What Keynes really meant

The centenary of Keynes’s birth in 1883 has come and gone. Last year saw the opportune publication of Robert Skidelsky’s much-heralded new biography – or at least of its first volume, which does not get further than 1920. It is a formidable work, designed to out-Harrod Harrod, which will be an unparalleled source for those interested in the rise of the junior clerk in the Military Department of the India Office and his extra-departmental interests. ‘Yes,’ he affirmed to his friend Lytton Strachey, ‘I am a clerk in the India Office – having passed the medical with flying colours, balls and eyesight unusually perfect they said.’ It is, as it happens, after 1920 that Keynes’s career acquires more interest for those concerned with other parts of his anatomy, especially what was happening inside his head – a story that remains to be told.

The materials from which to fashion it lie ready to hand with the completion of the text of the Collected Writings of John Maynard Keynes. Now that we have Volumes XI and XII, dealing with his more technical activities as an economist, only the index volume remains to be published, as the coping stone of a notable editorial enterprise. It is very gratifying that Sir Austin Robinson has been able to see it through from first to last, and the efforts of Donald Moggridge in picking up the brunt of the work in the last decade deserve explicit recognition, for we have almost slipped into taking them for granted.

It cannot be said that the plums have been left till last – there is actually quite a lot of pudding in these two bulky volumes. They include a good deal of correspondence generated by Keynes’s editorship of the Economic Journal, for which he was responsible from 1911, aged 28, the novice lecturer in the Cambridge Economics Faculty, until 1946, the elder statesman of international economic reconstruction. Thirty-five annual volumes stand on the library shelves as the abiding record – though these days they are usually kept in the dusty basements reserved for dead periodicals and the back numbers which nobody reads. (How often do economists refer to articles published before 1950?) An editor, however, is notoriously only as good as his last deadline and is inevitably preoccupied with the next. The peculiar satisfactions of this frenetic regime may hold an appeal even for busy dons, but an editor in aspic is a contradiction in terms. There is plenty worth publishing about Keynes without scraping the bottom of the filing cabinets of the Economic Journal and what we have been given is enough.

The opportunity has also been taken of presenting an account of Keynes’s activities as an investor, both personally and as Bursar of King’s College, Cambridge. In the end, he did very well by the college, and very well for himself into the bargain. The apocryphal story about old Mrs Marx is that she grieved over her boy writing about Capital when he ought to have been amassing it. Florence Keynes, by contrast, lived to see her son’s will proved at nearly half a million pounds in 1946 (say five million at today’s prices). Businessmen who reproach the academic economist for pontificating about market behaviour which he simply does not understand have no answer to that. It is actually other economists who have turned Keynes’s business dealings against him, arguing that the sort of speculation in which he indulged, and of which he had first-hand experience, gave him a distorted view of the real processes at work. ‘The speculators speculate, but what are they really speculating on? The answer Keynes gives is the behaviour of other speculators. Of course, when it comes to the practice of speculation Keynes must be admitted to be something of an authority. When one plays the market on the basis of day-to-day trading with a view to capital gains (rather than income), then one clearly does not spend much time pondering on the forces of productivity and thrift that lie behind the general level of interest rates (and the return on other assets) about which day-to-day fluctuations take place.’ Thus Alan Coddington, in the course of arguing that Keynes was simply in a muddle when he maintained that interest was explained by liquidity preference: whereas he should have seen its role as balancing the inducements to invest (‘productivity’) with the incentives to save (‘thrift’). Keynes’s stress on the part uncertainty played in forming expectations, which obviously partook of a speculative character, thus looks rather superficial, and hardly the basis for a profound contribution to the remaking of economic theory.

Coddington’s early death in 1982 was a considerable loss to the study of Keynesian economics, not least because of his lucid taxonomy of differing schools of interpretation. His piece on ‘the search for first principles’, which originally appeared as a scholarly article in 1976, is reprinted in this posthumous volume, buttressed by five like-minded essays. Coddington’s major stroke was to identify a ‘Keynesian Fundamentalist’ position – fundamentalist in the sense that it represented a direct frontal attack upon all attempts to reduce market phenomena to a theory of individual choices. So long as the market could be seen as the means of meeting every rational demand by, so to speak, a rational supply at the right price, everyone was happy. Felicity, to be sure, was underpinned by the assumption of a market-clearing equilibrium. The Fundamentalist objection is that it is impossible to postulate equilibrium upon individual choice in a world where expectations are vitiated by uncertainty.

This view undeniably finds an eloquent champion in Keynes. He flirted with it in the General Theory of 1936 and consummated the affair in the article he contributed to the Quarterly Journal of Economics for 1937, which is hailed by Fundamentalists as ‘Keynes’s ultimate meaning’. For this, of course, is the name of the game – what Keynes really meant. The rules of the game have naturally been interpreted by different economists so as to maximise their own chances of winning. It has been justly observed that the term ‘Fundamentalist’ is in this respect a misnomer since it does ‘not betoken a “fundamentalist” concern for the authority of “the texts”, but rather the opposite’. (Coddington is paraphrasing Don Patinkin’s argument here.) The vices of selective quotation and tendentious exegesis certainly do not reside solely in one quarter. They are generated by a felt need to seek authority from the past for rival views in the present. Thus economists are tempted to suppose that what Keynes ‘meant’ must be consistent with the true ‘meaning’ of Keynesian economics. The late Joan Robinson had peculiarly strong reasons for claiming this sort of counter-textual intuition, as in her comment that ‘there were moments when we had some trouble in getting Maynard to see what the point of his revolution really was.’ All that a historian can do, pitted against such odds, is try to find out what Keynes meant to mean.

Fundamentalism is seen by Coddington as one theoretical school. It stands distinct from ‘Hydraulicism’ of the kind popularised at the level of theory by Hicks and in the textbooks by Samuelson. This model seizes on aggregate flows as the salient feature of analysis, especially as regards the policy role of government. Finally, in Coddington’s account, comes ‘Reconstituted Reductionism’, conceived as an effort at salvage by economists who acknowledge that the equilibrium hypothesis has sunk. What they seek to save is a theory based on individual choice (hence reductionist) in a situation other than that of equilibrium. All these theories are Keynesian in the sense that they do not presume the actual existence of such an equilibrium; each has ground for dispute with the others in explaining why the presumption is invalid.

One explanation is that in the real world we do not enjoy the flexibility of prices, especially wages, which would permit market-clearing at full employment. But the notion that Keynes’s unique insight was to notice that wages are sticky is highly vulnerable. On the one hand, it overlooks the centrality of exactly this point in the diagnosis offered by such academic opponents as Pigou and Robbins. On the other, it disregards the General Theory’s explicit denial that flexible wages would subvert the analysis. A second line of explanation is that interest rates are sticky, and this naturally finds more favour among those who see liquidity preference as the crux of the Keynesian case. This brings in the role of psychology and uncertainty. The disappointment of expectations – especially those of entrepreneurs – becomes the crucial inhibition upon the wealth-creating potential of the economy. In peeling these explanatory onions, it seems, we are progressively invited to regard each more dire flaw in the market mechanism as the core of what Keynes really meant.

It is at this point that John Eatwell and Murray Milgate come along and kick away the onion itself. Their concluding essay in Keynes’s Economics and the Theory of Value and Distribution maintains that all of the above views can be comprehended within an ‘imperfectionist’ position. Admittedly, imperfectionists do not worship the market mechanism, with its assumption that supply and demand will push the economy towards full employment: but they believe in it, nonetheless, as having a tendency to do so which is thwarted by its imperfect operation. On this reading, the exact reason hardly matters: ‘Indeed, examples of “frictions” and “rigidities” can be multiplied at will – any factor which causes the market to work imperfectly will do.’ This analysis is not only more radical than Coddington’s taxonomy: it cross-cuts his categories. In his terms, Eatwell and Milgate would stand for one kind of Hydraulicism: but in their own terms nothing could be more distinct from what Keynes really meant than the sort of Hydraulicism represented by Sir John Hicks. For Hicksian imperfectionism shares with the orthodoxy of the market mechanism school a belief that what is problematic is whether interest rate will be able to bring saving and investment into equilibrium.

From a historical point of view, these claims depend largely upon the work of Milgate. His earlier book, Capital and Employment, is focused by his concerns as an economist and he squarely acknowledges that he uses a historical method ‘in order to reveal analytical rather than historical conclusions and insights’. This makes for a brilliantly clear treatment in which causal relationships and internal consistency (or otherwise) are searchingly illuminated. The construction of the argument is a triumph of well-considered exposition, and the way it is mounted in detail is persuasive because it demonstrates which points can be clinched by documentary citation while revealing which conclusions rest on logical extrapolation. Leading examples of each approach can be found in the treatment of the theory of interest.

This is manifestly a crucial topic, consuming most of Chapters Six and Seven in Capital and Employment, and constituting the theme of Milgate’s major contribution to the volume of essays. In a sense, his point is a very simple one. It is that Keynes’s concept of liquidity preference is not part of his negative critique of what he called ‘classical’ equilibrium theories, but rather his own positive alternative theory of interest. It was, moreover, an alternative which he canvassed with an uncharacteristically tentative air. To Milgate, this ‘indicates that it was not Keynes’s conviction that if liquidity-preference theory was wrong, then the “classical” theory would be right.’ The force of this comment is apparent if one considers what the ‘classical’ explanation was trying to explain. It saw interest rate as a supply-and-demand mechanism which brought saving into equilibrium with investment. Hence full employment of all factors of production.

This was the role which Keynes himself had assigned to interest rate in his Treatise on Money in 1930. His contention there that saving need not equal investment – because they were different activities carried out by different people – was really a rhetorical device for showing that the economy was in disequilibrium when they were unequal, so stressing the need to bring them together. Moreover, the reason such a disequilibrium could persist in the real world, leading to waste of resources and unemployment, was that interest rate was inhibited in its assigned role. But the message of the Treatise is loud and clear. If only we can have cheap money, it will do the trick. This, then, is Keynes as imperfectionist. The General Theory, however, tells us another story. It is no longer concerned with an inequality between saving and investment as a sign of disequilibrium. Instead it insists that there is an equilibrating mechanism which always balances them – not the rate of interest, but the level of output. Thus it may be perfectly normal to achieve this equilibrium at levels which leave plant and workers idle. Yet this is indeed an equilibrium – there is no self-righting tendency, actual or thwarted, towards full capacity. This is the practical implication of the theory of effective demand, but there is also a theoretical implication. For what role is now left for interest rate? No longer the arbiter of supply and demand for savings and investment, it was cast by Keynes as the measure of our preference for the liquidity of money itself.

Looking at the available evidence as a historian, I have little doubt that this represents the sequence of developments, and that Milgate is building upon a secure foundation. What he and Eatwell choose to build thereupon, given their own economic bent, is up to them, of course. They are much exercised to recover an understanding of Keynesian economics which will bring it into congruence with the truly classical, especially Ricardian, theories of value and distribution. Keynes’s idiosyncratic usage of ‘classical’ made it synonymous with the later neoclassical analysis of the marginalist school, which Eatwell and Milgate disparage. Their zeal in detecting the neoclassical worm in the rose of prevailing Keynesian interpretations is noteworthy. Eatwell is particularly scathing about the assimilation of Keynes’s ideas to a kind of theorising where investment is determined simply by expectations and the interest rate. This is, he writes, ‘as empirically vacuous as it is theoretically empty. It could only be taken seriously in a supply-and-demand model.’ It is good to know that these dry concepts can be invested with such passion.

Two names stand out in the demonology of assimilation: Sir John Hicks and Sir Roy Harrod, whose known weakness for supply and demand puts them in a very poor light. There is a changeling version of the story, in which Hicks visited the cradle of the General Theory and, while nobody was looking closely enough, substituted for it ‘Mr Keynes’s special theory’. (Coddington’s essay on Hicks shows that it can hardly be as simple as that, but his own treatment is blatantly assimilationist in its premises.) The part attributed to Harrod does not centre on his biographical efforts, which admittedly have their bias, but on his success in persuading Keynes to redraft parts of the General Theory which he had seen in proof. Milgate uses the Collected Writings to show that almost 60 per cent of the final text of Chapter 14, ‘The Classical Theory of the Rate of Interest’, had not appeared in the proofs as sent to Harrod, and had been recast as a result of his rooted defence of the supply-and-demand conception of interest. Milgate concludes that it was the effect of these changes which opened the door to a number of interpretations – notably Hicks’s claim that ‘it is the liquidity preference doctrine which is vital’ – all of them inconsistent with the true theory of effective demand. He is perfectly entitled to ask, therefore: ‘Upon which version, then, should attempts to reconstruct Keynes’s critique of the “classical” theory of interest be based?’ Nor is it a surprise to find him coming down ‘against an unqualified acceptance of the final text of Chapter 14’, because that would open the door in turn to muddle, confusion and inconsistency, which is no basis for the sort of viable reconstruction which will impress economists nowadays. As for the historians, they are inured to more messy notions of the way it really was. They may even have to accept a muddled Keynes, a confused Keynes, an inconsistent Keynes, in deciding what he meant at the time.