Keynes as Social Philosopher

Who do you think penned this little diagnostic of our times? 

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress … is over, that the rapid improvement in the standard of life is now going to slow down … that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us. I believe this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase in technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improvement in the standard of life has been a little too quick.

Was it: (a) Glenn Stevens, Governor, Reserve Bank of Australia? (b) Christine Lagarde, Managing Director, International Monetary Fund? (c) Wayne Swan, Australian Treasurer? (d) Ben Bernanke, Chairman, US Federal Reserve? (e) None of the above? The correct answer is of course (e), as the author was none other than that source of dangerous economic nostrums who helped put the word dismal into the social science of economics. Yes, it was John Maynard Keynes!

In 1928 Keynes had given a talk to Cambridge undergraduates, a group then heavily influenced by the communist experiment in Russia. A few years later that atmosphere incubated the “Cambridge Five” of communist espionage led by Anthony Blunt of Trinity College—Philby, Maclean, Burgess and the unidentified fifth—which did so much damage to allied intelligence efforts.

In 1930, with the world then in recession, Keynes took time off from his IS/LM analysis to develop the talk into a twelve-page chapter, “Economic Possibilities for our Grandchildren”, to conclude his book Essays in Persuasion. That paragraph above was the introduction in an attempt to provide an alternative capitalistic world prospect to that offered by communism. Overlooked under the press of great events at the time and largely forgotten since, the work is worth examining as an illustration of the great man’s Bloomsbury bohemian elitism coupled with a failure to understand human nature. It provides a more powerful refutation of Keynesian thinking for ordinary readers than many of the learned criticisms of his economics by economists. Kevin Rudd should have read it before he and his friends wrote that muddled 2009 Monthly essay.

In his lifetime Keynes both charmed and thrilled. His command of the English language coupled with a natural dramatic propensity saw his rhetoric play a highly impressive role at the Versailles Peace Conference, and then in the negotiations leading to the Bretton Woods Agreement of 1944—although there it failed to influence the Americans. As fellow economist Lionel Robbins of the London School of Economics (who shamelessly fell under his spell) said:

Keynes must be one of the most remarkable men that have ever lived—the quick logic, the birdlike swoop of intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement.

No wonder his closing speech at Bretton Woods was accorded a standing ovation.

But what has been obscured by the passage of time and the political grovelling to embrace his theories is what a thoroughly objectionable individual the great economist really was. Murray Rothbard, the American libertarian economist and historian, began his savage essay Keynes the Man with these words:

John Maynard Keynes, the man—his character, his writings, and his actions throughout life—was composed of three guiding and interacting elements. The first was his overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego. The second was his strong sense that he was born into, and destined to be a leader of, Great Britain’s ruling elite. Both of these traits led Keynes to deal with people as well as nations from a self-perceived position of power and dominance. The third element was his deep hatred and contempt for the values and virtues of the bourgeoisie, for conventional morality, for savings and thrift, and for the basic institutions of family life.

Keynes’s “Grandchildren” essay represented an economist’s venture into political philosophy from that exalted standpoint. The “trend of things”, as he put it, warranted neither the pessimism of revolutionaries, nor that of reactionaries who considered the balance of economic and social life too precarious to risk experiments. His purpose in the essay, he explained, was to disembarrass himself of short views and “take wings into the future”—with his vision of economic life in 100 years time. (This was itself strangely in contrast to his later disdain for considerations of the long run—when “we are all dead”.) As we are now only seventeen years from his utopian future, it’s timely to examine his expectations.

Keynes was a shrewd investor who made a fortune on the stock market (some say in part by insider trading), lost it in the Great Crash and made it again later. His undergraduate degree had been in philosophy; he came late to economics and then as a result of a single-term graduate course under Alfred Marshall. But he found it increasingly interesting. In a letter to his friend Lytton Strachey he wrote: “I think I am rather good at it. I want to manage a railroad or organise a Trust or at least swindle the investing public.”

He was obsessed with compound interest. As the economist and financial analyst Mark Skousen pointed out in his introduction to the collection of essays in Dissent on Keynes:

Keynes was in fact a social millenarian who ultimately envisioned a world evolving to the point of infinite accumulation of capital. By progressively expanding credit to promote full investment, Keynes believed that the universal economic problem of scarcity would finally be resolved.

Keynes’s “Grandchildren” essay set out his view that the modern age opened with the accumulation of capital which began in the sixteenth century with the treasure of gold and silver Spain brought from the New World. When Francis Drake in the Golden Hind captured an enormous cargo of Spanish gold, he enabled Queen Elizabeth to pay off England’s foreign debt, balance the budget and still have £40,000 in the kitty. That amount, accumulating at 3 per cent compound, Keynes estimated was by 1930 worth 100,000 times as much, equivalent to Britain’s total foreign investments.

He then applied the compounding principle to the standard of living, as the result of the “cumulative crescendo from the great age of science and technical inventions”. Since the beginning of the nineteenth century, this had been in full flood, he enthused—coal, steam, electricity, petrol, steel, rubber, cotton, the chemical industries, automatic machinery and the methods of mass production, wireless, printing, Darwin and Einstein and thousands of other things and men too famous and familiar to catalogue. The result had been that the standard of life in Europe and the United States had been raised about fourfold.

Then, in a mindset reminiscent of the present-day obsession with computer modelling of everything, Keynes turned to supposition. Assuming capital increasing by 2 per cent per annum, the capital equipment of the world would have increased seven and a half times in a hundred years. “Think of this in terms of material things—houses, transport and the like,” he wrote. Then there were the technical improvements in manufacture and transport, which were proceeding even faster than growth in the capital stock. Next stop—agriculture. “In quite a few years—in our own lifetimes I mean—we may be able to perform all the operations of agriculture, mining and manufacture with a quarter of human effort to which we have been accustomed,” he pronounced. We? All this from a man who was known to have never got his hands dirty.

But the economist in him immediately saw the fly in the ointment—technological unemployment. Productivity could be a problem. Economising the use of labour would mean outrunning the pace at which new uses for labour could be found.

Not to worry! A temporary phase of maladjustment would follow, which meant only that in the long run “mankind was solving its economic problem”. (The “economic problem” he defined as the problem of want and poverty, and the economic struggle between classes and nations.) In one hundred years time the standard of life in progressive countries would be four to eight times as high as in 1930. Three-hour shifts or a fifteen-hour week would be enough to satisfy the “old Adam” in most—that is, the need to do some work to be contented. But we had to learn to use the extra leisure time “wisely and agreeably and well”.

Then, in a great leap of faith and logic, but based on the complacency of his own class position, Keynes proposed that income had a diminishing marginal utility. He therefore envisaged, first, that the accumulation of wealth would no longer be of high social importance, and second, that consequently there would be great changes in the code of morals. This idea he buttressed with one of his rhetorical flights of fancy in which seductive language transcended common sense, and foreshadowed his later theories on saving. In the light of his Bloomsbury values, it also revealed his rank hypocrisy: 

I see us free to return to some of the most sure and certain principles of religion and traditional virtue—that avarice is a vice, that the exaction of usury is a misdemeanor and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field, who toil not neither do they spin.        

This seems the soft-left economic porn beloved of the Greens for whom national policy is best summed up in the title of the 1960s musical Stop the World I Want to Get Off. For Keynes, this was to be a “destination of economic bliss”. Ever larger classes and groups of people would have the problems of economic necessity removed. But the transition would not be easy. He dreaded the readjustment to be expected of the ordinary man when asked to discard the habits and instincts bred into him for countless generations. He might well suffer the “nervous breakdown” of the wives of the well-to-do classes, deprived by their wealth of the woman’s traditional tasks and occupations. Thus was the “bored housewife syndrome” born.

Where are we, eighty-three years later? Keynes included two qualifications to his scenario, both of which have been negated. He assumed no important wars and no important increase in populations. Yet despite the devastation of the Second World War and world population increasing in the period from 2.1 billion to 7.1 billion, the standard of living in his progressive countries has increased immeasurably. How could that be? The reason is the unimagined growth in productivity in all countries, coupled with a huge increase in the workforce and no great reduction in hours of work. Since 1930 working hours have declined on average by only 20 per cent; only France has legislated for a thirty-five-hour week, well above Keynes’s fifteen-hour target.

Angus Maddison was a senior economist in the OECD who until his death in 2010 worked to develop a monumental statistical analysis of the historical growth in the world economy over 2000 years. His tables permitted this calculation of the growth in per capita GDP from 1930 to the world recession in 2008:

            Ireland                         963 per cent

            Portugal                       919

            Finland                        913

            Norway                        786

            Spain                           752

            Greece                         726

            Italy                             682

            Austria                         673

            Sweden                        567

            Germany                      524

            Poland                          509

            USA                             500

            France                          490

            Belgium                       475

            Denmark                      461

            Netherlands                 441

            UK                                 436

            Switzerland                  402

Every advanced country experienced growth in living standards (as measured by per capita GDP) within the range predicted by Keynes, while those with a lower base eighty-odd years ago did even better. At the same time the class of idle rich—the aristocracy and landed gentry he knew so well—has largely disappeared; women have entered the workforce in large numbers; the “workaholic” executive has emerged.

In fact, many believe the world is likely to benefit from accelerating rates of growth. For example, all six Intergovernmental Panel on Climate Change scenarios assume that people living in 2100 will be four to eighteen times wealthier than those in 1990.

But what of Keynes’s elitist idea that as societies became richer, their citizens would find their needs satisfied and would prefer more leisure to further acquisitions? He thought that although the needs of human beings might seem to be insatiable, they fell into two classes—absolute needs, and needs relative to others, that is, to provide the satisfaction of feeling superior to one’s fellows. He foresaw an end to all this—a point when these needs were satisfied, as he put it, “in the sense that we prefer to devote our further energies to non-economic purposes”. But he failed to distinguish needs from wants.

There are two criticisms we can make of his analysis. Six years after penning this little essay, Keynes published his General Theory of Employment, Interest and Money, which turned classical economics on its head. In Chapter 2, he set out to demolish Say’s Law of classical theory, which he paraphrased and over-simplified as “supply creates its own demand”. We now know from our own experiences that it is the supply of the products of technology and innovation that have fuelled the unending demand for consumer goods, keeping people working and earning in preference to non-economic leisure. Needs may be self-limiting, but wants are infinite. Today’s bored housewife (or house-husband) resorts to retail therapy. Say’s Law was correct—supply does create demand. Ask Apple.

We live today in a world of conspicuous consumption. “There is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement,” wrote Adam Smith in 1776. Keeping up with the Joneses both establishes self-worth and gains entry to the desired social class. Expensive and preferably flamboyant purchases establish snob value. Knowing the maître-d’ at the best restaurant and travelling in the front of the plane set us apart in ways that Keynes in his British class-conscious straitjacket could not understand, forecast or compute.

In 1943, the American psychologist Abraham Maslow gave us a much more sensible and useful construct to explain why mankind (except for the hermit and the environmental extremist) was unlikely to go onto cruise control when basic human needs had been met. His hierarchy of needs, first set out in his paper A Theory of Human Motivation, hypothesised that human needs could be categorised as: physiological, safety, love and belonging, self-esteem and finally self-actualisation (reaching the individual’s full potential). Usually represented as a pyramid, it was a hierarchy because Maslow postulated that once needs on one level had been satisfied, ambition and human motivation propelled a striving for ascent to the next level.

Can leisure be an end in itself, as Keynes supposed in his Aristotelean imaginings? In his time, men worked until sixty-five and died, on average, two years later. Longevity has since become the plague of governments, superannuation funds and individuals who can’t imagine how to fill in their extended lifespans. Few aspire to the cultural pursuits of the early twentieth-century elites, and golf becomes increasingly unappealing once arthritis sets in. Australia went through the leisure debate some years ago, and retreated, defeated. Everywhere, national deficits and rising debt are forcing legislators to demand longer, not shorter working lives.

“Economic Possibilities for our Grandchildren” seems to have been Keynes’s only tentative toe in the water for what is now studied as behavioural economics, but it was really beyond him. The psychology of motivation and its potential effect on markets was to be left to the grandchildren. If the essay seems naive and primitive for such a clear-headed thinker and lucid writer, the explanation probably lies in the tempo of the times.

As the Great Depression dragged on, Keynes became much more occupied with the problem of unemployment than with skittish ideas about use of leisure time. By the time he got to the final chapter of the General Theory which he titled, “Concluding Notes on the Social Philosophy Towards Which the General Theory Might Lead”, Keynes was in full cry for statist ideas on public spending, reduction of interest rates, socialisation of investment and a reduction in the great inequalities of wealth.

Why did Keynes venture into the hypothetical field of social philosophy? The answer, according to Robert and Edward Skidelsky in their recent How Much is Enough—Money and the Good Life, was in the threat to society posed by the growing attraction of communism to English intellectuals. Robert Skidelsky, who wrote the definitive three-volume biography of Keynes, suggests that as a staunch supporter of capitalism, he put forward a theory of capitalism couched in Marxist terms.

Just as Russia’s socialism was promised as an intermediate phase and in Leninist theory the state would “wither away” to be replaced by the perfection of communist society, “capitalism too was a utopian project—a more effective utopian project than communism because it was the only efficient means to the abundance which would make possible a good life for all”. Keynes, Skidelsky suggested, was in fact conveying a message of hope to the suffering that “the spontaneous joyful attitude to life now confined to artists and free spirits [would be] diffused throughout society as a whole”.

I find this unconvincing, and Murray Rothbard would also have disagreed. He considered Keynes less of an economist than a social philosopher. His view of the General Theory was that it was a fraudulent work, obtuse, inconsistent and scornfully elitist in its categorisation of four classes of society, disdainful of workers and the bourgeoisie. The “Grandchildren” essay was a part of that thinking. This is how Rothbard summed up Keynes’s legacy:

Was Keynes, as Hayek maintained, a “brilliant scholar”? A more fitting term for Keynes would be “charismatic”—not in the sense of commanding the allegiance of millions but in being able to con and seduce important people—from patrons to politicians to students and even to opposing economists. A man who thought and acted in terms of power and brutal domination, who reviled the concept of moral principle, who was an eternal and sworn enemy of the bourgeoisie, of creditors, and of the thrifty middle class, who was a systematic liar, twisting truth to fit his own plan, who was a Fascist and an anti-Semite, Keynes was nevertheless able to cajole opponents and competitors … Above all, he was the extraordinarily pernicious and malignant figure—a charming but power-driven statist Machiavelli—who embodied some of the most malevolent trends and institutions of the twentieth century.

In any case, neither pure communism nor Keynes’s hoped-for bliss arrived. The big questions of the free market—its efficiency and its morality—are still open to debate, as they were in Adam Smith’s day. Recently Dr Andrew McAfee of the MIT Centre for Digital Business summed it up this way on a BBC program titled “The Productivity Paradox”:

I like to think there is a hard question and a harder question. How are we going to distribute the benefits of this abundant society as we are moving into a much more abundant economy? And you don’t have to go manning the barricades and turning into some kind of communard to start thinking we might need to re-examine our distribution policies here. The harder question is what is a meaningful life going to look like? Where does the sense of dignity, meaning and self-worth come from in a life that’s not defined by a good old-fashioned industrial-era job? And we think that is going to be the really great challenge for the 21st century.

The last word goes to Epicurus, Greek philosopher (341–270 BC) whose epigram Keynes didn’t understand: “Nothing is enough for the man to whom enough is too little.”