The Economic Consequences of Keynes

A Review of Peter Clarke’s Keynes

Peter Clarke is the author of acclaimed works regarding Keynes and the British history. His more well-known pieces include Keynes: the Rise, Fall, and Return of the 20th Century’s Most Influential Economist. Clarke was previously a Professor of Modern British History and Master of Trinity Hall at Cambridge University.

BY JESSICA DELGADILLO

The 1930s is known as the era of economic recession and recovery. As the United States struggled through a time of economic collapse, it recovered and became one of the world’s most successful economies. In light of the depression, President Franklin D. Roosevelt tried a new economic policy, one of fiscal policy and controversial government involvement in order to jumpstart the economy. The basis of his New Deal policy—as he attempted to stimulate the economy with government spending—were the new economic concepts introduced by the most influential economist of the 20th century: Maynard Keynes. Although Keynes—like any other intellectual presenting new ideas and challenging the old—was surrounded by much controversy throughout his life and his name will forever be remembered in history as the man who challenged classical economic theory. His life and legacy is presented in Peter Clarke’s historic work Keynes: The Rise, Fall, and Return of the 20th Century’s Most Influential Economist. Despite the fact some might argue “To find an economist of comparable influence one would have to go back to Adam Smith” and therefore saw Keynes as solely a man of economic intellect, there was—in a sense—more to Keynes than met the eye.1

Born on June 5, 1883, Keynes was born in England to a highly influential family. His parents were a part of an elite group of Cambridge intellectuals that provided Keynes with a privileged upbringing. Excelling in school, Keynes followed in his father’s footsteps by attending Cambridge University, where he pursued economics. Although economics was his proclaimed major, Keynes also had a strong belief that “the economist…must be a mathematician, historian, statesman, philosopher” ; in other words, Keynes was a strong advocator of a well rounded individual, which he later exemplified through his involvement in the arts and politics.2 Soon enough, Keynes began his career as a writer, publishing his first work Indian Currency and Finance. Keynes also began establishing the unique ideas and theories he is well known for. The first includes his distinction between private ethics (religion) and public duty (morals). Another is presented in his work Treatise of Probability where Keynes argues that “probability cannot simply be measured by observed frequency... [and] thus depends on expectations, not on actual outcomes.”3 During this time, Keynes nurtured a growing interest in politics; he soon was accepted into the Treasury; here Keynes work for his country continued to uphold his strong belief in laissez-faire economics as Britain entered an era of economic downturn. As certain economic and political decisions needed to be made, Keynes had his first taste of international politics during the Paris Peace conference. Moreover, Keynes was at the peak of his career by the early 1930s as he gained success. His success and popularity sky rocketed as his literary career took off when he wrote and published such works as The Economic Consequences of Peace and The Economic Consequences of Mr. Churchill. By then, it was evident Keynes was no typical economist.

As he entered his late 30s, Keynes’s homosexual relationships he developed as a youth in school came to an end as he met and married a ballerina, Lydia Lopokova. With this, his interest in the arts increased and he became a patron of paintings, as many of his close friends were artists. Keynes supported his wife’s acting career soon after her career as a ballerina came to an end. Soon, however, it was Lydia supporting Keynes after his deteriorating health became evident, forcing him to take time off from his hectic schedules to combat his worsening heart condition. Keynes was able to recover just as economic conditions were worsening in England. This is when Keynes began establishing his legendary economic policies known as depression economics. The first of these was Keynes national development plan, where he suggests that “prosperity is cumulative… [and] an impulse, a jolt, an acceleration” is necessary to get the economy going.4 With this, Keynes developed his most controversial topic, as he attacked the free market realizing the need for some government stimulation. To many, his concepts were those of socialism, and he took much criticism. His involvement in politics was seen as unsuccessful as the financial crisis in Britain turned into a political one as well. It was not until after the application of Keynesian theory to the United States New Deal did some optimistic possibilities present themselves to Keynes. Soon Keynes was appointed as director of the Bank of England and sent to Washington D.C.. to deal with a series of his Anglo-American issues. Meeting with President Roosevelt, Keynes discussed and negotiated the lend-lease policy and postwar loan negotiations. With this in mind, Keynes came up with a plan—later referred to as Bancor—in which a new international standard of exchange would take the place of the typical liquidity tied to the gold standard. Although passed, Bancor was later deemed unpractical. Keynes persisted in his last attempt in Anglo-American relations as he attempted to negotiate a compromise of U.S. aid to help the British government recover, blaming the U.S. for Britain’s involvement in the WWII. Despite his arguments, the U.S. denied Britain increased aid, leaving them only with a meager loan with high interest. With his wife and mother by his side, Keynes had reached the end of his life in 1946 as he passed away from a fatal stroke.

Keynes’ policies and theories—although controversial—were still regarded as greatly influential. The basis of controversy was surrounded around the fact Keynes—who formally began his career as an economist as a strong advocator of the classical economic theory of laissez-faire—realized an economic approach that was, in a sense, a somewhat socialistic approach to the economy. However, despite such misconceptions, he was not a socialist; he did not believe in a command economy. In a deeper sense, he made adjustments to what he saw needed to be made to the typical approach of how to run the economy. Keynes realized that the “long run is a misleading guide to current affairs. In the long run we are all dead.”5 In other words, classical economic theory teaches that government must not at any cost interfere in the economy, as it will take care of itself through any inevitable downturns it will face. The economy will mend itself without the assistance of government and eventually return to natural order. To Keynes, the word “eventually” was the deal breaker. For government to sit around hoping the economy would somehow mend itself seemed almost foolish, for as Keynes stated, “In the long run we are all dead.”6 He understood that in certain circumstances, the economy did in fact need some type of stimulating force and hence government intervention was more than acceptable to help the economy recover more rapidly and efficiently. With this in mind, Keynes took a stand on several issues during Britain’s epoch of extremely high unemployment rates, as the country struggled in looking for a solution. Keynes offered his knowledge by suggesting seven possible remedies to cure the country’s predicament: devaluation of the currency, an income policy involving a “national treaty to bring down all wages immediately to the required level, rather than leaving such adjustments to the slow and haphazard workings of the market,” bounties to industry where wages would be subsidized in vulnerable industries and especially those dealing with overseas markets, rationalism intended to cut unit costs, tariffs, home investment or public works, and international measures creating an agreement between nations to lower the high interest rates detrimentally effecting the economy.7 However, he felt the most effective way of dealing with the issues was the combined benefits of public works and home investment. With this, big businesses would benefit and the benefits would trickle down to the general population in a domino effect. There was a clash of opinion with the committee, who viewed Keynes as becoming more radical by the minute; in the end, however, it was evident that Keynes solution of a stimulus was unmistakably relevant and applicable.

Additionally, in providing us with a handful of theories, Keynes left his mark on the way the world studies the economy as a whole; “few economists would disagree that Keynes played a key role in establishing the importance of macroeconomics.”8 Some theories and concepts include: “interest as being the meaning of liquidity preference,” the monetary theory of production, and an emphasis on fiscal policy.9 Moreover, Keynes provided us with book on economic theory entitled The General Theory, which he divided into six parts. The first part gives a rejection of classical economic theory as he further explains some of his theories, including the fact that “individual choice in a free market is real” as he explains how “one person’s consumption is another person’s income.”10 These ideals exemplify how macroeconomics and the economy is studied today. Also, his way of viewing and studying the economy in terms of aggregate output—in other words, what the economy produces as a total—helped illuminate the importance of macroeconomics as it is defined as the study of aggregates or the economy as a whole.

Peter Clarke—author of this historic work—was clear on his purpose of writing his book. He makes it clear that despite an individual’s opinion of Keynes and the controversy surrounding his name, he undeniably had an enormous influence on the world through his challenged classical economic theory. This challenge opened the door to new ideas and economic principles. Clarke supports his thesis throughout the entire book by not only providing detailed examples of the way the world viewed Keynes but also solid facts that proved to be influential in many important decisions such as the Paris Peace Conference. Clarke clearly sees Keynes’s influence as surpassing others of his time, and defining our way of thinking today: “in one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”11

Based on Clarke’s knowledge as a British history major and professor, it is evident that he bases some of his opinions and points of views on this fact. This is exemplified by the way he presented America in the portion of the book where he described Keynes dealing with Anglo-American affairs. As Britain sent Keynes to negotiate aid to help their ailing economy, the United States instead gave them a loan, setting the “level of interest…ridiculously low in the American eyes, but the fact that it was demanded at all was humiliating in British eyes.”12 This thereby makes Britain seem more like the victim in the situation when indeed there was more to the circumstance than addressed in Clarke’s writing. Furthermore, it is evident that although his writings do not necessarily overly glorify Keynes; he is also presented in a light of flawed mistakes. Clarke also maintains a high level of respect for the economist by presenting his achievements as the one of the most influential economist of the 20th century. Evidently, Clarke is influenced by certain types of historiography, especially comparative and economic historiography as he compares the economic and certain political circumstances of the United States and Britain.

In analyzing Clarke’s work, columnist Brian Milner of the Globe and Mail gives a positive review of the book. Impressed by Clarkes ability to illuminate Keynes’s main ideas, Milner praises Clarke for “best examining how Keynes came to break away his from his early adherence to more or less orthodox economic ideas.”13 All the while, he acknowledges Clarke’s apparent goal to “demolish some misconceptions about Keynes and his revolutionary work” as well.14 Also analyzing Clarke’s work, Roy Hattersley of the Guardian offers a similar critique. Although Hattersley believes the topic on Keynes and his influence on the world is far too detailed to be crammed into a small book, he acknowledges Clarke’s ability incorporate the main points. Claiming that “much of the attraction [of the book] lies in the exposition of the ideas,” Hattersley gives his nod of approval to Clarke as his work contained the bulk of the most important fundamental ideas pertaining to Keynes.15 In terms of the material covered in his work, it seemed to be a sufficient overview of Keynes and all that pertains to Keynes. Although certain ideas seemed biased, Clarke managed to maintain a high level of equitable information as he presented his readers with solid information. Despite these facts, at some points some of the explanations of the economic theories and concepts seemed somewhat vague and could have possibly used a more detailed explanation for those reading the book with no previous knowledge regarding the topic. Overall, it was an interesting read with much to gain and learn from reading it.

Furthermore, marking a watershed in American history, Clarke acknowledges the fact that Keynes and his economic ideas did indeed have a huge impact on the United States in the 1930s. Having introduced the concept of a stimulus and government spending as a remedy to deal with the consequences of a recession, it was evident that President Franklin D. Roosevelt absorbed Keynes’ teachings and applied them to the creation of the New Deal that ultimately played a role in helping the U.S. economy recover. According to Clarke, Keynes applauded Roosevelt for “feeling [his] way by trial and error [as he] supported both the recovery policies and the reform measures of the New Deal.”16 Using Keynesian theory, The New Deal revolutionized the way the economy was dealt with in a broader spectrum, with the expansion of government aid to the economy, and a radical shift in public perception about government’s place in economics.

Keynesian theory’s impact continues to be evident in today’s world. With the recent economic downturn in the United States, a recession similar in circumstance to that of the Great Depression—in other words the recession of the 1930s—is evidently occurring. Although the severity is not as extreme as the Great Depression, it has still managed to impact our society significantly. As governments attempt to cope with the economic disaster at hand, they employ Keynesian theory by applying a government stimulus as a way to facilitate the economy.

All in all, Keynes progressed from a mindset of a “prevailing system of individualism and laissez-faire” to one advocating controlled government involvement.17 He has managed to make the world stop and rethink the way the economy is dealt with; Keynes provides the world with a new model of which to follow and also left the world with one of the most studied fields: Macroeconomics. Although Keynes may be dead, his significant concepts and theories continue to be a part of our world.

Endnotes

Student Bio

Jessica Delgadillo is currently a junior at Irvine High. She is involved in the music department singing in the Chorale. She is also a member of the water polo and swim teams. Jessica hopes to attend UC Santa Barbara after her senior year in hopes of pursuing a degree in the humanities.