The Keynesians vs. the entrepreneurs
A wicked joke attributed to George Stigler goes: “All great economists are tall — the only exceptions are Milton Friedman and John Kenneth Galbraith.” The diminutive Friedman grows ever larger. The NBA-sized Galbraith is a fading figure: He is survived by his trademark phrase, “the conventional wisdom,” and some remember that there was a book called The Affluent Society, others that he served as ambassador to India and as the butt of many jokes made by the founder of this magazine. William F. Buckley Jr. was mistaken to have described him as “the most influential U.S. intellectual of the 20th century,” but then he was generous to his friends, among whom Galbraith was a cherished one. Galbraith did not end his career as a public intellectual impressively, descending into self-caricature when he sniffed to WFB that “there is not one member of the faculty of Harvard University who is pro-Bush” and presented that demonstrably untrue datum as though it were a devastating argument, apparently having forgotten his friend’s endlessly quoted declaration that he would rather be governed by the first 2,000 names in the Boston telephone directory than by the 2,000 members of the Harvard faculty.
Galbraith has suffered ignominies, among them being dismissed as a “media personality” and “celebrity economist” by Paul Krugman, a media personality and celebrity economist. I suspect that there is an element of sibling rivalry in Krugman’s viciousness. Galbraith was treated by the best people as the intellectual heir to John Maynard Keynes, and Krugman — Nobel laureate, recipient of the John Bates Clark medal — does hack work for the New York Times while Robert Reich plays an economist on television. The memory of Keynes’s authority must be a wistful thing for 21st-century economists, inasmuch as none of them has as much command over public affairs as do a half dozen leering buffoons on television.
Both Keynes and Galbraith are thought by their admirers to have offered correctives to capitalism. But it is difficult to separate their ideas about capitalism, which were economic ideas, from their ideas about capitalists, which were largely moral and aesthetic. Each was marked in his way by an aristocratic revulsion from the trading classes and the grubby, advantage-seeking business of business. Keynes dreamed of a world in which we transcended scarcity, and Galbraith believed we had arrived there. Each contributed in his own way to the current progressive misreading of our economic troubles, inasmuch as their intellectual heirs see our current straits as being the product not of malinvestment but of sin.
But for progressives, sin is a matter of taste. Keynes’s tastes were complicated, and not just in the usual Bloomsbury way. Though he disliked hereditary wealth, his work contains an echo of the old gentry’s disdain for trade. A remarkable feature of it is its lightly concealed contempt for businessmen, a contempt that Galbraith shared and made even less effort to conceal in his own pronouncements. Keynes, in The Economic Consequences of the Peace, describes businessmen as a pitiable class, terrified by the rise of socialism, irresolute, and largely incapable of controlling their own destinies. Far from being profiteers, as the socialists charged, entrepreneurs could not help becoming wealthy during economic booms
whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European Governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. . . . We are thus faced in Europe with the spectacle of an extraordinary weakness on the part of the great capitalist class, which has emerged from the industrial triumphs of the nineteenth century, and seemed a very few years ago our all-powerful master. The terror and personal timidity of the individuals of this class is now so great, their confidence in their place in society and their necessity to the social organism so diminished, that they are the easy victims of intimidation.
Crises, especially crises of confidence, have their uses. It was not many years later that Keynes was writing to Pres. Franklin D. Roosevelt to offer advice on yoking that same diminished class of businessmen:
Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be “patriots,” perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You could do anything you liked with them, if you would treat them (even the big ones), not as wolves and tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish. It is a mistake to think that they are more immoral than politicians. If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market.
His other advice included nationalizing the utilities and the railroads, as well as pouring massive government subsidies into the housing market. (Thanks a million for that, Lord Keynes.) His prose communicates a deep conviction that entrepreneurs and their enterprises are pieces to be moved around on the national chessboard. The instrumental view of the businessman as a kind of specialized capital engineer exercising mostly local responsibility would come to be a recurrent theme in Keynes’s thought.
That thought was rife with contradiction. In their invaluable paper “Keynes and Capitalism,” Roger Backhouse and Bradley Bateman report that Keynes in 1926 planned to write a book titled “An Examination of Capitalism” and proposed to deliver a series of lectures on the subject. For whatever reason, he changed his mind, and his full view of capitalism remains a matter of some dispute. Surely this is in part because Keynes was an overly agreeable man, one who could write to F. A. Hayek to communicate his “deeply moved agreement” with The Road to Serfdom, and to FDR to express his agreement with the view that “investment must come increasingly under state direction,” and to socialist Kingsley Martin to note his agreement with his observation that “capitalism is an out-of-date institution incapable of meeting the requirements of the twentieth century.”
That’s a lot of contradictory stuff to agree with. But economics isn’t about economics — not when political power is involved. Regardless of whether low regard for the businessman as a kind of mindless pack animal has any warrant in Keynesian economics, it certainly is part of the Keynesian tradition, and was from the beginning. Or even before the beginning: Long before he published the General Theory, he already was making the case for managing the economy along moral-political lines rather than economic ones: “The business man is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.” Profit beyond propriety Keynes denounces in Biblical language — “the love of money,” which he described as a “disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.” So much for utility-maximizing economic actors.
The obvious question is which businessmen are to be held intolerable, and by what standard. The implicit answer is: those condemned by John Maynard Keynes — judge, jury, and economist. Keynes’s proposal to judge what businessmen “contribute to society” on non-economic grounds is a constant of our politics now, a tedious staple of progressive rhetoric, e.g. Hillary Rodham Clinton’s misquoting of Oscar Wilde on the market’s knowing “the price of everything and the value of nothing.”
A particular object of Keynes’s scorn was the “third-generation man,” the fellow whose grandfather began some enterprise and whose father developed it, then handed it off to him. The hereditary system behind the third-generation man was, Keynes wrote, “the reason why the leadership of the capitalist cause is weak and stupid.” Keynes himself was a kind of third-generation man: His grandfather was a successful entrepreneur, a self-made man whose fortune eased the way for Keynes’s father’s career as an academic economist and Keynes’s own. Keynes père was a famous man in his day, and Keynes fils very much went into the family business. The Keyneses were aristocrats long before Lord Keynes was titled — his mother was the mayor of Cambridge (the first woman to hold that position), and his knighted brother married the granddaughter of Charles Darwin. But Keynes was no mere privileged scion. Beyond his General Theory, he published on everything from probability mathematics to the management of the Indian rupee.
He was an enormously talented businessman on top of it all. He started off wobbly, badly bruising his personal finances with highly leveraged currency speculation. And though he required a bailout from a wealthy friend, that early failure did not much damage his confidence in his intelligence, the lesson learned being: “The market can stay irrational longer than you can stay solvent.” But the lesson was learned nonetheless, and he improved his strategy, becoming a gifted steward of his own money and that of others: Under his management, the King’s College trust fund returned an average of 12 percent from 1927 to 1946, years during which the overall British stock market declined 15 percent, and he hit those numbers with no reinvestment of dividends. This was in his spare time. Conservatives are wrong to scoff at Keynes the economist or Keynes the man of practical finance.
But we rarely encounter that Keynes, really. Instead we meet a great deal of Keynes the cultural and political dabbler, the man who was mystified that FDR did not wish to endure his mathematical lectures. Between the theory and the policy lies the shadow: History suggests strongly that Keynesian management of aggregate demand is not translated effectively into public policy — if it worked, we would never have a recession — and its loudest contemporary champions, men such as the aforementioned Mr. Reich, have a transparently different set of interests than can be justified by mere economics, chief among them moral concerns about income inequality. Keynes was the butterfly of which Paul Krugman is the larval form: an academic who leverages his academic reputation into political influence only lightly connected to his expertise.
A formative influence on Keynes, one who helped to expand his attention well beyond economics, was the art critic Roger Fry. As Backhouse and Bateman explain, Fry took a dualistic view of human life, dividing it between the animal necessities and the higher “imaginative life” of art and culture. Keynes’s idea of progress was to get free of the muck of the third-generation men and their competitive conspicuous consumption and to rise to the level of high culture and aesthetic contemplation. But we’d need some guidance after arriving in that Promised Land. Guidance from whom? From men like Keynes, of course. He addressed his concerns in “Economic Possibilities for Our Grandchildren”:
The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.
Yet there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy. It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional society. To judge from the behaviour and the achievements of the wealthy classes to-day in any quarter of the world, the outlook is very depressing! For these are, so to speak, our advance guard — those who are spying out the promised land for the rest of us and pitching their camp there. For they have most of them failed disastrously, so it seems to me — those who have an independent income but no associations or duties or ties — to solve the problem which has been set them.
Beware the wrong sort of rich people, in other words, and dread the day when all the wrong sort of people become rich.
To dream of a world without scarcity is to dream of a world without economics. John Kenneth Galbraith believed we had arrived there, to the extent that working to increase private-sector productivity was, in his view, irrational. He took an unremarkable fact of economic life (the declining marginal utility of consumption, e.g. you only want so much chocolate ice cream) and built a baroquely complex social critique on top of it: Since each new unit of consumption is marginally less valuable (assuming basic material needs have been met), then new investments in production must be of declining value as well. (Never mind that we do not produce to enable others’ consumption, but our own.) Like Keynes, Galbraith takes refuge in pseudopsychology and assumes his moral case rather than arguing it: “Our preoccupation with production is, in fact, the culminating consequence of powerful historical and psychological forces — forces which only by an act of will we can hope to escape. Productivity, as we have seen, has enabled us to avoid or finesse the tensions anciently associated with inequality and its inconvenient remedies.” This communicates very little other than Galbraith’s disappointment in the proletariat for taking more satisfaction in having more bread for its own table than in seeing that the rich have less for theirs. It is difficult to impose an authoritarian reorganization on a well-fed society. Villains are needed for that, and so Keynes’s third-generation man is reborn as Galbraith’s coddled corporate executive: “The riskiness of modern corporate life is, in fact, the harmless conceit of the modern corporate executive, and that is why it is vigorously proclaimed. Precisely because he lives a careful life, the executive is moved to identify himself with the dashing entrepreneur of economic literature.” Never mind that corporations tend to be the children of dashing entrepreneurs — and not just in “economic literature,” either.
Strange as it sounds, in Galbraith’s view, the corporate executives and ad men who were conspiring to increase the production of goods and services were making the world poorer. That is because he believed private-sector productivity and a wealth of privately produced goods did not merely correlate with public-sector privation and the consequent lack of relatively high-value public goods but was in fact the cause of it: “Our wealth in privately produced goods is, to a marked degree, the cause of crisis in the supply of public services.” His alternative was the usual welfare for the upper middle class: more subsidies for education and “the arts,” etc., funded by appropriating the goods of those rascally executives and their shareholders. He complained that GDP was a poor measure of the nation’s economic performance on the grounds that $1 in Harvard lectures was valued the same as $1 in television sets. He imagined advertising to have extraordinary powers, bordering on the occult, a belief that far exceeded the available empirical evidence of its efficacy, then or now. For Galbraith, that was as much a political problem as an economic one, inasmuch as “advertising operates exclusively . . . on behalf of privately produced goods and services.” The word “propaganda” exists to describe advertising government does on behalf of itself, but Galbraith ignores that.
Buyers and sellers in the free market had preferences at odds with his own, and it never occurred to Galbraith that this did not reveal a massive shortcoming of the free-enterprise system.
Galbraith could have used a little wisdom from Keynes, who shared in The Economic Consequences of the Peace a great insight: that the economic conditions that led to Europe’s unprecedented prosperity before the Great War were in no small part abnormal, and were not, as comfortable Europeans had concluded, “natural, permanent, and to be depended on.” The position of the United States following World War II produced what looked to Galbraith like “the affluent society,” but much of that affluence — particularly the country’s commanding position in the manufacturing sector — was the temporary result of the war. His intellectual heirs complain that wicked businessmen are “sending our jobs overseas” without understanding how those jobs came to be here in the first place. There are not that many third-generation men in the United States, outside of truly dysfunctional industries such as newspapers, but the totem remains potent.
Like Keynes, Galbraith enjoyed commanding positions in public life, beginning as one of FDR’s price fixers and ending with enough clout that WFB mistook him for the alpha intellectual of his century. But the legacy of Keynesian thinking isn’t C + I + G + X − M = Y, it’s, “Dear God, we cannot let those people run the economy. Is there a Harvard man in the house?” Most of what they touched, other than book contracts, produced failure: Galbraith’s price controls proved a fiasco, and his affluent society soon enough found itself in want, scourged by stagflation, gasoline rationing, and other signs of non-affluence. Custodial liberalism fell into intellectual discredit, and Keynesian macroeconomic management does not seem to much soften recessions. But we still use Keynes’s assumptions and Galbraith’s catchphrases, and a certain chief executive has picked up the latter’s habit of calling for programs to “invest in” this or that pet enthusiasm. All of which suggests that the man who taught us to question “the conventional wisdom” has become that, as has his mentor.