Keynes:
The Law and the Profits
By Gabriel Blanchard*
The love of money is a root of all kinds of government.
Economics is by no means a new discipline. Indeed, insofar as economics is the study of value—that is, the study of what human beings ought to choose, of what they do choose, and of what relationship exists between the ought and the do—economics is presumably about as old as the human intellect. Nonetheless, certain changes in circumstances and ideas have effected massive changes in economic theory, and treating economics as an independent discipline (rather than as a subdivision of political philosophy) is a relatively new phenomenon: even today it is hardly over two hundred and fifty years old. For this development, we have many ingenious minds to thank, from Fr. Luis de Molina, a Jesuit of the Spanish Renaissance, all the way back to King Croesus of Lydia, if the traditional story that he invented coinage is true.
We’re often presented with a picture of Late Modern† economic thought as if it were a straightforward two-way fight between capitalism and socialism. Naturally, any oversimplification of this kind is (1) wrong and (2) extremely popular. It would, equally, be wrong to pretend that Friedrich Hayek and John Maynard Keynes between them exhaust, or even summarize, the twentieth-century capitalist and socialist perspectives. Yet it is in the nature of rhetoric and human memory that, having said that this would be wrong, it will almost inevitably be the reader’s takeaway from this piece; like a complex question, the deepest impression upon the mind is made not by the context and implications of the words but by the mere words themselves. Sweeping aside, then, the thought of Pyotr Kropotkin and Emma Goldman, Antonio Gramsci and Leon Trotsky, Rosa Luxemburg and Josef Stalin—what is the “socialism” that Keynes ostensibly didn’t embody? To answer that question, we must take a short detour into the classical and neo-classical economic theories of the nineteenth century.
Classical and neo-classical economic theory trace their conceptual ancestry to such figures as Adam Smith. The classical economists espoused the labor theory of value, and advocated a more or less laissez-faire economy with little government interference in economic matters; these were reactions to the mercantilist policies of eighteenth-century colonial governments, which measured wealth purely in terms of precious metals and tightly controlled economic affairs, not foreseeing that this would lead to markets flooded with precious metals and, therefore, to hopeless inflation of the currency. (Even so, almost nobody would sincerely call for no government regulation, since this would mean doing things like legalizing the hiring of hit men. Even if the hit man could still be prosecuted for the murder, prosecuting the hirer or banning the trade is technically state intervention in purchase and sale.)
The power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately ... but, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
The neo-classical economists took a partly different route to largely similar conclusions, partly by dropping the labor theory of value in favor of a theory based on marginal utility. We have no space to do justice to either idea; another grossly misleading oversimplification here would be that the labor theory correlates a product’s value with its production cost, whereas the marginal utility theory correlates its value with how badly people want it. In any case, neo-classical economics was the “orthodox” school right up until the end of World War One—at which point Keynes, a British treasury official, objected to the formulation of the peace at Versailles.
Keynes’ objections were not heeded at the time, and he was so disgusted by the actual decisions taken by the Allies that he resigned from the treasury. However, he published his views in 1919, in a book titled The Economic Consequences of the Peace. He argued that if Germany were compelled to pay war reparations at the crippling rate proposed by the Allies, the result would be a global depression followed by a second war. The reparations were set exactly as the Allies wanted them—for all the good it did, since Germany’s economy was indeed destroyed by the burden placed on it, and payments in both kind and money were constantly interrupted throughout the 1920s (in fact, the debt was only finally resolved in 2010!). The Great Depression began in 1929; World War Two, in 1939 (unless we count the Anschluß or the annexing of the Sudetenland, which both occurred the year before, as the real beginning of the war). Keynes, it would seem, was thoroughly vindicated.
Beginning in the 1930s, Keynes began at last to draw the notice of the British and American governments, especially through his most influential book, bearing the (perhaps unimaginative, but reassuringly clear) title The General Theory of Employment, Interest, and Money. Several of his theses flew in the face of orthodox economics. As an example we may take Say’s Law, which may be loosely summarized as “supply creates its own demand”; as Keynes explained, “No.” Among other things, Say’s Law implied that a general glut in the market was not possible, which was evidently false, and that supply alone controlled economies, whereas Keynes argued that demand was the primary driver of economic behavior. One of his’ single most important conclusions was that state spending, even at a deficit, was an important driver of employment, and that increasing it was a good response to the Depression—an idea that flatly contradicted the advice of the neo-classical economists. This also led him to criticize austerity measures taken by the British government around this time.
See-sawing between the Keynesian view and a more pro-capitalist view, characteristic of the neo-classicists and their intellectual heirs, has been a common feature of economic policy all over the world since 1945. To explain the full details would require a far finer brain than the present author possesses. As so often, he finds himself able only to say: tolle, lege; tolle, lege.
*The present author but wishes he could claim credit for the title of today’s author profile; it has in fact been borrowed from a book of the same name by the late C. Northcote Parkinson, a British civil servant and a younger contemporary of Keynes, best known for his satirical volume Parkinson’s Law.
†Late Modernity, as used by CLT on our Author Bank, is roughly equivalent to the “long nineteenth” and twentieth centuries.
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Gabriel Blanchard is an uncle of seven nephews and serves as CLT’s editor at large. He lives in Baltimore, MD.
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Published on 10th July, 2023.