricalandlogicaltime.TheKeynesianrevolutionwasaboutbreakingwithequilibrium,whichcanoccuronlyinlogicaltime,andcreatinga theoryabouthoweconomicactivitytookplaceinhistoricaltime thatwasrelevanttotherealworld.Thisviewhassincethenbeen developedbyPaulDavidson(1972)andsomeotherpost-Keynesian economists(cf.King 2002).ThecommonfeatureofallsuchinterpretationsisthattheyseetheKeynesianrevolutionasoverthrowing preciselythetypeofrational-choicetheoryonwhichtheneoclassicalsynthesiswasbased.ThisexplainswhyRobinsoncoined thephrase‘bastardKeynesianism’todescribethepostwarKeynesianorthodoxy.
TherearecertainlypassageswrittenbyKeynesthatpoint towardsafundamentalistinterpretationoftheKeynesianrevolution.Ontopofthosementionedalready,the GeneralTheory containsachapter,puzzlingtomosteconomists,on‘Theessential propertiesofinterestandmoney’,whichcaneasilybereadas
providingsupportforthisview.ItfitswellwithmuchofKeynes’s earlierwork,suchashis TreatiseonProbability (1921)and TheEnd ofLaissez-Faire (1926).The GeneralTheory couldbeconstruedas providingatheoreticaljustificationforhisearlierclaimthat‘many ofthegreatestevilsofourtime[includingunemploymentoflabour] arethefruitsofrisk,uncertaintyandignorance’,andthatitwas necessaryforthestatetocontrolmoneyandcredit,andtodecideon theappropriatescaleofsavingandwherethosesavingsshouldbe directed(JMKIX: 291–2).
Ontheotherhand,thetextualevidenceagainstthisinterpretationisalsoverystrong.TheIS-LMmodelisbuiltfromelements thatareallfoundinthe GeneralTheory:evidenceforthisisfound inthenumberofeconomistswho,whenfacedwiththe General Theory,independentlycameupwithessentiallythesamesetof equations.WhenHicksshowedKeyneshisarticleonIS-LM,Keynes respondedthathehadnexttonothingtosaybywayofcriticism. Keynes’sclearstatementthattheclassicaltheorycomesintoits ownoncefullemploymentisachievedisclearlyincompatiblewith afundamentalistinterpretation.
Acompletelydifferentcritiqueofwhatbythenhadbecomethe KeynesianorthodoxywasopenedupbyRobertClower(1965).He sharedthefundamentalistKeynesianconvictionthattheKeynesian revolutionwasaboutamonetaryeconomy,andthatconventional modelsdidnotdealadequatelywiththis,buthedevelopedtheidea inadifferentway.Theessenceofamonetaryeconomyisthatgoods areexchangedformoney,notdirectlyforothergoods.Thismeant, amongstotherthings,thatgoodscannotbeboughtwithlabour: labourhasfirsttobesoldformoney,andthatmoneyusedtobuy thegoods.Theimplicationofthatisthatifworkerscannotsell theirlabour,theywillbeunabletobuygoods.Clowerthenadded theobservationthatifthereisunemployment,workerscannot(by definition)beabletosellthequantityoflabourtheywanttosell, whichmeansthattheycannotbuythequantityofgoodstheywould ideallyliketobuy.Hecalledthisthe‘dualdecisionhypothesis’–thenotionthatconsumptionisconstrainedfirstbyhouseholds’ resources(thehoursavailableinthedayandtheirwealth)and secondbythelabourtheymanagetosell.Withoutthedual-decision hypothesis,Clowerargued,Keynesiantheorysimplydidnotmake sense.
Thereasonwhythiswassucharadicalideawasthatitchallengedthestandardconceptionsofwhatlaybehindsupplyand demand.Ifmarketswereallinequilibrium,everyonewouldbeable tobuyandsellasmuchastheywishedatthegoingprices,and orthodoxtheorywasfine.However,outofequilibrium(whenthere wasunemployment),additionalconstraintscameintooperation thatmeantthateffectivedemandswouldbedifferentfromthe ‘notional’demandsoforthodoxtheory.TheKeynesianrevolution, therefore,involvedanewviewofhowmarketsoperated.Itturned outthatClower’sdual-decisionhypothesiswassimilartoanidea thatPatinkinhadproposedwhendealingwithdisequilibriumin Money,InterestandPrices;hehadproposedthatiffirmscannot sellallthegoodstheywishtosellattheprevailingprices,theywill cutbackontheirhiringoflabour.Puttogether,theseledtoaviewof howeconomiesmightgetstuckwithhighlevelsofunemployment: employmentwaslowbecausefirmscouldnotsellenoughgoods; andsalesofgoodswerelowbecauseworkerscouldnotselltheir labour.Itwasaviciouscircle.
Thebookthataddressedtherevolutionaryimplicationsofthese ideaswasAxelLeijonhufvud’s OnKeynesianEconomicsandthe EconomicsofKeynes (1968).Asthetitlestated,hearguedthat Keynesianeconomics,asithadcometobeunderstood,boreno relationtotheeconomicsofKeynes.Theconventionalviewattributedunemploymenttowagesbeinginflexible;asLeijonhufvud pointedout,theideathatwagerigiditymightcauseunemployment washardlyrevolutionary.Whatwasrevolutionaryaboutthe GeneralTheory,andwhichjustifiedtheword‘general’inKeynes’stitle, wasthatitwasabouteconomics‘withouttheauctioneer’.His reasoningwasthatinclassicaltheoryitisassumedthatmarkets areinequilibrium–asinmarketswhereanauctioneercallsout prices,allowingtradetotakeplaceonlywhensupplyanddemand balance.Inmarketswithoutanauctioneer,tradewilltakeplaceat pricesthatarenotequilibriumprices;asaresult,agentswillfind thattheycannotbuyorsellallthattheywishtosellatthegoing prices;andtheconstraintsanalyzedbyClowerandPatinkinwill comeintooperation.Disequilibrium,farfrombeingaspecialcase causedbyfailureofthewageratetoadjust,wasinfactthegeneral case.Keyneswasjustifiedintherevolutionaryclaimshemadefor histheory.
Leijonhufvudalsoreassessedtheargumentsoverexpectations andtherateofinterestthatarecentraltothe GeneralTheory. Inthesamewaythatheplacedargumentsaboutquantityconstraintsinthebroadercontextofeconomicswhenmarketsare notco-ordinated,heplacedKeynes’sargumentsaboutinterest ratesintoabroadercontextbyarguingthatKeyneswastalking aboutan‘inter-temporaldisequilibrium’.Becauseoftheway expectationswereformed,therateofinterestcouldnotco-ordinate decisionstosaveandtoinvest,withtheresultthattherecould emergeadeficiencyofaggregatedemand.Thistookupthemes thatSwedisheconomistssuchasErikLindahlandGunnarMyrdal, followingWicksell,hadpursuedinthe 1930s.Thesignificance ofLeijonhuvud’sargumentaboutinterestrateswasthathewas providingreasonswhyitmightbereasonabletoconsiderthefailureofmarketstoequilibriatethesystemtobethenormal,more generalcase.Keynesianeconomicswasnotsimplyaboutwhat happenedwhen,becauseofsomeinstitutionalconstraint,either thewagerateortheinterestratecouldnotadjusttobringabout equilibrium.
Forabriefperiod,Leijonhufvud’sbookwaswidelyreadanddiscussed.However,inthelongerterm,itsinfluencewasmuchless.In themid-1970s,hiswork,alongwiththatofClowerandPatinkin, wasseenasprovidingthejustificationforwhatcametobecalled ‘disequilibriummacroeconomics’,or‘fix-price’macroeconomics. FollowinganearlierpaperbySolowandStiglitz(1968),RobertBarro andHerschelGrossman(1971)constructedamodelwhereconsumerswereconstrainedbyactualsalesoflabourandfirmsemployed nomorelabourthanneededtoproducethegoodstheyactuallysold. Itwasthereforepossibleforaneconomytogetstuckinalow-level equilibriumwheretherewasunemploymentand,atthesametime, firmscouldnotsellallthegoodstheywantedtosell.Thiswas labelledKeynesianunemployment.Thoughthistypeofmodel couldbeinterpretedasawayofanalyzingtheimplicationsofmarketswheretradingtookplaceinrealtime,andinwhichtherewere manyimperfections,itcametobeinterpretedasexploringthe implicationsofrigidpricesinaWalrasiangeneralequilibrium model.Thisconfirmedwhatbythenhadbecomethestandard‘textbook’interpretationoftheKeynesianrevolutionthatLeijonhufvud hadsoughttodisprove.
THEKEYNESIANREVOLUTIONAFTERLUCAS
TheeconomiccrisisthatfollowedOPEC’sdecisiontoraisecrudeoil pricesin 1973–4 markedtheendofwhathasbeencalled‘theageof Keynes’.NotonlywasKeynesianpolicycalledintoquestion–it couldnotprovideguidancewhenunemploymentandinflationwere bothrisingsharply–butthetheoreticalframeworkthatunderlay Keynesianeconomicswaschallenged.Themainarchitectofthis challengewasRobertLucas,whoseworklaidthefoundationsfor whatcametobecalledtheNewClassicalMacroeconomics.Where previouschallengers(suchasMiltonFriedman)hadworkedwithin atheoreticalframeworkthathadmuchincommonwiththeKeynesian,andwasarguablystronglyinfluencedbyit,thefoundations oftheNewClassicalMacroeconomicswereradicallydifferent. WhereKeynesianeconomicswasbasedontheexistenceofempiricalregularitiessuchasthemarginalpropensitytoconsume,the NewClassicalMacroeconomicsarguedthattheonethingthat couldberelieduponwasthatindividualswererationalandtook upallprofitableopportunitiesopentothem.Thismeantthatmarketshadtobemodelledasbeinginequilibrium,becauseifsupply anddemandwerenotequal,anyonewhocouldnotbuy(orsell)all thattheywantedhadmerelytoraisethepricetheyoffered(orlower thepricetheywereasking).
Perhapsmoreimportant,whereKeynesianeconomistshad viewedgovernmentpolicyassomethingthatcouldbemanipulated toensurethatdesiredoutcomeswerereached(raisespendingto stimulatespendingandemployment;cutinterestratestogetthe optimallevelofinvestment;andsoon),theNewClassicalsargued thatprivateagentswouldseeanypatternsingovernmentpolicyand takeaccountofthem.Unlessthegovernmenttookprivateagentsby surprise,theprivatesectorwouldneutralizetheeffectsofpolicy changes.Policywouldbeineffective.Fromthisperspective,which spreadthrougheconomicsinthelate 1970sand 1980s,Keynesian economicswascompletelymisconceived.Itwasbasedonpremises bothabouttheeconomyandabouthowtodoeconomicsthatwere fatallyflawed.Keynesianeconomicsseemedtobedying,ifnotdead, andtheKeynesianrevolutiontohavebeenaharmfuldetour.
However,Keynesianeconomicsdidnotdie.Theproblemofpersistentunemploymentdidnotdisappear,butre-emerged,especially
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