John Maynard Keynes

M. G. Hayes

• Publisher: Polity
• Year: 2019
• ISBN:
  9781509528288
• Topic: Economics
• Subtopic: Economic Policy
• Edition: 1

John Maynard Keynes is the 20th century's greatest economist. He sparked an intellectual revolution that transformed economic theory and policymaking. This book, written in plain English with minimal mathematics, is a concise and probing account of his major ideas. Keynes, argues Mark Hayes, showed that economics is a science of thinking in terms of models, in which progress depends on recognising when established models have become obsolete and new ones are required. Hayes outlines how Keynes did this, tracing his progression from the 'Classical' model that he inherited through to his masterpiece, The General Theory of Employment, Interest and Money, and beyond. The intellectual narrative is placed in its historical context, from the Versailles Peace Conference in 1919 to Bretton Woods. The final chapters consider the impact of Keynes's legacy, including his relevance to reform of the Euro. This accomplished study is not only a comprehensive introduction for students and general readers, but also a crystal-clear demonstration of how Keynes' thought is vital to understanding why contemporary economics needs to discard its old models and embrace profound change.

1
Why Study Keynes?

Few will deny that John Maynard Keynes (1883–1946) was the most outstanding economist of the twentieth century. Undoubtedly his reputation is based not only upon his scholarship, which remains controversial, but also on his roles as a prominent public figure, as a newspaper journalist and broadcaster, as an official representative of the UK government during the two world wars, and as Lord Keynes of Tilton. Nevertheless he was, first and foremost, a Cambridge economist. He wrote about economics and economists in the following terms:

An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of human nature or institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician. (CW 10, 173–4; references to Keynes's Collected Writings are explained in the Bibliography)

Although Keynes was writing about his mentor Alfred Marshall (1842–1924), he was really describing himself. There are only a handful of other individuals – perhaps Adam Smith (1723–90), David Ricardo (1772–1823), John Stuart Mill (1806–73) or Karl Marx (1818–83) – who might fit the bill. Not many of today's economists are historians; only a tiny minority are philosophers, let alone statesmen. Most are content to be mathematicians.

The Use of Models and Mathematics in Economics

Economics has come to be distinguished from the other social sciences mainly by its use of mathematics rather than by its subject matter. There is a difference between mathematics and numbers. It is true that economics studies quantifiable aspects of human behaviour; yet students of other social sciences, together with the intelligent lay reader who is quite capable of reading a chart, find themselves excluded by the mathematical language of economics.

Economists use mathematics to build models of the real world. Any model, whether physical or mathematical, is necessarily an abstraction from reality. For example, a map is a model of terrain; a map at a scale of 1:1 is not useful. Niels Bohr's model of the atom as a tiny solar system with electrons orbiting a nucleus is not a complete representation of reality, yet it allows us to understand the properties of atoms well enough to do advanced chemistry.

Undergraduate, let alone graduate, degree courses in economics involve learning a series of mathematical models of such complexity that most students have no time or energy left to question their limitations as an explanation of the world around us. Leading employers of economists such as the UK Government Economics Service and the Bank of England have complained that an economics degree no longer equips a student to be an economist outside a self-perpetuating academia. Many economics students are fed up and, remarkably for such short-lived creatures, have organised themselves into a permanent global association, Rethinking Economics, which demands what its name declares: a rethinking of economics.

Yet Keynes himself was a modeller. He wrote to Roy Harrod (1900–78):

It seems to me that economics is a branch of logic, a way of thinking; and that you do not repel sufficiently firmly attempts … to turn it into a pseudo-natural science … Progress in economics consists almost entirely in a progressive improvement in the choice of models. The grave fault of the later classical school, exemplified by Pigou, has been to overwork a too simple or out-of-date model, and in not seeing that progress lay in improving the model …

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases. Good economists are scarce because the gift for using vigilant observation to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one. (CW 14, 296–7)

However, even if economics is a branch of logic, a science of thinking in terms of models, it does not follow that models can be expressed only in mathematics. Keynes writes:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems … Too large a proportion of recent ‘mathematical’ economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols. (CW 7, 297–8)

Furthermore Keynes understood that economics is also an essay in persuasion:

When we write economic theory, we write in a quasi-formal style; and there can be no doubt, in spite of the disadvantages, that this is our best available means of conveying our thoughts to one another. … [Yet in] economics you cannot convict your opponent of error; you can only convince him of it. And, even if you are right, you cannot convince him, if there is a defect in your own powers of persuasion and exposition or if his head is already so filled with contrary notions that he cannot catch the clues to your thought which you are trying to throw to him … Time rather than controversy … will sort out the true from the false. (CW 13, 469–471)

The Models in This Book

As I have noted, modern economics is full of models, most of which are written in mathematical squiggles incomprehensible to the untrained reader. The models in this book are simple. There are a few tables, charts and the odd equation but rather less than is demanded of today's 16-year-old. Economics has to use models to say anything coherent, because everything connects and changes together. Without a model, however simple, we lose our way in a shifting maze.

The use of a simple model leads to the accusation of setting up a straw man in order to demolish it. This is not the intention. The corn model used to explain classical theory in chapter 2 is a simplification of more advanced mathematical models, but not a distortion. The purpose is to show the essence of classical analysis and to demonstrate the power of its central ideas, notably the concepts of competitive equilibrium and marginal productivity.

If those terms make you groan, please ask yourself whether you really want to understand Keynes. His thought cannot be understood, especially in the light of the classical restoration, without understanding the essence of the classical model. You cannot understand his revolution without a grasp of what he was revolting against, let alone of what he actually wrote. Many criticisms of both classical economics and Keynes's are misinformed. As he himself wrote,

The worst of economics is that it really is a technical and complicated subject. One can make approximate statements in a common-sense sort of way which may appear superficially satisfactory. But if someone begins to ask one intelligent and penetrating questions it is only possible to deal with them by means of something much more complicated. (CW 20, 469)

Nevertheless this book tries to make the learning process as painless as possible. Readers who already know what is meant by competitive equilibrium and marginal productivity will find chapter 2 an easy read. The intention is that students beginning economics, students of other social sciences, and interested lay readers should find that chapter 2 equips them with the basic knowledge required to understand the real issues at stake.

The Nature of This Book

This book is a biography of sorts, but not of Keynes the man. There are several hundred books about Keynes. Many better qualified authors have written about his l...