A Keynes for All Seasons



ON JUNE 5, 1883, the year of Karl Marx’s death, John Neville Keynes, a Cambridge economics don, and his wife Florence, one of the university’s first women graduates, celebrated the birth of a son. They christened him John Maynard. The boy prospered at Eton, which he (unlike George Orwell and Cyril Connolly) loved, and still more at Cambridge, where he duly enrolled in 1902. A comfortable career opened before him. He blossomed as a polemical speaker and won election as head of the University Union Society, undergraduate imitation of the House of Commons and nursery of future prime ministers. Coming under the influence of Alfred Marshall, the father figure of English economics, he quickly established himself as the best young economist at Cambridge and, therefore, in the universe.

But Cambridge also inducted Keynes into the adversary culture of Bloomsbury. The early history of this coterie of the culturally elect—its members included E. M. Forster, G. E. Moore, Virginia Woolf, the painter Duncan Grant, and the art critic Clive Bell—revolves around Cambridge and the magnetic personality of Lytton Strachey. Two years Keynes’s senior at the university, Strachey recruited him into “the Society,” whose members populated Bloomsbury. Throughout his life, Keynes cherished the affection and responded to the influence of this group of liberated souls. Among them, no practice was taboo—from homosexuality (Keynes apparently vied with Lytton Strachey for the affections of Duncan Grant) to conscientious objection—provided only that it could be justified as enhancing friendship or the appreciation of beauty.

Had Keynes chosen to play the establishment game, he almost surely would have succeeded Alfred Marshall as the dominant academic authority of his generation. That was never Keynes’s choice. He preferred to shatter the icons of his tribe. In 1919 his The Economic Consequences of the Peace argued that the reparations clauses of the Versailles Treaty contained the seeds of political turmoil and renewed conflict. That was bad enough. Worse, in the same book Keynes personally attacked his own chief. Prime Minister Lloyd George, who had taken him to Versailles as one of his advisers. In one memorable passage, excised in later editions but subsequently resurrected in an essay entitled “Mr. Lloyd George: A Fragment,” he wrote: “Lloyd George is rooted in nothing; he is void and without content; he lives and feeds on his immediate surroundings; he is an instrument and a player at the same time which plays on the country and is played on by them too; he is a prism, as I have heard him described, which collects light and distorts it and is most brilliant if the light comes from many quarters at once; a vampire and a medium in one.” It helped matters not at all that the polemic was a sensational success.

The reputation for unsoundness that this best seller created was compounded by its author’s willingness during the 1920s to question such verities as free trade, the prewar dollar-sterling parity, the adequacy of competition as the explanation for British prosperity, and the wisdom of the Treasury. Soon reconciled to Lloyd George, he even advocated deficit spending on public works as an unemployment remedy.

He climaxed his career of heterodoxy at the end of 1935 with this century’s most influential book by an economist: The General Theory of Employment, Interest and Money. The central message was clear and powerful. The conventional theory of unemployment as a malady of high wages was sheer nonsense. In a depression no wage was low enough to eliminate unemployment. Accordingly, it was wicked to blame the jobless for their plight. Unemployment, argued Keynes, occurred when consumers, investors, and governments spent too little. The cure was as simple as the diagnosis; one or more of these three groups had to spend more.

Keynes’s demonstration that depressions do not automatically cure themselves was a shock. But once the shock wore off, mainstream economists and the more alert members of the corporate community discovered that a suitably domesticated Keynesianism, shorn of Keynes’s contempt for businessmen and his indignation about inequitable distributions of income and wealth, could be good for business. This was the best news for capitalism since Franklin D. Roosevelt’s New Deal. Lower taxes on corporate profits, reduced marginal rates on personal income, and new incentives to investment could all be justified as stimuli to aggregate demand and high employment, a splendid disguise for old-fashioned avarice.

This conservative version of Keynes dominated economic policy for a generation after World War II. It facilitated an unprecedented improvement in living standards and a secular rise in economic growth, interrupted only by brief and mild recessions. In 1973, however, OPEC’s coup marked the start of a time of troubles: intractable unemployment, sharp inflation, and unpleasant mixtures of the two. Keynes no longer seemed to have the answers. The prophets of monetarism and supply-side economics preached alternative sermons.


YET EVEN conservative Keynesianism is proving more durable than its critics imagined. Early in 1971, Richard Nixon confessed that he was a convert to Keynes. To date Ronald Reagan gives no sign of similar insight. Nevertheless, on the highway to hog heaven supposedly guaranteed by supply-side tax favors to the certifiably unneedy, the Reagan folks stumbled into some embarrassing potholes, the first and deepest being the worst recession since the 1930s. Indeed, that mischievous conservative economist George Stigler ungratefully tagged the episode with the horrible word “depression,” spoken under the very roof of the White House after an audience with himself in the Oval Office.

The recession-depression was made worse by an investment community disloyal enough to curtail, not expand, plans for new plant and equipment. No wonder that as early as the spring of 1981 David Stockman began to confide his doubts about supply-side miracles to his great friend William Greider. He soon had company. By September of the same year. Treasury Secretary Donald Regan, in palmier days head man at Merrill Lynch, was reduced to scolding his former associates in this poignant cri de coeur: “The Administration has done its job. It has provided just what American industry said it needed to transform our economy. . . . Yet I must stand here today and ask: Where is the business response? Where are the expansion plans? It’s like dropping a coin down a well—all I’m hearing is an empty clink.”

Just to make things intellectually if not politically worse, the skittish recovery now under way bears not the remotest resemblance to those supply-side scenarios in which the leading role is played by risk-taking entrepreneurs. Investment continues to shrink; the most recently revised forecasts by the Council of Economic Advisers contemplate unemployment at close to 10 percent for the rest of 1983, with scant improvement in 1984. Scarcely a supply-sider is left on the Reagan team. At Treasury, Beryl Sprinkel is the last, lonely exponent of the competing monetarist fallacy.


THE AWFUL TRUTH is that the recovery, such as it is, is an old-time Keynesian event. Let us count the ways in which the current economic news merits so ghastly a label.

First, last summer Paul Volcker and his six clones junked the monetarist experiment pursued by the Federal Reserve since October 1979. (Yes, Jimmy Garter appointed Volcker, not the smallest of his sins against his fellow creatures.) Reverting to traditional Keynesian emphasis upon interest rates, the Fed began pumping up M-1, M-2, and the other Ms barely in time to limit Republican losses in the midterm election—another of those odd political coincidences that punctuate postwar relationships between the ostensibly independent Fed and each transient White House resident. Second, in response to actual and anticipated personal income tax reductions, as well as lower mortgage and installment rates, consumers cautiously began to buy a few more houses and cars. Third, Pentagon hardware procurement, an unpleasant variant of the public works advocated in a recession by good Keynesians, began to pick up speed. Finally, OPEC disarray reduced gasoline and home heating oil prices. Just as OPEC’s 1973 and 1979 coups in effect raised taxes on the citizens of oil importing nations, the current price slide is the equivalent of a tax cut that leaves more spendable dollars in the possession of average Americans.

Most economy-watchers blame the feebleness of recovery not upon Keynesian doctrine but upon supply-side blunders. Reckless tax cutting and headlong arms spending have generated huge and increasing budget deficits. At some point in the recovery, when business investment finally demonstrates signs of life, corporate financing requirements will jostle Treasury borrowing, shove interest rates upward, and plunge the economy downward into renewed contraction. The fact that in the spring of 1983 interest rates still are historically high and show signs of rising testifies to the skepticism on the part of the financially informed about the permanence of this Administration’s single victory: the cooling of inflation. As Mrs. Thatcher has demonstrated in unlucky England, it is no great feat to tame inflation. Thirteen percent unemployment will do the trick every time. Here at home 10 percent apparently suffices.

Americans are less patient, or less masochistic, than their British cousins. Hence the Reagan Administration’s unacknowledged retreat from Reaganomics. The retreat, of course, is to a version of Keynesianism. It was G.E.A. Chairman Martin Feldstein who briskly dismissed supply-side economics last year at his Senate confirmation hearings as “proven decisively wrong.” Monetarists, hedgehogs who knew one big thing (that firm control of the money supply was the beginning and end of sound economic policy), now quarrel over the definition of money itself, bicker over which M is the one to be regulated, brood over the fickleness of the velocity with which money, whatever it is, changes hands, and forecast the course of the economy with the precision of astrology. Pleasant as it undeniably is to witness the punishment of error, three wrongs do not make even a single right. The failures of monetarist and supply-side therapies do not establish the soundness of the Keynesian pharmacopeia.

We should be properly grateful for the role Keynesian policies played for a generation after World War II, a period in which living standards climbed, the violence of the business cycle diminished, and global growth accelerated. But the same policies worked far less well in the 1970s and the 1980s. And it is now clear that Keynes underestimated both the inflationary potential of full employment and the impact on public expectations of continuous inflation without serious interruption for so long a period. Keynes exaggerated the competitiveness of the private sector and, in some moods, the efficacy of fiscal and monetary remedies. For the last decade and a half, economists have fretted over Phillips curve trade-offs between inflation and unemployment. This year, without apology, the Economic Report of the President set 6 to 6.5 percent unemployment as the appropriate policy objective half a decade from now because, its authors argued, any smaller figure would be highly inflationary.


FOR KEYNESIANS, then, the question remains: is it possible to combine high employment, say the 4 percent quaintly advanced as the 1983 goal by the Humphrey-Hawkins Act, with acceptable levels of inflation, perhaps the same number? The answer for small or even medium-sized countries is probably no—unless major trading partners pursue similar strategies. Francois Mitterrand was compelled to retreat from Keynesian expansionism, redistributive taxation, and further nationalization of industry and finance partly because French capital fled from the terrors of socialism. The rest of the explanation involved the comparative prices of French and competing merchandise. Because Germany, Britain, and the United States were deflating their economies, French goods soared in price in comparison with those of rivals, the balance of payments suffered, and the franc had to be devalued twice.

Foreign trade is more important to Americans than it used to be, and the American economy is a smaller fraction of the global economy than it was in the 1950s, when the American writ ran without effective challenge. Nevertheless, our share of free-world output is still so large that vigorous expansion here is likely to stimulate activity in Europe and Japan. This says no more than that, other circumstances favoring, determined American expansion toward full employment need not share the French fate.

How favorable are the “other circumstances”? The inflationary bias in our economy is far stronger than it was in the 1960s, when, until the Vietnam disaster terminated the idyll, we enjoyed one of the longest episodes of noninflationary growth in business cycle annals. Even then, it is worth recalling, the astute Keynesians who shaped Kennedy-Johnson policy—Walter Heller, James Tobin, Kermit Gordon, Gardner Ackley, Arthur Okun—felt the need to supplement fiscal and monetary policy with wage-price guideposts.

The guideposts lacked the force of law. Today stronger measures seem essential for an economy in which inflationary expectations at best are dormant. In the face of declining sales, auto and steelmakers raise prices and cry for protection against Japanese exports. Property owners have acquired huge stakes in prospective capital gains from the sale of their homes. Bankers and oilmen worry as much or more about falling energy prices than they did when OPEC was quadrupling its charges.


A WORKABLE incomes policy, the essential complement to full-employment monetary and fiscal measures, comes in a choice of coercions. One, preferred by a majority of the minority of economists at all sympathetic to incomes policy, deploys tax policy. TIP, for tax-based incomes policy, concentrates on price and wage setters. Corporations and unions will get tax refunds if they heed price and wage guideposts, or, in the stick version, subject themselves to tax surcharges if they don’t. TIP employs the market, cherished by all right-minded economists, to further public objectives. The second approach starts with the perception that in large portions of the American economy, two or three producers dominate their industry’s pricing policy. In industries where market power is concentrated, mandatory price controls, judiciously applied, do little more than substitute the judgment of public for private bureaucrats.

As yet, TIP has not undergone the trial of experience. Like other devices, it is all but certain to be more complex in practice than in conception. Controls are notoriously difficult to administer fairly and efficiently. But the only conventionally acceptable alternatives are worse: indefinite operation of the economy at high levels of unemployment or equally wasteful alternations of inflationary expansion and deflationary recession.

Much as incomes policy supplements but does not supplant Keynesian techniques, industrial policy can be comprehended as a more specifically purposeful set of investment stimuli than that of The General Theory. In 1935 Keynes was willing to spend public money on anything just to set the multiplier process in motion. Thus Robert B. Reich’s The Next American Frontier responds in its program to the failures of American management and education and to the corresponding achievements of the Japanese model. Reich proposes to reward enterprises that retrain their employees, improve instead of desert their communities, avoid layoffs, cherish workers as precious human capital even more valuable than the inanimate variety. It is an intelligently conservative strategy, which avoids central planning, works with market forces, and deploys government in support of private enterprise.

Reich talks to the leading Democrats. So do Lester Thurow and Felix Rohatyn. One suspects that the battles for the hearts and minds of the aspiring Presidential nominees is over variations of by-now-familiar recipe ingredients—some adaptation of Rohatyn’s revived Reconstruction Finance Corporation; targeted education, training, and retraining initiatives; tax encouragement of investment; special emphasis on research and development; and, hovering in the background, some politically thinkable incomes policy—if one exists.

Even the United Auto Workers’ domestic-content legislation fits, with a little ingenuity, under the rubric of industrial policy. Its advocates predict that we will benefit from an infusion of Japanese investment, and perhaps still more from the opportunity to inspect at close range Japanese handling of technology, factory organization, inventory control, and human relations.


THIS IS THE NEAT, tidied-up Keynes, the textbook Keynes who deplored involuntary unemployment and explained how economic policy could counteract recession. Some capitalists have been astute enough to grasp the lessons of this Keynes, who saved their necks and fortunes in the 1930s and gave them pro-business tax cuts and investment incentives in the 1960s.But another Keynes lurked within the pages of The General Theory—a Keynes who was pessimistic about the viability of capitalism for reasons that echo Marxist prophecies of declining rates of profit. Listen:

Today and presumably for the future, the schedule of the marginal efficiency of capital [Keynes’s synonym for expected profits] is, for a variety of reasons, much lower than it was in the nineteenth century. The acuteness and peculiarity of our contemporary problem arises, therefore, out of the possibility that the average rate of interest which will allow a reasonable average level of employment is one so unacceptable to the wealth-owners that it cannot be readily established by manipulating the supply of money.

Here was the germ of the secular stagnation doctrine articulated in the late 1930s at Harvard by Alvin Hansen. Keynes never advocated socialism as a substitute for capitalism, at least in part because of the horrible Russian example. Capitalism had positive virtues. It fostered individualism, and

individualism, if it can be purged of its defects and abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colors the present with the diversification of its fancy. . . .

The echo of Bloomsbury trembles in the air.

All the same, the “defects and abuses” were, in Keynes’s eyes, gross—above all mass unemployment and flagrant inequities in the distribution of income and wealth. Keynes looked forward to the “euthanasia” of rentiers, redistributive taxation—particularly of inheritances, and “a somewhat comprehensive socialization of investment” as “the only means of securing an approximation to full employment.” Here is a Keynes with whom Sweden’s Olaf Palme and France’s François Mitterrand can be quite comfortable.


IN SUM, Keynes has not disappeared as an influence on thought and policy. Now that the monetarists and supply-siders have been tested and have flunked, Keynes more and more sets the terms of policy debate in the democratic world. The Swedes, who anticipated Keynes in the work of Wicksell, Ohlin, and Myrdal, among others, have even moved on from two of Keynes’s goals—full employment and diminished inequality—toward a third, his “somewhat comprehensive socialization of investment,” in the shape of their Meidner Plan for worker ownership.

As for the more conventional Keynes, in backward lands like the United States he seems to be an ex officio member of the Board of Governors of the Federal Reserve. Our Treasury Secretary hopes consumers will lead us out of the wilderness to the promised land of prosperity. Keynes inspires industrial policy mavens, incomes policy advocates, and vote-hunting Democrats. There is even a protectionist Keynes on call for fans of domestic content bills.

The other big anniversary, of course, is that of the New Deal, a mere fifty years old. Between them, Keynes (b. 1883) and Roosevelt (b. 1882) have indeed soured for true believers the celebration of the hundredth anniversary of the passing of Marx (d. 1883). Capitalism still shows signs of life and capitalists still show flashes of intelligence. For better or worse, these are among the legacies of the man who wrote that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood, Indeed the world is ruled by little else. 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 . . . soon or late, it is ideas, not vested interests, which are dangerous for good or evil.”

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