In yesterday's Financial Times, Keynes biographer Robert Skidelsky weighed in on the Queen's question about the sorry state of economics:
It is only by imagining a mechanical world of interacting robots that economics has gained its status as a hard, predictive science. But how much do its mechanical constructions, with their roots in Newtonian physics, tell us about the springs of human behaviour?I want to seize this opportunity to tie in Skidelsky's current remarks with related observations he made a decade ago dealing with Keynes's wartime memorandum on full employment that the Sandwichman posts each month to coincide with the BLS's monthly employment situation report.
One of the most interesting contributions to the FT.com debate was the argument that, after Keynes, economists should have aligned their discipline with other social sciences concerned with human behaviour. Keynes opened the way to political economy; but economists opted for a regressive research programme, disguised by sophisticated mathematics, that set it apart. The present crisis gives us an opportunity to try again.
My final section can best be introduced by quoting from a letter Keynes wrote to T.S. Eliot on April 5, 1945: "The full employment policy by means of investment," he wrote, "is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less" (CW, XXVII, p. 384).
To make sense of this mysterious remark, one has to go back to Keynes' essay, "Economic Possibilities for our Grandchildren," first read to Winchester schoolboys in 1928, or even further back to G.E. Moore's Principia Ethica, the bible of his youth and the source of his ideas about the good life. Economics, Keynes always insisted, is only useful if it can get us over the hump of scarcity, as quickly as possible, into the realm of plenty, when man would confront his "real, his permanent problem--how to use his freedom from pressing economic cares ... to live wisely and agreeably and well" (CW, IX, p. 328). "The full employment policy by means of investment" is Keynes' method of accelerating through the barrier. From this perspective, the mass unemployment of the interwar years was not just the result of a random collapse of confidence, but the precursor of what can happen to rich societies that fail to make adequate preparations for the good life which wealth makes possible.
It is typical of Keynes that he should have returned to this vision during the war itself, as soon as it became clear that the Allies would win. The core of it is contained in a memorandum he wrote on May 25, 1943, entitled "The Long-Term Problem of Full Employment." He saw three phases after the war. In phase I, which he thought might last five years, investment demand would exceed full employment saving, leading to inflation in the absence of rationing and other controls. In this phase, the emphasis should be on securing a high rate of saving in order to reconstruct the war damaged economy. In phase 2, which he thought might last between five and ten years, he foresaw a rough equilibrium between investment and full employment saving "in conditions of freedom," with the state active in varying the pace of investment projects. In phase 3, investment demand is so saturated that it cannot be brought up to the level of full employment saving without embarking on wasteful and unnecessary programmes. In this phase, the aim of policy should be to encourage consumption and discourage saving, and so absorb some of the unwanted surplus by increasing leisure, with shorter hours and more frequent holidays. This will mark the entrance to the "golden age," the age of capital saturation. Eventually, Keynes thought, "depreciation funds should be almost sufficient to provide all the gross investment that is required" (CW, XXVII, pp. 321-324; also see Keynes to Josiah Wedgwood, July 7, 1943, p. 350). It is the age, foreshadowed in the General Theory, of the "euthanasia of the rentier," since there will be no demand for new capital.
The same objection can raised against this essay in prophecy that was raised against Keynes' earlier "Economic Possibilities for our Grandchildren": that it assumes that all material wants in the wealthy nations will be quickly saturated, and that it completely ignores the capital needs of the poor countries. In these respects Keynes was a child of his times. He did not foresee that technology would constantly create new products and underestimated the ability of advertising constantly to create new wants. Above all, he did not foresee the postwar population explosion in the developing countries. This factor, more than anything else, has rendered his prophecy academic.
Nevertheless, it does raise some pretty fundamental questions about what economics is for, as well as the distinctly awkward question of how far the peoples of wealthy nations should continue postponing their own "golden age" until everyone in the world has caught up with them. What is certain is that Keynes would never have worshipped at the altar of GDP. The rate of per-capita income growth was only important to him as an indication of the speed at which societies were approaching material abundance. Beyond that point, he expected that rates of growth would and should slow down. One can surmise that he would have had little sympathy for "endogenous growth theory" which promises to postpone the slowdown of rich countries, and thus the "catch up" of poorer countries, into a far distant future.
My purpose in this paper has not been to enter into an argument with Keynes. It has been to show that his thought, from whatever period of his life one chooses to take it, is richer, more suggestive, and more unexpected than the textbook Keynesianism that still flourishes, or the administrative Keynesianism that ruled policy in the 1950s and 1960s. His views on the minimum sustainable rate of unemployment and his fiscal philosophy still have a great deal to offer governments. His reminder that economics needs to retain its connection with the non-economic ends of life as these have been conceived by moralists and ethical philosophers remains a necessary warning against blind worship of the golden calf, and against marketization carried to extreme lengths. So I say: Down with Keynesianism, and up with Keynes!