I was thrilled to help James Graham and Sir Nicholas Hytner as an advisor on their wonderful West End production “The Standard of Living” about the life of John Maynard Keynes. Here are the notes I wrote for the playbill
The Economic Consequences of John Maynard Keynes
John Maynard Keynes was one of the most influential figures of the 20th century. Like Freud, he gave his name to a school of thought providing a modern perspective on the world. His legacy is reflected in a widespread belief that governments have the tools and responsibility to manage the economy and in the existence of Gross Domestic Product (GDP) as a key policy target.
Born in 1883, at the height of the Victorian era, Keynes died in 1946 as the sun set on the British Empire and a new world took shape. He had a ringside seat at key events defining this shift. He was there in Versailles, after the First World War, as the victors demanded huge reparations from Germany. In the 1920s he argued with Churchill against a return to the Gold Standard. During the Great Depression, he was in the White House demanding governments spend money to save the economy and democracy. In 1944, at Bretton Woods, he led the British delegation, as the Allies created the IMF, the World Bank and the international regime that persists today.
But Keynes’ world stretched far beyond economics. Whether conversing in Cambridge with Russell, Wittgenstein and Einstein; in politics with Lloyd George, Churchill and Roosevelt; in the arts with Virginia Wolf, Vanessa Bell and Sergei Diaghilev, Keynes dazzled across a spectrum as no one field could fully contain him.
Behind this dazzle was Keynes’ intellect. Bertrand Russell, not known for feelings of intellectual inferiority, wrote that ‘Keynes’s intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool.”
Keynes’ initial focus was mathematics, culminating in his A Treatise on Probability. But the foundations of modern statistics were being built elsewhere. It was during this time that Alfred Marshall, the founder of modern economics and a family friend, persuaded Keynes to focus on economics instead.
What attracted Keynes to economics? Intellectual self-confidence gave him optimism he could solve difficult problems, but a wider sense of purpose demanded that solutions were proved not on paper but by changing the world. For Keynes “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood”. If great things were expected from Keynes, then what better discipline than economics?
But solving real world problems required proximity to power, creating a curious ambiguity. Proximity to power meant being an insider but Keynes used his intellectual acuity to challenge orthodoxy, leaving him often in the role of outsider.
This duality revealed itself during the First World War. He was excused from military service as a conscientious objector but on condition he worked at the Treasury. He was part of the British delegation at Versailles but in 1919 published “The Economic Consequences of the Peace” – an outspoken criticism of the Treaty and its lead negotiators. The book became an international bestseller, saw him nominated for the Nobel Peace Prize and established as a leading economic voice.
Keynes again found himself an outsider in the 1920s. Britain had left the Gold Standard in 1914 to finance the war. With the war over, the Treasury and City of London were keen to return. Not doing so would be to accept economic decline and threaten the global ascendancy of the City. But doing so required tightening monetary policy, pushing prices and wages down to restore competitiveness. Keynes argued this would depress demand, create unemployment and see workers bear the brunt of adjustment. At a time when communism and fascism were increasingly popular this was not just an arcane monetary policy debate. Keynes frequently opposed orthodoxy but his aims were often conservative – directed at preserving economic and political stability.
In his 1924 lecture, The End of Laissez Faire, Keynes continued along his path to economic unorthodoxy. Laissez-Faire is the doctrine that, left to its own devices, markets bring about the best outcome. But Keynes argued that the modern economy was no longer well served by this view and there was no natural law dictating that markets align private and social interest. The recommendation was greater government involvement, including increasing demand through a program of government works and coordinating savings and investment.
Once again, Keynes’ recommendations were too much for the establishment. But then, in October 1929, the US stock market crash catapulted the world into a Great Depression, with unemployment peaking at 25% in the UK and U.S.
This bleak economic outlook made politicians more open minded, especially in the United States where Roosevelt launched the New Deal. Although, in retrospect, a relatively modest program it represented a radical shift from Laissez- Faire. As the economy recovered and was further boosted by the rearmament boom of the 1930s, the notion that the government could steer the economy via demand management became established.
In 1936 Keynes published his magnum opus, The General Theory, outlining a range of reasons why markets fail: prices and wages are sticky; interest rates get stuck at a floor; the future is uncertain so ‘animal spirits’ play a role in influencing the economy. As a result, markets can get stuck far from good outcomes and the solution is for governments to intervene, stimulate demand and boost the economy.
Not everyone supported this new emerging consensus. Hayek and Friedman argued that a reliance on demand management would inevitably produce inflation. Further, ignoring the signalling role of prices would lead to governments determining the allocation of resources and an erosion of individual political and economic freedom.
But in the face of a post-war “Economic Golden Age”, faith in Keynesian policies became the consensus. Victory was complete when in 1971 President Nixon said, “I am now a Keynesian in economics”.
However, in the 1970s, inflation increased and unemployment rose in response to the OPEC oil crisis. The inability of governments to control GDP and inflation via demand management led to a loss of faith in simple Keynesianism. Instead, under Thatcher and Reagan, monetarism and supply side policies became the order of the day as the intellectual influence of Friedman and Hayek gained the upper hand.
But Keynesianism wasn’t defeated but instead retreated and mutated. Starting in the 1980s, New Keynesianism emerged in the halls of academe. Building from microeconomic foundations, new models provided a richer framework for familiar Keynesian themes. As Central Banks became more independent and powerful, New Keynesian models played a critical role shaping modern monetary policy over the last 20 years.
This vintage of Keynesianism was not bound by textual knowledge of Keynes or reverence for the man. Keynesian economics had long since taken on an existence independent of its founder, as reflected in Margaret Thatcher’s remark that “It seems to me that Keynes was certainly not a Keynesian”. That Thatcher referred to a long since ‘defunct economist’ more than thirty years after his death speaks volumes for Keynes’ legacy. It also brings us back to the question – who was Keynes and what did he stand for?
Joan Robinson, part of the “Cambridge Circus’ that shaped The General Theory, said that Keynes’ “basic view of life was aesthetic rather than political. He hated unemployment because it was stupid and poverty because it was ugly. He was disgusted by the commercialism of modern life.” For a man who wrote volumes on monetary theory, Keynes didn’t particularly value money. He saw “The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — as a somewhat disgusting morbidity”
In his 1930 essay, The Economic Possibilities of Our Grandchildren, Keynes argued that in the future, as the economy became more productive due to technological progress, we will need to work less to meet our material needs. The challenge then will be what to do with our leisure. For Keynes that meant friendships, art and creativity. His focus on economics was not because GDP was an end in itself. Money mattered because if you didn’t need to worry about money you could focus on what did matter. In Cambridge, Keynes could meet his intellectual needs, in Westminster his need for power and influence and in Bloomsbury he was drawn to the beauty of friendship and the arts. His skills in the former were exceptional, but his values lay in the latter. Reconciling this divergence was part of Keynes’ creative drive.
The great economists – Smith, Ricardo, Marx and Keynes–emerge during times of economic and social upheaval. As the world braces for the impact of Artificial Intelligence, we await a new thinker to guide us in the decades ahead. If Keynes were alive today, he would for sure be engaged in the debate and pushing governments to act urgently. He would, I suspect, be focused as much on the human as the economic consequences of Artificial Intelligence. He would also be working hard on writing A New General Theory. As Keynes said, ‘when the facts change, I change my mind. What do you do?”.
