Distinctions That Define and Divide   /   Summer 2021   /    Book Reviews

The Man Who Saved Capitalism from Itself

Tracing the lost legacy of Keynesian liberalism.

Charlie Tyson

Portrait of John Maynard Keynes, c. 1908, by Gwen Raverat (1885–1957); National Portrait Gallery, London; Pictures Now/Alamy Stock Photo.

“Well, God has arrived. I met him on the 5:15 train,” John Maynard Keynes wrote to his wife in 1929, wryly noting the return of the philosopher Ludwig Wittgenstein to Cambridge after a sixteen-year hiatus. Observers would later describe Keynes himself in similar terms—but without the irony. The British economist Lionel Robbins detected in Keynes a certain “unearthly quality” that he could describe only as genius. Recalling the 1944 Bretton Woods Conference, at which Keynes helped forge the postwar international monetary order, Robbins wrote, “The Americans sat entranced as the God-like visitor sang and the golden light played around.”

John Maynard Keynes (1883–1946) wore his genius lightly. So lightly, indeed, that he is sometimes mistaken for a dilettante. Whereas his rival deity Wittgenstein, brilliant and arrogant, lived like a divinely inspired madman—wild eyed, hawk-like, domineering, casting off academia to pursue menial labor as a hospital porter—good-natured Keynes reconciled deep originality with every measure of conventional success: fame, money, public duties, a beautiful wife.

In studying Keynes, we watch radical ideas emerge filtered through a conservative sensibility. His work in economics is rightly called revolutionary. He broke with the classical economists of the eighteenth and nineteenth centuries by arguing that humanity’s overriding economic problem was not scarcity but mismanagement. He imagined a new, enlarged role for the state as an active investor.

Yet his sense of life was streaked with conventionality. True, he was a freethinking, pacifist bisexual who, with the rest of the Bloomsbury Group, worshiped at the altar of art. In other respects, however, he appears to us, unlike Wittgenstein, as a characteristic man of his time: very middle class, very English. He sympathized with the British Empire and nursed a vague distaste for the proletariat, making exceptions for the occasional tryst with a stable boy or elevator operator (all recorded in his sexual diary). An admirer of Edmund Burke, he feared social instability and upheaval.

That his Burkean attitudes led him to push left-wing reforms—to repudiate austerity and call for harnessing the power of the state to transfer wealth from the rich to the poor—might seem perplexing. In fact, this apparent contradiction points to certain enduring confusions in our political categories. A keen (though not infallible) observer of ascendant authoritarianism in Europe, Keynes was prescient in seeing that in complex and wealthy modern societies, stability may well matter more to the left than to the right. His risk-averse radicalism resonates in our era, when the political left is concerned with guaranteeing stability (food, housing, health care, steady jobs, protection from environmental dangers), whereas the right has become the party of disruption and insurrection.

Zachary Carter’s new biography of Keynes enters a crowded field. Less magisterial than Robert Skidelsky’s towering three-volume study, and less juicy than Richard Davenport-Hines’s more recent Universal Man, Carter’s book may nonetheless merit a wider readership than either, because in Keynes’s life and thought Carter finds a guide to our present political and economic dilemmas.

Ever the good liberal, Keynes spent his career fighting a two-front war. On the one hand, he opposed free-market absolutists like Ludwig von Mises, Friedrich Hayek, and Joseph Schumpeter who argued that governments should let depressions burn themselves out. It might be true that in the long run, episodes of inflation and deflation correct themselves. But as Keynes offered in his most famous formulation, “In the long run we are all dead,” adding that his fellow economists “set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

It is foolish, in other words, to expect populations to weather hunger, unemployment, and unrest while waiting walleyed for markets to adjust. A thinker fated to live in “tempestuous seasons,” Keynes warned that austerity invited the rise of demagogues. Moreover, as he argued in The General Theory of Employment, Interest, and Money (1936), a depressed economy might stay contracted, having readjusted to a new, lower equilibrium. The way out was government investment to boost aggregate demand and bring the economy back up to full employment. Thus he fought the true believers in what Ronald Reagan would later call the “magic of the marketplace.”

At the same time, Keynes sought to win over critics to his left, offering Marxists and assorted revolutionaries a bargain: radical transformation of the social order without violence. In his scheme, governments would direct about two thirds of total investment in the economy. The state would use its control over capital investment to maintain full employment. It would also pursue an ambitious public works agenda. The goal was to unleash virtuous cycles of wealth creation while supporting the good things in life. The state would build parks, bridges, symphony halls, museums, universities, libraries, art galleries, theaters: Bloomsbury for all. For many radicals who prized broadly shared prosperity over vengeance against the ruling class—among them the great heterodox economist Joan Robinson, whose contributions to Keynesian thinking are well documented in Carter’s book—Keynes’s approach was a triumph of hope and vision.

The Price of Peace succeeds not merely as a miracle of timing (published on the heels of the largest economic stimulus package in US history) but as an intelligent survey of twentieth-century political history. Carter finds his lanky, buoyant protagonist at the center of nearly every grand world-historical event of the first half of the century. The story picks up speed in Paris, 1919. Representing the British Treasury at the post–World War I peace negotiations that led to the Treaty of Versailles, Keynes pressed the United States to forgive the enormous war debts run up by Britain and France. Such high levels of debt threatened postwar economic recovery. Handling the debt by making Germany pay large sums in reparations, he warned, would result in austerity, which in turn would give way to unrest, resentment, and militant nationalism.

Keynes’s advice went unheeded, and he resigned from the Treasury in protest. He took revenge by writing The Economic Consequences of the Peace (1919). Having learned from his fellow Bloomsburyian Lytton Strachey how to skewer a public man on the rapier point of a sentence, he ripped into the leaders of the Paris Peace Conference, describing the weak and idealistic Woodrow Wilson as a “blind and deaf Don Quixote…entering a cavern where the swift and glittering blade was in the hands of the adversary.” The economist scoffed at the notion that communities across Europe could be rebuilt while governments strained under the weight of massive war debts and reparation payments demanded by the treaty. In attempting to crush Germany into submission, the treaty’s architects only laid the groundwork for another war.

The Economic Consequences of the Peace earned Keynes an international reputation. His fame grew as it became clear that his predictions were justified. The fallout from Versailles was terrible. After World War I, inflation surged across Europe. Governments responded with aggressive deflationary campaigns. These led in turn to skyrocketing rates of unemployment. (With prices for goods reduced, firms could not make enough money to employ people.) The tumult led Keynes to argue that central banks should take on a new role: regulating the value of money by raising or lowering interest rates in order to secure stable prices. The gold standard became a thing of the past. The age of monetarism had begun.

Inflation, deflation, unemployment, hunger, bombed-out infrastructure, two world wars: Keynes’s mature career unfurled against the backdrop of a Europe in crisis. His consciousness having been molded by prewar Bloomsbury, he believed that art, literature, ideas, and exciting conversation were civilization’s highest goods. His self-appointed task was to encourage political leadership that could sustain an economic order in which those goods were secured for as many people as possible. To a degree, he succeeded. The rarefied Bloomsbury vision led to some practical and humane policy achievements. Some readers may not know, for example, that Keynes had a hand in the creation of the National Health Service: During World War II, he served as a crucial ally to William Beveridge, the economist who designed the NHS. If Beveridge is the father of the British welfare state, Keynes is at minimum a benevolent uncle.

Keynes’s most lasting influence, however, was on the United States. The New Deal stands as a profound vindication of Keynesian ideas. President Franklin Roosevelt’s public works agenda confirmed that government spending could reverberate through the economy and unleash growth (a phenomenon Keynes called the “multiplier”). The idea that governments can kick-start economic recovery by deficit spending, initially regarded as counterintuitive and perverse, is now widely accepted. The near-universal consensus among conservative and liberal economists alike in favor of ambitious deficit spending in response to COVID-19 is just the latest testament to Keynes’s farsightedness.

In Carter’s book, we see the genial economist in a number of guises: weeding the garden path at the painter Vanessa Bell’s farmhouse with a pocketknife; securing a collection of Degas paintings for the National Gallery in what Bloomsbury hailed as the “great picture coup”; seated in the front row at the ballet, his eyes shining. The focus, however, is on Keynes as economist and statesman—the public life rather than the private. The tour through Versailles, the Depression, World War II, and Bretton Woods occasionally drags, and Carter sometimes overstates Keynes’s centrality, flirting with the same deification bestowed by the besotted Lionel Robbins. (Carter contends, for instance, that T.S. Eliot’s The Waste Land [1922] was “based on” Keynes’s Economic Consequences.) Yet Carter is a clear and energetic explicator of Keynes’s ideas. When analyzing the economist’s writings, he is never short of excellent.

The hero of The Price of Peace dies two thirds of the way through the book, in April 1946, not quite a year after the end of the war in Europe. And it is in sketching Keynes’s long, distinguished afterlife that Carter truly hits his stride. American followers of the British economist once argued that we had two basic options for our society: aggressive government spending or the dictatorship of “men of business.” Carter tells the story of how we ended up with the latter.

Immediately after Keynes’s death, American business groups—among them the National Association of Manufacturers, a lobby that fought against the New Deal and promoted unregulated capitalism as the “American way”—launched disinformation campaigns smearing Keynes, Keynesian economists, and Keynesian economic doctrines. In the twitchy environment of Cold War paranoia, attempts to link Keynesianism with Marxism found a receptive audience. The writer Rose Wilder Lane (who helped her mother, Laura Ingalls Wilder, compose the charming libertarian parables known as the Little House on the Prairie series) led a successful industry-funded campaign to pressure universities into dropping Lorie Tarshis’s Elements of Economics (1947), an economics textbook that incorporated Keynesian ideas. Other Keynesian economists fell victim to McCarthyite accusations of consorting with Communists. The guilt-by-association tactics put Keynesians on the defensive.

These canceling campaigns weren’t entirely paranoid. Whether Keynes was trying to save capitalism or replace it with something new remains a matter of dispute. He once described his program as “liberal socialism.” But he explicitly rejected Marxism, arguing that capitalism needed not to be destroyed but “wisely managed.” He advocated neither revolution nor the elimination of markets, but rather greater democratic management of the economy.

In the postwar years, John Kenneth Galbraith emerged as the most influential exponent of Keynesian ideas. He condemned what he saw as an era of “private opulence and public squalor”—gleaming cars on poorly paved roads. Galbraith’s social vision shaped Lyndon B. Johnson’s Great Society agenda (quite literally—Galbraith wrote the speech in which LBJ introduced it). The Great Society programs amounted to a second New Deal: a huge expenditure of public money that reduced poverty and pushed corporations to create new jobs.

But fortune’s wheel was about to turn. The free-market neoliberals had long languished on the margins, with Friedrich Hayek at last banished to obscurity at the University of Freiburg. Having simmered with resentment through the years of the New Deal, postwar prosperity, and the Great Society, the reactionaries were poised to strike. Inflation gave them their opening. Many of Keynes’s American followers believed in a tradeoff between inflation and unemployment, represented by a model called the Phillips Curve. The idea was that by accepting a slightly higher rate of inflation (achieved through tax cuts or increased public spending), governments could push down unemployment. In the “stagflation” years of the 1970s, however, slow growth accompanied rising prices. The Phillips Curve was discredited. Because the Phillips Curve had been strongly identified with Keynesianism, stagflation tarnished the Keynesian brand.

With Keynesian economics in disrepute, neoliberalism rose to power. Starting with Jimmy Carter, US presidents pursued antiregulatory, laissez-faire agendas that ceded power to financial markets and corporations. Republicans and Democrats alike have favored neoliberal measures primarily benefiting the super-rich. Consider Bill Clinton’s capital-gains tax cut (more than half of all capital gains go to the top 0.1 percent of households), or Donald Trump’s corporate tax cut (many firms used the cash for stock buybacks while laying off workers). Meanwhile, wages for most workers have been stagnant since the 1970s, lagging far behind productivity gains—with executives pocketing the difference. Dangerous financial deregulation led to a global recession that cost Americans trillions of dollars. In short, the result of the anti-Keynesian backlash has been dazzling wealth for the few, precarity for the many, and widespread ecological devastation—costs that are all meticulously documented in Carter’s book.

Carter also offers a detailed analysis of Keynes’s debts to Enlightenment liberalism that may help dispel a certain confusion about liberalism’s legacy. Leftists of a certain stripe have developed a habit of pointing to the dismal features of neoliberalism—the shift in power from labor to capital; privatization and the outsourcing of government functions to for-profit companies; cuts to the welfare state—and decrying those features as the consequences of liberalism. The problem is that in doing so, they are playing into the neoliberals’ hands.

Neoliberal thinkers like Hayek and Milton Friedman, along with assorted reactionaries today, proudly claim the mantle of classical liberalism, with at best shaky justification. (Even John Locke—not known for his radical sympathies—believed that one’s labor conferred a natural right to property ownership; he thus placed the worker at the center of his analysis of value.) Partly in response, in many regions of the academic left, the intellectual resources of liberalism—a rich and varied tradition compatible with egalitarianism, socialism, and other political ideals that leftists endorse—have been thrown overboard, and leftist liberals have been sidelined. For the left, neoliberalism’s conspicuous failure suggests, spuriously, the failure of liberalism tout court. For the neoliberals, claiming a monopoly on an illustrious intellectual heritage confers a sheen of legitimacy and obscures the fact that within liberalism there are other options.

The truth is that neoliberalism is not a natural extension of liberalism but a cynical distortion of it. Carter shows how the ascendance of neoliberalism is in large part a reaction against not just Marxism or workers’ movements but, specifically, Keynesian liberalism.

The biographer makes it equally clear that to detach Keynes’s economic ideas from his normative vision is to misinterpret him. In the United States, one of the economist’s more baleful legacies is what Carter calls “reactionary Keynesianism”: colossal sums of government money spent on weapons and wars. Our bottomless military spending—such as our costly nuclear weapons arsenal, currently undergoing a $1.2 trillion upgrade—reflects a gross distortion of Keynesian thinking in which the economist’s internationalist pacifism is lost.

What might a genuinely Keynesian American economy look like? Public works spending on bridges, roads, parks, levees, railroads, and transit would help repair our long-neglected infrastructure. Investments in scientific research (including basic science), medical research, and green technology would unleash virtuous cycles of growth and innovation. But Keynes wouldn’t stop there. A strong believer in the idea that the economy should serve human needs—not the other way around—he would support funding for libraries, universities, and other regional cultural institutions, trusting that these institutions might help diffuse our urban-rural divides. (Possible funding sources for these arts and humanities projects might include the $1.2 trillion committed to sustaining a bloated cache of unusable nuclear weapons, as well as the trillions in taxes that go unpaid by the rich and big businesses.)

Keynes might also see a case for the public funding of journalism. As I was writing this review, the news broke that Carter, along with dozens of other talented journalists, had been laid off from HuffPost after BuzzFeed acquired the company. Keynes would see such a move—part of a larger degradation of journalism into “content”—as irrational. He thought one of wealth’s chief purposes was to promote art and culture: to give citizens the education, leisure, and resources needed for a rich intellectual life. That the most prosperous country in human history appears intent on destroying its intellectual culture would strike him as nothing less than perverse. Nearly a century ago, Keynes helped save capitalism from itself. If we heed his ideas today, we might be able to do so again.