John Maynard Keynes: Where’s The Genius?! (Part 1)

The following is the first part of my conversation with Benn Steil. Dr. Steil is senior fellow and director of international economics at the Council on Foreign Relations. His latest book is “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.”

ILANA MERCER: Congratulations on a beautifully written book, so carefully researched, with both archival and secondary material. Followers of the Austrian School of economics, as I believe we both are, have a reflexive disdain for John Maynard Keynes. Nevertheless, the portrait you drew of him was powerful and persuasive. For example, it is easy to sympathize with Keynes’ frustration with the American mind—so prosaic and anti-intellectual—during the critical Bretton-Woods negotiations. There is much to admire too about Keynes’ “unrelenting nationalism.” I had never before thought of Keynes as an English patriot, first. You, a Hayekian thinker, managed to humanize J. M. Keynes. How did that happen?

BENN STEIL: Thanks Ilana. I’m a great admirer of Hayek’s writing, as you know, but I’ve never been one to wear the Austrian (or any other) label. More importantly, “The Battle of Bretton Woods” is in large measure a parallel biography of Keynes and Harry Dexter White, and no biographer succeeds in engaging readers of any stripe without empathy towards his subjects. In the case of Keynes, I may not sympathize with his economics in the way that his greatest biographer, Robert Skidelsky, does, but I found it not in the least bit difficult to admire him as a gifted public intellectual and to warm to him as a human being, with all his obvious flaws and foibles. One aspect of Keynes that I tried to bring out is how fundamental his English upbringing and nationalism were to shaping both his economic and political thinking. He was a defective diplomat, no doubt, but he took to the role with ease and enthusiasm.

MERCER: My mistake. You were awarded the 2010 Hayek Book Prize, so I presumed you favored Austrian economics. But back to Keynes. As you reveal, he “never bothered with a [doctorate]; he hadn’t even a degree in economics,” and “he formally studied economics for a brief period” only. (page 61) His election to “a life fellowship at Kings College, Cambridge, at twenty-six” seemed to rely on familial membership in Britain’s intellectual peerage. Yet, as you contend, he amalgamated the qualities of “mathematician, historian, statesman, philosopher” “with a genius that no economist has ever matched.” (page 62) Guide the perplexed, please.

STEIL: It’s important to understand that in Keynes’s day, and particularly in the “Oxbridge” environment in which he was schooled, it was not abnormal to become an economics “don” without a Ph.D. Also, there was and still is a powerful element of “nature over nurture” in Oxbridge thinking about a person’s capacity, and the combination of Keynes’s natural polymorphic intelligence and lineage (his father was a Cambridge economist) no doubt influenced his tutor and patron, the great economist Alfred Marshall. Hayek was critical of what he felt was Keynes’s lack of knowledge of important elements of classical economics, which was – in Hayek’s view – partly due to the fact that Keynes did not read German, which was still an important language for economics theorizing in the late 19th century.

MERCER: By extension, I didn’t see in “The Battle of Bretton Woods” evidence for Keynes’ asserted brilliance. Clearly, John Maynard Keynes possessed an “effortless facility with words.” There were, moreover, a few wonderfully enjoyable quips that showed Keynes to be likeably bourgeoisie. Those of us on the Old Right can identify with what you call Keynes’ “Burkean conservatism.” Namely, his view that “society should never be forced to bend itself to abstract economic principles.” But public works, economic protectionism, cheap money, “deficit-financed government spending,” and “the animal spirits of the spendthrift in the service of boosting “consumption demand”: Where’s the genius in these? Doesn’t Keynesianism simply appeal to the worst in human nature?

STEIL: Keynes, I should emphasize, was not a redistributionist. He wrote, for example, that “the immense accumulations of fixed capital which, to the great benefits of mankind, were built up during the half century before the [first world] war, could never have come about in a Society where wealth was divided equally.” Keynes’s aim was to save capitalism, which we must understand was under great intellectual assault after WWI and the Russian revolution, and particularly during the Great Depression.

MERCER: Twice do you compare Keynes to Albert Einstein, writing that Keynes had “assaulted the intellectual orthodoxy of the economics profession the way Einstein had done with physics two decades earlier.” (pages 3, 89) However, for good or ill, Einstein unearthed laws of nature. Keynes’ theories perverted the natural laws of economics, did they not?

STEIL: I argue in the book that Keynes was transparently mimicking Einstein, whom he greatly admired, in titling his opus magnum “The General Theory” (of Employment, Interest and Money) – as in “The General Theory” of Relativity. Here’s the crux of the problem you touch on (somewhat brutally, in your second batch of questions) – Einstein’s induced laws of physics were falsifiable, whereas Keynes’s laws of economics were not. This is why economists can argue with such passion about the same phenomena decade after decade without the matters ever getting “settled.” I explain in my book economist Jacques Rueff’s critique of Keynes’s critical concept of “liquidity preference,” which underlies the whole intellectual structure of “The General Theory” as a universal theory. It matters who is right – if Keynes is right, then a depression can literally go on forever unless government steps in to substitute for fallen aggregate demand, whereas if Rueff is right, and depressions are manifestations of remediable policy failures (say, inappropriate monetary policy) or institutional blockages, then massive Keynesian fiscal interventions will cause new problems.

MERCER: You omitted another option derived deductively: the Austrian Business Cycle theory of Mises and Hayek, which is most assuredly correct. In any event, let us return to the character of Keynes. In your book you remark that, “What is striking is that Keynes did not support his position with economic theory. It was purely a matter of political viability.” (page 83) In 1917, British Prime Minister David Lloyd George captured the essence of Maynard’s “mercurial” mind, referring to him as an impulsive man who “dashed at conclusions with acrobatic ease,” and “rushed into opposite conclusions with the same agility.” (page 70) Again: Where’s the genius?

STEIL: Well, regarding the first quote you do cut out the middle of the sentence, which said “at this point in time.” The context was 1931, when, as I explain, Keynes’s stimulus ideas were a political nonstarter. So, he publicly backed import tariffs as, what he considered, a second-best policy alternative to revive the British economy in the face of internationally uncompetitive but sticky wages. Keynes, as a scholar, pundit, and government adviser, did dash back and forth during his career between positions he believed were fundamentally right and those he believed were better than the most likely alternative policy stance. As for Lloyd George’s comments, they are spot on. Despite fundamental shifts and reversals through time in Keynes’s thinking on matters such as the virtues of free trade and price and currency stability, his writing sustained one supreme constant: biting disdain toward those who remained wedded to either old heresies, as he saw them, or old orthodoxies. If consistency were a mark of genius, then Keynes was surely not one. But he was right about much in his career – important stuff, like deriving the grave economic and political consequences of British war debts, or of the Versailles treaty – and, when he was wrong, he was typically wrong with sparkling flair.