A quarterly magazine of the IMF

December 2001, Volume 38, Number 4

Keynes is widely recognized as the dominant economist of the past century. A recent scholarly biography evaluates how well his reputation has stood the test of time.

The publication of the final volume of Robert Skidelsky's impressive trilogy—John Maynard Keynes: Fighting for Britain, 1937-1946—is an appropriate occasion to evaluate Keynes's life and his legacy as the most creative and influential economist of the twentieth century, even though, as the book's subtitle suggests, it is really about Keynes's part in Britain's struggle for survival during the war years. As Lionel Robbins, the Director of the Economic Section of the War Cabinet, wrote to Keynes's widow, the ballerina Lydia Lopokova: "Maynard had given his life for his country, as surely as if he had fallen on the field of battle." Keynes struggled stoically against an incurable heart condition, first diagnosed in 1937, to become the architect of Britain's wartime economic strategy and the postwar financial order. "His illness did not diminish his prodigious energy, though it may have affected his judgment," Skidelsky observes.

Keynes's role, reminiscent of that of Walter Bagehot in the nineteenth century as the "Spare Chancellor," was that of an unpaid advisor—without portfolio—to three successive Chancellors of the U.K. Exchequer during 1940-46 (Kingsley Wood, John Anderson, and Hugh Dalton). As such, he was the architect of successive war budgets that were inspired by his seminal monograph, How to Pay for the War, which based war finance on the theory that government absorption of purchasing power through taxes, loans, and compulsory savings, while the government allocates resources through the price system, is vastly more efficient and equitable than price and other controls. This role, in Skidelsky's words, "made him the Churchill of war finance and postwar financial planning."

Ironically, despite this stellar contribution, there is only one reference to Keynes in Winston Churchill's five-volume history of World War II, even though Churchill knew Keynes intimately as an active member since 1927 of the Other Club, a dining society that Churchill founded in 1919. This omission was not due to any lack of esteem for Keynes. In fact, Churchill exhorted John Anderson, on his appointment as Lord President of the Council, to "summon economists like Keynes to give their views to you personally." Rather, it reflected, as Skidelsky notes, "Churchill's indifference to the economic and financial aspects—and consequences—of the war."

Contributions

Although Skidelsky's work is, in his words, "about practical applications, not theory" and "much more about the relationship between politics and economics than previous biographies of Keynes have been," it does emphasize the influence of Keynes's main theoretical propositions. Thus, Keynes's liquidity preference theory—that is, the public's demand for excessive cash balances—led him to advocate cheap money, capital controls, and the primacy of creditor country adjustment in his plan for an International Clearing Union. The comprehensive analysis of his General Theory of Employment, Interest, and Money, which allows an almost infinite variety of applications, framed his fiscal plans to counter both inflation and depression. His skepticism on the sensitivity of international trade and capital flows to price and exchange rate movements explains his preference for fixed over floating exchange rates. His principal achievements—the first "Keynesian" budget of Kingsley Wood in 1941, the Full Employment White Paper of May 1944, and the establishment of the International Monetary Fund—were largely the work of others. His distinction is rather in the authority and influence he imparted to policies that would not otherwise have been followed or else would have been followed less assiduously. The Bretton Woods Agreement of July 1944 that led to the foundation of the IMF and the World Bank, Skidelsky notes, "reflected [U.S. Assistant Treasury Secretary] Harry Dexter White's ideas rather than Keynes's, not because they were technically superior but because the Americans had the power." Similarly, Keynes's failure in the Anglo-American loan negotiations of 1945 was "not because he had poor arguments, but because he had poor political weapons."

What was the key to Keynes's achievements and influence? It was the rare combination of genius and talent, of charisma and creativity, and a profoundly bicameral mind, at once conceptual and institutional, strategic and tactical. "There was much of the civil servant in Keynes," Skidelsky writes. "Theory must always be serviceable for policy, even if its echoes went beyond practical requirements." The normative Keynes was the fraternal twin of the analytic Keynes. The thinker and policy guru was also a superb institutional architect, whether it was in designing the State Bank for India in 1913, an International Clearing Union (1941), or the Arts Council of Great Britain and the Cambridge Arts Theatre. His financial acumen surfaced during his terms as Bursar of King's College, Cambridge, and as Chairman of the National Mutual Life Assurance Society.

Lonely genius

Keynes's "genius was lonely, as all genius is," but Keynes was also the high priest who recognized the essential role of those who have been called supporting "Levites," without whom lonely genius can be ineffectual. Keynes acknowledged: "Both the currency scheme and the investment scheme are largely the fruit of the brain, not of Harry [White] but of . . . [Edward M.] Bernstein [assistant director of monetary research at the U.S. Treasury and later the first Director of Research of the IMF]. It is with him rather than Harry that the pride of authorship lies." Keynes went on to say, "I have been over the economics, and Bernstein has been over the economics, and we are both convinced that the operations of the [International Monetary] Fund are technically sound." Asked about the repurchase provision, under which member countries are required to repay their drawings from the IMF, Keynes said, "Bernstein wrote that, and it's correct." These compliments evoked a modest disclaimer from Bernstein to the effect that "he was just a Levite serving the priests in their holy work, that the ideas were White's; all I did was to dress them in economic clothing." Keynes graciously responded: "we priests need Levites just as the flowers need bees."

In fact, it was the perfect understanding between Keynes's Levite (Sir Dennis Robertson, the Cambridge economist) and Harry White's Levite (Bernstein) that resolved many a technical glitch in the tortuous negotiations leading to the Bretton Woods Agreement. According to Skidelsky, Keynes thought Robertson "alone had the intellectual subtlety and patience of mind and tenacity of character to hold on to all details and fight them through Bernstein." But readers might well wonder about Skidelsky's accolade for Robertson as "the most subtle mind in British economics in the first half of this century" in a biography of the greatest economist of the twentieth century. There were other Levites, too, in Keynes's career, notably the Cambridge "Circus," the sounding board for the Treatise on Money and the General Theory; Richard Kahn, the inventor of the multiplier; and Erwin Rothbarth, who provided the critical statistical framework for How to Pay for the War.

Sensibilities

Genius is not synonymous with infallibility. Keynes, too, had his "Achilles heel," his lack of political sense, according to Skidelsky. Noel Annan, the intellectual historian who later became Provost of King's College, Cambridge, observed that he "never studied the sources of power, nor how society is affected by social stratification or the forces of social control." Isaiah Berlin, the Oxford philosopher, said he remained dubious about Keynes's grasp of American politics, despite the latter's constant contacts with the renowned American columnist Walter Lippman, and Keynes's "provocative insouciance" shocked Berlin. U.S. President Franklin Roosevelt's special advisor, Harry Hopkins, called Keynes "one of those fellows that just knows all the answers." Keynes was even irritated by the American variety of legal English, or Cherokee, as he called it. His "ill manners" crippled monetary discussions, according to James Meade, the Cambridge economist and Nobel laureate, while Skidelsky comments that "as a negotiator, Keynes was fallible. It was as an advocate that he was supreme." The acute political sensibility characteristic of Keynes's Economic Consequences of the Peace of 1919 and A Revision of the Treaty of 1921 is conspicuously missing from his World War II writings and activities.

Nor was Keynes the easiest of colleagues. James Meade recalls from his service in the Economic Section of the Cabinet the times when he had "to meet the whole battery of Keynes's wit, petulance, rudeness, and quick unscrupulousness in argument . . . and was actually reduced to tears." Keynes's legendary put-downs did not spare even the highest civil servants. He called the objections of Donald Ferguson, Permanent Secretary, Agriculture and Fisheries, to his Buffer Stock Plan of 1942 "barmy." But Keynes did not always get his way. His proposal to replace the income tax with a contribution to a self-supporting social security fund got a withering response from Richard Hopkins, Permanent Secretary to the U.K. Treasury: "I do not feel equal to settling between now (21st July 1942) and 15th August Lord Keynes's suggestions for a complete modeling of the system of direct taxation."

There was also an intellectual downside to Keynes, unexplored by Skidelsky, most notably a certain disdain for the scholarly apparatus and the state of the art. The Swedish economist and Nobel laureate Gunnar Myrdal complained that Keynes's work, like that of the Cambridge School, "suffers somewhat from the attractive Anglo-Saxon kind of unnecessary originality." Even Richard Kahn, the British economist who was Keynes's favorite acolyte, conceded that it was unfortunate that Keynes failed in his General Theory to refer to Myrdal's book Monetary Equilibrium. The General Theory would have benefited immeasurably from a judicious leavening of Erik Lindahl and Myrdal's work on expectations, even as it would have profited from taking into account Frank Knight's 1921 classic, Risk, Uncertainty and Profit, considering that, as Skidelsky notes, "in Keynes's vision uncertainty is the condition of all human life which goes back to his early work on probability." This blind spot led Keynes to startling conclusions, like his opposition around 1911 to India's industralization because of the country's static comparative advantage in agriculture, whereas the doctrine of dynamic comparative advantage as the basis of international trade and development had been propagated much earlier, by Alexander Hamilton in the United States in 1791 and by Friedrich List in Germany in 1841.

Legacy

What, in fact, is the enduring legacy of Keynes? Skidelsky addresses but does not fully answer this central question in the section of the epilogue titled "A Man for All Seasons?" A distinguished economist, Sir Alec Cairncross, said Keynes was essentially a man who will be "longest remembered for his ideas" and who "never said the same thing for long." Sir Hubert Henderson, the British economist and Treasury advisor, who was arguably the most perceptive and persistent critic of Keynes, remarked that Keynes's influence was too varied to be captured by a single production like the General Theory. Rather, Henderson said, "he was an opportunist and eclectic to the end," who once wrote to Prime Minister Ramsay Macdonald that, "The peculiarity of my position lies, perhaps, in the fact that I am in favor of practically all the remedies which have been suggested in any quarter."

Skidelsky concentrates too exclusively on the General Theory in assessing Keynes's real legacy, which lies in the totality of his scientific contributions. As the first economist to view the economy as a whole, he can claim to be the inventor of modern macroeconomics. He developed a new apparatus of thought in accordance with his lifelong stance that "economics is a technique of thinking . . . not a body of settled conclusions," as he put it in his introduction to the Cambridge Economic Handbook Series. His ideas are still the most productive matrix of testable hypotheses, the ultimate test of scientific status. Among his lesser-known pioneering contributions are the seminal concepts of "the fringe of unsatisfied borrowers" and of financial market imperfections, which he described in his Treatise on Money and which are the genesis of the modern analysis of credit rationing; and the theory and organization of central banks, particularly their developmental role, an idea that he expounded in Indian Currency and Finance. Keynes has been aptly described as the "Einstein of Economic Theory" by the economist Teodoro D. Togati. Keynes provided a defining new paradigm and, as Skidelsky notes, "was the impresario of his own revolution."

Keynes would not claim to be a development economist but, in an unpublished address delivered around 1944 to the Marshall Society (for which the author is indebted to a communication from the distinguished Indian economist I.G. Patel), he made a most profound statement on the economics of development: "In the ultimate analysis, economic prosperity depends not on how brilliant a few people are, but on how large a scale you are able to produce competent people in all walks of life." In short, the mass competence of human capital is the key to development.

Finally, a clinching thought on Keynes's influence. Keynes is unquestionably the most quotable and most discussed economist. The battle lines are still drawn between pre-Keynesian and post-Keynesian economics and the interpretation of his thinking still remains a vigorous subdiscipline. The adjective "Keynesian" is very much a staple of public discourse. Keynes has even figured in English fiction, albeit in an unflattering role, as Barralty, the "half adventurer, half squire, and wholly amoral, financier," in John Buchan's 1936 novel the Island of Sheep, a caricature that reflected "the standard right-wing Tory opinion of Keynes as a man of first-class brains but second-class character." Clearly, the pervasive imprimatur of the marketplace seems so much more decisive than even the most stringent academic peer review. The observer who exclaimed "we are all Keynesians now" in effect acknowledged that we have all been educated by Keynes, and now Skidelsky has further educated us on Keynes, "warts and all." Keynes has found both his James Boswell and his Lytton Strachey in Skidelsky.

The impressive scholarly apparatus of the book taps virtually every extant primary source except, surprisingly, E.M. Bernstein's unpublished papers at the University of North Carolina, Chapel Hill and the illuminating monograph of Stanley W. Black (1991), which details the crucial role of Bernstein in the formulation of the Bretton Woods system.

The Keynes phenomenon will not be duplicated, and Skidelsky has now enshrined it in an abiding literary monument "for a successful, not a tragic, hero—An Odysseus rather than an Achilles," a fitting epitaph for Keynes. To date, only about one-third of his papers have been published in the 30-volume edition of the Collected Writings of John Maynard Keynes. The only part of Keynes's personal papers to have been published so far are the Two Memoirs— "Dr. Melchior" and "My Early Beliefs" and the three years of his correspondence with Lydia Lopokova before their marriage. One tantalizing question remains: what surprises will Keynes's still unpublished economic papers have for posterity? As Keynes remarked: "The inevitable never happens. It is the unexpected always."

The third and final volume of Lord Robert Skidelsky's study of Keynes, John Maynard Keynes: Fighting for Britain, 1937-1946, is published in the United Kingdom by Macmillan, London (£25.00). A U.S. edition will be published by Viking Press, New York.

The first two volumes: John Maynard Keynes: Hopes Betrayed, 1883-1920, and John Maynard Keynes: The Economist as Saviour, 1920-1937, are published by Viking Press in the United States ($24.95 and $37.50, respectively) and by Macmillan in the United Kingdom.

Anand Chandavarkar, a retired IMF staff member, is the author of Keynes and India (Macmillan, 1989) and was an invited speaker at the Tenth Keynes Seminar, "Keynes and the Role of the State," which was held at the University of Kent, Canterbury, England, 1991. The papers delivered at the seminar were compiled and published under the same title by Macmillan in 1993.