This book, by Peter Temin and David Vines, has just been published.
As you can see from the endorsements, I liked the book. In this post I just
want to focus on a particular chapter, which was Keynes’s role as part of the Macmillan committee, an episode I did not know about
before. Just as the book does so well, I want to draw parallels between the
past and current events.
It is the end of 1929: UK unemployment was already high as a
result of going back on to the gold standard five years earlier, and Wall
Street had just crashed. The new Labour government was overwhelmed, so in the
British tradition it set up a committee to recommend what to do, and Keynes was
a member. As Temin and Vines note, although Keynes was at the centre of
economic discussion at the time, he was also outside the establishment, as a
result of publishing his attack on the Versailles treaty in the Economic Consequences of the Peace.
Keynes diagnosis of why British unemployment was so high linked
returning to the gold standard at an uncompetitive level and the problems of
downward nominal wage adjustment. The book’s description of how the then governor
of the Bank of England, Montagu Norman, failed to see the problem is amusing -
from a distance of nearly a century - but of course as the book points out this
is exactly the ‘conversation’ that Germany is currently having with the rest of
the Eurozone.
The obvious solution was therefore devaluation, and the book
seems a little ambivalent about whether that was not much discussed because it
was ‘off the table’ for political reasons, or whether Keynes and others thought
that, having joined (which Keynes had opposed), Britain should stay the course.
(Eurozone parallels again. Ironically Britain did devalue three months after
the report was published, although as I note here, this was forced rather than a choice.)
What Keynes argued for was instead increased government spending, but he failed
to convince the committee that its impact on unemployment would not be crowded
out. Here Temin and Vines attribute this failure not to the ability of the
others to see the obvious, but to the fact that Keynes arguments did not fit
with the model he was using, which was the model of the Treatise. They write: “the Macmillan Committee is of
interest to us because Keynes’ presentations to it didn’t add up to a coherent
view. Rather, they show Keynes thinking on his feet at a time when his ideas
were in flux.” Those ideas ended up, of course, with the General Theory.
Finally, one thought of my own. When I was younger, I drew the
wrong inference about the Great Depression. If only the General Theory had been
written 10 years earlier, I reasoned, much of the agony of the Great Depression
could have been avoided. Instead I should have focused on the gold standard.
Not because this was more important as a cause of the world wide Great
Depression - it well might have been - but because of what it tells you
about the influences on macroeconomic policy.
Montagu Norman said to the committee “I have never been able to
see myself why for the last few years it should have been impossible for industry,
starting from within, to have readjusted its own position”. This was a few
years after the General
Strike of 1926! This was not someone lacking a coherent theory, but someone
blind to the evidence and human nature, and enthralled to the ideology of the
gold standard. No doubt being a central banker rather than a worker, or even an
industrialist, helped this blindness. The lesson I should have drawn from the
Great Depression is that a powerful ideology, in the hands of people remote
from those adversely affected by it, can overcome common sense and
evidence.
