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Reading Notes for Robert Skidelsky: "Keynes: A Very Short Introduction"...

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John Maynard Keynes: John Maynard Keynes was brought up a classical liberal and a classical economist. He believed in free trade, economic progress, cultural uplift, and political reason. He then found himself working for the British Treasury during World War I, unable to stop what he thought were disastrous post-World War I political decisions. He then found himself watching as the classical economic mechanisms he had been taught to admire all fell apart.

He then picked himself up.

After World War I Keynes used what power he had to—don't laugh—try to restore civilization.

He had, all things considered, amazing success and an amazing impact.

In Skidelsky's—powerful and I believe correct--interpretation, Keynes before 1914:

believed (against much evidence, to be sure) that a new age of reason had dawned. The brutality of the closure applied in 1914 helps explain Keynes’s reading of the interwar years, and the nature of his mature efforts... to restore the expectation of stability and progress in a world cut adrift from its nineteenth-century moorings... (ES, page xv)

Thus he then spent the rest of his life arguing that, if only statesmen would be farsighted and clever enough, they could put Humpty-Dumpty back together again: the world could get back to a good world of free trade, economic progress, cultural uplift, and political reason. He undertook a brave if losing struggle against the approaching Great Depression, against political insanity, and against the Nazi Party's attempted revenge for the German defeat in World War I. And when he lost in the 1920s and the 1930s he picked himself up yet again, and tried yet again in the mid-1930s and thereafter to lay the groundwork for future victories for prosperity, rationality, and technocracy.

And, in the end, he succeeded.

In this second attempt at the task of rescuing civilization he was successful: His General Theory of Employment, Interest, and Money did change the world. The book ends with a bold claim for the importance of ideas rather than interests that, in context, has to be read not as a considered judgment but as his desperate hope:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.... But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil... (page 570).

The most extraordinary thing is that Keynes was right.

But what, exactly, did he think needed to be done? What framework of ideas did he construct in the process of trying to persuade people to do it? And how well did he do? And how did he do so well?

These notes assume that you have followed my advice for how to read Skidelsky's Keynes: A Very Short Introduction Start with the first paragraph of chapter 1, then skip forward to chapter 3, and read to the end of chapter 5, and then read the eipilogue. Only after that go back: read first the Introduction, and then chapters 1 and 2, and finally chapter 6.

1st ¶: "Keynes set out to save what he called 'capitalistic individualism'...:

Chapter 3: The Monetary Reformer: Skim (and largely ignore) the sections if this chapter in which Skidelsky summarizes and analyzes Keynes's Treatise on Money: It was largely a dead end. Focus on the sections devoted to Keynes's Tract on Monetary Reform, The Economic Consequences of Mr. Churchill, and Can Lloyd George Do It?

Keynes believed that full employment and price stability were the essential keys to the creation of prosperity and the maintenance of social and international peace. The rich, under the influence of their established morality of thrift, would take the profits from the capital they owned and largely reinvest them, thus boosting productivity, and thus raising wages and creating equitable growth. The key for Keynes was therefore that the government had to manage the monetary system to avoid the extremes of both "deflation" and "inflation":

Rising prices and falling prices each have their characteristic disadvantage.... Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But 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. The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one. For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision...

But if full employment and price stability could not be maintained, bitter political experience taught that the result would be the very unpleasant victory of Hitler-Mussolini fascism or Lenin-Stalin communism.

But how did you avoid inflation or deflation? In the terms in which Keynes was thinking in the 1920s, you did so by having the government take steps to balance the supply and demand for money. If there was an excess demand for money, people would slow down their spending in order to build up their money balances—and the result would be closed factories, unemployed workers, and deflation. If there was an excess supply of money, people would speed up their spending in order to get rid of money they did not think the needed—and the result would be inflation and disappointed savers. Clever technocratic management of monetary policy could, Keynes thought in the 1920s, do the job of balancing the supply of and the demand for money. Skidelsky's chapter 3 follows Keynes's thought as he makes this first attempt to explain why he thought that, and thus his first attempt to build something that could be called a "macroeconomic theory".

Chapter 4: The General Theory: Chapter 4 is Skidelsky's account of how Keynes changed his mind: how he came to believe that clever technocratic management of monetary policy could not always and—perhaps—could not even usually do the job, and that other tools would be needed: "a somewhat comprehensive socialization of investment" under the auspices of the government or of incentives provided by it, was his ending point. Most of the issues we will cover in at least the business cycle portions of the course are raised here, in Skidelsky's chapter 4, in his account of Keynes's second attempt to build something that could be called a "macroeconomic theory", and his publication of that theory in his book The General Theory of Employment, Interest and Money

Chapter 5: Economic Statesmanship: With the growing influence of the General Theory before September 1939 in promising an easy and straightforward policy path that would lead the North Atlantic out of the Great Depression, and with the outbreak of World War II in Europe in September 1939, Keynes's influence grew. He found himself applying his theory to problems of how to finance World War II (in which his theory had moderately conservative implications, in that it required less of a government takeover of the whole economy than was presumed to be needed) and how to build a strong and prosperous post-WWII economy (where his role in creating the Bretton Woods system of international macroeconomic management was a remarkable politico-economic success). He also found himself nurturing and guiding a growing group of economists who took the task of managing and damping the business cycle seriously. Unlike other schools of economics, which tended to see depressions as things like bad weather that one had to endure, Keynes and his disciples promised a much more sunny future for the economy.

Epilogue: The View from 2010: What has remained of Keynes's accomplishments? Among economists, the idea that it is the government's business to generate full employment and price stability has remained—except for diminishing factions of economists at the University of Chicago, the University of Minnesota, and the Ludwig von Mises Institute. And, among economists, the General Theory framework he proposed of focusing primarily on the components of spending and demand rather than primarily on the excess demand or supply of money has endured. In addition, we owe to Keynes:

  1. A focus on the role of uncertainty, and of changing expectations.
  2. A belief, among economists, that fiscal policy has a powerful role to play: that when the private sector sits down as far as demand and spending are concerned, the government should stand up.

As Skidelsky closes his book:

We do not need a new Keynes; we do need the old Keynes, suitably updated. He will not be our sole guide to the economic future, but he remains an indispensable guide.

Introduction: By now you should have read chapters 3-5 and the epilogue, and should be circling back to the introduction. Tell me what you think of the introduction: there is a lot in it, but it is, it seems to me, written more for somebody steeped in the intellectual and cultural history of Great Britain in the first half of the twentieth century than for you, or indeed for pretty much anybody likely to pick up the book in this day and age. This time through reading it, I was struck by a passage in the introduction that, I believe, summarizes Keynes's standpoint toward life and toward his mission very well:

After 1914 there was the management of the world to attend to—a world which, after 1914, seemed to be spinning into chaos. Here the problem was one of control, not liberation. Civilization, Keynes acknowledged in 1938, was a 'thin and precarious crust'. The men of power took over... Stalin... Mussolini... Hitler.... But the important point is that [Keynes] never succumbed to the politics of cultural despair. Despite everything, that Edwardian [era, 1894-1914,] cheerfulness survived. Uncertainty could be managed, not by brute force, but by the exercise of intelligence, and gradually the harmonies might be restored. This was his ultimate credo, his message, if there is one, for our time...

Chapter 1: The Life: Keynes's life was one of the most interesting lives I know of lived in the twentieth century. It is not, however, clear to me that it has all that much to do with his economics—either with the economics of John Maynard Keynes or with the doctrines of those who have claimed to follow and develop his insights and created Keynesian economics. So read this chapter for a flavor of the times in which he lived: not to get a secret key to understanding macroeconomics.

Chapter 2: Keynes's Philosophy of Practice: This chapter, also, is very interesting in its own right—the intellectual and cultural portrait of a particular kind of man, the early twentieth century British anti-democratic liberty, a man for whom the Conservative was the stupid party and Labour was the silly party. Inequality did not much bother Keynes. Disappointment did. And waste. And lost opportunities. Nevertheless, as with chapter 1, it is not clear to me that this chapter has all that much to do with his economics—either with the economics of John Maynard Keynes or with the doctrines of those who have claimed to follow and develop his insights and created Keynesian economics.

Chapter 6: Keynes's Legacy: This chapter is, I think, largely wrong. It was written in July 1905, just a few years after the Reagan-Thatcher high tide. In the United States, Ronald Reagan had been president for eight years from 1981-1989, his Republican successor George H.W. Bush for four from 1989-1993, and then Bill Clinton had become president in a confused three-candidate election. Clinton was seen as largely an accident—and it was, after all, Clinton rather than Reagan who had announced that "the age of big government is over" in his State of the Union address. In Britain, the highly conservative Margaret Thatcher had ruled from 1979-1990 and her Conservative successor John Major was still resident at 10 Downing Street. Thus Skidelsky's judgment was that Keynes and "Keynesian" policies were of little relevance:

Keynesian policies come to us today wrapped in a history of rising inflation, unsound public finance, expanding statism, collapsing corporatism, and general ungovernability, all of which have seemed inseparable from the Keynesian cure for the afflictions of industrial society. We do not want to traverse that path again...

This conclusion is very much of the particular time in which it was written. The epilogue is, I think, much more balanced.

Further Reading:

John Maynard Keynes:

Brad DeLong:

MOAR from me, if you have time: