Keynes is best known for The General Theory of Employment, Interest and Money. This book created macroeconomics (p. 257). It "proved that the condition and organization of society were not the inevitable, dispassionate requirements of tragically insufficient resources. They were, instead, political choices that societies could not avoid." (273) The General Theory was written partly in response to societies' inability to escape the worldwide economic depression of the 1930s due to a reliance on old ideas that assumed that economies would fix themselves. This wasn't dry ivory tower economics: one reason the book is so important is that, as experience has shown, high levels of unemployment can lead pretty quickly to radicalization, militarism, and war.
Economists who repeat old doctrines simply because familiar ideas are comfortable can be dangerous, and Keynes devoted a lot of effort attempting to convert "the priesthood of academic economists to his new doctrine." (245) Keynes admired the classical economists, including Ricardo, James and John Stuart Mill, Alfred Marshall, and AC Pigou, and believed that their picture of the economy "had once been an accurate understanding of how social needs could best be met." But things change: the productive capitalist economy of the 20th century was different from the 18th and 19th century world the classical economists were describing. The General Theory was the culmination of Keynes' attempts to help the economics profession remain relevant.
The United States was the country that implemented Keynesian ideas on the biggest scale. To escape the Great Depression, FDR established more than two dozen federal agencies including the Public Works Administration, which built dams, bridges, and power plants; the Works Progress Administration, which built schools, theaters, and hospitals, and the SEC, which policed Wall Street. These policies worked: unemployment dropped from over 20 to below 10 percent, and between 1934 and 1936, the US economy grew by more than 10 percent per year. To administer the new policies, the government needed economists: public intellectuals such as John Kenneth Galbraith got their start in New Deal DC.
Galbraith explained that in 1933, things were so bad that the financial community was grateful to Roosevelt for putting things on surer footing. But there was always resistance to the implementation of Keynes' ideas, despite (and because of) their success."By 1934, things were enough better so that his efforts on behalf of farmers and the unemployed ... could be disliked and even feared. Roosevelt had become 'that man in the White House' and 'the traitor to his class.'" (287-8) This resistance extended to economics education as well. When Lorie Tarshis published The Elements of Economics in 1947, a textbook introducing students to Keynesian economics, conservatives pushed back, effectively banning book sales. Their campaign helped Paul Samuelson's Economics to become a bestseller. The difference between the books was significant. Tarshis presented markets for money and debt as "creatures of the state, an expression of democratic politics that citizens could manage and adjust." Samuelson, on the other hand, highlighted the "power of the market to order social preferences, with the help of just a little fiscal adjustment." (p. 379) The acceptance of Samuelson's ideas had widespread implications for the development of "Keynesian" economics in the US, including for the policy response to the 1970s inflation, which was seen as discrediting Keynesian ideas.
What struck me most about this book was just how damaging American Keynesians were to the project that Keynes and his Cambridge group initiated. Establishment Republicans and Democrats uniformly embraced the neoliberal project by the late 20th century. The Republicans were explicit about "starving the beast", and the Democrats to a large extent followed along. Milton Friedman said that Ronald Reagan was unsuccessful in cutting down the size of the government-- "It would take a Democrat to finish the job." (483) As the coronavirus pandemic and financial crisis made clear, we have built a system that is largely unprepared for external shocks and occasionally creates existential crises itself. In 2008, after two decades as the world's most powerful economic policymaker, Alan Greenspan admitted to being mistaken in the view that a free market could always regulate itself. He said "I found a flaw in the model that I perceived as the critical functioning structure that defines how the world works." Keynes' work is a reminder of the danger of clinging to orthodox models that fail to provide a useful guide to circumstances. We need to adapt our economics to the world as it is, constantly changing.
Quotes
- p. 100 Keynes had crafted an innovative philosophical cocktail. Like Burke, he feared revolution and social upheaval. Like Karl Marx, he envisioned a great crisis on the horizon for capitalism. And like Lenin, he believed that the imperialist world order had reached its final limit. But alone among these thinkers, Keynes believed all that was needed to solve the crisis was a little goodwill and cooperation. The calamity he foresaw in 1919 was not something inevitable, hardwired into the fundamental logic of economics, capitalism, or humanity. It was merely a political failure, one that could be overcome with the right leadership.
- 102 In the twentieth century, Keynes believed, it was debt, not oil, that made the world go round.
- 132 "To close the mind to the idea of revolutionary improvements in our control of money and credit is to sow the seeds of the downfall of individualistic capitalism," he warned Charles Addis
- 150 The doctrine of laissez-faire, he argued, had captured the public imagination by finding a harmonious tone between several otherwise discordant intellectual traditions. It took the conservative defense of individual property rights developed by Burke, John Locke, and David Hume, and melded it with the "democratic egalitarianism" of Jean-Jacques Rousseau and the "utilitarian socialism" of Jeremy Bentham. At the same time, it satisfied the logic of both Social Darwinism (competition would ensure the advancement of the best and strongest) and variants of Christian theology in which God guided human affairs according to a divine plan (winners were chosen by God) ... Devotees of [both Burke and Rousseau] could celebrate laissez-faire if defending the property rights of the wealthy resulted, through the magic of commerce, in a more equal division of power and wealth than governments could secure through more ambitious state planning. Quite by accident, Keynes argued, laissez-faire had become a wildly popular doctrine because it reconciled otherwise incompatible ideas. But if laissez-faire didn't deliver the goods -- if it didn't generate broadly shared prosperity -- then the ideological coalition it bound together would become unstable.
- 153 This was the remarkable synthesis Keynes tried to formulate throughout his career: how to make the practical, risk-averse, anti-revolutionary conservatism of Burke fit the radical democratic ideals advanced by Rousseau.
- 160 "The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty."
- 170 Paying people to work would not be as expensive as it looked, as the Treasury would be able to stop cutting unemployment checks as people accepted government jobs.
- 186 "There is nothing worse than a moderate evil!"
- 187-8 Keynes had discovered an ancient history that upended some basic tenets of economics going back to Adam Smith and undermined nearly three centuries of Enlightenment political theory. Ever since Thomas Hobbes had published Leviathan in 1651, most European philosophers had imagined government as an artificial imposition on what Hobbes called "the state of nature." For Hobbes, the state of nature was a nightmare of violent disorder where life was "nasty, brutish and short," making government--specifically monarchy--a source of human salvation.
- 189 Money had no meaning absent political authority. Keynes thus came to see economic history as a fundamentally political story--the tale of riches conquered and surrendered by political powers as empires rose and fell. Economics, by extension, could not be a bloodless scientific investigation into unshakable laws of nature but only a set of observations about trends in human political arrangements. Economics as a field of study had to adjust to the social behavior of human beings, which might very well change over time.
- 201 Keynes did not see economics as a foundational science upon which politics must be carefully constructed--it was a passing phase, almost past its period of relevance. Without the constraints of resource scarcity, economics as a discipline wouldn't matter much at all. [economists as dentists]
- 206 There would be costs for any nation that wished to make the lion's share of its economy a domestic concern. But innovation had dramatically reduced those costs. National self-sufficiency, he wrote, was fast "becoming a luxury which we can afford if we happen to want it." And he believed that there might very well be reasons to want it. The hyper-financialization of the global economy had separated business owners from the social impact of their ownership decisions.
- 256 GT is one of the great works of Western letters, a masterpiece of social and political thought that belongs with the monuments left by Aristotle, Thomas Hobbes, Edmund Burke, and Karl Marx. It is a theory of democracy and power, of psychology and historical change, a love letter to the power of ideas. GT is a dangerous book because
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