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The Political and Economic Consequences of Mr. Keynes (1). (Review Essay/Revue Critique).

Abstract: Unlike most economists, among sociologists and the broader political economy community Keynes has tended to get a good press (so to speak). His virtues are identified as the demonstration of a need for activist governments that manage demand, along with some sort of role in the creation of the postwar welfare state. The recent completion of Skidelsky's extraordinary three volume biography provides an occasion and a resource for reconsidering Keynes's contribution. While Keynes can be correctly identified as an advocate of an activist government, we argue that the limits to the activism he preferred are often neglected.. We argue further that it is a mistake to identify him as a father of the welfare state. Our view is that his intellectual legacy is what we call 'intelligent liberalism.' We specify what we mean by that.


There is a good deal of truth in the simple statement that sociology is essentially anti-capitalist. Key concepts of the founding fathers -- alienation, anomie, disenchantment -- demonstrate visceral dislike for the disruptions caused by the dynamism of this mode of production. There is also good reason to think that sociologists are intimidated by the technical challenges of modern, often aggressively mathematical, economics. (2) Since the mainstream of economics can reasonably be viewed as a celebration of capitalism it is not surprising to find hostility to both within sociological writings. The current expression of this is a reflexive antipathy to anything that can be classified as 'neoliberal' thought, along with a generalized distrust of globalization. Consequently, it is scarcely surprising -- especially in light of Mrs. Thatcher's famous declaration that there is no such thing as society -- that conferences now abound that seek to 'reinvent' society in the face of the 'new economy.'

There is an exception to this generalized antipathy towards economics. Sociologists have joined with many political scientists in admiring John Maynard Keynes. To some substantial degree this seems to rest on the view that the economic and political stability of richer countries from the end of the second world war through to the early 1970s was a result of Keynesian policies. In his introduction to a much cited collection of essays Peter Hall (1989) identifies Keynes's contribution as the refutation of Say's law. Supply does not create its own demand and this means that demand management by the government is necessary. By forcing recognition of this, Keynesianism "became a component of the class coalitions and political compromises that structured the political economy of the postwar world" (p.7; see also Piore and Sabel, 1984: 73, 91, 252; Marchak, 1991:66). (3) Going beyond this, both Block (1990: 2-3) and Hirst and Zeitlin (1997:223) identify Keynesianism with the enlightenment embodied in the welfare st ate. (4)

The publication of the third and final volume of Robert Skidelsky's magisterial biography of Keynes (1983, 1992,2000) both occasions and allows an assessment of such perceptions of this great thinker within both sociology and political science. (5) We focus on three broad issues: first, thanks to Skidelsky's biographical discoveries we are better able to identify the relationship between Keynes's economics and his particular variant of liberalism; second, related to his liberalism are his fundamental economic ideas, and the economic policies he thought were implied by those ideas; third, there is the question of how to appraise Keynes, given the experience of the postwar period as a whole. This latter is a consistent theme in Skidelsky's treatment.

Economics as a Last Resort

Keynes was born into what Noel Annan (1955) has aptly described as late Victorian England's intellectual aristocracy. Both of his parents came from dissenting stock. Both were able to attend Cambridge University as a result of Gladstone's repeal of the Test Acts. (6) Taught by the most considerable philosopher and economist of the time -- Henry Sidgwick and Alfred Marshall, respectively -- his father went on to become Professor of Economics at Cambridge, and to author clear but unoriginal treatises on logic. A very great deal of attention and money was devoted to the education of the three children in the family. Keynes's family provided a background that combined expectations of high accomplishment with a sense of public duty (I 106). (7)

Keynes easily met the expectations of high accomplishment. He was a scholar at Eton, then effortlessly gained a prize fellowship at King's College, Cambridge. His undergraduate career was brilliant and included participation in the Apostles, a small, fiercely intellectual, debating society whose members included Bertrand Russell. Oddly enough, however, his economics training was confined to eight weeks tutoring in the subject from Marshall.

The sense of public duty was, at first at least, another matter. Keynes famously rebelled against his parents' world. In his youth there was the hedonism of his close friend Lytton Strachey and of the Bloomsbury Group of which they were both members. More fundamentally, Keynes was profoundly influenced by the ideal utilitarianism of G.E.Moore, the central principle of which was that the purpose of life was the cultivation of the mind and the advancement of friendship. This precept shaped Keynes's views throughout his life, though care needs to be taken in establishing links between the two. An early piece by Skidelsky (1977) sought to make a direct link between Bloomsbury' s insistence on pleasure and Keynes's advocacy of deficit spending. Happily, this facile connection does not survive in the biography. In any case, Keynes's revolt against the Victorians was only partial. His thought rested on a second pillar. His prize-winning undergraduate essay of 1904 on "The political doctrines of Edmund Burke" applau ded Burke's "extreme timidity in introducing present evils for the sake of future benefits" (I,155). (8) This was one expression of the disposition that led to his lifelong mistrust of both marxism and fascism.

This leads to the core of Skidelsky's interpretation of Keynes's life. It is that events so impinged on him that he was progressively forced into politics to save liberal culture. To put it another way, he sought to mobilize Burkean political responsibility to protect the values of Moore. In doing so, he saw himself as a guardian of reason, a quality that he came by the 1930s to believe was much more weakly entrenched than he had thought in his early years (Keynes, 1972). As he aged, he became increasingly motivated by the visceral sense of duty that he had inherited from his parents, perhaps most spectacularly and disastrously in the way that he appears to have -- literally -- worked himself to death in the construction of the new architecture for the world economy in the last years of the second world war. It is useful to consider the evolution of his political ideas in this context.

In his early years, a progressive political consciousness was not obvious. The redistributive component of the 'new liberalism' left him indifferent (Skidelsky, I, 241). He retained a strong interest in preserving the conditions that made possible free trade. And an early trip to Ireland shows him repeating the conventional complacency of the time -- namely, that Irish nationalism had been subverted by prosperity (I, 262). But the idyll of private life, public service dealing with Indian currency reform, and technical work on probability theory was destroyed by war. Two different parts of his persona were set in opposition by the war. The part of him devoted to public service led him to serve at the Treasury, creating ingenious schemes designed to finance the war machine as efficiently as possible. But his Bloomsbury friends were opposed to the war -- a particular challenge for a disciple of Moore, with his association of friendship and the good life. Consequently, Keynes considered resignation on several oc casions (I, 295). In the end he stayed in government and attended the Versailles conference. But unity was restored to his personality only after he resigned, and above all by the writing of The Economic Consequences of the Peace (1919), his most approachable book.

The book's central argument was that punitive reparations would hurt the allies quite as much as Germany. But what matters here is the general background to the analysis. There is a sense that everything was falling apart. First, Britain no longer dominated the international system. Second, he thought, all advanced countries were likely to face eugenic difficulties as the birth rates of the educated fell. Third, there were the bolsheviks, prone to violence, devoted to a system sure to lead to economic inefficiency, and shattering the possibilities of Europe's political unity. Fourth, politicians had proved themselves to be even more inadequate than Keynes had imagined -- cunning in the short term but blind to longer term rationality. Fifth, there is a much neglected section on "The psychology of society" which contains the key tenets of Keynes's political sociology (Skidelsky, 1979). Here is Keynes's description of capitalism.

... this remarkable system depended for its growth on a double bluff or deception. On the one hand 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 cooperating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake their's and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. (Keynes, 1919: 11-12)

Two presuppositions underlie this passage. The first is that combining social inequality with democracy is bound to lead to trouble. In the nineteenth century, deference limited the extent and virulence of class conflict. (9) But so did economic growth, the future of which Keynes wished to ensure. The second suggests that political stability rested on the wisdom of the elite. If mere short-term self-interest guided the actions of the wealthy then liberal capitalism would slowly undermine itself. A third presupposition was clearly present in the rest of the book: that the international environment must be so ordered as to ensure that zero sum competition between national economies did not destroy the possibility of abundance.

This polemic made Keynes famous. He gained a reputation as a radical, a gadfly able to offer striking opinions on the issues of the age. In a sense this was true. There was, after all, the continuing impact of Moore. Consider Keynes's address to the pupils of Winchester public school in 1928, replete as it was with the influence of Freud. (10) Capitalism was driven by mere neurosis -- the love of money. But, there were important benefits attached to this unreason: a hundred years of two percent per annum growth, within a reasonably stable population size, would produce the magnitude of increase in living standards required to make true civilization possible. But, at this point, the love of money would be recognized as "a somewhat disgusting morbidity, one of the semi-criminal, semi-pathological propensities which one hands over with a shudder to specialists in mental disease"! There was also a radical component to his economic positions. He attacked the return to the gold standard, as part of a more general a ssault on laissez-faire. Capitalism could no longer be left to itself, he argued: it had to be managed.

Nonetheless, his radicalism operated within strict bounds. He remained loyal to the Liberal Party -- managing, remarkably, to maintain good relations with both Asquith and Lloyd George. For many years he hoped that the Liberals, who were in clear decline at this time, would combine with the Labour Party. Keynes detested the Labour Party's class antagonism and implausible economics. But he saw a rapprochement between the two parties as a means to a middle way between reactionary conservatism (embodied in the gold standard) and bolshevism. His self-appointed task was to provide innovative policies that would allow the enlightened to rule effectively. It is probably fair to say that the Liberal Party under Lloyd George, partly through their Summer Schools, did provide the brightest ideas of the time. They also provided a forum through which Keynes could develop his own. In this context it is important to emphasise the following, fundamental, characteristic of Keynes's ideas. He was never a system-builder. He was , rather, a pragmatist, attempting to think through the practical issues of whatever situation was at hand. Skidelsky's volumes make it clear that, in this sense, he was not a Keynesian. Different situations would occasion different responses from his extraordinarily fertile mind. We return to this shortly, when we discuss his economics and economic policy positions.

The Great Depression dramatically increased the stakes of political life. Liberalism had begun to seem a faded failure. At the same time, social organization in both Germany and Russia seemed to work and the leftist heroism of the latter had decided appeal to the children of the original members of the Bloomsbury group. Keynes's liberal background showed itself superbly at this time. He was utterly prescient about the Soviet experiment, emphasizing how much it depended upon persecution and how very likely it was that its economics would fail. He was less pessimistic about fascist economics (we will return to this). But, again displaying remarkable prescience, he detected the crucial weakness that eventually destroyed the second revolutionary regime of twentieth century Europe: that fascism's addiction to Darwinian heroism would lead it to geopolitical blunder. If his liberal instincts were impressive, what mattered even more was his desire to reconstruct liberalism -- to make the economy work so that liberal values could be maintained. Recognition of this attitude, of Keynes's fundamental loyalty to the basic liberalism of his own society, led to him being listened to in the corridors of power.

The second world war and its aftermath elevated Keynes to a central place in government decision-making. His efforts were characterized by the same combination of pragmatism, within limits imposed by his broadly liberal premises. Keynes was profoundly hostile to Hitler's Germany but, also, "was 90% per cent pacifist" (III, 28), a position that was substantially rooted in a profoundly liberal unwillingness to endorse actions by governments to make engagements on behalf of their citizens that risked the lives of those same citizens. But, ever the pragmatist, as war became inevitable and declared he directed his efforts to the very fundamental issue of wartime finance. Resources would have to be diverted from consumption to military expenditures. But how? Here, to simplify, the issue was rationing versus the price mechanism. The left saw equity as the central issue and argued for rationing and planning. Keynes preferred to reduce consumption by allowing prices to rise, both because he was sceptical about the me chanics of rationing, and because he saw rationing and planning as an affront to the freedoms that he so valued (III, 67)."

Whether rationing or the price system was used to control consumption, without external support Britain could not have successfully prosecuted the war.

The empire was an important supplier of resources. But the United States was indispensable. It was to the negotiation of United States support to the British war effort that the bulk of Keynes's war time efforts were directed. Keynes had difficulty coming to grips with the United States. Everything from its abundance of lawyers to the style of language tended to irritate him. There is no doubt, moreover, that Keynes's own caustic style of language tended to irritate the Americans (III, 117). Most importantly, he had great difficulty grasping their lack of sympathy -- or hostility -- for the British position. Many Americans loathed the British Empire and/or deeply resented the fact that Britain had repudiated the debts it incurred to the United States during the first world war. Nonetheless, while he was concerned to avoid American hegemony over post war institutions like the International Monetary Fund (III, 466), he clearly found the economic and political direction pursued by Washington to be increasingly a ppealing as compared to more or less everything that was being advocated and advanced by the postwar Labour government of his own country (III, 426).

On the left, this particular government has achieved an almost mythic status as the creator of a welfare state. What did Keynes think about the welfare state? The touchstone on this issue was the Beveridge report, which proposed universal national insurance programs to cover retirement, unemployment, and disability. (12) In response to it Keynes expressed "wild enthusiasm" for the general principle and, in the Treasury offered some defence of the plan (III, 267-268). However, in subsequent discussions Keynes proposed limiting access to benefits to those with a record of employment, reductions in the benefit rates, and an extended phase-in process linked to the affordability of the reforms. Skidelsky sums up Keynes's position as follows: "The truth seems to be that he was not interested in social policy as such, and never attended to it. The sole question in his mind was whether the Exchequer could 'afford' Beveridge" (III, 270). The relative indifference to redistribution of Keynes youthful detachment from th e 'new liberalism' seems to have persisted into the last years of his life.

What does all this imply for the interpretation of Keynes's political position? Remember that, inspired by Moore, Keynes treated money-making in a thoroughly condescending way. In this he belonged to and furthered a recognizably British intellectual tradition. Consider the following passage from Adam Smith's neglected 1759 treatise The Theory of Moral Sentiments.

Power and riches then appear to be, what they are, enormous and operose machines contrived to produce a few trifling conveniences to the body, consisting of springs the most nice and delicate, which must be kept in order with the most anxious attention, and which in spite of all our care are ready every moment to burst into pieces, and to crush in their ruins their unfortunate possessor.

They are immense fabrics, which it requires the labour of a life to raise, which threaten every moment to overwhelm the person that dwells in them, and which whilst they stand, though they may save him from some smaller inconveniences, can protect him from none of the severer inclemencies of the season. They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death (1976: 182-183).

What this quotation indicates is a serious exercise in moral distancing from monetary acquisition. This is analogous to Keynes's treatment of acquisitive activity as a "disgusting morbidity." However, the parallel goes further in an interesting way. Keynes, it will be recalled, treated acquisition as morbid but useful. So did Smith. A little after the passage quoted above he went on to write that "it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind" (p.183).

There is more than this. Keynes often started his lectures by citing Samuel Johnson's quip that "a man is never so innocently employed as when he is making money." Differently put, he appreciated the tradition, so brilliantly explored by Albert Hirschman in his The Passions and the Interests, that sought to set the relative calm of money-making against the wholly dangerous desire for political power. Keynes's best expression of this can be found in the last chapter of his General Theory (1936), though the view antedates that publication (I, 399).

... dangerous human proclivities can be canalized into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannize over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as but a means to the latter, sometimes at least it is an alternative (p.374).

It may as well be said immediately that Hitler and Stalin were indeed "not in it for the money." This lends a certain pathos to Keynes's view.

There is, of course, a very large political area between Stalin and Hitler. Within that larger space, where should Keynes be located? His Burkean convictions disposed him to be dubious about radical measures. While not actively opposed to redistribution through the provision of government programs he appears not to have been passionate about the matter and was certainly worried about both budgetary soundness and economic incentives. And he really did not like much of what he saw of the Labour Party in government. Keynes viewed as a father of the welfare state is stretching things a bit! Still, he was certainly enormously concerned with unemployment. Before drawing conclusions from this, it is necessary to review Keynes's economics and economic policy.

Keynes's Economics: Will the Real Keynes Please Stand Up?

To interpret Keynes, Skideisky says, "It is not enough just to refer to the General Theory, because the General Theory is a book which allows almost infinite elasticity of applications" (III, xxi). In fact, pinning Keynes to particular policy views is not a straightforward matter. It is useful to distinguish between two relevant sources of information. Most obviously, there is a series of broad interpretations published as major works, of which the General Theory was one. But since throughout his career Keynes was intimately involved in policy issues, we also have evidence on what happened to his principles when he applied them to practical issues. One of the great values of Skidelsky's treatment is the light it sheds on this side of Keynes's work.

Keynes was a pragmatist. This meant a willingness to modify his position -- sometimes fairly radically -- on quite fundamental issues. Skidelsky remarks that "when facts changed he rearranged his views" and quotes Kingsley Martin on this: "a reasonable procedure which only seemed inconsistent because he phrased both his objurgations and repentances in such stirring and memorable language" (III, 154-155). So in what follows we illustrate our interpretation with both the central themes of his major published works and his position on two major policy issues - free trade versus protectionism, and the extent to which wages should be treated as a policy target.

Three connected themes can be regarded as central. The first is the most commonly identified: Keynes as a theorist of market failure and legitimator of government intervention. We argue that this interpretation of Keynes is broadly correct, but warrants qualification. The second has attracted less attention. This is Keynes's concern with institutions and institutional design. On the third, as Skidelsky makes clear, Keynes has often been misrepresented. This is the question of the relative policy importance of unemployment and inflation.

Market failure and the role of government

From the Tract on Monetary Reform (1923), through the Treatise on Money (1930), culminating in the General Theory of Employment, Interest and Money (1936), Keynes developed his fundamental ideas about sources of capitalist instability. By the early 1920s falling prices and an unemployment rate in excess of ten percent had become the salient policy issues. The Tract represented his first systematic and elaborate attempt to come to grips with these issues. It also marked Keynes's clear break with Britain's particular form of laissez-faire. It was, in the first instance, an attack on the government's plan to return to the gold standard. Tying the nation's currency to the value of gold removed government control over the domestic price level because, under the gold standard, international gold flows in response to a country's balance of payments determine its price trends. (13) The situation is worse where a currency is overvalued relative to gold. This imposes, Keynes argued, a systematic and persistent deflatio nary bias. Keynes's position was that the British government was not only erring in its decision to return to the gold standard but, worse, was compounding its error by planning to do so at a rate that was too high. Keynes's alternative to the gold standard was a government policy of injecting or withdrawing cash from the banking system in order to manipulate interest rates -- reducing economic activity by raising them and increasing it by reducing them.

The Tract, then, advocated an activist government, changing interest rates to support higher levels of output and employment. It argued against the removal of government policy discretion implicit in the automatic stabilizer of the gold standard. All this, of course, left open the question of why automatic stabilizers failed to work. The market provides an extraordinary set of signals and opportunities. In 1920s Britain the abundance of Economic Possibilities for Our Grandchildren remained science fiction. (14) There was no shortage of economic wants. Economic depressions imply resources -- plant, equipment, and labour -- that might be used to meet those wants. Doing so ought to provide opportunities for entrepreneurs to profit and for the economically idle to earn wages. What prevented this from happening? And, before that, what led to the accumulation of unused resources in the first place? The Treatise on Money was Keynes's first large scale attempt to answer these questions. The arguments in the Treatise were amplified and extended in the General Theory. It is worth considering these two texts together.

One central part of his answer proposed in the Treatise follows from the observation that savings and investment were, for the most part, carried out by different people -- saving is by a large part of the population but, in particular, rentiers, and investment by capitalists. The separateness of these decisions implies that the aggregates that they produce may diverge -- with, in Britain in the 1920s, an excess of savings over investment. Now, since there is a market for capital as for other resources, the standard economic assumption would be that the price of capital -- the rate of interest -- adjusts to reflect its relative supply. Excess savings imply a lower interest rate which in turn widens the range of profitable undertakings. Clearly, for Keynes persistent deflation required that the observed interest rate (he called it the 'market rate of interest') diverged from the rate that would be required to raise investment to savings (which he called the 'natural rate of interest'). He did not contest the fact that savings ultimately equals investment . Rather, he asserted that this can be a result of a fall of savings to match the falls in income produced by a declining rate of investment (II, 551).

A first source of unused resources, then, was the fact that capitalists' estimates of the future rate of return on investment come with a large degree of uncertainty attached, that their investments are risky, so those investments are vulnerable to waves of pessimism on the part of those responsible for making them. In chapter 12 of the General Theory, Keynes elaborated at some length on the possibilities and effects of pessimism. The decision to hold cash rather than to invest is influenced by the rate of interest. But it, in turn, rests on liquidity preference, which is "a barometer of the degree of our distrust of our own calculations and conventions concerning the future" (quoted II, 560-56 1). Liquidity preference is a gauge of uncertainty and anxiety.

So when a bearish climate is established, to induce investment would take an even lower rate of interest than the market establishes (II, 322-325). And equally pessimistic savers will seek the security of holding money (or assets secure and liquid enough to constitute near-money). Worse yet, in the Treatise Keynes expressed the view that the response of pessimistic savers in Britain of the 1920s to a decline in the domestic rate of interest would have been to shift funds to Wall Street. But, under the gold standard, that flow of funds out of the country would have required a rise in the rate of interest to protect the gold value of sterling. The Treatise was yet another attack on the gold standard combined with a further step in Keynes's analytic justification of government intervention to stabilize the economy.

The prognosis becomes even more gloomy in the General Theory where Keynes asserted that consumption rises with income, but at a declining rate, accompanied by a rise in the rate of savings. There is, then, a secular and systematic tendency toward chronic unemployment. By the General Theory Keynes was arguing that aggressive interest rate cuts would not be enough. Rather, Keynes wrote, "I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment" (quoted II, 557).

The common reading of Keynes as apostle of government activism appears, then, to be warranted by the contents of the Tract, the Treatise, and the General Theory. The only qualification that we would add is that his opposition to the gold standard does not necessarily imply opposition to laissez-faire. It only implies an opposition to a particular institutional device for managing international financial transactions. Flexible exchange rates, or exchange rates that are generally fixed but provide for periodic adjustment where conditions warrant, are no less compatible with laissez-faire than the gold standard. Indeed, in practice, countries unable to preserve the gold value of their currencies to which they had committed themselves periodically abandoned the gold standard. In the nineteenth century Italy made a habit of this (Fratianni and Spinelli, 1984). The difference between a gold standard and a fixed exchange rate with periodic readjustment can be exaggerated. Nonetheless, it remains the case that Keynes did not believe that interest rates adequately served the equilibriating role assigned to them by classical theory. Nor did wages. We discuss wages, and other institutional issues in the next section.

Institutions and economic performance

For the maximizing and optimizing behaviour that is the stuff of textbook economics to occur there has to be an institutional framework including, in particular, property rights. At the same time, most economists recognize that institutions in a more general sense -- custom and bases for power that may or may not rest on statutes -- complicate the operation of the textbook market. Keynes's writings display both his normative preferences with respect to institutions and his judgments with respect to which institutions needed to be treated as fixed for purposes of policy analysis and which institutions should be modified. Here we consider four institutional areas that played an important role in Keynes's analysis: i) the effects of the Treaty of Versailles on world economic performance; ii) the role of rentiers; iii) wages; iv) free trade versus protectionism.

The Economic Consequences of the Peace made Keynes's reputation. Germany, he argued, was a core part of the international trading system, in particular in Central Europe. By appropriating Germany's merchant marine, forcing the cession of overseas territories and government property (including railways and harbours), demanding reparations that Germany could not in Keynes's view meet, creating a national barrier between the coal- and iron-producing areas of Silesia and Alsace-Lorraine on the one hand and German industry on the other, and removing both railway rolling stock and access to major waterways like the Rhine and the Danube, the allies both subverted Germany's own economic capacities and the larger world trading system of which Germany had become a lynch pin (Moggridge, 1992: 329-330). Keynes was arguing that the prosperity of the parts of the world economic system depended on the economic health of the major components of that system, of which Germany had become one. And Germany's economic health depen ded on particular property and property rights. In his argument against Germany's treatment by the Treaty of Versailles Keynes was asserting the importance of a larger set of institutional arrangements upon which economic growth rested.

At the other end of the institutional spectrum is rentiers. Keynes despised them. As we have seen, in the Treatise he identified excess savings as the central contributor to the sustained deflation of the interwar period. But this was not innocent error on their part -- of the sort displayed by entrepreneurs when they underestimated the likely returns on their investments. It was a result of moral weakness. They were a "life-denying rentier class" (11, 542) living from accumulated wealth rather than enjoying the wealth that they had accumulated (or that had been accumulated for them) or participating in the creation of new wealth. This was related to Keynes's broader moral position: savings represent a choice to abstain from consumption; excess saving represents an abstinence that is unequivocally bad (11,317-318). The long shadow of George Moore and the "somewhat disgusting morbidity" of the love of money should be evident here. What he is doing is treating the tastes of the rentier class as exogenous; they are sand in the gears of economic progress, an institution to be weakened by supplanting their centrality in the investment process with an activist government.

Wage determination provides yet another Keynesian approach to institutions. In the negotiations that led to the postwar international settlement that defined Britain's postwar financial obligations a major premise that divided Keynes from his American interlocutors was their divergent assumptions with respect to wages. Keynes's intellectual inspiration was the persistent unemployment of the inter war period. A classical remedy to persistent unemployment is a wage cut. If, when labour is in excess supply, wages fail to fall, a part of the reason is the institutions and policies that support them that prevent that from happening. Keynes, however, largely rejected wage cuts and chose the exchange rate (in his attack on the gold standard), then (and related to the exchange rate) aggregate demand, as his policy foci.

Why? Keynes's principal answer was that wage cuts were not feasible (e.g. Moggridge, 1992: 5O3). (15) In other words, he largely ruled out supply side adjustments as a means to secure full employment. The problem was that the Americans did not accept this position. The banker, Thomas Lamont, thought that the return to the gold standard in 1925 at the prewar value of sterling had not been a mistake; the error had been the failure to simultaneously attack trade union power III, 186). In his reactions to the relatively liberal access to credit for debtor nations built into Keynes's Clearing Union scheme, the distinguished economist Jacob Viner objected that the mechanics Keynes envisaged largely ratified trade union power (III, 304; see also II, 602).

To defend his position, Keynes would have had to show why wages should be spared from policy attention. But his position on the sources of inflexibility meandered a bit. In 1925 he identified the following sources of wage inflexibility: trade unions, mobility-limiting housing scarcities, and a high reservation wage as a result of welfare payments (II, 201). By 1930, to the 'dole' as a source of inflexibility Keynes was adding something like custom--"social and historical factors" (III, 347-350). Now, as in other policy areas Keynes wavered a bit on the necessity of treating nominal wages as fixed. (16) In 1925 he floated the possibility of making a five per cent reduction in wages politically feasible by tying it to an increase in the income tax (which at the time started at earnings above those of most industrial workers) and in 1930 raised the possibility of controlling wage increases through some sort of 'social contract' (II, 362).

We find, then, two treatments of wages in Keynes's career. One treated them as an institutional constant. Wages could not be cut sufficiently to make a difference to the level of investment -- so it was better to focus on other policy instruments, including the government, the policies of which, he thought could be changed. The other treated them as a target of institutional redesign. He envisaged some sort of bargaining between organized labour and the government -- lower wages in exchange for higher taxes on the rich.

But it was in the area of trade policy that Keynes made his largest investment of effort in institutional redesign. We know that, early in his career, Keynes was a strong supporter of free trade, campaigning for it in the 1923 election (II, 151). We also know that he urged the Liberal Party to commit itself to methods to control the business cycle because doing so might provide an electoral alternative to protectionism (II, 222-234). But as Britain settled into a sustained period of high unemployment his views started to shift. In a 1924 lecture ("The end of laissez-faire") he demonstrated a bit more sympathy for protectionism (II, 226). In a 1933 lecture he argued for a policy of self sufficiency on a variety of grounds, but with particular emphasis on the fact that self sufficiency allowed greater domestic policy choice (II, 476-478). By the beginning of the 1940s, he was expressing some approval for German trade policy -- associated with Hitler's economics minister, Hjalmar Schact.

The Schactian system was, in effect, a trading area delimited by German dominance, with multilateral clearing, with a heavy component of national specialization among the countries involved, combined with Berlin-managed trade with non bloc members (III, 194-199). This was a relevant model because it provided some elements of a possible design for postwar trade relations within the British Empire and the larger sterling area. (17) So far, this makes it sound as if the route followed by Keynes was from his youthful wisdom (folly?) of free trade to a mature understanding (misunderstanding?) of the need for substantial government regulation of the international market. And during negotiations over postwar economic arrangements with the Americans he wrote a letter to a Board of Trade official outlining a profoundly anti free trade position. (18)

The matter is not as straightforward as this. Keynes was resolutely engaged in the pursuit of the feasible. He had no difficulty abandoning a broad principle to which he was committed if circumstances seemed to rule out the principle's advancement. Moreover, he tended to define his positions in vigorous opposition to whoever he was in dispute with at the time. Understatement was not part of Keynes's rhetorical armoury. Some of the Schactian system's attraction to him was that it provided a model for managing international trade in a devastated postwar Europe, in a context here there was no evidence that the United States -- then running huge surpluses with the rest of the world -- was willing to engage itself in reconstruction. His attack on free trade during negotiations with the United States on managing postwar debtor-creditor relations appears, again in part, to have been motivated by Keynes's desire to avoid settling for anything less than the Clearing Union scheme he had proposed. This institution would have facilitated international trade by financing the deficits of countries like Britain, while providing for very modest limits on the domestic policy discretion of the borrowing country (III, 217-228). The United States (and to varying degrees other countries, including Canada) were opposed to allowing the borrower discretion that Keynes sought. Keynes, then, was constructing a radically protectionist alternative to more liberal international trading arrangements, in the context of the devastated condition anticipated for the postwar British economy.

By the end of his life, Keynes was back to celebrating laissez-faire (III, 470). But, as profoundly practical as he tried to be, he was entirely willing to envisage circumstances where major derogations from any particular principle -- including free trade -- were appropriate.

What, then, can we say about Keynes's treatment of institutions? The answer is that it tells us about his views on where governments might be effective. After the first world war governments motivated by enlightened self interest might have eschewed vindictiveness and preserved the bases for a vigorous German economy. Clearly he thought that a better Treaty of Versailles could have been produced. He also thought that, either through interest rate policy or direct investment, governments could have spared the economy the effects of the moral turpitude of rentiers. And, with varying degrees of confidence, he clearly thought that a post second world war settlement was possible that preserved a liberal trading environment while allowing the reconstruction of postwar economies that had been devastated by the war -- in particular, Britain's. In each of these three areas Keynes saw government action as feasible and desirable, to some degree or another. In contrast, he largely took for granted the institutions of wag e setting, modifying his position on a couple of occasions to float the possibility of institutional changes that might have allowed wage flexibility. This raises the question: What considerations led him to think that government could be effective in one area rather than another? We return to this shortly.

Does inflation matter?

The middle part of Keynes's professional career was dominated by the interwar recession. But at each end of his career the overwhelming policy issue was the economic effects of warfare. We have already noted Keynes's concerns with the institutional changes embodied in the Treaty of Versailles. But there was another postwar economic phenomenon that greatly concerned him: inflation. Several of the first world war combatants experienced severe postwar inflations. Keynes made it clear that inflation should be considered a major issue because of the arbitrary redistributions of wealth that it produced and that, he thought, would undermine the moral basis of capitalism (I, 386). (19)

At the other end of his career was the long descent into the second world war that followed the publication of the General Theory. By now a well- entrenched policy luminary Keynes was intimately engaged in issues related to the financing of the war and the management of the war economy. This brought him back to inflation. In How to pay for the War, Keynes addressed the question of how to manage an economy where there was a shortage of goods and labour, which might lead to inflation. The issue was posed as follows: on the one hand, enormous resources would have to be diverted to the war effort, drastically reducing civilian consumption; on the other hand, mobilization for war would greatly increase purchasing power.

How, should these problems be managed (III, 54-5 8)? One answer was to reduce consumption through rationing, which was vigorously supported on grounds of equity. Keynes, equally vigorously, opposed this option on two grounds. First, he argued, rationing only makes sense when one or a limited set of goods is in unusually short supply. It provides no distinctive solution when all goods are in short supply, in this case relative to generally rising purchasing power. That is to say, it provides no better protection for the poor than would directing income increments to them. Second, by defining quantities, rationing imposes common tastes on people. Third, it implies a large and costly bureaucracy. Another answer was to deter price increases through an 'excess profits tax' -- equally likely to be supported on the grounds of 'equity.' But this would provide no solution whatsoever to the real problem, which was a rise in the purchasing power of the working class for which there would be no corresponding increase in the volume of goods. Quite the contrary! A third answer was simply to borrow to finance the war and then allow the rise in purchasing power that resulted from the loan-financed expenditures to cause a very large inflation. But, and this is worth underlining, Keynes argued that workers and their organizations had become sophisticated in monitoring prices. Substantially rising prices would lead them to demand corresponding wage increases, setting off a wage-price spiral. Remember that Keynes regarded inflation as both unfair and liable to undermine capitalism.

That left only one solution, the one advocated by Keynes: reduce demand and finance the war by taxing the working class. He justified this as follows: "We must find a way of preventing individuals from spending more than before, but in a way which avoids penal taxation of the wealthy and which rewards the working class for increased effort by giving them claims on future resources. They can only enjoy an increase in real earnings if they are prepared to accept deferred pay" (quoted III, 55). Contained in this proposal, then, were two key elements: one was a rejection of the idea of using the war as a pretext for redistribution -- indeed, the view that such a redistribution would harm incentives; the other was the idea of compelling workers to save -- obliging them to defer their consumption until after the war (III, 55-61).

There is a much quoted passage of the Tract that has been construed to indicate that Keynes viewed unemployment as a more important policy target than inflation. Keynes was certainly immensely concerned with the waste implied in unemployment. But this did not mean that he was indifferent to inflation. Skidelsky (II, 156) makes it clear that to think this would be to misread Keynes. He quotes him as follows: "it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned." On the contrary, he regarded inflation as undesirable for all sorts of reasons but, in particular, because it implied a threat to capitalist institutions. This latter point has tended to disappear from much of the sociological and related writing on Keynes.

Keynes and His Legacy

The postwar period is often divided into two parts: a golden age from the early 1950s to the beginning of the 1970s when rapid growth was combined with the development of the welfare state, then a prolonged period of poor economic performance accompanied by welfare state retreat in many countries. (20) The first of these two periods is often associated with Keynes. Thus, in an influential collection of essays edited by Goldthorpe, Esping-Andersen and Korpi wrote of "the Keynesian welfare state politics of the post-war era" in Scandinavia (1984: 186). (21) Other authors in the same collection identify demand management as his main legacy in this period (Lehmbruch, 1984: 63; Scharpf, 1984: 264) and still others with class compromise. From this point of view, the golden age was to some non-trivial degree Keynes's legacy.

Is this a reasonable interpretation? Skidelsky's biography suggests that it is, at best, a half truth. The view involves a number of separate components: first, that Keynesian policies were responsible for the growth and full employment of the postwar period; second that Keynes had something to do with the creation of the welfare state; third that Keynes had been an apostle of a postwar class compromise.

How much does postwar prosperity owe to Keynes? Keynes was intimately engaged in the redesign of the international economic organization. A good case can be made that the international economic organizations established at Bretton Woods and after contributed greatly to postwar growth and prosperity. But in the final design it was the views of the United States and Harry Dexter White that prevailed. How could it be otherwise? By 1944 Britain was economically devastated; power rested firmly with the United States (III, 357). What about the provision of the intellectual basis for demand management? Following Abramovitz, Skidelsky observes that postwar growth was a product of the institutional reconstruction that followed defeat -- the break up of legal and de facto monopolies. But "The reconstruction of industries and industrial relations on the Continent of Europe were the products of defeat, not of Keynesian policy. The victorious nations, Britain and the United States, which were also most influenced by Keyne sian ideas, exhibited the weakest tendency to structural reform" (III, 501). On the whole, Keynesian ideas seem to have made little contribution to postwar growth.

What about the creation of the "welfare state"? If the central conception of it is the provision of a set of protections and opportunities -- health coverage, pensions, and access to education -- Keynes had little to do with the matter. As we saw, his initial enthusiasm for Beveridge's proposal gave way to indifference and concern with financial feasibility. If the conception is extended to include income redistribution, Keynes was generally opposed to that, from early distancing from that component of 'new liberalism,' through his hostility to the arbitrary redistribution by inflation, to his opposition to an excess profits tax to pay for the war.

If the welfare state is extended to include a commitment to full employment the matter is less straightforward. Keynes clearly was committed to something called 'full employment' though what he meant by that varied overtime. It did so because: "Full employment for Keynes is ... a politically determined variable. It is an estimate of the maximum unemployment the community will stand and the minimum that can be achieved without imposing on it an unwanted cost" (III, 272). The importance of this point should be underscored. Skidelsky uses it to demarcate Keynes from the Keynesians who followed him, who wrapped themselves in the mantle of his legacy. Whatever its operational definition, full employment is not an absolute. When its pursuit generates a high level of inflation it is not to be sought. When its pursuit impinges on liberty -- for example, through the imposition of wage and price controls -- it is not worth it. Skidelsky makes it clear that Keynes had a sensible approach to full employment, one that re quired cautious and intelligent judgment. The Keynesians who succeeded him often did not.

Following Skideisky, however, we would emphasize another aspect of his legacy. Keynes was an intelligent liberal, valuing liberty both as a path to prosperity under most circumstances and as an end in itself. This was one reason for his rejection of rationing to manage wartime demand. It was why he regarded full employment as an object to be pursued prudently rather than at any cost. And, while he was not entirely consistent on this, in general, he treated markets as the default option for organizing the economy. In doing so he recognized that markets depended on institutions of which private property is perhaps the most basic, but the rules of the international trading system are another. Preserving liberty and the market economy requires attention to institutional design. At the same time, his Burkean inheritance led him to be sceptical of proposals for radical change. Nonetheless, he recognized that there were often circumstances when doctrinal rigidity with respect to markets makes no sense. Keynes was a selective interventionist.

In his interventionism, he sometimes went too far. His approach to policy was shaped by his own record of extraordinary accomplishment and that of many of those of the social and professional circles within which he moved.

There is little mystery about Keynes' own assumptions concerning the politics of economic policy. Personally, he was an elitist, and his idealized world embodied decisions being made be a small and enlightened group of wise people. But these "presuppositions of Harvey Road," .... extended beyond idealization. Economic policy decisions must be made in the real world, and these Keynesian presuppositions also impinged on reality. Keynes not only envisaged government by an enlightened and small elite as his ideal; he also assumed that, at base, this model described government as it actually was observed to operate. (22) (Buchanan and Wagner, 1977: 78)

The problem here is that he tended to overestimate his own and his peers' capacity to produce improved outcomes by substituting their judgments for those of individuals making private decisions in their own interests. (23)

Still, once it is allowed that institutions matter, the public interest will require government intervention from time to time. Governments have to create, protect, and modify the institutions required to allow the market to work. Property rights, for example, have to be protected but also modified to adjust to technological innovation. Thus, technological innovation has posed the problem: how, to what degree, and for how long should the property rights of software designers be protected? Or, we know that markets work best with a suitably educated population but, on their own, probably fail to provide such a population. And so on. Alternatively, governments may have to weaken or abolish institutions that have outlived their usefulness and hinder markets, to no useful effect. The statutory privileges of various professions often provide useful examples of this. (24) Finally, because institutions cannot be modified or eliminated (at a reasonable cost), governments will often have to intervene to secure adjustme nts in one part of an economy for what is fixed in another part. Rightly or wrongly, Keynes (for the most part) regarded the institutions supporting wage inflexibility as an example of this. But a good case can be made that, at any given time, modern economies are filled with such institutional fixities.


An initial conclusion that suggests itself is straightforward. Sociologists should read Skidelsky's volumes. One reason is that they give enormous pleasure. Keynes was genuinely brilliant, inventive, caustic, keen to win arguments. Time spent in his company, so to speak, is intellectually and morally refreshing. More than this, we are offered something like a history of our age.

A second conclusion may well seem more controversial. Our own evaluation of Keynes is blunt: he was the greatest liberal voice of modern times. He sought to understand and to improve the workings of capitalism -- within whose parameters we live, whether we like it or not, and whose workings sociologists ignore at the cost of their own irrelevance. How much more important accordingly is his thought than that of Isaiah Berlin! While Keynes did not always get things right in terms of policy recommendations, as Skidelsky makes clear, he exemplifies (and this is rare!) political responsibility on the part of an intellectual. His liberalism treats markets as the default option but also recognizes that prosperity and civilization requires governments that have a sense of responsibility that goes beyond 'holding the ring,' and exercise that responsibility. Above all, perhaps, is that subtle marriage in his mind between wealth and human Value, the recognition of the importance of the first so as to allow the full vari ety, and vanity, of human wishes to appear and to flourish. That is the real legacy of Keynes.

(1.) This title is, of course, a play on the title of Keynes's The Economic Consequences of Mr. Churchill (1925)--a fairly characteristic exercise in vitriol. This pamphlet contains a succinct statement of his opposition to the restoration of the gold standard after the first world war.

(2.) See, for example, Goldthorpe's comments in Swedberg (1987: 11).

(3.) There is some irony in this. while Halt's introduction assumes that Keynesianism substantially shaped postwar capitalist economic policy the country case studies that comprise the rest of the book tend to suggest that the adoption of policies inspired by Keynes was rare!

(4.) For another positive evaluation by sociologists see e.g. Stehr and Grundman (2001).

(5.) Moggridge's (1992) rival biography is also valuable. We have used it for this paper too.

(6.) These had required that would-be graduates attest to the 39 Articles of the Anglican church in order to gain a degree.

(7.) To save space we confine references to skidelsky's biography to the volume and page number.

(8.) An interesting analogy can be drawn here with the only other thinker of the twentieth century -- Karl Popper -- with something like Keynes' stature as an exponent of liberalism. Both were suspicious of grand designs (as in Popper's praise of piecemeal social engineering), but both equally stressed the need for radicalism in thought. A brilliant analysis of Popper's epistemology and politics can be found in Gellner (1974: 170-184).

(9.) This argument reappeared in discussions of the acceleration of inflation in the 1970s. See, for example, Goldthorpe (1978: 197-201). That does not, of course, necessarily imply the correctness of the argument.

(10.) This was published as "Economic possibilities for our grandchildren" (Keynes, 1931).

(11.) Skidelsky quotes Keynes: "The abolition of consumers' choice in favour of universal rationing is a typical product ... of Bolshevism" (III, 68).

(12.) The report was published in December 1942, under Churchill's wartime government. Its implementation, of course, was the responsibility of postwar governments.

(13.) The gold standard implies that the value of a country's currency is fixed to a particular quantity of gold. Suppose the country runs a balance of payments deficit, That implies a net outward flow of the currency. But, under the gold standard, foreigners can exchange for gold the currency that they have accumulated, and are likely to do so. This outflow of gold reduces the reserves of the banking system and, in turn, banks' capacity to lend. The effect of this is likely to be deflationary, producing both falling prices and unemployment (see, for example, Klein, 1970: 436-439).

(14.) It still does! But that is another matter. Economic Possibilities should probably not be regarded as one of Keynes's larger accomplishments.

(15.) In fact he opposed cuts in coal miners' wages on equity grounds (related to labour mobility -- reducing changes in institutional conditions--II, 203-204). But, in general. Keynes used high unemployment as his gauge of inequity and focused on practical methods for dealing with it.

(16.) In the General Theory he distinguished between downward nominal wage rigidity and real wage flexibility -- implying that inflation can be used to reduce the real cost of labour. Subsequent experience has not been kind to this position. Skideisky (It, 601-606) is very good on this.

(17.) He did not believe that these arrangements could be mechanically transferred to the Empire. "Britain, unlike Germany, was in no position to plan the trade of its Empire" (III, 199).

(18.) "I am ... a hopeless sceptic about this return to nineteenth century laissez-faire, for which you and the Suite Department seem to have such a nostalgia. I believe that the future lies with -- (I`) State trading for commodities; (ii) International cartels for necessary manufactures; and (iii) Quantitative import restrictions for non-essential manufactures" (III, 321).

(19.) The view that Germany could not pay reparations has increasingly been rejected Maier, 1975: 252-253; Trachtenberg, 1980). Both Skidelsky (II, 33-34) and Moggridge (1992: 341-344) are more sympathetic to Keynes on this.

(20.) For an example of the use of this periodicity see Goldthorpe (1984) and other essays in the same collection. The middle of the 1990s may have marked yet another break, with a pick up of growth and employment in at least some countries. But how durable this is remains to be seen.

(21.) When writing of Germany later in the same article (p.196) they distinguish between "welfare state improvements and Keynesian style management of the private economy." It is not clear why they are separate in one place and combined in another.

(22.) The biographer in question is Harrod (1951).

(23.) The classic theoretical attack on this position is, of course, Muth's (1961) critical analysis of the so-called 'cobweb' cycle of hog prices.

(24.) For an extremely entertaining analysis of the workings of a professional monopoly see Quemin's (1997) discussion of French auctioneers.


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John A. Hall is James McGill Professor and Chair of the Department of Sociology at McGill University. He is the author of a number of books, most recently Is America Breaking Apart (with Charles Lindholm, Princeton, paperback 2001). He is currently completing an intellectual biography of Ernest Gellner, and plans to write next on the interrelations of nations, empires and states.

Michael Smith is Professor of Sociology at McGill University. His recent publications deal mainly with the effects of globalization and technological change on the labour markets of Canada and other rich countries. His current research uses Statistics Canada data sets to examine trends in earnings inequality in Canada in the 1990s, and the properties of so-called 'high-performance work organizations'.
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