Book review: The Price of Peace

In The Price of Peace, Zach Carter writes about John Maynard Keynes' life, work, and the impact of that work through today. Keynes was "not only an economist but the preeminent anti-authoritarian thinker of the twentieth century ... a moral philosopher, political theorist, and statesman".

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.

Smith and Keynes on the history of money

In The Wealth of Nations Adam Smith writes that after division of labor is established, people begin to save a bit of some commodity to trade for things they need. This could have been cattle, salt, shells, cod, tobacco, hides, nails, and so on, but "In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity." (Smith, p. 127) Metal was preferred because it's not perishable, can be divided into parts, and can be fused together. Eventually, people started making coins to prevent having to weigh the metal for every transaction, the public office of the mint was created to stamp money, William the Conqueror introduced the custom of paying taxes in money, avaricious and unjust princes would consistently reduce the metal in the coins, and so on. "It is in this manner that money has become in all civilized nations the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another." (p. 131) It all sounds fine, I believed that story for about a decade. But it is so obviously wrong.

Money started when humans organized into states and those states started requiring money for taxes -- whether that money was in the form of corn, cows, or coin.

An excerpt from Carter's The Price of Peace, showing what Keynes discovered about the history of money (p. 187-8):

"Keynes had discovered an ancient history that upended some basic tenets of economics going back to Adam Smith and undermined nearly tree 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--especially monarchy--a source of human salvation. Even thinkers who rejected Hobbes' politics accepted his history. In The Wealth of Nations, Smith had presented markets for trade as a primordial force that came into being long before the development of the political state. Commercial life had started with people bartering goods, trading goats for wheat or cloth for buttons. They eventually adopted money as a medium of exchange, since passing tokens to each other proved to be more convenient than toting wagonloads of cumbersome goods. All of this activity had taken place among free individuals undisturbed by the machinations of capricious, meddling sovereigns, who entered the scene much later. The market was natural, while the state was a relatively recent artifice that intervened in or distorted the independent rhythms of trade. 

"Studying Athens, Babylon, Assyria, Persia, and Rome, Keynes concluded that this history was all wrong. Capitalism itself was an ancient creation of government, dating back at least as far as the Babylonian Empire of the third millennium B.C. "Individualistic capitalism and the economic practices pertaining to that system were undoubtedly invented in Babylonia and carried to a high degree of development in epochs more distant than the archaeologists have yet explored," he wrote--one of several startling observations recorded in seventy pages of unpublished notes and fragmentary argument from his 1920s research. Money, moreover, was not a custom developed by local traders for convenience but a sophisticated tool or rulership that had emerged simultaneously with other developments of the state, including written language and standardized weights and measures. 

"Smith and other thinkers had been led astray by confusing the development of coinage with the invention of money. Coinage, according to Keynes, was "just a piece of bold vanity ... with no far-reaching importance"; money had existed in "representative" form much longer. Its real significance was as a "unit of account"--the demarcation of debt and "the legal discharge of obligations," which governments had been maintaining in ledger books, scrolls, or clay tablets for millennia. Powerful, economically sophisticated empires had developed without using coinage at all.

"States, moreover, had always maintained a policy of active monetary management as a basic condition of rulership. They created and abolished debts as reward or punishment and reformed units of measurement, depreciating or debasing their currency not merely as a trick on unsophisticated subjects but to stimulate trade and ease social tension. Inflation--viewed by orthodox economists of the 1920s as an underhanded sovereign's subversion of the natural order--had instead been a near-constant condition "throughout almost lal periods of recorded history."

"... Money, he argued, was an inherently political tool. It was the state that determined what substance--gold, paper, whatever--actually counted as money--what "thing" people and the government would accept as valid paymnt. The state thus created money and had always regulated its value. "This right is claimed by all modern states and has been so claimed for some four thousand years at least." ... The true source of monetary stability was the public legitimacy of the political authority."