Keynes on global trade, conflict and full employment

keynesThe passage below is taken from the concluding pages of John Maynard Keynes’ famous General Theory, where he speculates on the benefits to international relations from avoiding conflict over international trade. If full employment can be achieved domestically through judicious government policies this would, he hoped, lessen the need for countries to come into conflict with each other over the balance of payments of trade, investment and capital flows.

Given the historical record, I am actually skeptical about the possibilities for achieving and sustaining full employment, however that might be defined. I am therefore not a perennially optimistic Keynesian. Sooner or later, growing economic imbalances will give rise to crisis and recession, and rising unemployment. However, I do think the world economy could be more wisely managed than it is now, with the US the (still?) reluctant hegemon and a rising China among other potentially destabilising trends. Continue reading

Keynes on uncertainty and investment

keynes“The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market.”

John Maynard Keynes (1936), The General Theory of Employment, Interest and Money, Ch.12, p.149

Keynes on bankers

800px-A1_Houston_Office_Oil_Traders_on_Monday“A ‘sound’ banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”

John Maynard Keynes (1932), Vanity Fair, January (taken from The Essential Keynes, edited by Robert Skidelsky, p. 516)

Keynes speculating on economic and social possibilities

Economist John Maynard KeynesThe great man wrote a short essay, published in 1930, entitled Economic Possibilities for our Grandchildren, which can be found in the book Essays in Persuasion. In it he speculated on a time 100 years in the future (not so far from today) when the ‘economic problem’ had been solved, and the changes that this might bring about in human behaviour and society. Here is a short extract:

“When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money motive at its true value. The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.”

Predicting the future is a difficult business, the moreso the further ahead we try and look. It seems that Keynes would have been disappointed with the world as it is today, in terms of the solving and transcending of the material or economic problem. In many already rich countries, overwork exists alongside unemployment and inequality. Some countries, few in number, have in recent decades made great strides in development and have joined the elite club of the richest. But poverty is still a major problem globally. It is not clear that the current orthodoxy and its influence on economic policy-making is sufficient to solve this in a sustainable fashion, in which the environment is protected even as humanity advances.

Keynes on inequality

As the last post before Christmas, here is Keynes on inequality and economics, taken from his General Theory. Some sound thoughts to dwell upon in today’s society:

“For my own part, I believe there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present.”

The philosophy of economic policy-making: Keynes on ‘The End of Laissez-Faire’

keynes

John Maynard Keynes

Should government intervene in economic life? In advanced countries it does so extensively. Laissez-faire literally means ‘let (it/them) do’ or ‘let go’ and is a doctrine which preaches non-interference by government in the economy. In my view, it is not so much whether or not government should in many cases intervene, but how.

Here is Keynes, writing in 1926:

“It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.”

From right to left, rich country governments often intervene to curry favour with particular interest groups. Sometimes these might come close to some kind of majority, though they often do not. This kind of intervention, while it is in some cases regrettable, is probably inevitable, especially in democracies with their constant pressure for politicians to respond to events.

To quote Bill Clinton when he first ran for president, ‘it’s the economy stupid’: the material conditions of life are part of our modern conception of ‘well-being’. If the economy is failing the many, governments can and must act to improve things. Across the world they failed to see the 2008 financial crisis coming, and could only really prevent it becoming another Great Depression. This was better than no response at all, or ‘laissez-faire’. Despite unprecedented intervention, at least for while, we still have not shaken off the legacy of this crisis, despite some degree of recovery in the US and UK.

Economics would therefore be better off termed political economy, as it used to be. This would help to make it clear that issues such as power, conflict, inequality and justice and the attempts to grapple with them by politicians and citizens, as individuals or as social groups, are inevitably connected with economic life as it moves along.

Philosophy of mind and ideas in economics

Alfred_Korzybski

All theories and models generated by the human mind and brain are simplifications of reality. They of necessity leave out information in order to make analysis manageable and useful.

This is true of all human thinking, not just in economics. Beliefs, values,  theories and models are all products of human consciousness and are apparently accepted and used when they prove useful, at least to some people!

All schools of economics, whether they emphasise mathematical methods or simply the written word, must necessarily simplify reality. As Alfred Korzybski (pictured above) proclaimed: ‘the map is not the territory’. A map to the scale of 1:1 would be impractical, so mapmakers simplify in order to provide a useful product. Continue reading