Saturday, November 30, 2019

Steve Keen on Keynes and Keynesianism

This is an older and short video in which Steve Keen is interviewed, and gives a short summary of Keynes’ economic ideas:

An important issue is Steve Keen’s point that Neoclassical synthesis Keynesianism was a misguided and distorted development of the General Theory and Keynes’ later articles, even though Keynes did allow this to happen in Chapter 18 of the General Theory, where he played down the role of uncertainty (as had been stressed in Chapter 12). As King notes, if Keynes had strongly maintained the crucial role of uncertainty, this would simply have “ruled out any stable functional relationship between investment and the interest rate” (King 2002: 14). The door was thereby left open for neoclassical synthesis Keynesians to reformulate the General Theory as a general equilibrium model where the interest rate has a pivotal role (King 2002: 14). On this issue, see my post here.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Friday, July 19, 2019

Keynes’ Life: 1931

I give an account below of Keynes life in 1931.

January–May 1931
On 27 January 1931, Friedrich Hayek arrived in London at the London School of Economics (LSE). Hayek gave four evening lectures at 5 p.m. from 27 to 30 January 1931 on “Prices and Production” (Howson 2011: 196), and these lectures were later published in England as the book Prices and Production (September 1931), an exposition of the Austrian Business Cycle Theory (ABCT). Hayek himself had returned to Austria by 14 February 1930, but he moved to Britain to take up a visiting professorship at the LSE in October 1931. Keynes did not attend Hayek’s LSE lectures, but Nicholas Kaldor had been at the LSE since April 1927 (to undertake a BSc. in economics), and presumably attended.

From winter 1930–1931 and the spring of 1931, Keynes was involved in drafting the report of the Macmillan Committee (Moggridge 1992: 509). This report was signed by Keynes on 29 May and made available on the 13 July 1931 (Moggridge 1992: 511).

On 15 January 1931, in a radio broadcast, Keynes pointed to the problem of a lack of public and private spending as a major role in causing the depression, and urged increases in public and private spending to lower unemployment (Skidelsky 1992: 383–384).

Keynes helped to organise the merger of the New Statesman and the Nation in January–February 1931, and Keynes himself became chairman of the combined board in February until he died (Moggridge 1992: 508). On the 7 March 1931, Keynes published an article called “Proposals for a Revenue Tariff” in the New Statesman and Nation, which presented the case for protectionism in Britain (Moggridge 1992: 509). Keynes proposed a tariff of 15% on manufactured and semi-manufactured imports and 5% on foodstuff imports, mainly to reduce the need for budget cuts or tax increases (Moggridge 1992: 512–513). Lionel Robbins wrote a reply to Keynes’ case for protectionism, published on 14 March 1931 (Howson 2011: 198).

In late February Keynes became ill with tonsillitis and influenza (Skidelsky 1992: 389).

On 4 May 1931, Piero Sraffa was appointed as Marshall Librarian at Cambridge.

From May to July 1931, Nicholas Kaldor attended the summer term at the University of Vienna as part of his research studentship at the LSE (Thirlwall 1987: 23), and on 1 August 1931, Kaldor was first appointed to a temporary lecturing position at the LSE (Thirlwall 1987: 27; in October 1932, Kaldor became a permanent Assistant Lecturer).

June–11 July 1931: Keynes in America
On 30 May 1931, Keynes sailed for New York with his wife and his visit lasted from June–11 July 1931. Keynes spent two weeks in New York and met numerous officials and bankers including Walter Case and Eugene Meyer (president of the Federal Reserve Board) (Skidelsky 1992: 390).

Keynes had been invited to the Harris Foundation seminars at the University of Chicago (an annual event) where he was to give a talk called “Unemployment as a World Problem” (Moggridge 1992: 518), and he gave three lectures on 22 June, 26 June, 2 July 1931 (Skidelsky 1992: 391).

Keynes was in Chicago from 22 June to 2 July 1931 (Moggridge 1992: 518). Curiously, Keynes, at this stage in his thinking, did not advocate a large-scale public works program in America, but thought interest rate policy should be the main tool for fighting the depression (Moggridge 1992: 518), and Keynes found that some Chicago economists were more supportive of public works programs to bring down unemployment than he was (Skidelsky 1992: 392). Skidelsky has suggested that some Chicago school economists were more “Keynesian than Keynes” in 1931 (Skidelsky 1992: 392).

Keynes spent his last weekend in America in New Hampshire, and on 11 July 1931 Keynes and his wife left New York for England, and during his return voyage Keynes wrote a memorandum called “Economic Conditions in the United States” which was later circulated to the Prime Minister, the Economic Advisory Council (EAC) and the Bank of England (Moggridge 1992: 519).

18 July–December 1931
When Keynes returned to England on 18 July, the 1931 world financial crisis was in progress, and Keynes was generally at Tilton over the months from July to September. On 11 May 1931 (before Keynes had left for America), the Austrian bank Kreditanstalt had collapsed. By late May 1931, the financial crisis had spread to Germany, where the Reichsbank suffered from serious losses of reserves. On 20 June 1931, Herbert Hoover announced the Hoover Moratorium, which was a one year moratorium on German debt re-payments, approved by Congress and, after some initial resistance by France, by fifteen other nations. Hoover also provided $100 million for the Reichsbank. But this did not prove sufficient and by late June and early July a severe external run on foreign exchange hit Germany (Moggridge 1992: 521).

By 13 July 1931, Germany was forced to introduce a two-day bank and stock exchange holiday, after the collapse of the Danat Bank (Moggridge 1992: 521). Britain was also hit by a severe outflow of capital: from July to September the Bank of England lost over £200 million in reserves in its attempt to maintain the pound sterling on the gold exchange standard (Moggridge 1992: 522).

In response to a request for advice from the Prime Minister, Keynes replied on 5 August 1931, and opposed austerity measures and declared that it is “now nearly certain that we shall go off the existing gold parity at no distant date” (Moggridge 1992: 523).

The crisis was so serious that Ramsay MacDonald (British Prime Minister) returned from summer holidays on 11 August, and held emergency meetings and a full Cabinet meeting on 19 August 1931 (Moggridge 1992: 534). Remaining on the gold standard was now impossible for Britain as borrowing in foreign currencies required severe cuts to government spending and tax increases, as the price of borrowing from the Bank of France, the Federal Reserve of New York and J. P. Morgan was their demand to balance the budget (Skidelsky 1992: 395). The conflict within the Labour party also destroyed the Labour government, as the Cabinet voted by 15 to 5 in favour of a revenue tariff, and also a majority would not support more than £56 million of budget cuts (Skidelsky 1992: 395).

In August 1931, there appeared the first of a two-part review of Keynes’ A Treatise on Money by Friedrich von Hayek in the journal Economica. The second part appeared in February 1932. Keynes did reply to Hayek, but the criticisms of Hayek were mostly irrelevant since Keynes soon came to repudiate many of the ideas in the Treatise.

On 24 August 1931, Ramsay MacDonald formed a National Government with the Conservatives, Liberals and a new National Labour group.

The history of governments in Britain in these years can be summarised as follows:
5 June 1929–24 August 1931 – Labour government with Ramsay MacDonald as British Prime Minister
24 August–27 October 1931 – First National Government with Ramsay MacDonald as British Prime Minister with Conservatives, Liberals and a new National Labour group
27 October 1931 – United Kingdom general election
5 November 1931–7 June 1935 – the Second National Government
7 June 1935–28 May 1937 – Stanley Baldwin is Prime Minister of Britain.
On 27 August, the new National coalition government decided to implement a program of austerity, with expenditure cuts and tax increases, and by 10 September 1931 it began to implement these measures.

On 16 September, Keynes addressed a group of MPs in the House of Commons, and he condemned the austerity budget as folly (Skidelsky 1992: 395–396).

But none of the measures adopted by the new National government stopped the capital flight from Britain, and when the Bank of England lost over £18 million on 18 September, it was decided to suspend the gold convertibility of the pound sterling after noon on 19 September 1931 (Moggridge 1992: 527).

On 20 September the government announced that Britain would abandon the gold exchange standard the next day, which then happened on Monday (21 September 1931) when a Gold Standard (Amendment) Bill was passed in Parliament (Moggridge 1992: 527).

Keynes went to London and stayed from 21 September to 10 October 1931, when he attended three meetings of the Economic Advisory Council’s Committee on Economic Information as well as a meeting of the Other Club (Moggridge 1992: 528). Keynes dined with the Prime Minister on 5 October 1931 and then visited Lloyd George at Churt (Skidelsky 1992: 400).

On 30 September, Keynes recorded a British Movietone newsreel, where he defended the suspension of the gold standard and predicted that British trade would benefit from the currency depreciation that resulted (Moggridge 1992: 528). This newsreel was screened in October 1931 and Keynes appeared in many cinemas in Britain, and can be seen here:

It was also in September 1931 that Ludwig von Mises visited London for an annual meeting of the British Association for the Advancement of Science, and Mises attended a dinner held for him at the LSE on 24 September (Howson 2011: 210). In September 1931, Friedrich Hayek also published Prices and Production.

From autumn 1931, a number of students and economists at Cambridge began to meet informally in Richard Kahn’s rooms in King’s College, Cambridge, to analyse and discuss Keynes’ A Treatise on Money. These included Piero Sraffa, Richard Kahn, Austin Robinson, James Meade, Joan Robinson, and Dennis Robertson (Moggridge 1992: 531).

By Lent term 1932 (January–March 1932), these meetings became a formal seminar held in the Old Combination Room of Trinity College, Cambridge, and were known as the “Circus,” though Keynes himself did not attend these meetings and Richard Kahn acted as an intermediary for Keynes (Moggridge 1992: 531–532).

On 5 October 1931, Hayek began teaching at the London School of Economics (LSE) as a visiting professor (Howson 2011: 206). Hayek and his family lived in Constable Close in Hampstead Garden Suburb (Howson 2011: 206).

From late October to November 1931 (in the course of the Michaelmas term at Cambridge), Keynes was ill with heart problems (Skidelsky 1992: 432–433).

Late in the year on 5 November 1931, Philip Snowden stood down as Chancellor of the Exchequer and was replaced by Neville Chamberlain (Chancellor of the Exchequer from November 1931–May 1937). On 27 November 1931, Keynes’ book Essays in Persuasion was published, which included many of his writings and essays from the 1920s onwards.

On 13 December 1931, Keynes addressed a socialist group on “The Dilemma of Modern Socialism.”

Howson, Susan. 2011. Lionel Robbins. Cambridge University Press, New York.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Thirlwall, A. P. 1987. Nicholas Kaldor. Wheatsheaf, Brighton.

Wednesday, July 17, 2019

Keynes’ Life: 1930

I give an account below of Keynes life in 1930, the second year of the Great Depression.

January–May 1930
In January 1930, the second Hague Conference adopted the Young Plan on German reparations, and, as we saw in the last post, Keynes had corresponded with the leading members on the issue of German reparations. By early 1930, Keynes was beginning to think that an international slump was a possibility (Moggridge 1992: 483).

On 19 January 1930, Keynes’ friend Frank Plumpton Ramsey died after an operation for jaundice, which deeply saddened Keynes (Skidelsky 1992: 380).

On 24 January 1930, the British government established an “Economic Advisory Council (EAC),” chaired by the Prime Minister, which included the Chancellor of the Exchequer, the President of the Board of Trade, the Minister of Agriculture, Hubert Henderson (as senior economist), and Keynes, among others (Moggridge 1992: 481–482). This council had its first meeting on 17 February 1930 (Moggridge 1992: 482), and seems to have met once a month (Skidelsky 1992: 363). At the council’s first meeting a further “Committee on the Economic Outlook” was created and Keynes as the chairman (Skidelsky 1992: 363). To add to the confusion, yet another small committee of economists was established on 24 July 1930, with Keynes as the chairman, and Arthur Pigou, Hubert Henderson, Sir Josiah Stamp and Lionel Robbins as the other members, and Richard Kahn as one of the secretaries (Skidelsky 1992: 364). This committee met for the first time on 10 September 1930 (Skidelsky 1992: 364).

We can list these committees in which Keynes was involved in these years as follows:
(1) the Macmillan Committee (Committee on Finance and Industry) (21 November 1929–31 May 1931), chaired by Lord Macmillan (Dostaler 2007: 192).
This committee included Ernest Bevin, Lord Bradbury, R. H. Brand, Theodore Gregory, Keynes, and Reginald McKenna. The Macmillan Committee’s report was completed in May 1931, and published on 13 July 1931.

(2) Economic Advisory Council (EAC) (24 January 1930–1938)

(3) Committee on the Economic Outlook, created on 17 February 1930 with Keynes as the chairman.
This committee held meetings on the 21 March, 3 April, and 1 May 1930 (Moggridge 1992: 495).

(4) Committee of Economists (which met from the 10 September–23 October 1930), established on 24 July 1930, with Keynes as the chairman. This committee produced a report on 24 October 1930 (Dostaler 2007: 192).
In 1930, Keynes also participated to a great extent in the Macmillan Committee (which included Ernest Bevin). He was active in the examination of witnesses and in the production of the final report (Skidelsky 1992: 345), and it was in the debates within the Macmillan Committee that Keynes summarised his current economic thinking as he had developed it in the yet unpublished A Treatise on Money. Keynes also criticised general equilibrium theory by pointing to the relative rigidity of money wages in Britain in the 1920s, and Keynes even came to question whether money wages had ever been highly flexible even in the 19th century (Skidelsky 1992: 347; Keynes did, however, sometimes slip into Neoclassical explanations of money wage rigidity when he invoked the role of unemployment relief in February 1930: Skidelsky 1992: 347).

On 30 March 1930, Heinrich Brüning became Chancellor of Germany, an office which he held from 30 March 1930–30 May 1932. Brüning inflicted an austerity regime on the Weimar Republic, which exacerbated the Great Depression, and which effectively destroyed democracy in Germany.

Meanwhile in March 1930 in Britain, Keynes proposed deficit-financed public expenditure as a remedy to Britain’s economic malaise to the Macmillan Committee (Skidelsky 1992: 353). On 26 March 1930, Sir Ernest Harvey (deputy governor of the Bank of England) appeared before the Macmillan Committee, and Keynes’ role in questioning him, along with others, was considered a disaster for the Bank of England (Skidelsky 1992: 356). Curiously, as a defence against Keynes’ attack on bank policy, Harvey retreated into a version of the Real Bills doctrine and the idea that the Bank of England was mainly responsive to the needs of trade and could not directly control the volume of credit demand, which drifts into the modern endogenous theory of money (Skidelsky 1992: 357). It was in May 1930 that the Treasury official Sir Richard Hopkins appeared before the Macmillan Committee, and used an altered form of the now famous “Treasury View” against Keynes: Sir Richard Hopkins claimed that government deficit-financed public works might cause “psychological crowding out,” that is to say, a blow to business confidence and expectations (Skidelsky 1992: 361). Keynes now was forced to think more explicitly about the role of business “confidence” (or what would later be called “subjective expectations”) in determining investment (Skidelsky 1992: 361).

Skidelsky (1992: 362) notes that the inspiration for Keynes’ General Theory was in part a response to the opposition that Keynes had encountered to his ideas from the British Bank of England and Treasury officials during the Macmillan Committee.

On 23 April 1930, Keynes sent Ralph Hawtrey drafts of the Treatise, but Keynes himself did not have time to mull over Hawtrey’s criticism until November 1930 after the book was published (Moggridge 1992: 483).

In May 1930, the ruling Labour party was split in a great controversy over government policy in relation to the depression and the need for unemployment relief. The crucial figure within the British Labour party was the MP Oswald Mosley, who strongly supported deficit-financed public works programs. On 23 January 1930, Mosley had sent a memorandum to the Prime Minister in which he advocated direct government control of banking, protectionism, and large-scale public works programs financed by deficits (Dorril 2007: 130). These policies, along with an abandonment of the gold standard (which soon happened anyway in 1931), would certainly have cured the Great Depression in Britain. Mosley, influenced by Keynes, was therefore effectively proposing his own “New Deal” for Britain (Skidelsky 1992: 378).

On 8 February 1930, Mosley’s memo was leaked to the newspaper the Telegraph and provoked a minor crisis within the Labour party (Dorril 2007: 131). However, leading figures in the Labour party opposed this. In particular, Philip Snowden (1st Viscount Snowden), who was Chancellor of the Exchequer from 7 June 1929–5 November 1931 – despite being a socialist – favoured free trade, balanced budgets, and rejected public works programs to reduce unemployment. He also favoured export-led growth as a primary solution to the depression. This crisis within the Labour party in May 1930 is dramatised in this movie scene where Mosley appears before the Cabinet and his proposals are dismissed by Snowden:

These bizarre and Neoclassical policies held by influential figures in the Labour government – and in particular the appeal to export-led growth – destroyed the Labour government of 1929–1931, and, remarkably, also wiped out the German Social Democratic Party in Germany by 1933, as they too supported balanced budgets, sound money and crackpot Marxism.

On 28 May 1930, Oswald Mosley gave a powerful resignation speech in the House of Commons (Skidelsky 1992: 364), in which he attacked the Labour government’s “do nothing” policy. That speech can be read here, and Mosley rightly condemned “the belief that the only criterion of British prosperity is how many goods we can send abroad for foreigners to consume” (that is, by export-led growth).

June–December 1930
As the Great Depression deepened, Keynes rejected Marxist dogma that this was the final crisis of capitalism (Skidelsky 1992: 379).

His fundamental optimism – despite the disaster of the depression – can be seen in his essay “Economic Possibilities for our Grandchildren,” which was first given to the Winchester Essay Society, and then as a public lecture in Madrid on 9 June 1930 (Skidelsky 1992: 379). Keynes spent some ten days in Spain and returned to his home at Tilton, South Downs, where he continued to work on the Treatise over the summer (Skidelsky 1992: 380).

Keynes continued to be involved in the Macmillan Committee, which heard witnesses until the end of July 1930 and then adjourned until 16 October 1930 (Moggridge 1992: 495). It was also in July 1930 that Keynes came to endorse industrial protectionism as a policy to protect British industry (Moggridge 1992: 500).

On 25 September 1930, the British Cabinet of the Labour government rejected any further fiscal stimulus by public works and even accepted the need for limiting unemployment insurance (Moggridge 1992: 507).

In September and October 1930, Keynes also continued his work as chairman of the “Committee of Economists,” but the final report on 24 October 1930 was a complex mix of analysis and possible solutions to the economic problems faced by Britain because of the intense disagreements between Keynes, Pigou, Hubert Henderson, and Lionel Robbins (Skidelsky 1992: 374–377; Dostaler 2007: 192). The report was undoubtedly a failure in either advocating or urging any sensible Keynesian policy. Lionel Robbins, in particular, had been advocating the Austrian Business Cycle Theory (ABCT) in his analysis. Astonishingly, leading figures in the Labour party government favoured austerity and free trade, and rejected Keynes’ thinking (Skidelsky 1992: 377).

On 16 October 1930, the Macmillan Committee resumed its meetings normally for two days a week (Moggridge 1992: 507). Keynes took the lead in discussions by November and early December 1930 (Moggridge 1992: 507).

In October 1930, Keynes finally published his short essay “Economic Possibilities for our Grandchildren” in two parts in the The Nation and Athenaeum (see Keynes 1930a and 1930b), which was later reprinted in Essays in Persuasion (London, 1933). I have previously analysed Keynes’ essay here.

Keynes’ A Treatise on Money was published on 24 October 1930. I will not describe Keynes’ arguments in this book in detail. In brief, Keynes still assumed in this book that there were long-run forces bringing an economy to full-employment equilibrium; he assumed that investment was the most important driver of a capitalist economy, and that the rate of interest was in turn the main driver of investment (Moggridge 1992: 484–486). Keynes also adopted versions of Knut Wicksell’s concepts of the natural rate of interest (the rate at which savings would equal investment) and the market rate of interest (Moggridge 1992: 486).

Dorril, Stephen. 2007. Blackshirt: Sir Oswald Mosley and British Fascism. Penguin Books, London and New York.

Dostaler, Gilles. 2007. Keynes and his Battles. Edward Elgar, Cheltenham.

Keynes, John Maynard. 1930a. “Economic Possibilities for our Grandchildren II,” The Nation and Athenaeum 48.3 (October 18): 96–98.

Keynes, John Maynard. 1930b. “Economic Possibilities for our Grandchildren II,” The Nation and Athenaeum 48.2 (October 11, 1930): 36–37.

Keynes, John Maynard. 1933. Essays in Persuasion. Macmillan, London.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Saturday, July 13, 2019

Keynes’ Life: 1929

I give an account below of Keynes life in 1929, the year in which the Great Depression began.

January–May 1929
Keynes taught at Cambridge in the first half of the year. The teaching periods at Cambridge were divided into three terms:
October–December – Michaelmas
January–March – Lent or January term
April–June – Easter term.
On 18 January 1929, Ludwig Wittgenstein returned to Cambridge, and Keynes met him when he arrived, and allowed Wittgenstein to share his rooms at Cambridge until February 1929 (Skidelsky 1992: 291).

From 9 February to 7 June 1929, an international committee met to propose changes to the German reparations system, which was chaired by Owen D. Young, and called the Young Committee (Moggridge 1992: 476). Keynes corresponded with the leading members on German reparations and published a famous article called “The German Transfer Problem” in the Economic Journal of March 1929 (Moggridge 1992: 476–478).

Keynes also visited the Treasury on 7 March 1929 and recommended raising the bank rate to attract more capital from abroad (Skidelsky 1992: 302).

From March 1928 until the UK general election of May 1929, Keynes strongly supported David Lloyd George’s Liberal program of deficit spending and public works to cure the problem of high unemployment in Britain (Skidelsky 1992: 297). It was at this stage that the British Treasury formulated its so-called “Treasury View” opposing debt-financed public works. Curiously, the ruling British government included some ministers like the Home Secretary (Joynson-Hicks) who favoured large public works programs in February 1929, and so the Treasury fought both these proposals and those of Keynes and Lloyd George (Skidelsky 1992: 299). Keynes attacked the “Treasury View” in an unsigned article in the Nation of 23 February 1929 called “The Objections to Capital Expenditure” (Skidelsky 1992: 299). Keynes identified two “leakages” of savings which caused disequilibrium between savings and investment, as follows:
(1) leakage of savings into financial asset markets (that is, the stock, share and bond markets) where this money is not spent on real capital investment, and

(2) leakage of savings overseas into foreign investments (Skidelsky 1992: 299).
Keynes maintained that therefore there were savings available in Britain for deficit-financed public works programs (Skidelsky 1992: 301). Winston Churchill, as Chancellor of the Exchequer, also defended the Treasury view in his budget speech of 15 April 1929 (Moggridge 1992: 462).

On 10 May 1929, Hubert Henderson and Keynes published Can Lloyd George do it?, a pamphlet in support of Lloyd George before the UK general election of 1929. In this pamphlet, Keynes and Henderson pointed to the “cumulative force of trade activity” as a further argument in favour of deficit spending, and this eventually inspired the concept of the “multiplier” formulated by Richard Kahn in the summer of 1930 (Moggridge 1992: 464).

In the UK general election of 30 May 1929, Keynes expected the Liberal party to do well in the election and win at least 100 seats (Skidelsky 1992: 306), but the results, summarised below, disappointed him:
Party | Leader | Seats Won
Conservative | Stanley Baldwin | 260
Labour | Ramsay MacDonald | 287
Liberal | David Lloyd George | 59.
The UK Labour Party under Ramsay MacDonald won 287 seats, and formed a government, with Ramsay MacDonald as British Prime Minister from 5 June 1929–7 June 1935, but proved disastrously inept and stupid, as it supported austerity when the Great Depression hit Britain.

Keynes was so disappointed that he never attended a Liberal Summer School event ever again (Moggridge 1992: 464).

June to December 1929
Since summer 1924, Keynes had been occupied in writing A Treatise on Money, and his work continued into the summer of 1928 and 1929. With his Easter teaching term over at the end of June 1929, Keynes returned in summer to working on the Treatise on Money. Keynes spent much of the summer at his house in Tilton, South Downs near Lewes, and engaged in writing his Treatise (Skidelsky 1992: 338).

Keynes had taken possession of Tilton house on 3 March 1926, rented on a 21 year lease (Skidelsky 1992: 214). It was in Tilton house that Keynes and his wife Lydia would spend their Christmas and Easter holidays and two and a half months during the summer (Skidelsky 1992: 217).

From 19 to 29 July 1929, Keynes travelled to Geneva, where he gave four lectures at the School of International Studies (Moggridge 1992: 479), having been invited by the Financial Section of the League of Nations (Skidelsky 1992: 338). He and his wife Lydia then had a holiday in Burgundy in August (Skidelsky 1992: 338).

After his return to Britain during summer, Keynes had an active social life, and he appears to have taken part in a BBC broadcast, a dinner with Lloyd George at his house in Churt, and a meeting with Oswald Mosley (the new Chancellor of the Duchy of Lancaster). This was long before Oswald Mosley became a fascist, and at this time Mosley was a rising figure in the British Labour Party (which he had joined in March 1924), and a Member of Parliament for Smethwick (21 December 1926–27 October 1931). In 1929, Mosley was appointed by Ramsey MacDonald to the position of Chancellor of the Duchy of Lancaster (a post without Portfolio and outside the Cabinet), but was tasked with solving the unemployment problem in Britain, which had been high since the early 1920s. On 4 September 1929, Keynes met Mosley in London and discussed the problem of unemployment (Skidelsky 1992: 339).

In August, Keynes decided that many chapters of A Treatise on Money needed to be re-written and he also decided to divide the work into two volumes (Moggridge 1992: 479). In mid-November, Keynes allowed Arthur Pigou and Dennis Robertson to read and comment on his new draft of the Treatise (Moggridge 1992: 480). However, it was not until the next year that Keynes’ A Treatise on Money was published, on 24 October 1930.

Before August 1929, Richard Kahn, who was Keynes’ student, also began to assist Keynes in the development of his thinking on economics (Moggridge 1992: 480). Moreover, it was in October 1929 that Joan Robinson and Austin Robinson returned to Cambridge, and from 1929 to 1930 Joan Robinson attended Piero Sraffa’s lectures (Sraffa had arrived in London in July 1927 after fleeing Italy).

Keynes did not predict, or foresee, the Great Depression of 1929–1933 (Moggridge 1992: 478; Skidelsky 1992: 338).

It was in October that two severe corrections hit the New York stock exchange, as follows:
24 October 1929 – “Black Thursday” on the New York stock exchange, the beginning of the US Stock Market Crash of 1929

29 October 1929 – “Black Tuesday” on the New York stock exchange.
When the first Wall Street Crash occurred on 24 October 1929, Keynes was surprised. Indeed, in an article in the New York Evening Post, Keynes appeared to think that monetary policy would eventually correct the problem (Moggridge 1992: 480).

Keynes’ investments also suffered heavily from falling stock and commodity prices, so that by late 1929 his new worth dropped from £44,000 to £7,814 (Skidelsky 1992: 342).

On the 5 November 1929, the UK Treasury created a “Committee on Finance and Industry,” chaired by Lord Macmillan (and therefore called the “Macmillan Committee”), to which Keynes was appointed, and its first meeting was on 21 November 1929 (Moggridge 1992: 481). This committee was an inquiry into banking and finance, amongst other things. Keynes even met Ramsey MacDonald, the British Prime Minister, on the 25 November, the 9 December and 16 December, to discuss economic issues (Moggridge 1992: 481).

Later on 24 January 1930, the British government established an “Economic Advisory Council (EAC),” chaired by the Prime Minister, which included the Chancellor of the Exchequer, the President of the Board of Trade, the Minister of Agriculture, Hubert Henderson (as senior economist), and Keynes, amongst others (Moggridge 1992: 481–482).

Keynes was now a government adviser, and he had to attend sixty-five meetings related to these committees between November 1929 and September 1930 (Moggridge 1992: 482). Keynes was especially active in the Macmillan Committee (which included Ernest Bevin), both in the examination of witnesses and in the production of the final report (Skidelsky 1992: 345).

From 1929 to 1931, Keynes lost interest in the now small Liberal Party and its politics (Skidelsky 1992: 344).

Keynes gave the Ludwig Mond Lecture at Manchester University on 7 November 1929, and noted the relative rigidity of money wages, and particularly how money wages were determined by “social and historical forces,” and not by marginal labour productivity (Skidelsky 1992: 347).

In December 1929, Richard Kahn, Keynes’ student, submitted his dissertation called “The Economics of the Short Period,” and Kahn became a Fellow at King’s College in March 1930 (Moggridge 1992: 480).

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Thursday, July 11, 2019

Victoria Chick on the History of Post-Keynesian Economics

Victoria Chick gives a talk here on some aspects of the history of Post-Keynesian economics. This talk appears to have been given in 2018:

Thursday, January 17, 2019

Proto-Keynesians in the Last Years of Weimar Republic Germany

It is well known that the Great Depression hit Weimar Republic Germany particularly hard. There was severe unemployment, and the wage and price deflation was also severe, as can be seen in these graphs (with data from Mitchell 1992):

Moreover, the wage and price deflation did not bring about a rapid or effective recovery. Austerity policies clearly failed in the Weimar Republic, and a number of German businessmen, bureaucrats, journalists, and unorthodox economists were driven to advocate the only real policy solution that had not been tried: namely, unemployment relief and stimulus of the economy by large-scale deficit spending and public works programs.

Proto-Keynesian ideas were already being advocated in Germany before 1933 by the following people:
(1) Wilhelm Grotkopp (a business journalist) and Heinrich Drädger (a businessman) through the organisation they created in November 1931 called the Studiengesellschaft fur Geldund Kreditwirtschaft (Society for the Study of Money and Credit).
Both Grotkopp and Drädger held PhDs in economics, and advocated countercyclical fiscal policy in various meetings of their society in 1931 and 1932 and in writings for the public (Garvy 1975: 398).

(2) Wladimir S. Woytinsky (a statistician of the German Trade Union Federation).
Wladimir S. Woytinsky had been a Russian Bolshevik and then Menshevik who had fled to Germany in 1922. In 1931, Woytinsky published a paper in a German trade union journal supporting a credit-financed public works program for Germany (Garvy 1975: 399). This paper was called “Aktive Weltwirtschaftspolitik” (Arbeit 6 [June] 1931). In 1931 and 1932 Woytinsky continued a public campaign thorough the media to support his proposals, and he enlisted the support of Fritz Tarnow (who had already endorsed expansionary spending in a book) and Fritz Baade (head of a government agency for agricultural marketing). The plan was dubbed the “WTB Plan” (from the initials of Woytinsky, Tarnow and Baade).

(3) Ernst Wagemann (the head of both the Reich’s Statistical Office and the Institute of Business Cycle Research).
In 1932, Ernst Wagemann advocated a plan for reducing unemployment by deficit-financed public works programs in a book called Geld- und Kredit Reform (Berlin, 1932).

(4) Wilhelm Lautenbach (an official in the Ministry of Economics).
Wilhelm Lautenbach had in September 1931 advised the Weimar government to use bank credit for public works programs to relieve unemployment in a memorandum called “Moglichkeiten einer Konjunkturbelebung durch Investition und Kreditausweitung” (Opportunities for Economic Recovery through Investment and Credit Expansion).
These proposals to use fiscal stimulus and public works received varying degrees of support from other intellectuals in Germany such as Adolph Lowe, Emil Lederer, Werner Sombart, F. Baade, and G. Colm (Garvy 1975: 398).

In particular, the deficit-financed public works proposals of W. S. Woytinsky are interesting, and deserve further analysis.

Woytinsky had even corresponded with Keynes in December 1931, and requested that Keynes participate in an international trade union committee which Woytinsky thought would endorse his ideas (though the Board of the International Labour Federation failed to endorse or examine Woytinsky’s plan: see Garvy 1975: 400).

Keynes replied that his spoken German was not good enough and he was too busy to be involved in this endeavour (Garvy 1975: 401). A modified version of Woytinsky’s plan was later formally adopted by the German Trade Union Federation in April 1932 (Garvy 1975: 401), but, astonishingly, the German Social Democrats and their prominent Marxist intellectual Rudolf Hilferding refused to give Woytinsky’s plan any support (Garvy 1975: 401).

One can only marvel at how stunningly worthless the German Social Democrats were during the last years of the Weimar Republic in Germany, in that they shunned the only real economic policy that could have rapidly ended the Great Depression. A similar state of affairs occurred in Britain, where the British Labour party endorsed Neoclassical austerity and also shunned Keynesian policies to end the Great Depression in Britain.

In a meeting between Wladimir S. Woytinsky and the German Social Democrats in August 1932 in which Woytinsky’s plans for public works programs were discussed, the monumentally stupid Marxist Rudolf Hilferding rejected Woytinsky’s ideas to end unemployment by public works, because, he maintained, this was not a Marxist policy (Berman 2006: 114).

Wladimir S. Woytinsky later wrote an account of the meeting in his autobiography:
“The [sc. WTB] Plan gained more and more popularity in the nation [sc. in 1932], but the S-D party remained adamant and refused to use the slogan of public works in the Reichstag election campaign in July, 1932. It preferred to stick to Brüning’s guns — defense of the currency. The results of the election were catastrophic for the Republic. The Nazis gained more than one third of all the votes and 230 seats out of the Reichstag’s 568. The new Reichstag had a clear anti-republican majority of Nazis and Communists and was unable to form a republican government. All parties began to brace themselves for a new appeal to the voters.

Leipart called me to his office. ‘The party,’ he told me, ‘has agreed to meet with us to discuss the plan of public works. There will be forty party representatives and as many from the labor unions. Will you prepare our case for the conference?’

I asked Gerhard Colm, a scholar of national reputation, not connected with the labor movement, to be our reporter. The party named [sc. Rudolf] Hilferding as its spokesman. I was slated to open the panel discussion with a rebuttal of Hilferding’s arguments.

The conference was held in a large room in the Reichstag building. Everyone sat around a horseshoe-shaped table covered with green cloth. Wells occupied the chair, with the union people at his right and the Reichstag members at his left. Red in the face, he opened the discussion grimly. ‘It is time to end this silly dispute. Inflation-deflation, public works ... I do not know what. . . . This non-sense must be stopped.’

Colm spoke in an academic way, developing a theory that since has become commonplace. The price level and volume of economic activities can be regulated by monetary and credit measures. Public works is the best, and politically the most expedient, approach to the problem.

Hilferding was the next speaker. ‘Colm and Woytinsky,’ he said, ‘are questioning the very foundations of our program, Marx’s theory of labor value. Our program rests on the conviction that labor, and labor alone, creates value. Prices deviate from labor values under the impact of the interplay of supply and demand. Depressions result from the anarchy of the capitalist system. Either they come to an end or they must lead to the collapse of this system. If Colm and Woytinsky think they can mitigate a depression by public works, they are merely showing that they are not Marxists.’

My first thought was that Hilferding could not have taken that nonsense seriously. Obviously, he had a limitless contempt for his listeners and did not condescend to argue before them but appealed to the cliches in their brains. A score of deputies listened to him as to an oracle. Wells sat motionless in his armchair, his eyes closed and his head sunk on his breast. Hilferding ended with an appeal to the party to rise united to the defense of a sound currency and Marxism.

I began my rebuttal. ‘The flood of unemployment is rising, the people are at the end of their patience. The workers, holding us responsible for their misery, are deserting the party to join the Communists and Nazis. We are losing ground. There is no time to waste. Something must be done before it is too late. Our plan has nothing to do with any particular value theory. Any party can execute it. And it will be executed. The only question is whether we take the initiative or leave it to our enemies.
It is not true — ’

I felt that I was gaining the audience, but suddenly a deafening noise came from the head of the table. Wells was pounding the desk with both fists and shouting, ‘Shut up! I will not permit — ’

‘You will not permit what?’ I asked in consternation.

‘You said it is not true.’ If what Hilferding said is not true he must be a liar! I will not permit — ’

Hell broke out, a dozen people shouting. Wells fell back into his chair, with closed eyes and his head sunk on his breast, sound asleep. Leipart asked me to continue, but the effect of my speech was completely lost. I elaborated the technical and financial aspects of the Plan. Nobody listened — for the union people this was old stuff and the Reichstag deputies did not care. After a few remarks from both sides, Leipart put the ADGB plan to a vote. All the representatives of the unions raised their hands in favor of it, all the representatives of the party except Baade voted ‘nay.’

The break between the party and the unions was complete.” (Woytinsky 1961: 470–472).
So, at this meeting, the Social Democratic party doomed itself to continuing electoral disaster, and revealed itself to be in the grip of deranged Marxists, who, urged on by Hilferding, were united in the defence of “sound currency [!] and Marxism.”

In contrast, the left-wing of the Nazi Party led by Gregor Strasser supported a large-scale public works program called the “emergency program” in May 1932, when Strasser had given his famous “Work and Bread” speech in the Reichstag. Here we must remember that the actual name of the Nazi party was the “National Socialist German Workers’ Party” (Nationalsozialistische Deutsche Arbeiterpartei or NSDAP), and it did have a real anti-capitalist wing around Gregor Strasser called the Strasserites, who were purged in the Night of the Long Knives (29 June 1934).

The endorsement by Gregor Strasser of a proto-Keynesian policy to end unemployment in Germany in May 1932 was surely one factor in the electoral success of the Nazi party in July 1932, when the party won 37.3% of the vote in the Reichstag elections.

Of course, it is well known that when Hitler became chancellor of Germany in 1933, he began to enact large-scale deficit spending which financed public works programs, civilian spending and rearmament.

Years later, the Post Keynesian economist Joan Robinson – in an article in 1972 – pointed out the following:
“I do not regard the Keynesian revolution as a great intellectual triumph. On the contrary, it was a tragedy because it came so late. Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred.” (Robinson 1972: 8).
However, Joan Robinson was not quite right here, because the inspiration for these policies, as we have seen, did not originally come from the Nazis, but from German businessmen, bureaucrats, journalists, unorthodox economists and from Wladimir S. Woytinsky, who had been, before coming to Germany, a literal Russian Bolshevik and Menshevik in the Soviet Union.

The Nazi deficits from 1933 were hidden and kept secret by means of special bills called Öffa bills and MEFO bills which were redeemable at the Reichsbank for reserves by German banks. The most important of these bills was the MEFO bill, issued by a dummy company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). For an extended discussion of MEFO bills and Hjalmar Schacht’s ingenious controls on foreign exchange and trade, see here.

The real lesson here is that the sheer catastrophe of the Great Depression in Germany forced original thinkers to the only solution left that could actually work: large-scale deficit spending and public works programs.

As I outlined in a previous post on pre-1938 fascist Austria here, history ran a most fascinating experiment for us from 1933 to 1939: in Austria, the clerical fascists pursued austerity with wage and price deflation from 1934 to 1937, partly under advice from Ludwig von Mises, while in Germany from 1933 the National Socialist government of Hitler implemented deficit-financed stimulus and public works programs and other highly effective economic interventions (such as restrictions on imports and rationing of foreign exchange to overcome balance of payments problems). Germany rapidly recovered from the Great Depression.

The best way to illustrate this is simply by looking at a graph of both Austrian and German unemployment from 1928 (with German unemployment rate from Mitchell 1992: p. 160 and 163, B2, and Austrian unemployment from Stiefel 1979: 29):

This speaks for itself.

Berman, Sheri. 2006. The Primacy of Politics: Social Democracy and the Making of Europe’s Twentieth Century. Cambridge University Press, Cambridge.

Garvy, George. 1975. “Keynes and the Economic Activists of Pre-Hitler Germany,” Journal of Political Economy 83.2: 391–405.

Mitchell, Brian R. 1992. International Historical Statistics: Europe 1750–1988 (3rd edn.). Stockton Press, New York.

Robinson, Joan. 1972. “The Second Crisis of Economic Theory,” The American Economic Review 62.1–2: 1–10, at p. 8

Stiefel, Dieter. 1979. Arbeitslosigkeit: soziale, politische und wirtschaftliche Auswirkungen – am Beispiel Österreichs 1918–1938. Duncker & Humblot, Berlin.

Woytinsky, Wladimir S. 1961. Stormy Passage: A Personal History through Two Russian Revolutions to Democracy and Freedom: 1905–1960. Vanguard Press, New York.