It is a great honour to speak at this celebration of Kings and Keynes. The greatest honour I can do to both Keynes and Kings College is to get down to business and speak frankly.
The world desperately needs to recover Keynes, but to do so it also needs to confront some deeply uncomfortable truths about the nature of power and the acceptance or otherwise of ideas.
In his 1902 Imperialism, John Hobson observed:
“No one can follow the history of political and economic theory during the last century without recognizing that the selection and rejection of ideas, hypothesis, and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy…….we find the most incontestable example.” (Hobson, 1902, pp. 218-19)
Given the pressure of class interests on today’s economic ideas and on the economics profession, the long-standing neglect of Keynes’s ideas, most significantly here in Cambridge, comes as no surprise.
The “moulds of schools of thought” now dominant in both economics, but also wider society, have led to a vast and prolonged failure of the global economy. A failure to provide people with work, stability, a decent standard of living – and in the light of this weekend’s events in Paris – security.
According to the ILO around 200 million people are now unemployed. The Middle East and North Africa has the highest rate of youth unemployment in the world. Even before 2008, 170 million people had no work.
Today most economists regard unemployment as a non-event; not worthy of consideration as a major indicator of economic health. Instead the economics profession seeks only to impose the consequent failure of economic activity as the new norm – “Secular Stagnation”.
The appalling conditions of the world today – in Europe, high levels of unemployment, the dominance of liberal, unfettered finance, an ‘independent’ central bank, political tensions and divisions and the rise of right-wing and even fascist parties – are precisely the conditions that Keynes sought to eradicate.
From the time of his rejection of the gold standard, Keynes was concerned with the prevention of economic crises. In the wake of the great depression, he wanted to establish conditions for the restoration of prosperity and to prevent such events ever recurring again.
In this Keynes clearly failed.
But this failure was through no fault of his own.
For the Keynes that survived into conventional wisdom and most importantly, the Keynes that has survived into the lecture theatre – if he is mentioned at all – is a gravely distorted and diminished figure.
He is now associated largely with fiscal policies to combat crisis, when to prevent crisis he was concerned primarily with monetary policies. His objective was the reform of the international financial system on the one hand, and the setting of low interest rates, on the other.
Managed finance and cheap money – on a permanent basis – were his central ambitions.
It has to be our hope that the economics profession’s ongoing refusal to reform the monetary system along the lines proposed by Keynes, does not reflect the same forces of class interest outlined by Hobson.
But either way it is time the profession woke up to the impossibly high stakes of its intransigence and neglect of Keynes. Most notably, it must be said, the neglect here at Cambridge.
From a theoretical perspective Keynes was a monetary economist, understanding immediately that conventional or classical economics was irrelevant to an economy based on credit. He was concerned to devise a theory for what he called a ‘monetary production economy’.
In the classical theory the rate of interest is a passive consequence of whatever real events are regarded as dictating outcomes. Today neoclassical economists appeal to these events to explain “a global savings glut”; changes in population growth and failing productivity.
In Keynes’s theory it is the rate of interest that dictates events, and that, unchecked is the ‘villain of the economic piece’.
High rates of interest have been condemned by both philosophical and religious doctrines for over two millennia. The jubilee principle is fundamentally a rejection of usury.
Ultimately Keynes understood the rate of interest as a social construct, set according to the balance of conflicting economic interests.
He did not use the language of class, but his theory meant that class struggle was very much a reality. But his view was different from Marx’s account in this respect: Productive industry and Labour shared interests, and these were opposed by Finance. What Keynes called “vested interests” or the rentier class.
Low rates of interest or cheap money favoured Industry and Labour.
Easy, dear money favoured Finance.
The progressive euthanasia of the rentier was for Keynes the price society must pay for a) full employment, b) decent public goods and services and c) economic stability.
Given the rentier was hardly likely to engineer his or her own demise, then the assertion of public authority over the financial system was essential.
Until Keynes, Finance had been jealously guarded by private authority.
Today such public authority is rejected by mainstream economists who use the deeply imprecise and pejorative notion of financial repression to attack democratic management of the finance sector.
Financial “repression” is akin to regarding the emancipation of slaves as the repression of the rights of slave owners.
For the five years after the collapse of gold standard, Keynes orchestrated a major realignment of class relations.
Exchange rates were managed by central bank intervention in forex markets, using massive funds provided by governments, rather than by manipulation central bank discount rates. These interventions were supported with a degree of capital control and permitted a major reduction in interest rates all over the world.
Britain, the United States and France imposed democratic, public authority over finance.
In Germany under Hitler and Schacht, private authority over finance prevailed.
Democratic governments had been freed from the restraints applied under financial orthodoxy, most triumphantly under FDR’s New Deal.
With the exception of the stunning five years of the 1945 Labour Government in Britain, the decisiveness of this re-alignment of class interests was ruptured in the post-war age.
But even though the global trajectory was set to move away from Keynes and monetary reform…The Golden age was truly golden. There was employment. Economic activity, theatre, sport, music. Inequality declined. Even the public finances were to be stabilised.
But in the 1960s and 70s Finance was freed from so-called “repression”. Low interest rates were replaced by high real rates of interest.
Since then advanced economies have endured 35 years of high unemployment and severe instability. This finally ended with the global financial crisis of 2007-08 after the greatest expansion of private debts probably in the history of the world – which could no longer be sustained.
Governments have been and are still required to retrench, to manage low investment, unemployment and political instability within severe constraints, and greatly reduced means.
Keynes is associated merely with those who argue against going too far.
Yet – of course – the retrenchment is resolving nothing. Debt is unresolved. And deflationary forces loom.
An emerging authoritarianism is rationalised as reflecting the ineptitude of democracy in the wake of this terrible crisis.
The immensity of the power of the finance sector is uncontested to any material extent – by both progressive and reactionary forces in society.
The power of Keynes’s ideas is of a scale that has no precedent.
The [associated] threat to vested interests is obvious.
To understand properly the General Theory is to recognise the genuine possibility of a profoundly better world – both for this generation, but also for our grandchildren.
The fact that the General Theory is not recognised – or even taught here in Cambridge – tells us more about today’s economists, than about Keynes’s nature as a genius – alongside that of Darwin.
For as Austin Robinson wrote back in the Economic Journal in 1972:
“If in the process of reappraisal Keynes does not emerge as a truly great man, something, let me repeat, will have gone sadly wrong with the criteria of greatness”.