It is worth listening to his peers. “When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool,” wrote Bertrand Russell. And here is what Lionel Robbins, a younger economic antagonist, wrote of him:
I often find myself thinking that Keynes must be one of the most remarkable men that have ever lived—the quick logic, the birdlike swoop of intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something of several degrees beyond the limit of ordinary achievement . . . .
Clarke knows that to understand the man’s influence and the quality of his work, it is important to understand his struggle with his own ideas and his willingness to seek intellectual advice from others. The author has found a novel tool to shed light on the way Keynes thought: verbatim transcripts of policy discussions among a panel of experts (including Keynes) convened by the British government that took place from 1929 to 1931. They allow us to see Keynes as a man of doubt, determination, and dogged pursuit of several large truths.
In such pursuit, he stood one hundred years of conventional economics on its head. Traditional wisdom had it that economies were essentially self-adjusting. In bad times, prices (meaning interest rates, wages, currencies, or the value of commodities) fell until they stimulated more demand. Then, as incomes rose again, all was well with the world.
The most important element in the self-adjusting system was the interest rate. As savings increased or business declined, the interest rate fell, and thereby stimulated more business investment. At some point in the 1920s or early 1930s, Keynes grew skeptical that the interest rate, however low, would assure full and optimal investment of savings. But it took him several years to come up with an adequate explanation of why this was so. This he did, breathtakingly, in his General Theory.
Clarke sells this achievement somewhat short, and draws no distinction between his contribution and that of his later rival, Milton Friedman, during the Reagan years. Friedman cleverly and controversially revived the old theory for contemporary times. Keynes’s achievement was a good deal more—and more revolutionary. He made a strong case that economies could settle for long periods of time in a situation of high unemployment, and fundamentally reoriented the game by introducing uncertainty and psychology into macroeconomics. He showed that “animal spirits,” not simply a low interest rate, were a foundation of investment and that such “animal spirits” depended on confidence, a strong business environment, and a few things one simply couldn’t know at any moment in time. During recession, doubt, fear, and pessimism prevail—and must be counteracted.
This is what is happening today. People are saving far more of their income and thus undercutting demand for goods and services. Profits collapse, businesses fail, jobs vanish, and spending falls all the more. Add to this dangerous spiral a credit crisis of stunning proportions, in which banks and other intermediaries have (or had) no money to make available for investment.
The Federal Reserve acted a bit sluggishly but quite admirably under Ben Bernanke, cutting interest rates sharply and providing funds to the banking system. They may well have stanched the ensuing economic depression. But it was not enough. Government had to spend to make up for the shortfall in demand and bring back confidence. The Obama administration got a $787 billion stimulus passed. Sadly, much of it was tax cuts, which will not help encourage spending in this environment. Instead those dollars will flow into savings.
Still, Keynes’s central propositions are now in full harness. A falling interest rate will not itself stimulate adequate investment. Economies can bounce along in supposed equilibrium with high unemployment, unused capacity, and feeble investment. Credit must be force-fed, demand must be stimulated, and this requires the government to spend.
Because of Keynes, the nation will probably avert the worst of economic possibilities. If it does, many of Keynes’s natural antagonists will soon forget why. They will say that the economy mostly adjusted on its own. They will say new levels of debt were not worth it. They will say that government intervention may well “crowd out” private investment. And they will again be wrong.