Review: The incredible shrinking man - I

By MARTIN HUTCHINSON, Business and Economics Editor  |  March 5, 2002 at 8:47 PM
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WASHINGTON, March 5 (UPI) -- In reading "Fighting for Freedom" the third volume of Robert Skidelsky's biography of John Maynard Keynes (Viking, 2001, $34.95), I was struck by how much of Keynes' economic thinking has since been discarded by mainstream economists. Truly, in terms of his remaining intellectual footprint, to borrow the title of the cult 50's sci-fi movie, he is becoming an Incredible Shrinking Man.

This review is divided into two parts. In this part, I examine Keynes' non-economic activities, and the role he played in British war mobilization. In the second part, to be published Wednesday, I examine his role in wartime negotiations with the U.S. and in the postwar settlement, and look at his economic legacy.

Skidelsky, as is appropriate for a man who has spent over 20 years writing a biography of Keynes (the first volume came out in 1983) doesn't tell you this, of course. Instead, the inconsistencies and the sillier excesses in Keynes' economic outpourings are glided over, and Skidelsky as it were takes an average, fitting Keynes neatly into membership of Britain's 1980's Social Democrat Party, an enterprise in which Skidelsky himself was intimately involved. In the first volumes, written two decades ago, this was still more or less possible, in the latest volume, which deals with Keynes' activities from his first major illness in 1937, just after publication of the "General Theory of Employment, Interest and Money" until his death in 1946, the strain is showing.

To be fair, Keynes in these years was dealing with the problems of a war economy, and with British postwar reconstruction, both circumstances more extreme than we have seen for several decades. Nevertheless, his solutions were eccentric, and in many cases counterproductive. To ask the question "Was Keynes a Keynesian" is to misunderstand the man; his economic prescriptions varied all over the map, according to the short term problems with which he was faced.

While the "General Theory" is internally consistent (if in many points provably wrong) Keynes himself deviated from the book's prescriptions whenever he found it convenient to do so. In this he was consistent of his time and intellectual milieu; the Bloomsbury Group were famous for their abandonment of fixed intellectual and moral preconceptions, while scientific thought at the time was also abandoning fixed Newtonian principles in favor of relativity and quantum mechanics. However, it's one thing to believe in Heisenberg's Uncertainty Principle, it's another to apply it to your intellectual output so that you behave like a sub-atomic particle, darting about all over the place and impossible to pin down.

Personally, Skidelsky tries to make the reader like Keynes, but fails. Keynes was a past master of the witty put-down, but there was little kindness attached to the wit -- one observer thought that "he must have been responsible for more inferiority complexes among those with whom he came into contact than anyone else of his generation." Outside economics, Keynes was a patron of the arts, founder of the Cambridge Arts Theatre and from 1941 Chairman of the forerunner of the Arts Council. One is however unsurprised to learn that he spent several months, at the peak of his wartime work, in maneuvering to ensure that architect Sir Edwin Lutyens, probably the one artistic figure of the era on which we can all now agree, was kept off the Council because he might oppose Keynes' preferred Modernism. Artistically, Keynes was a centralizer -- no "obscure concerts in village halls" for him; rather, he was instrumental in establishing the mediocre money-pit of state subsidy that is the Royal Opera House, Covent Garden.

For previous biographers of Keynes both his sexual tastes and his financial position were passed over -- fair enough, because his wife, former ballerina Lydia Lopokova, lived until 1982. Skidelsky dwelled at some length in his first volume on Keynes' homosexual proclivities, but of more interest throughout are his financial affairs. Here, from the scattered information Skidelsky gives on Keynes' finances, one can draw a startling conclusion.

Far from being a genius investor, as the legend had it, it is fairly clear although not provable that Keynes was nothing more than a ruthless insider trader on a substantial scale. His net worth, very modest in his early years, took off sharply, more than doubling in the year after he got a senior Treasury job in 1914, as he borrowed substantial sums of money in order to speculate. Again, having mostly by successful speculation accumulated a fortune of over 500,000 pounds (equivalent to $25 million at today's prices) by 1936, he then lost no less than two thirds of it in the 1937-38 downturn, at which point he was out of favor with the Chamberlain government and without sources of inside information. So bad was his investment performance that the National Mutual Insurance Company, of which as a supposed investment expert he was Chairman, fired him in October 1938, in spite of his plea that "it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself."

Keynes need not have worried. War was coming; by 1940 he was back on the inside information circuit, and he died in 1946 once more worth 480,000 pounds, having nearly trebled his investment portfolio in a period when British stocks (in which alone from 1939 he could legally invest) were up only modestly from their 1938 levels.

In 1937, Keynes was regarded in left and centrist circles as "The Economist as Savior" to use the title of Skidelsky's previous volume. This was quite unfair. Keynes had indeed won popular applause by describing the gold standard as a "barbarous relic" and opposing Britain's re-establishment of it in 1925, but his policies had no effect on Britain's recovery from depression after 1931, since he was out of favor with Neville Chamberlain, Britain's 1931-37 Chancellor of the Exchequer, of whom he remarked "If he could see even a little ... his superbly brazen self-confidence would be fatally impaired."

Chamberlain was thus able from 1931 to ignore Keynes's barracking and employ a policy of Imperial Preference and tight control of government spending, both anti-Keynesian, to pull Britain rapidly out of slump.

After 1939, Keynes came into his own. For one thing Chamberlain, and by extension his orthodox brand of economics, were discredited. For another, his anti-inflation prescriptions in "General Theory" coincided more or less with orthodoxy. Further, certain of Keynes more eccentric economic ideas were more appropriate in a period of total war.

For example, import controls and state commodity buying cartels were clearly sensible in a period of rationing and raw material shortages, while his preferred ultra-low interest rates were also not inflationary at a period when a substantial portion of Gross Domestic Product was being shot at Germans. Thus in the early years of the war he worked well with Treasury mandarins, gave valuable advice on how to handle shortages and reduce inflation, and instituted the system of Post-War Credits, which provided an acceptable "savings" fig-leaf for the necessary punitive taxation of the working classes.

Nevertheless, even during this period Keynes performance as mobilizer of the war effort is less than impressive when one remembers that by 1943 British war production was far outstripped by German, under the direction of Hitler's uber-economist Albert Speer.

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