I was expecting this to be a great book: as stunning as the first two volumes of Robert Skidelsky's biography of John Maynard Keynes (Hopes Betrayed and The Economist as Saviour). But it was not. Do not get me wrong: it is still a good book, well worth reading. Anyone who loved Skidelsky's first two volumes will like this one. Nevertheless, this book did not match up to its predecessors.
After some thought I believe that I understand why. I think the source of the problem lies in the fact that Robert Skidelsky is not an economist. The fact that Skidelsky is not an economist was not a hindrance while he was writing the first volume, Hopes Betrayed--that book was mostly about John Maynard Keynes as a developing intellectual, seeking to figure out his place in the world and how to use his talents. The fact that Skidelsky is not an economist was not a hindrance while he was writing the second volume, The Economist as Saviour--that book was mostly about Keynes as politician, trying to influence events by analyses based on the standard monetarist toolkit of a Cambridge economist between the wars. (The attempt by Skidelsky to summarize the contribution of Keynes's most important book, The General Theory of Employment, Interest and Money, did strike me as the least satisfactory part of The Economist as Saviour.) But somewhow the fact that Robert Skidelsky is not an economist matters a lot here in the third volume.
It matters because in this book Keynes is neither developing his mind nor playing Cassandra as he warns of approaching disaster, but is instead designing and implementing policies. Thus the technocratic details matter here. And, in my view at least, Skidelsky gets too many of the technocratic details awry for this to be a truly great book.
But first let me praise the excellences of Skidelsky's third volume. As long as Skidelsky remains at a height, he is unsurpassed at summarizing Keynes's key contribution: to find not a middle way between "laissez-faire and central planning... conservatism and socialism" but a genuine Third Way that promised to achieve the benefits that each of the traditional poles of politics had claimed but had never been able to deliver. As Skidelsky writes (p. xvi), Keynes's thought was "...a break-out into a new dimension--in which one could have continuous full employment without suppressing political and economic freedom.... It is tempting to think of him as the philosopher of the Middle Way.... But... his mind pointed... to a New Way.... Keynes's ideas entered as new ingredients into established habits of thought, where they have lodged..."
Skidelsky is also very good at pointing out the fundamentally liberal nature of Keynes's thought. Keynes saw the market economy as having two great flaws: first, that demand for investment was extraordinarily and pointlessly volatile as business leaders and investors attempted the hopeless task of trying to pierce the veil of time and ignorance, and, second, that the fluctuations in the wage level that classical economic theory relied on to bring the economy back into balance after such an investment fluctuation either did not work at all or worked too slowly to be relevant for economic policy. (No, I am not going to be drawn into the debate about "unemployment disequilibrium.") But if these problems could be fixed, Keynes believed, then a great deal of the standard market-oriented toolkit of economists was worthwhile and relevant once more.
As Skidelsky quotes Keynes (p. 460), he found himself "moved... to remind contemporary economists that the classical teaching embodied some permanent truths of great significance.... There are in thse matters deep undercurrents at work, natural forces, one may call them, even the invisible hand, which are operating towards equilibrium..." Hence Keynes's eagerness to find a way to let the market work, and to make the market substitute for simple, crude rationing and command to achieve the necessary balance of resources in time of war. The result was his book How to Pay for the War which showed that the Keynesian toolkit could be as relevant in figuring out how to curb aggregate demand when it was too high as in figuring out how to boost aggregate demand when it was too low. And as Skidelsky points out (p. xix), it was this enlistment by Keynes of the analytical apparatus of the General Theory on the side of market-oriented solutions that "brought about a reconciliation between Keynesians and non-Keynesians, especially in the Treasury and the Bank of England..."
Skidelsky is also very good at pointing out how Keynes during World War II knew things that other economists would only rediscover a decade or two later. For example, Skidelsky (p. 277) cites Keynes as arguing against fiscal stabilization via the tax system, for "...a remission of taxation which they could rely on only for an 'indefinitely short period' might not stimulate their consumption by much," and as biased "against fiscal fine-tuning. The emphasis should be placed on prevention, not cure; on maintaining a steady stream of investment, not offsetting fluctuations..." Both these points--the dependence of consumption not on transitory but on permanent income, and the limits imposed on stabilization policy by ignorance and uncertainty" did not register on the consensus of economists until forcefully argued by Milton Friedman a decade and more later.
But because Skidelsky is not an economist, he misreads the post-World War II development of economics. He sees Milton Friedman as an anti-Keynes who believed that "the built-in stabilisers were present in market exchanges, so to speak, and did not have to be imported from outside." But if Friedman has sounded one single theme throughout his career, it is that economic stability can only be maintained if money growth is carefully managed--and that an unmanaged system like a gold standard will produce large fluctuations not just in the monetary base but the monetary multiplier as well. Keynes saw the government's key task as the stabilization of investment, Friedman saw it as the stabilization of the money stock. They are each much, much closer to the other than to the Hayeks or the Schumpeters or the Haberlers or the Pigous who dominated macroeconomics before the Keynesian Revolution. (And someone needs to tell Skidelsky that Stanford Professor Sargent's first name is Thomas, not Richard.)
And because Skidelsky is not an economist, he overstates the gap between John Maynard Keynes and U.S. Treasury official Harry Dexter White in their joint design of the post-World War II international monetary system at Bretton Woods and elsewhere. Skidelsky (p. 239) writes of the relationship between Keynes and White as a "battle between the two... one of the grand political duels of the Second World War, though it was largely buried in financial minutiae..." But that is a gross misrepresentation.
When an economist like me looks at the competing Keynes and White plans for post-WWII monetary reconstruction, I am struck not by their differences but by their extraordinary similarities. The White plan called for a Bank for Reconstruction (now the World Bank) to finance an enormous amount of investment in the post-World War II decades. The White plan called for an International Stabilization Fund to repair the flaws in the interwar golds standard: to make explicit and to enforce the rules of behavior expected of countries, to manage exchange rate changes, to assist in resolving balance of payments problems, to encourage tariff reduction and free trade, and to control destabilizing movements of "hot money" like we saw in Mexico in 1995 and in East Asia in 1997.
The Keynes plan called for the same.
Oh, there were differences, and the differences were important. Keynes envisioned a much better-funded institution than White did, capable of taking action on a much larger scale. (I should point out that the IMF today has only a fraction of the resources that White thought necessary, and only a tiny fraction of resources that Keynes thought desirable.) Keynes saw a balance of payments imbalance as a problem for both surplus and deficit countries, both of which needed to be encouraged to change their policies. White saw a balance of payments deficit as the problem of the country running the deficit which needed to change its policies to correct the problem. (I think White was mistaken: Keynes was more farsighted.)
Skidelsky widens the gap between the two to an immense gulf (p. 245): "The White and Keynes plans were based on different concepts... loans out of subscribed capital... [or] overdrafts [created] out of nothing.... For the British, the White Plan spelled financial orthodoxy, the gold standard, and deflation; the the Americans, the Keynes plan spelled reckless experiment and inflation..." He sees the differences as the result of American malevolence (p. xx): "Harry Dexter White of the US Treasury wanted to cripple Britain in order to clear the ground for a post-war American-Soviet alliance..."
But Skidelsky is wrong. He quotes (p. 253) a critic of both plans who had a much clearer view of what was at stake. This critic at the time saw both plans as near-identical twins: "both plans set up a super-national Brains Trust which is to think for the world and plan for the world, and to tell the governments of the world what to do.' They were both British plans... both reflected trends in Keynesian thinking and British monetary policy..." Keynes agreed that the differences were less important than the similarities. He focused not on what was left undone but on what was accomplished, and what was accomplished was "... a revolutionary change for the better compared with the position in the interwar period..." (p. 328).
What about American malevolence seeking to cripple Britain? It is only fair to counterbalance Skidelsky's view of Harry Dexter White--a complex man, Russian agent of influence, New Dealer, ruthless bureaucratic infighter, accomplished technocrat, and co-architect of the post-World War II international monetary system that played a key role in giving the world economy its fastest generation of growth ever--with John Maynard Keynes's view (p. 323): "With Harry White, as you may suppose, we have been spending a vast amount of time... over-bearing, a bad colleague, always trying to bounce you, aesthetically oppressive... not the faintest conception of how to behave.... At the same time, I have a very great respect and even liking for him. A very able and devoted public servant, carrying an immense burden of responsibility and initiative, of high integrity and of clear-sighted idealistic international purpose, genuinely intending to do his best for the world. Moreover, his over-powering will combined with the fact that he has constructive ideas mean that he does get things done, which few here do. They way to reach him is to respect his purpose, arouse his intellectual interest (it is a great softener to intercourse that it is easy to arouse his genuine interest in the merits of any issue), and to tell him very frankly and firmly without finesse when he has gone off the rails..."
Keynes's true adversary wasn't Harry Dexter White. His true adversaries were those who feared any form of international financial management, or those who wanted tight controls over all international economic transactions. But Skidelsky does not see this.
I've talked about the good and the bad. Now I have to talk about the ugly--even though the ugly takes up a very small number of pages in the book, and appears to be an afterthought largely confined to the introduction.
Skidelsky appears to have fallen under the influence of a strange and sinister sect of British imperial conservatives who believe that somehow the U.S. during World War II provided aid to Britain on niggardly terms, terms guaranteed to destroy Britain as a great power. Skidelsky writes (p. xx) of the "...intensity and often bitterness of the struggle between Britain and America for post-war position which went on under the facade of the Grand Alliance. When the European war started, Britain, not Germany, was seen by most American leaders as America's chief rival..." The chief accusation seems to be that America squeezed Britain's financial resources dry before it would open the spigots of Lend-Lease aid, and so destroyed Britain as a great power.
Any economist would know that this is total nonsense. Britain imported 17 billion pounds' worth of goods during World War II, of which America paid--in Lend-Lease and in post-World War II Marshall Plan and MSA aid--for 7 billion. Had America paid for all 17 billion pounds, then Britain would have had an extra 10 billion pounds' worth of overseas assets at the end of World War II. At a 5% real return on overseas investments, this would have boosted post-World War II British GDP by four percent. Britain was not the post-World War II leader of the western alliance because it had 1/4 the population of the United States, because its factories were only 2/3 as productive as American workers, because it was willing to spend only 2/3 as large a share of national product on the military--these add up to an 800% gap in relative strength as a Great Power. That's a much larger gap in politico-military strength than the 4% gap that could be attributed to America's failure to pay for all rather than one-third of Britain's World War II imports.
But even though it is nonsense, Skidelsky seems to believe it. He writes of how (p. xv) "Churchill fought to preserve Britain and its Empire against Nazi Germany. Keynes fought to preserve Britain as a Great Power against the United States. The war against Germany was won; but, in helping to win it, Britain lost both Empire and greatness..." He writes of how (p. xxi) it was a tragedy that Hitler's being "in charge of a great nation... threw Britain into the arms of America as a suppliant, and therefore subordinate: a subordination masked by the illusion of a 'special relationship'...". He even seems (I can barely believe it) to feel some regret that the British government's "...underlying belief that the New World had to be yoked... to the Old" led to "...the deference Britain paid to America's wishes... and its failure to exploit crucial elements in its bargaining position--like fighting a more limited war, or even making a separate peace with Germany..." (p. 180).
But everyone knows that a Britain that made peace with Hitler in 1941 because American Lend-Lease aid was insufficiently generous would not be great. Britain fought to defeat a tyranny, not to preserve an empire. As Winston Churchill said: "You ask, what is our policy? I say it is to wage war by land, sea and air--war with all our might and with all the strength God has given us--and to wage war against a monstrous tyranny never surpassed in the dark and lamentable catalogue of human crime. That is our policy. You ask, what is our aim? I can answer in one word. It is victory. Victory at all costs. Victory in spite of all terrors. Victory, however long and hard the road may be, for without victory there is no survival. Let that be realized. No survival for the British Empire, no survival for all that the British Empire has stood for..." .
And any economist would know that greatness does not lie in numbers of battleships or large foreign exchange reserves. Greatness lies in the use of power to shape the world for good. Of all the kinds of power, the greatest is--as Keynes reminds us--the power of "ideas... both when they are right and when they are wrong.... Indeed, the world is ruled by little else.... [S]oon or late, it is ideas, not vested interests, which are dangerous for good or evil..." The ideas for human good that Britain has incubated since Magna Carta and nurtures still today are what make it great. And among those ideas for human good are the thoughts of John Maynard Keynes.