Indian Defence Review

Introduction

Three economists have straddled the policy space globally, as no one else. Adam Smith, with his invisible hand and free market promoted welfare of all and hoped to bolster wealth of countries. Marx who prophesized death of capitalism under its own weight of contradiction to usher in a utopian classless society. And John Maynard Keynes who understood that automatic equilibrium does not happen always and capitalism can relapse into severe economic depression which can be squelched through public investment and generating additional employment. Such was the case in the US when the national income precipitously fell from 87 billion dollars in 1930 to 42 billion dollars in 1932, when a song was being played, ‘Brother, can you spare a dime?’. By 1933, the nation was virtually prostrate. The jobless millions were like an embolism in the nation’s vital circulation. The economists wrung their hands and wracked their brains and called upon the spirit of Adam Smith, but could neither offer diagnosis nor remedy. The grim prognostication of Marx cast their shadows. The man who tackled it was almost a dilettante. with nothing like a chip on his shoulder. He had written a most recondite book on mathematical probability, a book that Bertrand Russell had declared ‘impossible to praise too highly’. He was an economist, of course, a Cambridge don with all the dignity and erudition that go with such an appointment. He collected modern art before it was fashionable to do so.  He ran a theatre and became a director of Bank of England. He knew Roosevelt and Churchill, and also Bernard Shaw and Pablo Picasso. He had once claimed that he had one regret in life – he wished he had drunk more champagne!

The Early Marx

John Maynard Keynes was born this month in 1883 to a father, John Neville Keynes – a well known economist in his own right. He was born in the very year that Karl Marx died. But the two economists who thus touched each other in time and who were to exert the profoundest influence on the philosophy of the capitalist system could hardly have differed more. Marx was bitter, at bay, heavy and disappointed. He was the draftsman of capitalism doomed. Keynes loved life and sailed through it buoyant, at ease and consummately successful to become the architect of capitalism viable.  He took the civil service examination with an apparent indifference and was second in the list. His lowest mark was in the economics section of the examination. “I evidently knew more about Economics than my examiners,” he explained later – a remark that would be unforgivably presumptuous if it were not in this case entirely true.

Economic Consequences of Peace

The war years brought Keynes to the treasury and assigned to work on Britain’s overseas finances. He was soon a key figure in the treasury and contributed more to winning the war than any other person in civil life. But all this was tangential to the main thing – the settlement of Europe after the war. Keynes was the first to see that the Versailles Treaty of 1919 laid the unwitting goad for an even more formidable resurgence of German autarchy and militarism. He resigned in despair three days before the treaty was signed and began his polemic against it in a brilliant book, ‘The Economic Consequences of the Peace’. He wrote of Clemenceau that ‘he had only one illusion – France, and one disillusion – mankind.’  Keynes saw the conference, a reckless settlement of political grudge of France against Germany in utter disregard of the pressing problem of the moment – the resuscitation of Europe into an integrating and functioning whole. He foresaw the rise of fascism and Hitler to avenge the humiliation of Vienna. He saw the peace to be a Carthaginian one, that would force Germany to resort to the most vicious practices of international trade.

Treatise on Money

He published ‘Treatise On Money’ in 1923 – a long difficult uneven, sometimes brilliant and sometimes baffling attempt to account for the behavior of the whole economy. It was a fascinating book for it took as its central problem, the question of what made the economy so unevenly – now bustling with prosperity and then sluggish with depression. He noticed a vital fact – there is nothing automatic about savings and investment channel. If our savings does not become invested by expanding business firms, then the business outlook is poor. Our incomes must decline. The vulnerability of our faith to the interplay of savings and investment is in a sense the price we pay for economic freedom. The Treatise was a sparkling exposition of the seesaw of savings and investment. The seesaw theory seemed to promise that there would be an automatic safety switch built right into the business cycle itself; that when savings became too abundant, they would become cheaper to borrow and thereby business would be encouraged to invest.

The Magnum opus

But this was exactly what failed to happen in the Great Depression of 1930s. The rate of interest declined but there were no takers. As Crowther writes, ‘you can stop the horse from drinking water, but you cannot make it drink unless it is thirsty.’  Keynes’ magnum opus ‘The General Theory of Employment’ had been brewing for some time. He had written to Bernard Shaw in 1935, ‘I believe myself to be writing a book on economic theory which will largely revolutionize in the course of the next ten years – the way the world thinks about economic problems. He was as usual prescient and right. The book like the economic consequences of 1920 was to be a bombshell. It stood economics on its head, very much as The Wealth of Nations of Smith and Capital of Marx had done.

The General Theory had a startling and dismaying conclusion. There was no automatic safety mechanism. A depression, in other words, might not cure itself at all; the economy could lie stagnant indefinitely like a ship becalmed. Keynes found that there would be no flood of savings at the bottom of the trough. When an economy goes into an economic tailspin, its income contracted the result of a depression would not be a glut of saving, but a drying up of saving; not a flood but a trickle. It actually happened in the US. In 1929, the American private citizenry put aside 3.7 billion dollars out of its income. By 1933, it was saving nothing. The corporations which had tucked away 2.6 million dollars at the top of the boom found themselves losing nearly 6 billion dollars three years later. Quite obviously, Keynes was right; saving was a kind of luxury that could not withstand hard times. No one can blame the society for saving when saving is so apparently a private virtue. It is equally impossible to chastise businessmen for not investing if they saw no reasonable chance for success. The difficulty is no longer a moral one – a question of justice, exploitation or even human foolishness.  It is a technical difficulty, almost a mechanical fault and the price of inactivity is unemployment. Certainly, it was an unsettling outlook. But it would have been utterly unlike Keynes with making a diagnosis of gloom and letting it go at that. With all its prophesy of danger, the general theory was never meant to be a book of doom. On the contrary, it held out a promise and it also proposed a cure.

As a matter of fact, the cure had begun before its actual prescription was written. The medicine was being applied before the doctors were precisely sure of what it was precisely supposed to do. Franklin D Roosevelt’s 100 days of the New Deal had enacted a flood of legislation that was languishing behind a dam of governmental apathy. These laws were meant to improve the social tone, the moral of a discontented nation. However, the tonic was something else – the deliberate undertaking of government spending to stimulate the economy. The government was suddenly a major economic investor in roads, dams, auditoriums, airfields, harbors and housing projects. Keynes came to Washington in 1934 and urged Roosevelt that the New Deal Program should be extended further. He hoped that the government spending would act as a stimulus by bolstering the nation’s general buying power – priming the pump as it was called in those days. When the General Theory came out in 1936, it pointed out that the catastrophe facing America and indeed the whole western world was only a consequence of a lack of sufficient investment on the part of business. And so the remedy was perfectly logical: if the business was not able to expand, the government must take up the slack.

The American people had waited for four long years and they were in no mood to wait much longer. The voice of Marx rang louder than I ever had rung in the past. Many pointed to the unemployed as evidence that Marx was right. There was still more chilling voice that never wearied of pointing out that Hitler and Mussolini knew what to do with their unemployed. In this welter of remedies and advocacy of desperate action, the message of the General Theory, the civilized voice of Keynes, was certainly becalming and reassuring. While Keynes espoused a policy of managing capitalism, he was no opponent of private enterprise. ‘It is better that a man should tyrannize over his bank balance tan over his fellow citizens.’ He had written in the General Theory and went on to state that the government should only concern itself with providing enough public investment, the working of the vast bulk of the economy should be left to the private initiative. During the Second World War, Prof Hayek wrote a book, ‘The Road to Serve Them’ which was a cogent indictment of planned economy of USSR. Keynes wrote to Hayek, ‘what we want is not no planning or even less planning. Moderate planning will be safe enough if those carrying it out a rightly oriented in their own minds and hearts to the moral issue.’

His Closing Years

An IMF and International bank was to be established to act as guardians of international flow of money ; in place of the old dog eat dog world where each nation sought to undercut everyone else. The final conference was held at Brettenwoods. Keynes despite his illness dominated the conference; not when it came to the final point which was closer to the American proposal of Patrick White than Keynes of Britain. He wanted a neutral currency rather than dollar to dominate. Keynes had clearly seen the flipside of Pound Sterling dominance in the first world war. He did not want the history to repeat after the second world war with dollar. Once again he was found to be prescient and economist of enormous foresight .

The Challenge to Keynes

Keynesian economics dominated the field from 1940s until the 1960s. In 1971 Richard Nixon said: We are all Keynesians now. The began a slipping away by the 1980s when it was hard to find an American economist under the age of forty who professed to be a Keynesian. In part, it was a failure to find a satisfactory way of reconciling Keynes’s macro view of the economy, with the Marshallian micro view that emphasized centrality of individual markets. From another consideration Keynesianism was weakened by a resurgence in inflation related questions of money where Milton Friedman brought up centrality of controlling money supply as the panacea to control spiraling inflation in the US in the 70s. Robert Lucas, the Nobel laureate developed the hypothesis of ‘rational expectation ‘ to deepen our understanding of economic policy. From yet another quarters came a growing disenchantment with the activist role of government explicit in Keynes.

Yet Keynesianism never withered There arose in Scandinavia, Germany and the Netherlands and France a pragmatic fusion of macro and micro. It’s a vision which conceives capitalism as the only workable system at hand, but one that could not function satisfactorily without a strong government presence aware of both the needs to compete in an ever more globalized world and of the necessity to provide generous programs of both welfare and education of those who were casualties of that process. The global financial crisis of 2007-08 clearly demonstrated that in a world of greed and unscrupulous speculators, “it led to the bankers’ wellbeing, with the rest of the society bearing the cost “, as Joseph Stiglitz wrote in his book The Price of Inequality”. Both Smith and Keynes overlooked the pernicious side to market forces and the importance to regulate the market.

The Resurgence of the Master

However, the pandemic years (2019-2021) brought a resurgence in the interest in Keynesian precept of fiscal stimulus to combat economic depression. All national leaders like Nixon in 1971 almost swore, ’They were Keynesians’ ,  resorting to fiscal stimulus of varying degrees, even at the risk of triggering inflation, to revive investment, demand and employment. Even a right wing government like BJP in India increased allocation under the MNREGA program to provide employment to displaced migrant government. Keynes was prescient that the government can not wait interminably for an equilibrium of savings and investment to happen. The history of 1930s repeated in 2019-20 . A government wedded to welfare and not abdicating planning came handy. Despite such stellar contribution to the public policy space, Keynes never addressed the issue of distributive justice and the need to expand opportunities for the underprivileged and poorly employed adequately. It is to the credit of Thomas Piketty who is fervently arguing for wealth redistribution through appropriate fiscal measure to stem the menace of rising inequality. India’s right wing zealots sadly do not bite this bullet of distributive justice.