John Maynard Keynes (1883–1946)

Keynes' The Economic Consequences of the Peace is a good companion piece to Margaret MacMillan's Paris 1919. Keynes participated as an expert in the Paris peace treaty negotiations which were mainly one-sided negotiations among the Allies themselves (mainly the French and Italians vs. the Anglo-Americans). The Germans, the Austrians and the Hungarians (the latter had to wait for the Treaty of Trianon in 1920) were only consulted post factum. Keynes holds Woodrow Wilson to be the main show more culprit, considering him to be too slow, ignorant and inflexible. One in a long line of US presidents not ready for the international parquet, whose failure, however, had the gravest of consequences. Similar to Bush's crazy adventure in Iraq, Wilson claimed the high ground of applying only moral and universal principles while counteracting and undermining these with naked power plays. Either an appeal to naked power or a pure application of principles would have worked. It was the mix that was toxic, applying principles only as long as it was convenient.

Keynes also shows that essential parts of the treaty were not grounded in fact. The restrictions and reparations placed on Germany were counterproductive and self-defeating. Depriving Germany of the necessary coal, ships and rolling stock of its railways crippled the economic recovery. The failure of the Allies (and especially the US) to net the internal war debt obligations meant that the weakest nations were plagued with high interest payments. Keynes also advocated for a sort of Marshall plan which surely would have helped Europe recover. Written in shocked frustration about a clearly unworkable treaty, this lean booklet is a fast and concise read that offers lessons what happens when burdens are placed upon third parties without those parties' involvement in the negotiations. Today's efforts to make the PIIGS pay for the bankers' mistakes run into the same calamities that Keynes foresaw in 1919. show less

The heart of this book is engaging as it argues that provisions of the Versailles Peace Treaty are so blindly harsh and unrealistic as to do great harm not only to Germany and its former allies but to all of Europe and the world. Also of interest are the trenchant sometimes unsparing portraits of the then world leaders: Woodrow Wilson, Loyd George, and Clemenceau. Keynes gives a much clearer insight into Versailles and its participants then the somewhat more famous book on the same subject show more by Harold Nicholson. Keynes is a bureaucrat and economist so his many numbers though needed and convincing do slow and punish the reading towards the end. If not remedied the future is portrayed as bleak leading to disaster and this has turned out to be exactly true.

QUOTES: (page 15) “Thus the extraordinary occurrences of the past two years in Russia, that vast upheaval of Society, which has overturned what seemed most stable—-religion, the basis of property, the ownership of land, as well as forms of government and hierarchy of classes---may owe more to deep influences of expanding numbers than to Lenin or to Nicholas; and the disruptive powers of excessive national fecundity may have played a greater part in bursting the bonds of convention than either the power of ideas or the errors of aristocracy.”

(pages 34-35) “According to this vision of the future, European history is to be a perpetual prizefight, of which France has won this round, but of which this round is certainly not the last. From the belief that essentially the old order does not change, being based on human nature which is always the same, and from consequent skepticism of all that class of doctrine which the League of Nations stands fr, the policy of France and of Clemenceau followed logically. For a Peace of magnanimity or of fair and equal treatment, based on such 'ideology' as the Fourteen Points of the President, could only have the effect of shortening the interval of Germany's recovery and hastening the day when she will once again hurl at France her greater numbers and her superior resources and technical skill. Hence the necessity of 'guarantees'; and each guarantee that was taken, by increasing irritation and thus the probability of a subsequent Revanche by Germany...For Clemenceau made no pretense of considering himself bound by the Fourteen Points and left chiefly to others such concoctions as were necessary form time to time to save the scruples of the face of the President.”

(pages 42-43) “But in fact the President had thought out nothing; when it came to practice his ideas were nebulous and incomplete. He had no plan, no scheme, no constructive ideas whatever for clothing with the flesh of life the commandments which he had thundered for the White House.”

(page 146) “Apart from others aspects of the transaction, I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible. To what a different future Europe might have looked forward if either Mr. Lloyd George or Mr. Wilson had apprehended that the most serious of the problems which claimed their attention were not political or territorial but financial and economic, and that the perils of the future lay not in frontiers or sovereignties but in food, coal, and transport....But in any event the atmosphere for wise and reasonable consideration of them was hopelessly befogged by the commitments of the British delegation on the question of Indemnities.” show less

Generally, it seems that Keynes is a left-leaning economist—contrasted with Hayek. But in reading this book, Keynes doesn't make any appeal to ethics. This book is an investigation into the relationship between savings, investment, and capital. Although you could say that, if you follow through with some of Keynes' suggestions, you get pro-social outcomes, this doesn't make him pro-social. Apparently he was actually a very active investor, and quite a wealthy man.

Keynes was a proponent of show more increasing consumption—a prescription that no longer makes sense in our peak-everything world. This also applies to the wealthy, as, if wealthy people don't spend their money, wealth inequality just gets worse and worse.

This book is slow going. In the introduction, he states that his primary audience is economists, so maybe this was to be expected. show less

I found this free at Project Gutenberg and is the first ebook I've read exclusively on my iBooks (instead of Kindle & Kindle apps). I decided it would be great to read it since I just finished Wealth of Nations. My highlights and notes are legion, but Apple/iBooks doesn't put them out on a website for easy copy-and-paste like Amazon does.

This review is not intended to be exhaustive, it's just my main take-aways. Like WoN, the GT is a book you read a lot about but really need to read for show more yourself. In some ways, it's a more difficult read than WoN because some of Keynes' thoughts are underdeveloped and ambiguous. It made me appreciate the Hicks-Hansen IS-LM framework more (particularly with foreign exchange added in later, since Keynes is mainly thinking in terms of a closed economy).

GT needs to be read with a commentary. I used the ever-helpful Ekelund & Hebert textbook, and for the first 12 chapters used commentary from Tyler Cowen (who apparently quit posting after Ch. 12). I didn't have any epiphanies like renowned conservative Judge Richard Posner, who claimed recently reading the book converted him to Keynesianism.

Keynes is primarily dealing with one big weakness in economic thinking: interest rate determination. He explores all historical explanations of interest rates, from Ricardo, Mun, Marshall, Pigou, Wicksell, Von Mises, and many more, and finds them wanting. He contributes his liquidity preference theory to the mix, and shows how that can augment others' previous contributions.

Besides harping on the failure of the classical British school of thought to explain interest rates, he also harps on the classical model's failures in explaining unemployment. Writing from 1936, unemployment had been high for years. His "animal spirits" explanation of fluctuations in Investment is often derided but I don't see how reasonable people could say it's wrong. We've seen 2 very recent examples-- the tech bubble and the housing bubble-- that Shiller and others point out prove Keynes' point.

Even though Keynes blasts his teachers Marshall and Pigou, he also pays tribute to the classical school for its contributions to the world, and his own upbringing. He devotes considerable space in a late chapter, however, to Mercantilists. The free trade arguments of Smith and Ricardo are generally held up as economic Gospel, and as such Mercantilist ideas had been ignored and discarded. Keynes makes the point that the Mercantilists had figured out that by increasing the money supply one could lower interest rates and stimulate the economy-- something the Classical school found abhorrent.

As Milton Friedman later showed, Keynes' biggest problem was his lack of faith in monetary policy to stimulate investment. Everything monetary in Keynes' view revolves around the interest rate. And if the central bank can't get the interest rate low enough to stimulate investment anymore, then you're in the "liquidity trap." This has led to the problematic current thinking of monetary policy being ineffective at the zero lower bound.

Keynes seems to ignore the possibility of creating an excess of money beyond what people want to hold, so that people will eventually spend that money. Output will rise, unemployment will fall, and prices will eventually rise as well. This is why I prefer a Hayek/Sumner idea of a central bank ignoring interest rates and targeting M x V growth instead.

The original sin of Keynesianism is this whole obsession with monetary policy via interest rates. Following that was then Keynes' skepticism of monetary policy to do anything stimulative in his 1936 environment. Which meant that the only other entity left was the government-- hence, he advocated government investment to replace or enhance private investment.

It's not an unreasonable conclusion. If the economy isn't quickly self-correcting and monetary policy is useless, the only way to stimulate investment is to have the government plan to keep it going. Save for a "rainy day" during the boom years, run deficits when the private economy turns downward, and you can keep the party going indefinitely. For Keynes, the trade-off between inflation and unemployment is a long-run one, which Phelps & Friedman later reminded us isn't true.

I liked how Keynes addressed Austrian economic concerns/criticisms at the time. Austrians believe that "malinvestment" is created by keeping interest rates "artificially" low. People wouldn't build houses or purchase other capital equipment if interest rates were higher. But Keynes points out that a) who's to say which investments are mistaken?, and b) by raising interest rates to snuff out the malinvestment, you also snuff out the legitimate investments. Having the government choose investment projects probably wouldn't be any more helpful, but as Skidelsky put it, we can put up with a little bit of government waste if it means getting rid of the waste of human capital that unemployment causes. Keynes solution is to keep the interest rate from rising to prolong the boom indefinitely (and where this fails, enter government investment).

Milton Friedman believed that had Keynes lived longer (to read Friedman and Schwartz's book probably) he probably would have changed his mind about some of his prescriptions, particularly about monetary policy. And Keynes would not have agreed with Keynes' disciples' prescriptions for the U.S. economy in the 60's and 70's. Probably so. But Keynes would have definitely been useful the past few years to remind us that prices aren't going to start really rising until unemployment falls and we get closer to capacity.

Cowen and others point out the numerous errors and mistakes in the GT. That's fine, is there an economic book out there that didn't have errors and mistakes (WoN is full of them)?

But Keynes' contributions in how we think about and teach the macroeconomy are huge. We are indeed all Keynesians now, even though none of us is anymore (Friedman quote again).

I give the book 3.5 stars out of 5. I'm definitely a better macro teacher this semester having read it. show less