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Thursday, February 04, 2021

Review: The Price of Peace - Money, Democracy, and the life of John Maynard Keynes

 I picked up The Price of Peace thinking it was a biography of Keynes, the economist and scholar, but I got something much better, which was a biography of the man's ideas and its evolution and adoption (and lack thereof) over time.

I've long held that macroeconomics and Keynes' approach is a lot more challenging to understand than microeconomics for the same reason that quantum mechanics is a lot of more challenging than Newtonian physics. Your daily life and routines, whether as a child, householder, or manager and CEO are constrained by budgets, income, and spending. Yet at the aggregate level, those are not the constraints involved --- governments can run deficits indefinitely (and frequently do), and policy is driven largely by the sentiments of the people involved.

The key insight that Keynes brings to the equation is the debunking of money and markets as being fundamental:

Money, moreover, was not a custom developed by local traders for convenience but a sophisticated tool of rulership that had emerged simultaneously with other developments of the state, including written language and standardized weights and measures. Smith and other thinkers had been led astray by confusing the development of coinage with the invention of money. Coinage, according to Keynes, was “just a piece of bold vanity…with no far-reaching importance”;42 money had existed in “representative” form much longer. Its real significance was as a “unit of account”—the demarcation of debt and “the legal discharge of obligations,”43 which governments had been maintaining in ledger books (Kindle Loc 3623)

 Keynes thus came to see economic history as a fundamentally political story—the tale of riches conquered and surrendered by political powers as empires rose and fell. Economics, by extension, could not be a bloodless scientific investigation into unshakable laws of nature but only a set of observations about trends in human political arrangements. Economics as a field of study had to adjust to the social behavior of human beings, which might very well change over time. (Kindle Loc 3644)

The Treatise, then, was an all-out assault on the intellectual foundations of laissez-faire. There was no such thing as a free market devoid of government interference. The very idea of capitalism required active state economic management—the regulation of money and debt. Keynes had also defined the aim of economic policy: to set the foundations of an exciting intellectual culture. (Kindle Loc 3668)

One of the big ideas I took away from this book is the history and context of Keynes. It's quite clear that if democracy does not deliver rising prosperity and better standards of living due to market gyrations and machinations (which is largely driven by government policy), then usually it's not markets that lose legitimacy (people live with markets every single day!) but democracy. The rise of dictators in the period between World War 1 and World War 2 was largely because of impoverishment and the loss of legitimacy of democratic governments to solve the economic problems of the masses, rather than an inherent cultural problem with people's attitudes. (The same Germans who fought for Hitler also built an amazing post-war economy)

I found myself highlighting huge swaths of the book:

 The General Theory is a dangerous book because it demonstrates the necessity of power. It is a liberating book because it reframed the central problem at the heart of modern economics as the alleviation of inequality, pivoting away from the demands of production and the incentives facing the rich and powerful that had occupied economists for centuries. It is a frustrating book because it is written in novel abstractions, argued in convoluted sentences and dense equations. And it is a work of genius because it proves a simple truth that, once offered, seems obvious: Prosperity is not hard-wired into human beings; it must be orchestrated and sustained by political leadership. (Kindle 4868)

The material abundance of the Gilded Age had sown doubts in Keynes about the supposed scarcity of resources, but it was the ravages of the Depression that made him certain the old order had it wrong. Clearly the trouble was not a shortage of production. Crops were rotting in the fields while children went hungry in the streets. Producers were not cutting back because they couldn’t afford to meet the high wage demands of workers; laborers were roaming from town to town, desperate for any work at all. As he wrote in the opening chapter, “It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing.” (Kindle Loc 4927)

Creating large amounts of savings at the top of society did not bring about higher levels of investment. The causal arrow pointed the other way: Creating large amounts of investment caused higher levels of savings. And so “the removal of very great disparities of wealth and income” would improve social harmony and economic functionality. (Kindle Loc 5138)

the market, he argued, was not a reliable statement of society’s preferences, and it could not invisibly guide a polity to salvation. The market simply failed to deliver a host of real social goods that the public enjoyed, particularly art. The things that make life meaningful—beauty, community, a vibrant and multifaceted culture—all required collective, coordinated action. “Our experience has demonstrated plainly that these things cannot be successfully carried on if they depend on the motive of profit and financial success. The exploitation and incidental destruction of the divine gift of the public entertainer by prostituting it to the purposes of financial gain is one of the worser crimes of present-day capitalism.”52 (Kindle Loc 5152)

The history is also pretty good, explaining to me why the English got universal healthcare while the USA didn't (largely because Keynes was involved), and noting the conflict between American interests in the war and British interests.  There's a great discussion of the feud between Keynes and Hayek (long overblown), and clearly the success of Hayek was because he was politically acceptable to the wealthy people who wanted to fight the rise of Keynesian policy and economics.

What surprised me most about the book was that Carter didn't end the book even after Keynes death, but went on to describe the post-war purges that affected the careers of many economists and the rise of neoliberalism brought about by Clinton and Obama and their economic advisors. (Rubin, Krugman, DeLong, et al all come in for a pretty good drubbing)

The book is relevant, and has great explanatory power, even as it largely shies away from a full description of the Keynesian concepts, does provide an excellent roadmap to the delegitimization of democracy we've seen in the past 2 decades. The lessons are pretty clear - either policy has to be developed that raises the standard of living for all Americans rather than the top 1%, or more of what happened in 2016/2020 will continue to happen. You need to read this book.

In 2008, Joseph Stiglitz calculated that if the $48 trillion global economy were simply divided among every one of its inhabitants, a family of four would receive $28,000, high enough to end poverty in every country, including the United States, with its relatively high cost of living.39 In 2018, with an $85.8 trillion economy and 7.5 billion people, the global economy produces $11,440 per person, more than $45,000 for a family of four. The economic problem of humanity is no longer a problem of production but of distribution—inequality. (Kindle Loc 9706)

The European Central Bank and the IMF, in cooperation with the government of German chancellor Angela Merkel, demanded that countries in crisis reduce their budget deficits through fiscal austerity, inducing devastating recessions in Spain, Italy, Portugal, and most famously Greece. The economic ruin brought about by that project—the destruction of local industry, soaring unemployment, stingier social safety nets—has energized neofascist political parties, which now threaten the political establishment in some countries and have been effectively absorbed into mainstream conservatism in others. From Hungary’s Viktor Orbán to Italy’s Matteo Salvini to France’s Marine Le Pen to the United Kingdom’s Boris Johnson to America’s Donald Trump, this is an era of far-right demagoguery unseen since the 1930s. (Kindle Loc 9721) 

Why has Keynesianism proven to be so politically weak, even among ostensibly liberal political parties and nations? The Keynesian bargain of peace, equality, and prosperity ought to be irresistible in a democracy. It has instead been fleeting and fragile. Keynes believed that democracies slipped into tyranny when they were denied economic sustenance. Why, then, have so many democracies elected to deny themselves economic sustenance? 

Perhaps the type of social change he envisioned can be achieved only through the moral quagmire of revolution that he ardently hoped to avoid. Certainly the American experience does not inspire confidence. The greatest American victories for democracy and equality—the end of slavery in the nineteenth century and the defeat of fascism in the twentieth—came at the end of a gun. This is a dark time for democracy—a statement that would have been unthinkable to U.S. and European leaders only a few short years ago. It took decades of mismanagement and unlearning to manufacture this global crisis, and it cannot be undone with a few new laws or elections. (Kindle Loc 9728-9736)

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