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Foreign Affairs
In The Long Run: Keynes and the Legacy of British Liberalism
By Walter Russell Mead
Walter Russell Mead is Senior Fellow in U.S. Foreign Policy at the Council on Foreign Relations.
"You will read your Political Economy in my absence," Miss Prism says to the Reverend Canon Chasuble in Oscar Wilde's The Importance of Being Earnest. "The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational."
It was, in fact, the management of the Indian rupee that occupied John Maynard Keynes at the dawn of his career, and many chapters in the life of this distinguished economist and public servant were considered too sensational for his first biographer, Roy Harrod, to address. Now with John Maynard Keynes: Fighting for Freedom, 1937-1946, the third and last installment of his monumental biography, Lord Robert Skidelsky has brought us as close as we are ever likely to get to the whole Keynes, rupees and all.
The Economist as a Young Man
His was a very English life. At Cambridge, Keynes was one of the enfants terribles whose mix of philosophical idealism, undergraduate homoeroticism, and cynical disengagement from the certainties of their Victorian grandparents shocked the Edwardians and pointed to the vast cultural and social changes ahead. After helping to blaze the trail later traipsed by such bright young things as Evelyn Waugh, W. H. Auden, and Christopher Isherwood (and, for that matter, the double-agent Guy Burgess), Keynes plunged into the artistic and cultural mix of the storied Bloomsbury group, where he enjoyed the company of such betes noires of the British establishment as the author Lytton Strachey and the painter Duncan Grant.
What Bloomsbury regarded as the shades of the prison house began to close in about the growing Keynes during World War I, when he forsook the fashionable antiwar stance of many of his friends to serve in the British Treasury, ultimately accompanying the British delegation to the 1919 Versailles conference. His coruscating and still controversial account of the conference, The Economic Consequences of the Peace, remains one of the great landmarks in the history of the twentieth century and continues to shape debate over the relationship between the two great European wars of the era.
World famous in 1920 at the age of 33, Keynes in the following decades underwent an interesting shift: his private life became more orthodox as his politics moved toward the fringe. In 1925, he shocked respectable opinion by denouncing Britain's return to the gold standard at the prewar dollar-pound ratio of $4.86. (Then Chancellor of the Exchequer Winston Churchill would later confess that the return to gold at the prewar parity was one of the greatest mistakes of his life.) Eleven years later, with the publication of The General Theory of Employment, Interest, and Money, Keynes launched a revolutionary attempt to overthrow the structure of classical economic thought. Although Bloomsbury applauded his intellectual daring in these years, the group was increasingly vexed by the development of his personal life. While the fashionable intellectual world dabbled in communism and bohemian intrigue, Keynes acquired a large stock portfolio, joined Eton's board of governors, advised his college on its investments and, perhaps worst of all from the Bloomsbury point of view, wooed and, in 1925, married the Russian ballerina Lydia Lopokova.
Telling Left from Right
The first two volumes of Skidelsky's biography, Hopes Betrayed, 1883-1920, and The Economist as Savior, 1920-37, carry us this far. Fighting for Freedom takes us through the final nine years of Keynes' life. By then, his policies, if not his theories, had not only become the official basis of British economic policy but also informed the development of the International Monetary Fund and the World Bank. The concept of macroeconomic stimulus in times of recession was rapidly becoming entrenched as the orthodoxy of a new generation of economists and policymakers who believed that the Keynesian New Testament superseded the Old Testament scriptures of David Ricardo and Adam Smith.
Keynes' ascendancy makes for a great story and it is triumphantly told here, but Skidelsky has done more than tell a tale. Thanks to Skidelsky's work we can now see Keynes in something approaching true historical perspective and see how profoundly his engagement with the world was shaped by the twentieth-century crisis of the British liberal tradition.
During the 1980s it was often popular to tell the story of modern political economy as a debate between the followers of Keynes and those of Friedrich von Hayek. The Keynesians, according to this view, favored big government and central planning and argued that deficit spending was an unfailing cure for unemployment. The Hayekians, despite years of marginalization at the fringes of the profession, never lost their faith in free markets. The stagflation of the 1970s, the story concludes, ultimately exposed Keynesianism for the quackery it was and the neoclassical heirs of Hayek returned in triumph from the wilderness.
Skidelsky believes that Keynes was not, in this sense, a Keynesian. On reading The Road to Serfdom, Hayek's greatest and perhaps most controversial work, Keynes wrote Hayek that it was "a grand book. . . . Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement, but in a deeply moved agreement." The regard was mutual: Hayek said of Keynes after his death that "he was the one really great man I ever knew, and for whom I had unbounded admiration."
Skidelsky argues that Keynes preferred economic freedom to state control in general and in principle, but believed that the special circumstances (first the Depression, then World War II) of the day required a more active state role. But then, some of Keynes' "statist" proposals sought to minimize interference with markets. During World War II, for example, Keynes preferred high taxes on wartime earnings and compulsory savings plans to curb inflation because the only alternatives were uncontrolled price increases and rationing. Even during war, Keynes believed, a market-based price system would allocate resources more efficiently than could a rationing and planning system.
The basic disagreement between Hayek and Keynes, Skidelsky argues, was that Hayek believed that any deviations in the direction of state planning and control would begin an unstoppable momentum toward ever greater losses of freedom and ever tighter controls. Keynes disagreed, arguing that the (temporary) measures required first by the Depression and then by war and reconstruction would strengthen the hold of classical liberal values in British life.
If we accept this distillation of Keynes, then the revival of classical liberal economics since the 1970s is evidence for Keynes' position, not Hayek's. That is, the exceptional degree of state intervention required to win the war and establish a prosperous peace did not result in a grim slide to state socialism. Instead, when the need for the "Keynesian" remedies passed, British (and American) society returned to liberal economics and values. The triumph of liberal economics in the New Labour government of British Prime Minister Tony Blair would have satisfied, not horrified, Keynes.
For most of Keynes' adult life, the dominant fact of British politics was the collapse of the Liberal Party and the rise of Labour. Keynes could not find a comfortable home in either the Labour or the Conservative parties — he saw little choice between the socialism of Clement Attlee and Arthur Greenwood and the mindless traditionalism of Stanley Baldwin and Neville Chamberlain. Skidelsky powerfully argues that Keynes' career (like Winston Churchill's) should be understood as a series of attempts to perpetuate the values of the Pax Britannica at a time when the empire was dying and liberalism, assaulted from left and right, was close to eclipse.
A Special Relationship
Keynes served as the point man for Churchill's government in its economic negotiations with Washington. For most people, the story of Anglo-American relations during World War II is still wrapped in the public haze of bonhomie and solidarity with which Franklin Roosevelt and Churchill covered over the sometimes sordid transactions between the two allies. Although Fighting for Freedom is not the full history we need of how the United States replaced British hegemony with an international system of its own, Skidelsky sheds considerable light on some dark but important events in the most important geopolitical shift of the twentieth century.
World War II opened with U.S.-British relations at a nadir. The Democratic Party — to some degree, a coalition of British-hating Irish immigrants, Southerners still bitter about the United Kingdom's perfidious failure to support the Confederacy, and farmers angry about the British role in imposing the deflationary gold standard on the United States in the generations after the Civil War — was a less than sympathetic partner. London's failure to pay its World War I debts to the U.S. government and the increasingly brutal character of British repression in restless possessions like India only served to powerfully reinforce the party's Anglophobia. A widespread consensus in Washington held that, in World War I, the United States had done little more than "pull Britain's chestnuts out of the fire" and that the unscrupulous British had taken advantage of the Americans' naivete and goodwill. Keynes himself had contributed to this impression, describing Prime Minister David Lloyd George in The Economic Consequences of the Peace as a "Welsh witch" who had bamboozled the foolish Woodrow Wilson.
Up until 1940, Franklin Roosevelt was perhaps the most persistently anti-British president in American history. Early on, he torpedoed the London Economic Conference to wild applause from Democrats, who believed that a treacherous British plot had been scuttled. The appointment of the notoriously Anglophobic Joseph P. Kennedy as ambassador to the Court of St. James was a deliberate and public slap in the lion's face. Roosevelt also stood aside as Congress passed a series of Neutrality Acts whose only effect could be to hamper British access to U.S. markets in the event of renewed warfare.
The Roosevelt administration in general and officials such as Treasury Secretary Henry Morgenthau in particular were determined that America would eat any and all chestnuts pulled out of the fire this time around. As emergency wartime munitions orders poured into U.S. factories, London's dollar reserves plummeted. In October 1940, the British ambassador told American reporters, "Well, boys, Britain's broke; it's your money we want."
Keynes, whose sins of theoretical unorthodoxy were forgiven as his 1940 proposals on war finance increasingly commended themselves to both politicians and civil servants, was sent to Washington to negotiate the terms of war loans and postwar economic proposals — and, if possible, to save the empire from the Americans. "America must not be allowed to pick out the eyes of the British Empire," a furious Keynes noted on a Treasury memorandum as the degree of economic damage to the United Kingdom's prospects began to sink in.
Much of Fighting for Freedom — too much, it sometimes feels to the reader following the peregrinations of complex, evolving memoranda on both sides of the Atlantic — involves the story of Keynes' sometimes misguided, usually unsuccessful, but always brave efforts to roll back the tide of American demands. The British wanted gifts of money and materiel; failing that, they sought unrestricted, unsecured loans at concessional rates. The Americans, naturally enough, preferred to lend only on good security to a known defaulter such as the United Kingdom. Although they were prepared to offer concessions on both interest rates and the timing of repayments, they set their faces resolutely against any British efforts to rebuild a trade system centered around London, based on preferential tariffs for the empire and the crown dominions. They also kept a sharp eye on any British efforts to compete with American firms in Latin America, an area where U.S. and British commercial ambitions historically had clashed.
When it came to the Bretton Woods institutions, the British, led by Keynes, wanted flexible institutions that could force creditor countries (that is, the United States) to assist debtors (such as the United Kingdom). The Americans wanted more rule-bound institutions capable of exerting pressure on debtors.
Keynes, his health progressively undermined by the heart condition that ultimately killed him, won a number of the battles in this long, twilight struggle, but the American position was sufficiently strong, and suspicion of the British so deeply entrenched, that overall he made little headway. Although by no means an uncritical cheerleader for Keynes' diplomatic skills, Skidelsky argues that Keynes punched above his country's weight in these negotiations and that, in any case, there was little more that the British could have done.
If there is a villain in the story of Keynes' Washington negotiations, it seems to be Harry Dexter White, a key aide to Morgenthau whose Anglophobia was accentuated by his ideological sympathies for the Soviet Union. Skidelsky goes far beyond the usual discussions of whether White spied for the Soviet Union during the war (a question the author handles with great balance and skill) to look much more pertinently at the ways in which White's pro-Soviet stance sharpened some of the wartime conflicts between the United States and the United Kingdom. One such conflict concerned the notorious Morgenthau Plan, which would have reduced postwar Germany to a pastoral economy. The permanent destruction of the German economy would have made the Soviet Union the master of Europe, a consequence which disposed White (the plan's true author) to support the proposal, while adding to the horror with which Keynes and his colleagues in Whitehall regarded it.
A Man in Full
The chief flaw in this book is what it omits. Friendship and the arts remained central to Keynes' sense of himself throughout his life, but we see very little of the private or even the aesthetic Keynes here. This is not a plea for more information about what the historian Edward Gibbon called "the natural history of a human life," but a lament that so much of what made Keynes Keynes has been lost to the biographer and therefore to us by the passage of time. Keynes had no Boswell to jot down his table talk; almost all that is left is the paper trail — the memoranda remain, the conversation is almost all gone.
We get relatively little about the mature friendships of this man whose early views of friendship as the greatest good shaped, Skidelsky persuasively argues, his entire moral outlook on life. American readers will long in particular to know more about Keynes' friendships with future Secretary of State Dean Acheson and journalist Walter Lippmann. The connections Keynes had with the tumultuous events and politics of the era have also been slighted. Skidelsky does a good job of following Keynes' tortured views on appeasement, but his participation in the literary and political life of the period remains largely out of focus.
We do not know what made the mature Keynes appreciate a book or a painting. We only glimpse him at ease with his friends. Skidelsky mentions Keynes' interest in seventeenth- and eighteenth-century English authors but says very little about it. Many of the connections between the aesthetic and moral preoccupations of the younger Keynes and the practical concerns (and, as Skidelsky tellingly observes, the increasingly Burkean cultural views) of the mature Keynes can probably be traced through this interest. A passing reference to a correspondence between Keynes and fellow period enthusiast T. S. Eliot hints at undisclosed levels of reflection and thought.
But these are quibbles. Skidelsky's Keynes will for the foreseeable future be the definitive study of the most important economist of his time. It is indispensable for anybody who wants to understand the economics or the geopolitics of the twentieth century.
In 1946, a memorial service for Lord Keynes was held at Westminster Abbey. It was a stately moment in a drab year. The prime minister and the cabinet joined the governors of the Bank of England, the provosts of Eton and King's College, Cambridge, and a group of his colleagues in the House of Lords to attend this service for a man who had become one of the chief pillars of an establishment he once scathingly mocked.
Keynes has been buried many times since, generally with fewer honors. Politicians and economists spent 20 years proclaiming the death of Keynesianism. After reading Skidelsky, one sees that the essence of his contribution was not a set of policy prescriptions or even the theoretical formulations associated with his name. What preoccupied Keynes his whole life was the quest for a liberal middle way between the harsh realities of economic competition and the stultifying embrace of egalitarian socialism. That quest remains the central concern of most market economies. Keynes is likely to be with us as long as markets astound us with their dynamism yet the glittering prize of universal affluence dangles just beyond reach.