Chapter XXV DID KEYNES RECANT?

1. “The Classical Medicine”

There is a persistent belief among many non-Keynesians that Keynes recanted the doctrines expounded in the General Theory toward the end of his life. The belief is based in part on reported conversations with friends, but the only public evidence I can think of is an article which appeared in the June, 1946, edition of The Economic Journal called “The Balance of Payments of the United States.” Fifteen of its seventeen pages are concerned precisely with the subject of the title. They are a sympathetic study of the balance of payments of the United States and an attempt to forecast what it will be over the next five to ten years. We need not analyze either the arguments or the forecasts in these fifteen pages, which are either irrelevant to our present purpose or outdated. What concerns us are the final two pages. Here Keynes declares:

I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable today to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past.

This passage discloses a dawning suspicion on Keynes’s part that the General Theory may have gone too far. But it still fails to show a real understanding of “the classical teaching.” For there is nothing mysterious or occult about the forces which operate towards equilibrium. They are simply the result, in a system of freedom, of the efforts of producers to maximize their profits and the efforts of consumers to maximize their satisfactions.

Adam Smith’s “invisible hand” was a brilliant metaphor but, rightly interpreted, nothing more than a metaphor. If the individual producer is free to try to maximize his profits, but legally and morally prohibited from doing so by force or fraud, then the only way that remains is for him to try to serve the wishes and needs of the consumer better than his competitors, by offering either better goods or the same goods at lower prices. The result of this free competition among producers and freedom of choice of consumers is to bring about a constant tendency toward equilibrium. And what applies to prices, producing, and consuming applies as well to wage-rates and employment, and to interest rates, saving, and investing.

“Admittedly, if the classical medicine is to work,” Keynes continues, “it is essential that import tariffs and export subsidies should not progressively offset its influence.” This surely looks like a withdrawal of his advocacy of mercantilist restrictions, economic nationalism, and management of “the domestic price level” at whatever cost to foreign trade.

Praising the “sincere and thoroughgoing proposals, advanced on behalf of the United States, expressly directed towards creating a system which allows the classical medicine to do its work,” Keynes concludes: “It shows how much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems, with age-old poisons, that we [the British] should have given so doubtful a welcome to this magnificent, objective approach.” This looks like an almost savage rejection of the doctrines of the General Theory. But Keynes goes on:

I must not be misunderstood. I do not suppose that the classical medicine will work by itself or that we can depend on it. We need quicker and less painful aids of which exchange variation and over-all import control are the most important. But in the long run these expedients will work better and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift from expedient to expedient and never get really fit again. The great virtue of the Bretton Woods and Washington proposals, taken in conjunction, is that they marry the use of the necessary expedients to the wholesome long-run doctrine. It is for this reason that, speaking in the House of Lords, I claimed that “Here is an attempt to use what we have learnt from modern experience and modern analysis, not to defeat, but to implement the wisdom of Adam Smith.”

No one can be certain of anything in this age of flux and change. Decaying standards of life at a time when our command over the production of material satisfactions is the greatest ever, and a diminishing scope for individual decision and choice at a time when more than before we should be able to afford these satisfactions, are sufficient to indicate an underlying contradiction in every department of our economy.

2. The Underlying Contradictions

The greatest underlying contradiction, however, as this passage so clearly reveals, was in Keynes’s own thought. In 1946, as in 1936, he was still trying to reconcile irreconcilables. By “the classical medicine” he could have only meant what Lionel Robbins has called “the System of Economic Freedom,” which Robbins defines as “an urgent demand that... hampering and anti-social impediments should be removed and that the immense potential of free pioneering individual initiative should be released.” ¹ But Keynes wanted both freedom and controls. He wanted free trade and he wanted “exchange variation” and “over-all import control.” That is, he wanted government currency manipulation, exchange control, import quotas and prohibitions which are the very negation of free trade and a free economy. He deplored “diminishing scope for individual decision and choice” at the same time as he continued to advocate all these restrictions on individual decision and choice and failed explicitly to repudiate even his scheme for government control and socialization of investment. He wanted to “implement the wisdom of Adam Smith” and yet to ignore the wisdom of Adam Smith.

What, then, can we say about this “recantation”? The great difficulty with Keynes is how to tell his recantations from his contradictions. His contradictions consisted of incompatible views that he held simultaneously. His recantations consisted of incompatible views that he recognized as incompatible and hence held only successively.

We saw in Chapter XXIII that he swung from free trade to hyper-protectionism (almost to autarky) and back again. In his 1946 article he seems to wish a little of each. In his Treatise on Money he gave definitions of saving and investment which he explicitly repudiated in the General Theory and then tacitly adopted anyway, because they were essential to his arguments. In The Economic Consequences of the Peace, in 1919, he wrote one of the most eloquent warnings against inflation on record,² only to advocate inflation, in the General Theory, as the standard recourse to cure all unemployment, if not as a permanent way of life. And in the General Theory itself (perhaps the central contention of which is that a cut in money-wage-rates cannot cure unemployment and will probably increase it) he blurts out a sentence like this: “When we enter on a period of weakening effective demand, a sudden large reduction of money-wages to a level so low that no one believes in its indefinite continuance would be the event most favorable to a strengthening of effective demand” (p. 265).³

So the 1946 article in the Economic Journal might be set down as just one more contradiction. True, Keynes says some patronizing things in it in favor of “the classical medicine,” but he had already paid, as we have seen, many patronizing compliments to the classical system even in the General Theory.

And yet... There is that phrase, in the Economic Journal article, about “much modernist stuff, gone wrong and turned sour and silly.” What could this refer to except Keynesian theory itself, as interpreted and applied by his more zealous disciples?

Was Keynes, then, in the last year of his life, at least on the verge of recantation? I spoke at the beginning of this chapter of reported conversations with friends or other economists. I shall cite but one:

In my last talk with Keynes, a few months before his death, it was clear that he had got far away from his “euthanasia of the rentier.” He complained that the easy money policy was being pushed too far, both in England and here, and emphasized interest as an element of income, and its basic importance in the structure and functioning of private capitalism. He was amused by my remark that it was time to write another book because the all-out easy money policy was being preached in his name, and replied that he did think he ought to keep one jump ahead.⁴

The situation reminds one of that in The Brothers Karamazov, in which Ivan Karamazov, who has preached a purely “philosophical” atheism and immoralism—“everything is permissible”—finds to his horror that his half-brother Smerdyakov, taking him at his word, has murdered and robbed their father. “I was only your instrument,” says Smerdyakov, “your faithful servant, and it was following your words I did it.... ‘All things are lawful.’ That was quite right what you taught me... For if there’s no everlasting God, there’s no such thing as virtue, and there’s no need of it.”

Keynes was a brilliant man. Much of what he wrote he wrote with tongue-in-cheek, for the pleasure of paradox, to épater le bourgeois, in the spirit of Wilde, Shaw, and the Bloomsbury circle. Perhaps the whole of the General Theory was intended as a huge (400-page) joke, and Keynes was appalled to find disciples who took it all literally.

Wit and satire are dangerous weapons when not used in the service of good sense.

¹The Theory of Economic Policy in English Classical Political Economy, (London: Macmillan, 1952).

² This is the passage beginning with the oft-quoted sentence: “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency” (pp. 235-237).

³ This sentence, of course, comes nearer to a correct analysis than the rest of the General Theory; but it cannot be accepted as it stands. A belief in the indefinite continuance of the lower wage-rates would also lead to a restoration of buying, production, and employment. All that is necessary to cure unemployment due to excessive wage-rates is individual (not necessarily general or uniform) wage-rate cuts just large enough to destroy the conviction or fear that there may have to be still more cuts to come.

⁴ John H. Williams, American Economic Review, May, 1948, pp. 287-288n.