For connoisseurs of biography, Robert Skidelsky’s projected three-volume work, John Maynard Keynes, will rank with the best of the genre. The first volume appeared over a decade ago under the subtitle Hopes Betrayed. The second volume, under review here, surpasses the first. The third is not yet finished.

Like its predecessor, volume two is a masterpiece of narrative, providing superb analysis of Keynes’ life and times and economic theory. Readers will learn of Keynes’ contribution to both the arts and the Bloomsbury Group. And while Skidelsky’s prose style is lucid enough not to discourage nonspecialists, serious students of economies will find themselves riveted to his description of the theoretical aspects of one of the most fertile and turbulent eras in economic thought.

For many today, it is difficult to reconstruct the deep ideological struggle that erupted during the Great Depression, when the already high unemployment that haunted Europe in the difficult period of adjustment following World War I exploded into mass unemployment, and when international trade, the engine of growth and employment, broke down, separating nations into self-contained units. As radical predictions by national and international socialists seemed to have been realized, fascist and communist movements were catapulted to the cutting edge of history. Ordinary democracy and capitalism were not only in disrepute, but the theories of Burke and Adam Smith were treated as outdated window dressing for sinister interests. In this milieu, Keynes’ work helped bring back sanity by grasping the immediate issues and trying to turn the tide.

Before touching briefly on Keynes’ economic contribution, I must point out that Skidelsky has unearthed information regarding Keynes’ life and beliefs that is sure to surprise even those already knowledgeable about the man. For example, I was surprised to learn that the great economist read and respected Edmund Burke, and that he not only was impressed with T.S. Eliot but was sympathetic to the poet’s conversion to Christianity, a step Keynes refused to take. Similarly, so great was Keynes’ reverence for the English way of life that he appreciated the dangers of communism when it penetrated the Apostles Society at Cambridge—the society that produced Philby, Blunt, Burgess, and Leo Long—to which Keynes belonged and for which he had great loyalty. Skidelsky tells us that Keynes, who had several homosexual liaisons, ended this part of his life when he married Lydia Lopokova, a Russian ballerina and actress, and that the economist was an inveterate and successful trader in stocks and bonds, both on his own behalf and on that of his Cambridge college. Thus, Skidelsky portrays a side of Keynes that, despite his often rakish ways, represents the best of English life.

As for Keynes, the economist, he not only exhibited his talents early on but took pains from the outset to be something of an iconoclast. This was no small matter, since he held positions in the Treasury during World War I and later at Versailles, positions which gave him invaluable insights into the inner workings of policymaking. An able polemicist and publicist, he was also capable of describing complex issues with great ease and forcefulness, as in his Economic Consequences of the Peace, a tour de force of iconoclasm, astute analysis, and polemical thrust. Political elites distrusted him for that iconoclasm, literary circles for his stinging prose, and economists for being what we now would call a cranky policy wonk. Fortunately for Keynes, he was right enough of the time never to lose his credibility. In 1926, he opposed a return to the Gold Standard, which was too high to be maintained. It collapsed in 1931.

His best work, Treatise on Money, failed to change the world, a feat that was accomplished by his second book, the General Theory of Employment, Interest, and Money, which no one considers his best. And while, as Skidelsky points out, almost none of the General Theory’s concepts is applied by economists today, historians of international trade theory can look back at the Treatise on Money as a milestone along the road to floating exchange rates. Indeed, Milton Friedman once told me that floating currency exchange rates “solved the problem Keynes could not solve.” Skidelsky explains why Keynes could not devise a system of employment generation: he could/not foresee floating rates which allow governments to choose between keeping a present rate or inflating the currency and accepting lower exchange rates (a choice made more or less consciously by the Reagan administration, which allowed the dollar to float downward during the 1980’s as it inflated the currency). For in Keynes’ time, fixed currency exchange rates were essential—as they were until late in the Nixon-Ford years and again during the Reagan era.

But it was the General Theory that shook the world in its day and for which Keynes is famous. The book’s most enduring contribution, Skidelsky writes, was the shift in focus from the economics of the firm, now called “microeconomics,” to an analysis of the national economy as a whole, or “macroeconomics.” It was this macro look at the national economy that most people under age 70 but over 40 had to study in the multitudinous versions of Paul Samuel’s textbook, that dominated discussions in the 1950’s and 1960’s and that informed the econometricians and whiz kids of the President’s Council of Economic Advisers. So entrenched were economic models based on this view that in the halcyon days of the “end of ideology” in the 1960’s a great economist wrote that there was not much more to learn in economics except how to manipulate the various numbers in the models. That Keynesian doctrine held America enthralled until the late 1970’s, lasted well into the 80’s in Thatcher’s Britain, and still survives in Japan. Indeed, until the latter part of the 60’s, many mainstream economists considered Milton Friedman a right-wing nut rather than a serious economic theorist.

Except for his macroeconomic views, most of the Keynesian construct has disappeared. Today exports, not government expenditures, are seen as the engine of growth and expansion of demand. The export multiplier of Keynes’ opponent, Fritz Machlup, has outlasted the Keynesian public works multiplier. Similarly, clarifications of interest rate theory and more sophisticated analysis of technological change have replaced, respectively, Keynes’ theory of liquidity preference and marginal propensity to invest. More importantly, many of the classical theories of the quantity of money and international trade have been restored to their place in the economic curriculum. Thus, what became known as Keynesianism wilted, as the world economy became more integrated and trade recovered from the state trading systems of the 1930’s. What many economists now see—indeed, what some of them saw from the outset—is that Keynes’ “general” theory was really a “partial” theory of certain conditions in international trade: the conditions of economic nationalism of the post-World War I and Depression eras.

This eclipse of many of Keynes’ ideas does not mean that continuing study of his thought is futile, especially for the United States. For just as Britain in the 20’s and 30’s found itself burdened with war debts and a currency that had ceased to be the staple of international trade, so, too, the United States no longer dominates the world economy. Since President Nixon declared in 1972 that “We are all Keynesians now,” the dollar has lost more than 50 percent of its value compared to other currencies, and the national debt and regular deficits are now enormous burdens on our national budget.

Moreover, economic nationalism is not dead. We know that Japan deliberately protects its markets, both directly and indirectly, and that a dollar devaluation of 60 percent against the Japanese yen is but another name for a 60 percent tariff, because it raises the prices in dollar terms of Japanese goods and lowers the prices in yen terms of American goods. The truth is that the world is on the verge of a change similar to the one that occurred before World War I, when the British pound sterling began to waver as the unit of international trade and British dominance no longer was guaranteed. Then Germany challenged Britain and knocked sterling from its place, which it never recovered. Today, the dollar wobbles with no clear challenger established. But, as a World Bank executive recently told me after Secretary of State Christopher’s disastrous trip to Beijing and after President Clinton failed in the GATT talks with France and in forcing Japan to open its markets to American goods, “There is no question that the United States today talks big, but no longer carries a big stick.” Were Keynes alive, he would understand our predicament, as Britain after World War I faced similar conditions.

There are many today who are ardent free-traders. I am among them. However, not a few of us are aware that hope of expanding world trade requires hegemony, and a single guarantor of both peace and debt collection. At least, these have been necessary in the past. Many of us have read the jeremiads against free trade by that old imperialist Leo Amery in his unappetizingly titled book The Washington Loan Agreements of 1946. In short, the specter of nationalism—that for Keynes was reality—still haunts the world, and the United States as a nation would do well to contemplate Britain’s plight in the 1930’s, if for no other reason than that “it could happen here.”

One hopes that those libertarian and “one worlder” advocates of a free trade managed by international institutions are not entrusted with assuring the welfare of the United States in the years to come. One also hopes that there is a Keynes around who understands the difference between what is good for the New World Order and what is good for America. What is good for both is often congruent, but just as often at loggerheads. It takes a steady gaze to walk the thin line between them. Without that steadiness, fears about our position in the world will be realized and American interests and institutions could come under siege even more than they are today. Keynes with his superb intellect comprehended the relationship between policy and theory, economics and national sovereignty. Britain today may not be the richest country in the world, but its institutions endure, thank God. And Keynes deserves some credit for this result.


[John Maynard Keynes, Economist as Savior: 1920-1937, by Robert Skidelsky (New York: Penguin) 768 pp., $34.95]