WEBVTT NOTE 25. Did Keynes Recant? 1 00:00:00.000 --> 00:00:09.000 Chapter 25. Did Keynes recant? 2 00:00:09.000 --> 00:00:13.000 The Classical Medicine 3 00:00:13.000 --> 00:00:25.000 There is a persistent belief among many non-Keynesians that Keynes recanted the doctrines expounded in the General Theory toward the end of his life. 4 00:00:25.000 --> 00:00:33.080 The belief is based in part on reported conversations with friends, but the only public evidence 5 00:00:33.080 --> 00:00:41.220 I can think of is an article which appeared in the June 1946 edition of The Economic Journal 6 00:00:41.220 --> 00:00:45.640 called The Balance of Payments of the United States. 7 00:00:45.640 --> 00:00:53.480 Fifteen of its seventeen pages are concerned precisely with the subject of the title. 8 00:00:53.480 --> 00:00:59.720 They are a sympathetic study of the balance of payments of the United States and an attempt 9 00:00:59.720 --> 00:01:06.100 to forecast what it will be over the next five to ten years. 10 00:01:06.100 --> 00:01:12.440 We need not analyze either the arguments or the forecasts in these fifteen pages, which 11 00:01:12.440 --> 00:01:17.800 are either irrelevant to our present purpose or outdated. 12 00:01:17.800 --> 00:01:21.200 What concerns us are the final two pages. 13 00:01:21.200 --> 00:01:24.000 Here, Keynes declares, 14 00:01:24.000 --> 00:01:31.760 I find myself moved, not for the first time, to remind contemporary economists that the 15 00:01:31.760 --> 00:01:37.840 classical teaching embodied some permanent truth of great significance, which we are 16 00:01:37.840 --> 00:01:44.600 liable today to overlook because we associate them with other doctrines which we cannot 17 00:01:44.600 --> 00:01:48.680 now accept without much qualification. 18 00:01:48.680 --> 00:01:56.000 There are in these matters deep undercurrents at work, natural forces, one can call them, 19 00:01:56.000 --> 00:02:01.800 or even the invisible hand, which are operating towards equilibrium. 20 00:02:01.800 --> 00:02:11.080 If it were not so, we could not have got on even so well as we have for many decades past. 21 00:02:11.080 --> 00:02:17.680 This passage discloses a dawning suspicion on Keynes's part that the general theory may 22 00:02:17.680 --> 00:02:20.320 may have gone too far. 23 00:02:20.320 --> 00:02:26.720 But it still fails to show a real understanding of the classical teaching. 24 00:02:26.720 --> 00:02:34.320 For there is nothing mysterious or occult about the forces which operate toward equilibrium. 25 00:02:34.320 --> 00:02:41.220 They are simply the result, in a system of freedom, of the efforts of producers to maximize 26 00:02:41.220 --> 00:02:55.280 Adam Smith's invisible hand was a brilliant metaphor but, rightly interpreted, nothing 27 00:02:55.280 --> 00:02:57.740 more than a metaphor. 28 00:02:57.740 --> 00:03:04.900 If the individual producer is free to try to maximize his profits but legally and morally 29 00:03:04.900 --> 00:03:33.620 The result of this free competition among producers and freedom of choice of consumers is to bring 30 00:03:33.620 --> 00:03:58.420 Admittedly, if the classical medicine is to work, Keynes continues, it is essential 31 00:03:58.420 --> 00:04:06.420 that import tariffs and export subsidies should not progressively offset its influence. 32 00:04:06.420 --> 00:04:12.820 This surely looks like a withdrawal of his advocacy of mercantilist restrictions, economic 33 00:04:12.820 --> 00:04:20.900 nationalism and management of the domestic price level at whatever cost to foreign trade. 34 00:04:20.900 --> 00:04:28.380 Praising the sincere and thoroughgoing proposals advanced on behalf of the United States, expressed 35 00:04:28.380 --> 00:04:57.380 It shows how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems, with age-old poisons, that we, the British, should have given so doubtful a welcome to this magnificent objective approach. 36 00:04:58.380 --> 00:05:04.380 This looks like an almost savage rejection of the doctrines of the general theory. 37 00:05:04.380 --> 00:05:06.380 But, Keynes goes on, 38 00:05:06.380 --> 00:05:09.380 I must not be misunderstood. 39 00:05:09.380 --> 00:05:17.380 I do not suppose that the classical medicine will work by itself or that we can depend on it. 40 00:05:17.380 --> 00:05:26.380 We need quicker and less painful aids of which exchange variation and overall import control are the most important. 41 00:05:26.380 --> 00:05:55.340 The Great Virtue of the Bretton Woods and Washington Proposals, taken in conjunction, 42 00:05:55.340 --> 00:06:01.980 is that they marry the use of the necessary expedience to the wholesome long-run doctrine. 43 00:06:01.980 --> 00:06:08.120 It is for this reason that, speaking in the House of Lords, I exclaimed that here is an 44 00:06:08.120 --> 00:06:15.900 attempt to use what we have learnt from modern experience and modern analysis not to defeat, 45 00:06:15.900 --> 00:06:19.660 but to implement the wisdom of Adam Smith. 46 00:06:19.660 --> 00:06:25.060 No one can be certain of anything in this age of flux and change. 47 00:06:25.060 --> 00:06:30.900 Decaying standards of life at a time when our command over the production of material 48 00:06:30.900 --> 00:06:37.180 satisfactions is the greatest ever, and a diminishing scope for individual decision 49 00:06:37.180 --> 00:06:43.780 and choice at a time when more than before we should be able to afford these satisfactions 50 00:06:43.780 --> 00:06:52.060 are sufficient to indicate an underlying contradiction in every department of our economy. 51 00:06:52.060 --> 00:06:57.260 The Underlying Contradictions 52 00:06:57.260 --> 00:07:03.500 The greatest underlying contradiction, however, as this passage so clearly reveals, was in 53 00:07:03.500 --> 00:07:06.020 Keynes's own thought. 54 00:07:06.020 --> 00:07:15.060 In 1946, as in 1936, he was still trying to reconcile irreconcilables by the classical 55 00:07:15.060 --> 00:07:21.480 medicine he could have only meant what Lionel Robbins has called the system of economic 56 00:07:21.480 --> 00:07:28.600 Economic Freedom, which Robbins defines as an urgent demand that hampering and antisocial 57 00:07:28.600 --> 00:07:35.120 impediments should be removed and that the immense potential of free pioneering individual 58 00:07:35.120 --> 00:07:38.220 initiative should be released. 59 00:07:38.220 --> 00:07:42.000 But Keynes wanted both freedom and controls. 60 00:07:42.000 --> 00:07:49.240 He wanted free trade and he wanted exchange variation and overall import control. 61 00:07:49.240 --> 00:07:57.360 That is, he wanted government currency manipulation, exchange control, import quotas and prohibitions 62 00:07:57.360 --> 00:08:02.560 which are the very negation of free trade and a free economy. 63 00:08:02.560 --> 00:08:09.380 He deplored diminishing scope for individual decision and choice, at the same time as he 64 00:08:09.380 --> 00:08:16.960 continued to advocate all these restrictions on individual decision and choice and failed 65 00:08:16.960 --> 00:08:25.240 explicitly to repudiate even his scheme for government control and socialization of investment. 66 00:08:25.240 --> 00:08:31.660 He wanted to implement the wisdom of Adam Smith and yet to ignore the wisdom of Adam 67 00:08:31.660 --> 00:08:33.540 Smith. 68 00:08:33.540 --> 00:08:38.320 What then can we say about this recantation? 69 00:08:38.320 --> 00:08:45.900 The great difficulty with Keynes is how to tell his recantations from his contradictions. 70 00:08:45.900 --> 00:08:53.000 His contradictions consisted of incompatible views that he held simultaneously. 71 00:08:53.000 --> 00:09:00.220 His recantations consisted of incompatible views that he recognized as incompatible and 72 00:09:00.220 --> 00:09:03.580 hence held only successively. 73 00:09:03.580 --> 00:09:12.540 We saw in chapter 23 that he swung from free trade to hyperprotectionism, almost to autarky, 74 00:09:12.540 --> 00:09:14.300 and back again. 75 00:09:14.300 --> 00:09:19.760 In his 1946 article, he seems to wish a little of each. 76 00:09:19.760 --> 00:09:26.540 In his treatise on money, he gave definitions of saving and investment which he explicitly 77 00:09:26.540 --> 00:09:33.000 repudiated in the general theory and then tacitly adopted anyway, because they were 78 00:09:33.000 --> 00:09:36.200 essential to his arguments. 79 00:09:36.200 --> 00:09:43.300 In The Economic Consequences of the Peace in 1919, he wrote one of the most eloquent 80 00:09:43.300 --> 00:09:50.340 Warnings Against Inflation on Record, only to advocate inflation, in the general theory, 81 00:09:50.340 --> 00:09:58.020 as the standard recourse to cure all unemployment, if not as a permanent way of life. 82 00:09:58.020 --> 00:10:03.420 And in the general theory itself, perhaps the central contention of which is that a 83 00:10:03.420 --> 00:10:11.020 cut in money wage rates cannot cure unemployment and will probably increase it, he blurts out 84 00:10:11.020 --> 00:10:20.660 When we enter on a period of weakening effective demand, a sudden large reduction of money 85 00:10:20.660 --> 00:10:27.860 wages to a level so low that no one believes in its indefinite continuance would be the 86 00:10:27.860 --> 00:10:33.020 event most favorable to a strengthening of effective demand. 87 00:10:33.020 --> 00:10:35.780 page 265. 88 00:10:35.780 --> 00:10:43.540 So the 1946 article in the Economic Journal might be set down as just one more contradiction. 89 00:10:43.540 --> 00:10:50.940 True, Cain says some patronizing things in it in favor of the classical medicine, but 90 00:10:50.940 --> 00:10:58.340 he had already paid, as we have seen, many patronizing compliments to the classical system 91 00:10:58.340 --> 00:11:01.200 even in the general theory. 92 00:11:01.200 --> 00:11:08.480 And yet, there is that phrase in the Economic Journal article about much modernist stuff 93 00:11:08.480 --> 00:11:12.480 gone wrong and turned sour and silly. 94 00:11:12.480 --> 00:11:18.720 What could this refer to except Keynesian theory itself, as interpreted and applied 95 00:11:18.720 --> 00:11:22.360 by his more zealous disciples? 96 00:11:22.360 --> 00:11:28.880 Was Keynes then, in the last years of his life, at least on the verge of recantation? 97 00:11:28.880 --> 00:11:34.360 I spoke at the beginning of this chapter of reported conversations with friends or other 98 00:11:34.360 --> 00:11:35.360 economists. 99 00:11:35.360 --> 00:11:39.440 I shall cite but one. 100 00:11:39.440 --> 00:11:45.280 In my last talk with Keynes, a few months before his death, it was clear that he had 101 00:11:45.280 --> 00:11:50.000 got far away from his euthanasia of the rentier. 102 00:11:50.000 --> 00:11:56.080 He complained that the easy money policy was being pushed too far, both in England and 103 00:11:56.080 --> 00:12:02.800 here and emphasized interest as an element of income and its basic importance in the 104 00:12:02.800 --> 00:12:06.640 structure and functioning of private capitalism. 105 00:12:06.640 --> 00:12:12.320 He was amused by my remark that it was time to write another book because the all-out 106 00:12:12.320 --> 00:12:18.080 easy money policy was being preached in his name, and replied that he did think he ought 107 00:12:18.080 --> 00:12:20.640 to keep one jump ahead. 108 00:12:20.640 --> 00:12:27.940 The situation reminds one of that in the Brothers Karamazov, in which Ivan Karamazov, who has 109 00:12:27.940 --> 00:12:35.080 preached a purely philosophical atheism and immoralism, everything is permissible, finds 110 00:12:35.080 --> 00:12:42.200 to his horror that his half-brother, Smerdyakov, taking him at his word, has murdered and robbed 111 00:12:42.200 --> 00:12:43.200 their father. 112 00:12:43.200 --> 00:12:50.000 I was only your instrument, says Smirdikoff, your faithful servant, and it was following 113 00:12:50.000 --> 00:12:52.160 your words I did it. 114 00:12:52.160 --> 00:12:54.520 All things are lawful. 115 00:12:54.520 --> 00:13:00.080 That was quite right what you taught me, for if there's no everlasting God, there's no 116 00:13:00.080 --> 00:13:04.640 such thing as virtue, and there's no need of it. 117 00:13:04.640 --> 00:13:06.960 Keynes was a brilliant man. 118 00:13:06.960 --> 00:13:12.760 Much of what he wrote, he wrote with tongue in cheek, for the pleasure of paradox, to 119 00:13:12.760 --> 00:13:19.560 by Épeter Le Bourgeois in the spirit of Wild, Shaw and the Bloomsbury Circle. 120 00:13:19.560 --> 00:13:26.320 Perhaps the whole of the general theory was intended as a huge, four-hundred page joke, 121 00:13:26.320 --> 00:13:31.600 and Keynes was appalled to find disciples who took it all literally. 122 00:13:31.600 --> 00:13:37.600 Credit and satire are dangerous weapons when not used in the service of good sense.