Lecture Notes for September 13: After World War I: Weber and Keynes: Political Economy 101: "Modern" Political Economy
September 13 PE 101 Lecture
Marxism, liberalism, nationalism--to be polite...
- We've talked about Marxism...
- We've talked about classical liberalism...
- We haven't talked about "nationalism"...
We read Norman Angell: We did not read Max Weber. Nationalism as social-darwinist doctrine:
Max Weber, "The National State and Economic Policy": [W]e all consider the German character of the East as something that should be protected, and that the economic policy of the state should enter into the lists in its defense. Our state is a national state, and... we have a right to make this demand....
[T]he economic struggle between the nationalities follows its course even under the semblance of 'peace'. The German peasants and day-labourers of the East are not being pushed off the land in an open conflict by politically-superior opponents. Instead, they are getting the worst of it in the silent and dreary struggle of everyday economic existence, they are abandoning their homeland to a race which stands on a lower level, and moving towards a dark future in which they will sink without trace. There can be no truce even in the economic struggle for existence; only if one takes the semblance of peace for its reality can one believe that peace and prosperity will emerge for our successors at some time in the distant future. Certainly the vulgar conception of political economy is that it consists in working out recipes for making the world happy; the improvement of the 'balance of pleasure' in human existence is the sole purpose of our work that the vulgar conception can comprehend. However... [reality] prevents us from imagining that peace and happiness lie hidden in the lap of the future, it prevents us from believing that elbow-room in this earthly existence can be won in any way than through the hard struggle of human beings with each other....
The overwhelming majority of the of the fruits of the economic, social, and political endeavours of the present are garnered not by the generation now alive but by the generations of the future.... [T]here can... be no real work in political economy on the basis of optimistic dreams of happiness.... The question... is not 'how will human beings feel in the future' but 'how will they be'.... We do not want to train up feelings of well-being in people, but rather those characteristics we think constitute the greatness and nobility of our human nature....
The economic policy of a German state, and that standard of value adopted by a German economic theorist, can therefore be nothing other than a German policy and a German standard.... Our successors will not hold us responsible before history for the kind of economic organization we hand over to them, but rather for the amount of elbow-room we conquer for them in the world.... Processes of economic development are in the final analysis also power struggles, and the ultimate and decisive interests at whose service economic policy must place itself are the interests of national power.... The science of political economy is a political science... a servant of politics... of the lasting political-power interests of the nation.... [F]or questions of German economic policy... the ultimate and decisive voice should be that of the economic and political interests of our nation's power, and the vehicle of that power, the German national state...
- This is a pre-WWI German liberal
- This is a German talking about Poles--Konrad Adenauer: "A Prussian [an eastern German] is a Pole who has forgotten who his grandfather was..."
- World War I did not change Weber's mind...
Yet more:
In the outstanding works of our historical colleagues we find that today instead of telling us about the warlike deeds of our ancestors they dilate at length about "matriarchy," that monstrous notion, and force into a subordinate clause the victory of the Huns on the Catalaunian Plain...
But in 451 the Huns lost the Battle of Chalons to the Visigothic-Roman coalition led by Comes et Magister Utriusque Militae et Patricius Flavius Aetius http://en.wikipedia.org/wiki/Battle_of_Chalons...
A second view of nationalism. Nationalism as way to distract people from domestic political concerns:
The Search for an Enemy: Matthew Yglesias: I've actually heard that Francis Fukuyama has said this before, but that information didn't come to me in reportable form. During a BloggingHeads.tv appearance with Robert Wright, Fukuyama says of Bill Kristol and his circle at The Weekly Standard that during the 1990s "There was actually a deliberate search for an enemy because they felt that the Republican Party didn't do as well" when foreign policy wasn't on the issue agenda. The obvious candidates were either China or something relating to Islamic fundamentalism and, as Fukuyama notes, what they came up with was China. Then 9/11 changed things around, at least for a few years. I think this is very telling, and reveals a great deal about the mentality that's been guiding America's foreign policy during the Bush years... http://bloggingheads.tv/?id=81&cid=271&in=04:59
William Shakespeare:
Henry IV to Prince Harry: [A]all my friends, which thou must make thy friends... by whose fell working[s] I was first advanc'd, and by whose power I well might lodge a fear to be again displac'd.... [R]est and lying still might make them look too near unto my state.
Therefore, my Harry, be it thy course to busy giddy minds with foreign quarrels, that action, hence borne out, may waste the memory of the former days...
The point of all this: World War I makes it impossible to be a liberal believer in progress, peace, rationality, equilibrium, the benevolence of the market, the triumph of reasoned discussion, et cetera. So what do you do?
The answer is "managerialism." Muddling through. Trying desperately to somehow cobble together something like pre-WWI liberalism--to make it true in practice even though it isn't true in theory, and to do so somehow.
Hence Keynes. And here I have little to say that I haven't stolen from Robert Skidelsky's magnificent three-volume biography of Keynes:
Skidelsky's first two volumes give us John Maynard Keynes's life up to 1937 entire, and he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important.
Who was this guy?> Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician--trying to advance the chances of Britain's Liberal Party between the wars--but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the "Bloomsbury Group" of artists and intellectuals that did so much to shape interwar culture.
For the literati it is Keynes of Bloomsbury--his loves, enthusiasms, acts of patronage, and wit--who is the most interesting. That story contains things like Virginia Woolf on Keynes. She wrote of her:
vivid sight of Maynard by lamplight—like a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginate. One of those visions that come from a chance attitude, lost as soon as he turned his head. I suppose though it illustrates something I feel about him. He’s read neither of my books... (page 15).
There is a clear lesson: if your circle includes future Nobel Prize-winning novelists with wicked pens, read their books and praise them as often as possible.
For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world--whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith's "system of natural liberty" but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.
The first volume of Skidelsky's biography is the story of growth and development. Skidelsky writes the best narrative interpretation of growing up as a smart and privileged children of academics in late Victorian Britain than I can ever conceive of being written. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain's upper class at Eton, and thus became part of "an intellectual elite thrust into the heart of a social elite" (HB, page 77). An entire cohort of Britain's upper class thus learned before they were twenty that Keynes could be very smart, very witty, very entertaining--and very helpful if there was a hard problem to be thought through or something to be done.
Skidelsky then writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete common among the students of the philosopher G.E. Moore. As Keynes put it in 1938, he believed that one should arrange one's life to achieve the most good, where "good" was nothing more or less than "states of mind... states of mind... not associated with action or achievement or with consequences [but]... timeless, passionate states of contemplation and communion…. a beloved person, beauty, and truth." Thus Keynes left Cambridge convinced that "one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first..." (HB, page 141).
This embrace of aestheticism was and remained the key to the "Bloomsbury" avatar of John Maynard Keynes, for whom the lodestars were to "be in love with one’s friends, with beauty, with knowledge" and who was and remained an enthusiastic member of the Bloomsbury group, sharing "its intellectual values and its artistic enthusiasms," and participating "in its wild fancy dress parties" (HB, page 234). Keynes was a man who could celebrate this appointment to the British Treasury with "...a party for seventeen… at the Café Royale.... Afterwards they went back to 46 Gordon Square for Clive [Bell]’s and Vanessa [Bell, the sister of Virgina Woolf]’s party. There they listened to a Mozart trio... and went upstairs for the last scene of a Racine play performed by three puppets made by Duncan [Grant], with words spoken by the weird-voiced Stracheys. ‘The evening ended with Gerald Shove enthroned in the center of the room, crowned with roses...’" (HB, page 300).
But at the same time Keynes's pursuit of knowledge was shading over into politics and policy as well. For Keynes it was never enough to pursue knowledge in order to achieve a good state of mind, one had also to be sure to cause the knowledge to be applied to make the world a better place. And how one could act in politics and policy was greatly constrained by the limits of our knowledge. One argument from Edmund Burke, especially resonated with Keynes. As he wrote:
[Edmund] Burke ever held, and held rightly, that it can seldom be right... to sacrifice a present benefit for a doubtful advantage in the future.... It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear... We can never know enough to make the chance worth taking..." (ES, page 62).
Keynes's industry and intelligence thus made him a trusted and effective member of Britain's intellectual and administrative elite well before the eve of World War I. Sir Edwin Montagu, especially, pushed him forward both before and during the war. Before the war Keynes decided that he wanted the life of an academic rather than of an administrator: Cambridge rather than the India Office or the Treasury. Yet he kept a strong presence in both worlds, writing his practical and policy-oriented book Indian Currency and Finance in spare moments as he worked on the deeper and philosophical project that was his Treatise on Probability.
Thus it was no surprise that Keynes found an important and powerful job at the Treasury during the national emergency that was World War I. How do you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power? These are all deep and complicated questions. These are what Keynes worked on. But as the death toll from World War I mounted up toward ten million, Keynes became angrier and angrier at this monstrous botch of human lives and social energy that was World War I--and angrier and angrier at the politicians who could see no way forward other than mixing more blood with mud at Paaschendale.
Keynes's friend David Garnett wrote him a letter condemning his work for the government, calling Keynes:
an intelligence they need in their extremity.... A genie taken incautiously out... by savages to serve them faithfully for their savage ends, and then--back you go into the bottle.... Oh... our savages are better than other savages.... But don’t believe in the profane abomination.
The interesting thing was that Keynes "agreed that there was a great deal of truth in what I had said..." (HB, page 321). And then the whole project of post-World War I reconstruction went wrong at Versailles--when the new German government was treated as a foe rather than a democratic ally, when the object seemed to be to extract as much in plunder and reparations from Germany as possible ("until the pips squeak").
Skidelsky quotes South African politician Jan Christian Smuts on the atmosphere at Versailles:
Poor Keynes often sits with me at night after a good dinner and we rail against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense... (HB, page 373).
Keynes exploded with the book you have read: The Economic Consequences of the Peace. It condemned the political maneuvering of Versailles and the treaty that resulted in the strongest possible terms. He excoriated short-sighted politicians who were interested in victory rather than peace. He outlined his alternative proposals for peace: "German damages limited to £2000m; cancellation of inter-Ally debts; creation of a European free trade area… an international loan to stabilize the exchanges...."
And Keynes prophesied doom--if the treaty were carried out and Germany kept poor for a generation:
If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy... the civilization and progress of our generation... (HB, page 391).
The Economic Consequences of the Peace made Keynes famous. His horror at the terms of the peace treaty won him friends like Felix Frankfurter, a powerful molder of opinion in the United States. In his book, propelled by "passion and despair," Keynes "spoke like an angel with the knowledge of an expert" and showed an extraordinary mastery not just of economics but also of the words that were needed to make economics persuasive. Before The Economic Consequences of the Peace Keynes was primarily an academic (with some government experience) with a lot of influential literary friends. Afterwards he was a celebrity. He was not only the private Keynes:
the Cambridge [professor] selling economics by the hour, the lover of clever, attractive, unworldly young men, the intimate of [the literate geniuses of] Bloomsbury.
He was also--because of what he had done with his pen after Versailles:
the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble... conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity... (HB, page 400).
Keynes to Lopokova:
In my bath today I considered your virtues—how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages—a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises? (page 181)
So after World War I Keynes used what power he had to--don't laugh--try to restore civilization. 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).
After World War II Keynes in the 1920s fought a brave but 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. Keynes struggled for stable money and full employment, and against deflation, overvalued exchange rates, and the sacrifice of the happiness of today's populations in the hopes of regaining the imagined benefits of the classical gold standard at some time in the distant future. Keynes spent more than a decade arguing against central bankers who "think it more important to raise the dollar exchange a few points than to encourage flagging trade." He tried to prevent Britain's return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain's Treasury Minister, Winston Churchill, was willing
... the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages. This policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts.... Deflation does not reduce wages 'automatically.' It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a Depression! (page 203).
But in the end Keynes failed. He was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. He failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen--though strong--was not strong enough. His allies were too few. And among central bankers and cabinet ministers understanding of the situation in which they were embedded was rare.
So the 1930s saw a change of emphasis. Fewer short polemical articles were written. Instead, Keynes concentrated his attention on writing a book, a book which he thought
...will largely revolutionize--not, I suppose, at once but in the course of the next ten years--the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change... (pages 520-521).
And he succeeded.
His General Theory of Employment, Interest, and Money did change the world. It 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 extraordinary thing is that Keynes was right.
