Steve Reads

The Economic Consequences of the Peace always feels like it’s going to get dragged down by statistics, but it rarely does. Indeed it’s one of the best presentations of a heavily numerical argument in plain English that I’ve seen.

Keynes wants to convince us, beyond a shadow of a doubt, that Germany will never be able to pay the reparations demanded of it. Accordingly, the middle 70% of the book is a detailed accounting of Germany’s exports, imports, and internal health. Among many other findings, Keynes shows that Germany couldn’t possibly pay the reparations without giving up most every creature comfort — down to coffee and tobacco. And as for its exports, allowing Germany to wither economically would drag down the rest of Europe with it.

Keynes dispenses with that middle 70% as clearly and briskly as he can, as support for the moral argument. The moral argument, in part, reads like so (footnote pp. 250-251, 1920 edition):

The following is by a writer in the Vossische Zeitung, June 5, 1919, who accompanied the Hoover Mission to the Erzgebirge: “I visited large country districts where 90 per cent of all the children were ricketty and where children of three years are only beginning to walk … Accompany me to a school in the Erzgebirge. You think it is a kindergarten for the little ones. No, these are children of seven and eight years. Tiny faces, with large dull eyes, overshadowed by huge puffed, ricketty foreheads, their small arms just skin and bone, and above the crooked legs with their dislocated joints the swollen, pointed stomachs of the hunger œdema. … ‘You see this child here,’ the physician in charge explained; it consumed an incredible amount of bread, and yet did not get any stronger. I found out that it hid all the bread it received underneath its straw mattress. The fear of hunger was so deeply rooted in the child that it collected stores instead of eating the food: a misguided animal instinct made the dread of hunger worse than the actual pangs.’” Yet there are many persons apparently in whose opinion justice requires that such beings should pay tribute until they are forty or fifty years of age in relief of the British taxpayer.

In large part, Germany cannot pull itself out of this hell until its people have some confidence in the future — until, in effect, they stop hoarding their bread under the mattress and start eating it instead. Keynes explores this from a particular angle than I’d never thought of before:

In the second place, it is a hazardous enterprise for a merchant or a manufacturer to purchase with a foreign credit material for which, when he has imported it or manufactured it, he will receive mark currency of a quite uncertain and possibly unrealizable value. This latter obstacle to the revival of trade is one which easily escapes notice and deserves a little attention. It is impossible at the present time to say what the mark will be worth in terms of foreign currency three or six months or a year hence, and the exchange market can quote no reliable figure. It may be the case, therefore, that a German merchant, careful of his future credit and reputation, who is actually offered a short period credit in terms of sterling or dollars, may be reluctant and doubful whether to accept it. He will owe sterling or dollars, but he will sell his product for marks, and his power, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes no better than a speculation in the exchanges, the fluctuations in which entirely obliterate the normal profits of commerce.

In short: the expectation of unstable currency makes the currency unusable now. The question then becomes: how do we reshape expectations? All of Europe needed Germany’s steel and its coal; but how were they to get it when Germans quite honorably refused to trade marks for pounds or francs? And, in turn, how could they expect to get any currency stability when reparations forced Germany to hand over nearly all of its gold and silver?

This book is an excellent blend of the moral and the statistical, the practical and the hopeful. And it also happens to be a terrific ground-level view of the world immediately after 1919.

John Maynard Keynes apparently had a life full of brilliant ideas, and the evolution from one idea to another is a brilliant story. I’m not quite sure how I know this, because the second volume of Robert Skidelsky’s Keynes biography doesn’t really convey it. But I do know it, somehow.

The main thing I’ve learned from this book is that I should go and read Keynes himself. Whenever Skidelsky quotes Keynes at any length, I breathe fresh air and I’m reminded that life can, indeed, be a wonderful place. For the remaining 95% of the book, I’m plodding through perfectly serviceable but unengaging prose. Skidelsky doesn’t explain Keynes’s economics well enough for intelligent non-specialists to really get the point. He explains Keynes’s social life decently well, but one can consume only so much about country vacations and “Bloomsberries” before mentally consigning the lot of them to an eternity of bad food and cattiness.

The jacket insists that Skidelsky has told an amazing love story, presumably the one between Keynes and Lydia Lopokova. I don’t know quite which biography that reviewer was reading. Certainly not this one.

I may be submitting to the sunk-cost fallacy , but I intend to finish this book. (I have maybe 200 pages to go.) I’ve invested a lot of time in it, and I’m aiming for a book a week this year. These are the sacrifices we make.

I’m told there’s a condensed version of the Keynes bio: one volume instead of three. That may be worth your time. It depends on what you want. The life of Keynes doesn’t actually seem all that interesting on its own — no more interesting than any other smart person’s life, and substantially less interesting than Russell’s (with whose life Keynes’s overlaps). As for the content of Keynes’s ideas, those certainly are worth the time, but I just can’t see that Skidelsky — condensed or otherwise — is the man to teach these to us.

Probably the best route is to read Keynes’s own Economic Consequences of the Peace, Tract on Monetary Reform, Essays in Persuasion, and General Theory of Employment, Interest, and Money. Cosma tells me that Alvin Hansen’s Guide To Keynes is how economists normally approach the General Theory, and my initial glance at Hansen’s book suggests that it’s a good start. I need more macro before I can really piece it all together, though; for that, a couple people have recommended the Krugman/Wells Macroeconomics.

If we believe Skidelsky, Keynes’s Treatise on Money is overlong, impenetrable, and notationally confused. I trust bad writers to spot their kin, so I believe him on this score.

The idea, it seems, is to focus on the role of expectations more than neoclassical economics had. If people expect that the economy is going to be in the tubes a year hence, they’ll postpone investment and instead put their money in savings. During a depression, says Keynes, savings and investment are disconnected: savings are high and investment is low. Society has all the resources it needs to keep everyone fully employed, but labor and capital aren’t getting properly matched up; resources are going underused.

As Skidelsky puts it (summarizing D.H. Robertson):

‘[I]nappropriate’ fluctuations are nevertheless endemic in a decentralised economy (even without money) for three main reasons: (1) the indivisibility of investment, (2) the interdependence of psychology, magnifying ‘errors of optimism and pessimism’, and (3) ‘the stress of competition, aggravated by the length of time which is required to adjust production to changing demand’.

I can’t perfectly articulate what the indivisibility part is, but I get it. It’s basically that investment is quantized: when you build a factory, that’s necessarily a large investment. You may feel confident enough in the economy to invest half a million dollars, but a factory costs a million. So instead you put your half-million in the bank and wait for conditions to improve. If someone could convince you that conditions would be better in a year, you might take that million out of savings and make a new factory out of it. This seems slightly at odds with the observation that society has plenty of capital and labor to go around. If that’s so, then you want to encourage production, rather than new-capital financing. I’m not sure if this distinction makes any difference for policy. In any case, you’re going to want to encourage industrialists and consumers to spend money.

It’s not entirely clear to me what psychological assumptions neoclassical economics made about consumer expectations. Did it just assume away expectations? Apparently Keynesian macroeconomics is famous, among other things, for helping to explain what money is. Money, said Keynes, was a subtle device to connect the present to the future. I’m not at a point yet where I can explain this.

Like I mentioned, I don’t think Skidelsky is an especially clear explicator. He quotes a longish passage from Keynes and Henderson’s article “Can Lloyd George Do It?” which I include below. It’s far clearer than anything Skidelsky himself has written. It conveys macroeconomic ideas clearly and stylishly.

Savings and investment will be different because people will dump money in the bank, and the bank will have no one to lend it out to: since fewer companies are making capital investments, there’s less to lend out. I’d expect neoclassical economics to say that if banks are lending out money at a low enough rate, someone will bite. The lumpiness of capital investments (i.e., that they’re quantized) is part of a response to that. And it may also be that banks would have to lower their rates to 0% in order for anyone to bite. It’s not clear to me when exactly this would happen.

If the Fed lowers the prime rate to 0%, banks will lower the rate at which they lend out. Hence they’ll also lower the interest rate on savings accounts and other savings instruments. If that rate is low enough, the rate of return on stocks may be higher, which drives people to invest in the stock market rather than in banks. But again we’re stopped by expectations: yes, the rate of return on the market may be decent, but all of that money may be going nowhere. Companies get money from the stock market and hoard it rather than investing it in plant and labor.

So then the challenge is to change people’s expectations. Keynes’s wish throughout the first two volumes thus far is to decrease the intensity of shocks to the market, rather than to focus on the quantity of money in the system. If you lessen shocks, people come to expect a better economy in the future, so they’re willing to invest more.

Of course I need to figure this out in more depth. Cosma reminds me that The Worldly Philosophers is a good introduction to many economic thinkers, including Keynes. I also know nothing about macroeconomics, so I need to pick up a macro textbook. Cosma and others have recommended Krugman’s macro textbook. Finally, I have Hansen’s A Guide To Keynes on hand, per Cosma’s suggestion. We’ll see if I get anywhere.

Below the fold, see the excerpt from “Can Lloyd George Do It?”

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Skidelsky should be less fascinated with Keynes. I don’t doubt that the man deserves an extensive treatment, but Skidelsky doesn’t know when to put the pen down. Many chapters — most that I’ve encountered so far, in fact – contain appendices explaining points of detail in Keynes’s philosophy or economics. Not only is this unnecessary, but it showcases a lack of discipline similar to David Foster Wallace’s footnote tic. If you have things to say, take the extra time to fit them into the main line of the text. In Skidelsky’s case, it’s not as though the appendices say anything especially technical; they just count as extra. In his case I think the guideline ought to be: if you think you need an appendix, you don’t.

I’m only 40% or so of the way through the book, but I read the first volume and the irritants are the same. If Skidelsky could have written a day-by-day chronology of Keynes’s life, he would have. As it is, he knew he couldn’t get away with that, so he resorted to the rather slack thing that I’m reading right now.

All that said, it’s a fine book — just not a masterpiece, and it doesn’t really justify its length.

In volume 1 of the biography, we met Keynes during his training at the knee of Alfred Marshall. He’s not really an economist in the modern sense by that point. Modern economists, and the later Keynes, are concerned with price theory, inflation, unemployment and suchlike. Marshall may well have been too, but his concern was more for the fundamental coordination problem: getting everyone to behave in such a way that the group outcome isn’t at variance with what all the individuals wanted. When the moral foundations of Western civilization — namely Christianity — have been cut out, what do we replace them with? At the end of Volume 1, Keynes is still a marginal voice whose Economic Consequences of Peace has just propelled him to the front pages. Apparently he had been a well-respected advisor at the Versailles peace conference, and had labored nonstop — and unsuccessfully — to go easier on Germany. Keynes saw the reparations for what they were: barbarous, symbolic tribal punishments. The Germans were never going to be able to repay the Allies, and at some level the Allied negotiators must have realized this. But the British people, and more especially the French, wanted blood. So they forced the Germans to pay their pound of flesh, and thereby set the stage for Hitler 20 years later.

That’s where we left off when Volume 1 ended. Skidelsky is at his best when he’s laying down the man’s philosophy and the context within which he wrote. In Volume 1 the context was all G.E. Moore. His ethics set the standard for all Cambridge dons in the early part of the century. Those things which were ultimately good were few: the appreciation of beauty, time spent in agreeable company, and so forth. Right action wasn’t the standard; right states of mind were.

That’s exactly the kind of philosophy that would appeal to Cantabrigians of independent means. If you have nothing to worry about, and you’re living a scholastic life, it seems perfectly natural to believe that the life of the mind is all that matters. Most of the first 2 volumes so far has shown what effect this has on the people who believe it. The Bloomsbury group, who live this ethic, couldn’t be more annoying. Virginia Woolf has appeared in these first two volumes through her catty letters about Keynes. I would prefer that she, Strachey and the rest would disappear. All the “Bloomsberries” live together in various houses around London, take vacations together, have sex with each other intermittently, swap houses, and bitch about the people they hate. None of them could stand Keynes’s wife, Lydia Lopokova. 1.4 volumes into the three Keynes volumes, I can’t stand the Bloomsberries. My only hope is that Keynes will jettison them as he becomes more important, as he becomes more settled in his life with Lopokova (whom he’s just married), and as the various Woolfs drown themselves.

Skidelsky wants to tell the complete life of Keynes, which means not only talking about his philosophy and his economics, but also about all those infuriating Bloomsberries. It means drawing out in fine detail every one of Keynes’s moods. It also means patching up all the holes in Roy Harrod‘s official biography of Keynes. It seems that Harrod brought a Victorian mood to writing Keynes’s story. This particularly meant leaving out the sodomy. Harrod wanted to smooth over what looked like Keynes’s more objectionable sides, but Skidelsky believes that Harrod made him boring in the process. It’s Skidelsky’s job to make Keynes spiky again.

As for his economics, I finally understand why Keynes is famous for saying that “in the long run we are all dead.” Economics, he said, was too focused on long-term equilibrating. Economists go too easy on themselves if they only look to long-run success; the question is how well a policy works within a finite time horizon. Moreover, human beings do not have the capacity to predict very far into the future; if only from a policymaking perspective, our economics has to be focused on the near term. Keynes’s Treatise on Probability is an extended meditation on this theme.

I can’t really make head or tail of the macroeconomics thus far in Skidelsky — that is, everything in the Tract on Monetary Reform, Treatise on Money, and “Economic Consequences of Mr. Churchill.” Keynes rejected a return to the gold standard, on the grounds that Britain needed price stabilization and that gold, despite promising to bring it, failed to do so. I’m not exactly clear on why the gold standard wouldn’t do this; my sense is that gold is a much better tool for international exchange stabilization than it is for domestic price stabilization.

More to the point for those who argued against Keynes (and won — Britain returned to the gold standard when Churchill was Chancellor of the Exchequer, hence “The Economic Consequences of Mr. Churchill”), the gold standard ties politicians’ hands. If the government can’t muck with the money, it can’t massively deflate the currency as a political tool. Keynes seems to be arguing that this is irrelevant: in a world where finance is increasingly controlled by large banks, the gold standard is but one lever on the economy, and by far not the most powerful.

Skidelsky has the capacity to explain these things clearly. His explanation of Keynes’s philosophy is concise and powerful. For instance, I never knew that Russell, Ramsey and others weren’t so much responding to Hegel as they were to F.H. Bradley. Bradley’s misunderstandings of Hegel turned out, in Russell’s eyes, to be mere grammar problems. That led Russell on the path through “On Denoting” and logical atomism, and led a generation of philosophers to reject Hegel and metaphysics altogether. But Russell never meant to kill metaphysics, says Skidelsky. (The chapter on Hegel, and the one on “modern philosophy,” from A History of Western Philosophy, would beg to differ.) In essence they only meant to kill Bradley. It was their disciples who took it in the direction that they did.

It may be that my confusion in the face of Skidelsky’s economic presentation has to do with my limited exposure to macroeconomics, whereas I’m decently educated on Russell and the rest. Certainly that’s part of it. But I think the larger issue is that, in a biography like this one, it’s important to understand your subject’s intellectual evolution. So we dive into macroeconomics at a level of detail that’s confusing to the uninitiated. And Skidelsky is just generally too verbose. He doesn’t need to spend that much time on Cambridge metaphysics, so he leaves that brief and clear. The economics isn’t so lucky.

If there should be an appendix at all in this book, it’s on the macroeconomics. A little context would go a long way.

So far in the life of John Maynard Keynes, he’s won more or less every prize that he could at Eton and Cambridge, done decently well at mathematics, worked nonstop, charmed Strachey and Russell, and engaged in an awful lot of sodomy.

I wouldn’t put it that way if Keynes himself weren’t doing so. His letters to Strachey (who was for a time his lover, it seems) contain repeated uses of the word “sodomy,” which I guess is what people called it back then. It was a little off-putting to read something like this in Keynes’s letters to Strachey:

Scott is dreadfully Oxford — a sort of aesthetic person; and of course his point of view always seems to me a trifle shocking; but we are quite happy together. Even in his sodomy, which he takes more solidly than anything else, he seems to want to worship an idealised vision in which he has clothed some good-looking absurdity rather than to come to close quarters.  . . . 

We have here a vast bedroom, a little room and a large balcony looking out over the city — also meals and wine for 5 francs a day.

Strachey, for his part, seems to be the quintessential drama queen, and if this were a novel I would be praying for his character to die.

I think a lot of the drama in Keynes’s circle is similar to the drama among college students anywhere. Keynes, Strachey and others were part of an élite clique at Cambridge called the Apostles, consisting of the most promising intellectual youth of their day; Apostles, it seemed, only talked to other Apostles, and looked down with an ironic arched eyebrow on the rest of the world. The Apostles could live lives of leisure, engaging in continuous college bull sessions for years and years. When they weren’t studying feverishly and philosophizing, they were taking months-long trips to the Mediterranean. Oddly enough, I can see this leading to more drama-queeniness than a life of toil: when you have nothing taxing to distract you, why not spend your time complaining?

Robert Skidelsky is so skillful at presenting Keynes’s life that it’s taken me 200 pages to realize just how tiresome that life is (so far). It’s like The Talented Mr. Ripley without Matt Damon or any suspense. Yet the book is compulsively readable. Skidelsky steps out of the way most of the time, and lets Keynes tell his own life story through his letters. And what marvelous, mellifluous letters they are. (It’s worth noting, by the way, that the Apostles all wished and expected that the story of their homosexuality would make it into the historical record eventually.) Only occasionally does the author pop in to explain the context to Keynes’s life that Keynes himself wouldn’t have needed to articulate — namely its Victorian philosophical background.

Notable in that background is the project of trying to understand what’s left of morals when religion is gone. Those places in world history where people are uncomfortably transitioning from one belief system to another are fascinating; the end of Christianity as a guiding principle for intellectuals from at least Darwin onward is one such transition.

Keynes and his peers took the transition so seriously. I envy them in at least one detail: they really did believe that the philosophy you held mattered, whereas I’m inclined to say that belief is gone for most people nowadays. It helps their philosophical seriousness that the Apostles didn’t have much else to worry about: being the rather socially stunted band of monks that they were, it was less important that you act properly than that you think and feel properly. They were living a life of claret and contemplative ease, each expecting his own university or government sinecure, so the urge to convert thought into action wasn’t so strong. It’s surprising that out of this came Russell and Keynes, two Apostles whose actions and thoughts spread far beyond the Cambridge monastery.

Owing to my recent debates with a Randian, I’ve meant to pick up a certain historical thread that Skidelsky touches on — namely, that the moral foundations of economics have been bled out of it, leaving it with the reputation for selfishness that it has today. My sense is that from the early Utilitarians to at least Keynes, economists believed that the Invisible Hand only went so far: you also needed a moral education to help you choose the right goods. Not all desires are equal. That moral foundation seems to have disappeared: the modern ideology says that all we need are selfish actors duking it out in the marketplace. Maybe that will lead to a fine economic optimum, but not a moral one.

When I get the time, I’ll quote a passage from early in Skidelsky’s book about the state of economics in Marshall’s day. It’s dominated by a priori reasoning and a nonsense psychology, and hence could be carried over without change to economics in the 1960’s. Keynes’s program, as I read somewhere recently (not in Skidelsky), was to understand how actual, sometimes-irrational, historically-situated human beings acted, and to derive macrobehavior from these micromotives.

If I’m reading things right, backsliding has been part of economics since the late 1800’s. Which is depressing.

Thus far in Skidelsky’s book there’s not very much economics, because Keynes isn’t much of an economist yet: he’s a philosopher and a probabilist. The index tells me that within a couple hundred pages we’ll have arrived at Keynes’s post-World War I book The Economic Consequences of the Peace; his transition to a policymaker and economist will be more or less complete. If the first half is any indication, it will be a gripping story throughout. I can’t wait.