Posted 9:29 PM by Robert

Keynes in the Long Run

The third volume of Robert Skidelsky's biography of John Maynard Keynes, "Fighting for Freedom: 1937-1946" has just appeared and has been reviewed by Sylvia Nasar in the Book Review of today's New York Times. I have not read the book, and do not comment on it here. But the publication and review of this book seems to be an opportune time to discuss Keynes and what seems to be something of a revival in his reputation.

I continue to believe that Keynes has enjoyed (at least among academics and certain others) a reputation far inflated from what he deserves, even as that reputation has waxed and waned. Judging from Ms. Nasar's well-written review, this book appears to be more of the same. Keynes is overrated for one sufficiently overpowering reason: To be great, an economist must address the central concerns of economics, which are how to (i) increase the chance that the correct actors (that is, most efficient or wealth producing) in the economy will receive the power to deploy the economy's real resources, and (ii) create incentives for those actors to make the efficient decision once they have such power. Keynes did not concern himself very much with either of these two central concerns of economics - and his policy recommendations suffer greatly, especially in their generalizability, because of it.

Any economist who fails to grasp and advance these basics must remain a niche intellect, and that is what Keynes really is - a good niche intellect concerned with a certain set of rather specialized problems in finance (notwithstanding the pretensions of the title "General Theory ... "). Keynes should therefore be compared more to Miller, Modigliani, Black, Schoales and people like that. But even in that area of finance I'm not sure Keynes' insights are the most important. (If you work in the finance industry, have you ever used Keynes in your work? How about Black-Schoales?) In part this may be because Keynes had to deal with extreme and rather weird questions and conditions: depression, two wars and the wars' aftermaths. So, while he arguably did a good job cultivating his rather narrow strip of turf, the broader claims made for him seem, shall we say, imperialistic.

Ms. Nasar's review acknowledges his failure - although the review (and, apparently, the book) fails to understand how small Keynes becomes inside of economics because of it. And, oddly, the review and book describe these central concerns of economics (that is, getting resources to their best user and then getting those users to employ the resources in the most efficient fashion) as "social policy"! Here is the full passage from the review with the most important part highlighted in bold:

"[T]he far more likely cause of Britain's failure to keep pace with the war's losers, Germany and Japan, in the decades following World War II -- [was] ...Britain's disastrous postwar experiment with socialism. [Skidelsky] does note, however, that Keynes had curiously little to say about the infamous Beveridge ''cradle to grave'' social security plan, which inaugurated that experiment. Keynes focused exclusively on the plan's affordability, ignoring its potential for wreaking havoc with incentives and efficiency. ''The battle lines on social policy were being drawn up which have raged ever since,'' Skidelsky writes. ''Keynes's incuriosity about this battle is itself curious. The truth seems to be that he was not interested in social policy as such, and never attended to it.''

Note that Skidelsky writes about Keynes' "incuriosity" not as something limited in its scope to the Beveridge fiasco - it was a general "incuriosity" about the basics of economics.

Compare Keynes in this sense with Milton Friedman - who has made huge contributions to finance theory while never losing sight of the biggest picture! Friedman is many times the economist Keynes was. And that doesn't even begin to take into account Friedman's role in fostering and/or creating the whole "Chicago School" of economics.

Much more than (at least pre-Thatcher) British culture, American culture has historically placed greater importance on getting resources to their best user and then giving that user major incentives to employ them efficiently, normally by making the user rich. But the "best user" of a resource is often not a gentleman or a lady - and Keynes didn't like that, and he didn't think it was "British". I think what Skidelsky calls Keynes' curious incuriosity about "social policy" (that is, the central issues of economics) correlates with two of Keynes' more distinctive traits: (1) aversion to Americans (he called them "complete boobies" - although in his defense he was apparently referring to the economic bozos Roosevelt had brought to Washington) and (2) his British "patriotism".

In short, Keynes as a niche player concerned mostly with finance who avoided the central issues of economics that others have labored so brilliantly to address.

Turning from reputation to application, it is instructive to look at a recent application of Keynes' policies: Japan. That country, with neo-Keynesians like Larry Summers cheering them on, has run up a huge national debt to finance mostly counterproductive government public works over the last ten years or so. These efforts were justified as attempts at "pump priming" the Japanese economy. But government is almost NEVER the most efficient user of resources, and government operates under a set of rules that almost NEVER incentivizes it to be efficient. It rather makes sense, then, that this Japanese "pump priming" has resulted in the needless paving of river bottoms, construction of ugly, counterproductive concrete "beach stabilizers" which now mar much of the Japanese coastline accelerating the oceanfront erosion which they were supposed to reduce, construction of thousands of miles of roads where none were needed, and the building of wildly expensive bridges linking some of these roads to fishing villages. Of course, in a depression or war, the counterproductiveness of allowing the government to direct so much of a nation's investment might escape notice or be of lesser significance - at least for a while.

But now? In Japan?

There is a famous story of someone telling Keynes: "But, Mr. Keynes, in the long run your policies cannot possibly work!" To which Keynes wittily replied: "In the long run we'll all be dead!"

Well, now it IS the long run, Keynes IS dead, and the Japanese are stuck with the consequences of his policies.