The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes
By Zachary D. Carter
Random House
Keynes Against Capitalism: His Economic Case for Liberal Socialism
By James Crotty
Routledge
As the economy collapses and the death toll mounts from COVID-19, economists are bound to ask, “What would Keynes do?” As two new intellectual histories of the great British economist make clear, that question is about much more than technical issues of monetary and fiscal policy, the Keynesianism found in economic textbooks. The real Keynes was a philosopher in the most profound sense. His was a towering intellect in search of the good society—human well-being—on the trail of Aristotle. Keynes today would address not only a searing health crisis and economic turmoil; he would instruct us on how the crisis lays bare the rot of our decayed public institutions, and he would bid us to pursue dazzling new solutions for our time.
Keynes, by David Low, 1934
Both James Crotty’s Keynes Against Capitalism and Zachary Carter’s The Price of Peace show brilliantly how Keynes was vastly more important to modern social thought and today’s politics than the “Keynesian models” of aggregate demand conventionally associated with Keynes today. Even in Keynes’s own time, when his magnum opus The General Theory of Employment, Interest and Money (1936) was still hot off the press, Keynes’s philosophical reflections on the social order were turned into a few mechanistic equations in disciple John Hicks’s IS-LM model (1937). As a new economics student almost 50 years ago, I was entranced by the IS-LM model: The economic fate of nations could be determined by the levers of monetary and fiscal policy. Yet this model, accessible even to a first-year enthusiast, did not convey Keynes’s real messages and thinking; it diverted our attention from a far deeper and more consequential political agenda.
Keynes indeed emphasized monetary and fiscal policy as tools of recovery from the Great Depression of the 1930s. In the 1920s, he emphasized the need to break with the gold standard to enable war-ravaged Europe to surmount the chaos after World War I. And in the 1940s, he helped to lay the monetary and fiscal foundations for economic recovery after World War II. He was an economic engineer of the greatest brilliance. Yet his financial engineering, dazzling as it was, is not why Keynes was the greatest public intellectual of his era, nor how we should distill his wisdom today. Keynes’s greater importance for us lies in the philosophical realm.
He was, I would argue, the unexcelled master of the moral virtue that the Ancient Greeks called phronesis, or practical wisdom. The Greeks were in search of the good life, or what they called eudaimonia. They believed that the good life could be achieved by cultivating moral virtues, in individual behavior and in politics as well. The leading moral virtues included practical wisdom, courage, moderation of wants, and justice, virtues that were to be pursued by each person in search of a good life, and through the collective life of the polis, or political community.
Moral virtues signified the ability to make rational choices for a good life instead of instinctive choices driven by greed and pleasure. The ability to choose the good over the merely pleasurable is what the Greeks called practical wisdom, the ability cultivated over time to judge the right action in the right circumstances, taking account of the specific context.
Keynes explained practical wisdom for economics in his remarkable tribute to Alfred Marshall, the pre-eminent Victorian-age economist at Cambridge University, who was Keynes’s predecessor as Britain’s leading public intellectual on economic issues. Keynes eulogized Marshall in these terms:
The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.
Every bit of this statement is remarkable, in its wit, eloquence, and wisdom—practical wisdom. These words have lived with me as a practicing economist for decades, as a benchmark, a standard, a life goal. I am sure that they have inspired countless others. His words epitomize phronesis: knowing how to act for the good life of society in the circumstances of the moment.
Therefore, trying to discern Keynes’s specific views—whether on trade, or money, or budget deficits, or public investments—almost surely misses the main point. Keynes did not give us a checklist of dos and don’ts other than general ones: Don’t waste human talents and physical resources through wanton unemployment, avoidable wars, or breakdowns of social and trade relations; don’t abuse power; don’t mistake wealth for happiness; and don’t tolerate the wanton suffering of others in the belief that all will be fine in the long run or that suffering is ordained and unavoidable. As the master of practical wisdom, Keynes honed solutions in the context in which crises arose.
His wisdom only gradually shifted the center of gravity of public opinion. Though vindicated by history, his insights threatened and still threaten elites. Yet for 30 long years, from 1914 to 1946, through challenges of two world wars and the Great Depression, nobody in public life was right more often, more deeply, more incisively, and more consistently than Keynes.
Zachary Carter’s brilliant book enables us to watch the unfolding of Keynes’s insights and the development of his practical wisdom, against the backdrop of history and Keynes’s personal life. Keynes’s early life was comfortable and optimistic—highly intelligent parents, the intellectual atmosphere of Cambridge University, a precocious childhood wherein Keynes’s genius was recognized early on, and the encouragement of those talents with other bright minds at Eton and Cambridge. As an undergraduate, Keynes fell under the influence of Britain’s leading moral philosopher of the day, G.E. Moore, from whom he imbibed the wondrous ideals of the good life and the cultivation of virtues that had been handed down in Western civilization from the Greeks. He fell into a circle of artists and future influencers who would provide the artistic and political leadership of Britain in the coming decades, and who would often serve as Keynes’s muses, guides, and patrons into the corridors of power.
Carter, a young and accomplished journalist, describes the fateful motorcycle ride that a young Keynes of 27 years took to London in July 1914 when beckoned to the British Treasury to brainstorm on the bank run that followed the start of World War I. Keynes dazzled the older assemblage with an ingenious approach to halt the run; and on that basis won his seat at the Treasury table to help Britain, then the center of global finance, to manage the complex finances of the war years.
The Great War gave Keynes three great and interlinked epiphanies that would define all of his subsequent thinking. The first involved the question of mobilizing industry for the war effort. Keynes realized that the economy must be viewed as a whole—as a macroeconomy—rather than as the mere assemblage of households, businesses, and markets. Britain had to shift resources to the war effort, and away from other activities. The system as a whole had to be managed, the core idea of the new macroeconomics. Indeed, the war planning in both the U.K. and U.S. gave rise to new “national accounts” data that would eventually become the gross domestic product, the measure of overall economic activity.
The second involved the linkages of money and finance to the real economy. Money, it might seem, is just a unit of account—pound sterling or dollars—for the trade of real goods. More money in circulation might change the sterling or dollar prices of goods and wages, but it was not so clear why a change of money would affect output and employment. And yet it did. Managing the macroeconomy was intimately linked to managing money and finance, in ways that Keynes brilliantly elaborated in the 1920s to 1940s, and that became the foundational ideas of modern macroeconomic policy.
His financial engineering is not why Keynes was the greatest public intellectual of his era, nor how we should distill his wisdom today.
The third idea was the most fundamental. Once Keynes realized that there was indeed a macroeconomy, one that could be managed for purposes of war or to maintain the peace, for promoting prosperity over penury, he intuited and reasoned deeply that the macroeconomy must be managed for the good. Economic policy must be guided by phronesis, practical wisdom for the social good. There was no reason to tolerate economic crises, still less to have them be the result of greed. Economics was a matter of choice, not just for individual consumers, but for societies as a whole. Economics, in Keynes’s hands, returned to become a moral science, where Aristotle had placed it in The Politics, and where Adam Smith had put it in The Theory of Moral Sentiments in 1759, before placing economics in the cause of wealth in The Wealth of Nations in 1776.
Keynes believed ardently that scarcity—the “economic problem,” as he called it—was on the way to a definitive end. There was already a great distinction between wealth and well-being, argued Keynes, and he came down all his life on the side of well-being, not only in the value of leisure and learning and arts for all, but in the need to share the benefits of progress widely to ensure the well-being of all.
Carter wonderfully describes the well-known story of how Keynes became a leading public intellectual—perhaps the leading public dissenter—with his book The Economic Consequences of the Peace in 1919, which railed against the harsh terms of the Treaty of Versailles that ended World War I. Rather than expressing Woodrow Wilson’s idealistic Fourteen Points, the Versailles Treaty was the product of calculating, conniving, and often vindictive politicians who produced a riot of instability, recrimination, tangled war debts, burdensome reparations against Germany, and ruthless advances of European imperialism (most notably into the Middle East).
Keynes gave prophetic warning that the harsh and cynical treaty would cripple Europe’s economy and politics, and eventually give rise to an even worse conflagration in the future. He warned that harsh terms would cripple economic recovery and lead to calls for vengeance and thereby to a spiral of violence. A hundred years later, the brutal eloquence and piercing accuracy of Keynes’s words retain their sting. On the inter-allied war debts that had sprung up during the war, and which Keynes argued should be canceled in the mutual interest of the creditor nation, the U.S., and debtors alike, he warned:
On the one hand, Europe must depend in the long run on her own daily labor and not on the largesse of America; but, on the other hand, she will not pinch herself in order that the fruit of her daily labor may go elsewhere. In short, I do not believe that any of these tributes will continue to be paid, at the best, for more than a very few years. They do not square with human nature or agree with the spirit of the age.
Probably no few words in the economics canon have had more effect on my own career. I read these words as I advised Bolivia in 1985, and was encouraged and inspired by Keynes to argue (successfully in my case, as the way had been prepared by Keynes and history) for the deep cancellation of Bolivia’s debts. I reread them and quoted them again as I advised Poland in 1989 and urged Poland’s creditors to cancel most of the Soviet-era debts to give Poland a fresh start as a post-Soviet European democracy. Keynes’s wisdom and the lessons of history at least implicitly informed the creditors when they heeded Poland’s call for debt relief.
Keynes lost the battle over reparations, and went on to lose other policy battles in the 1920s and 1930s. He proposed ingenious schemes for restoring financial stability in Europe in the 1920s, new ways to stabilize the price level rather than the price of gold only (as in the prevailing gold standard, which Keynes believed to be a dangerous anachronism); and new ways to use public investments financed by public deficits to restore full employment and output. The writings of the 1920s are scintillating: brilliant, eloquent, ingenious, humane. And yet they did not carry the day. Keynes described the truth well in 1931 when he described his role this way, as quoted by Carter: “During the last 12 years I have had very little influence, if any, on policy. But in the role of a Cassandra, I have had a considerable success as a prophet.”
Keynes’s philosophy by the late 1920s was indeed a radical one, a point rightly emphasized by both Carter and Crotty, an emeritus economics professor at the University of Massachusetts at Amherst. It was becoming “socialist” in one overriding sense: It aimed for the well-being of society as a whole. Keynes described his “liberal socialism” this way:
[A] system where we can act as an organized community for common purposes and to promote social and economic justice, whilst respecting and protecting the individual—his freedom of choice, his faith, his mind and its expression, his enterprise and his property.
That is, of course, a rather wide berth for the definition of socialism.
Keynes was taken with three abiding truths. First, scarcity had diminished, so that there was enough to go around, the result of generations of technological advancement. Second, it was possible, and therefore morally required, to move resources within the macroeconomy to meet the needs of all. Third, markets alone would not do that, but must be accompanied by government planning and policies to ensure social stability, basic economic justice, and full employment. Market forces if left alone could produce mass unemployment because of failures in finance, and to extreme inequalities of income that were injurious to the poor, destabilizing for politics, and perverse for long-term economic improvement.
Crotty emphasizes that Keynes championed specifically the socialization of investments and public-capital boards to manage society’s investments in industry and infrastructure. Crotty quotes Keynes in Chapter 22 of the General Theory: “I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.” Keynes stipulates that such a policy would involve “all manner of compromises and of devices by which public authority will cooperate with private initiative,” and that it is “not the ownership of the instrument of production which it is important for the State to assume.” The state, rather, should determine “the aggregate amount of resources” devoted to investment and “the basic rate of reward to those who own them.”
“During the last 12 years I have had very little influence, if any, on policy. But in the role of a Cassandra, I have had a considerable success as a prophet.” —Keynes, 1931
Crotty is right to underscore Keynes’s emphasis on the government’s role in promoting the aggregate of domestic investment, and for public investments, for their own merit and to stabilize aggregate investment spending. And yet it’s problematic to take Keynes’s recommendations as literal guideposts for current policy. Keynes was not wedded to the details of policy; he was intent on finding practical solutions to challenges of the day. He endorsed a wide range of measures, sometimes contradictory. He improvised. He was often “as near the Earth as a politician.” He wooed liberals and he wooed Marxists (especially among students at Cambridge in the 1930s), as well as bankers. He endorsed expedients (including the famous and indelible image in the General Theory of burying containers of money to spur private businesses to dig them up—with a multiplier greater than one on employment and output).
Most importantly for us, Keynes would be the first to say now that the times have changed, again. The solutions of the 1930s cannot be taken as the solution for the 2020s. We are incomparably richer, and therefore incomparably more able to meet everyone’s basic economic needs. The moral and practical case for economic justice is as powerful as ever. Keynes would again bid us to think about the macroeconomy as a whole, society as a system, and therefore society-wide solutions for our common purposes. He would likely subscribe to “liberal socialism” today, in regard to economic and social justice while respecting the individual, but would no doubt call for new—and ingenious—solutions for our day.
Carter’s book is wonderful for taking Keynes’s story across the ocean after World War II as it played out in the United States, which succeeded Britain as the apex of the global economy. Keynesian aggregate demand management would become a core pillar of U.S. economic policy. Paul Samuelson, James Tobin, and Robert Solow, the great macroeconomic titans of my early academic years, put Keynesian stabilization policies to work, and to work effectively, until Lyndon Johnson aimed both to fight the Vietnam War and build a Great Society at the same time in the second half of the 1960s, ending in a bout of inflation. Global turmoil followed, with the collapse of the dollar-based global monetary system that Keynes had helped to launch at Bretton Woods in 1944, and with the oil price shocks of an ascendant OPEC. Since then, faith in Keynesian aggregate demand management has waxed and waned. It found an adherent in Barack Obama in 2009, who deployed Keynesian stimulus spending and backed an aggressive monetary expansion to fight the financial crisis of 2008.
SIPA USA via AP
Keynes at the Bretton Woods Conference in 1944
Yet Crotty and Carter are on the mark that the U.S. “Keynesians” adopted the engineering part of Keynes without enough of the philosophical commitments. Paul Samuelson, the towering economist of his age, who wrote the “Foundations” of the new mathematical economics, married Keynesian aggregate demand management with a mostly free-market vision of economics, one in which a fully employed economy would proceed to allocate resources mostly on the basis of market forces. (One must be careful though in describing Samuelson as endorsing free markets. He certainly did, but provisionally and subtly.) What was underemphasized was the vision of common purpose, and social and economic justice. Keynesian economics became a mere set of tools, not a guiding philosophy, still less a practice of phronesis. Not only Republican presidents including Reagan and the Bushes, but also the Democratic presidents Clinton and Obama, abandoned the aims of social and economic justice in surrender to the demands of the rich and powerful, who championed the call for a new laissez-faire in order to enjoy tax cuts and deregulation while despoiling the environment. The main U.S. proponent of the original Keynesian moral vision was John Kenneth Galbraith, who was attacked harshly not only by the economic oligarchs but also by many “Keynesians” in academia.
Which brings me to our moment, the worst crisis since the Great Depression. We are facing not only a new virus but also a new kind of economic crisis. For the first time in modern economic history, we have deliberately shut down much of the economy to break the transmission of COVID-19. We display the intellectual confusion of the moment by labeling as “stimulus” the legislation to pay workers and firms during this shutdown period. This is not stimulus, but income maintenance during a temporary society-wide quarantine.
What would Keynes recommend? He would surely advocate a strong role of government to deploy the tools of public health, including testing, tracing, and isolating infected individuals. He would have ingenious schemes for restarting the economy once the virus itself is defeated. Public investments would be a large part of the response. Most importantly, he would urge that we act as an “organized community for common purposes.” The COVID-19 pandemic should rouse us, Keynes would insist, from the depths of our neoliberal fantasies. With tens of thousands of tragically and unnecessarily lost lives, with a for-profit health system that does not ensure basic public health, Keynes would bid us to launch a new era of economic and social justice, using the powers of government for our health, well-being, and economic needs, while respecting and protecting the individual. In this, Keynes would speak directly to both our hearts and heads, as he did to his own generation with such abiding and lasting wisdom, decency, and insight.
