Marcuzzo, Maria Cristina - Essays in Keynesian Persuasion-Cambridge Scholars Publishing (2019)
Marcuzzo, Maria Cristina - Essays in Keynesian Persuasion-Cambridge Scholars Publishing (2019)
Keynesian Persuasion
Essays in
Keynesian Persuasion
By
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Sources ....................................................................................................... ix
Abbreviations ............................................................................................. xi
Introduction ................................................................................................. 1
Figures
10.1. Unemployment rate (October 2009)
10.2. Real government consumption and real GDP
12.1. Backwardation on the forward market and price variations on the
spot market
12.2. Contango and normal backwardation
12.3. Seeding and harvesting calendar
12.4. Tilton Company forward purchases of Liverpool wheat futures for
various maturities (loads)
13.1. Food commodity prices, 1970 to 2007
13.2. Indices of primary commodities prices, 2000 to 2009 (2005 = 100)
14.1. Copper: Keynes’s weekly position in options and prices, December
1921 to December 1924
14.2. Tin: Keynes’s weekly position in option and prices, January 1922
to June 1933
14.3. Lead: Keynes’s weekly position in options and prices, July 1922 to
October 1927
14.4. Spelter: Keynes’s weekly position in options and prices, July 1922
to June 1925
Tables
4.1. Keynes’s Six Missions to the United States
5.1. Kahn’s papers
5.2. Robinson’s papers
5.3. Kaldor’s papers
6.1. Keynes–Kahn correspondence
7.1. Keynes–Robinson correspondence
10.1. Employment and output effects of fiscal stimulus packages
12.1. Months of standard maturities for futures contracts on major markets
13.1. Successive drafts of Keynes’s buffer-stock scheme
14.1. Keynes’s investment in metals by type of contract, 1921–39
14.2. Keynes’s investment in metal options (in £)
14.3. Annual ROI on metal options
ACKNOWLEDGEMENTS
This volume brings together papers published between 2002 and 2018 and
can be read as a sequel to my Fighting Market Failure (Marcuzzo 2012).
Unlike the previous collection, this volume focuses almost entirely on
Keynes and Keynesian thinking; hence the choice of the title, actually
borrowed from Keynes (Essays in Persuasion in CWK IX).
The word “persuasion” is chosen to convey to the reader not only my
own allegiance to Keynes’s approach to economics, but also the hope that
these essays may be “persuasive” in making Keynes’s message better
understood and therefore more likely to be accepted.
The first chapters are all related to the General Theory; a book raising
questions about the nature of its assumptions and conclusions and leading
to different interpretations, thus giving rise to controversies that have yet
to be settled. Three chapters concern the origin of the book and the
development of Keynes’s thinking on the way towards it. What emerges
from reviewing Keynes’s biographers’ views in Chapter 1 is that Keynes’s
main purpose in writing the book was to persuade his fellow economists to
abandon previously held views and embrace an approach which could
open the way to fighting unemployment. Chapters 2 and 3 show that
writing the General Theory took Keynes on a long journey from the
Treatise on Money and his own previously held views, such as his
adherence to the Quantity Theory of Money.
Persuasion was essential to Keynes’s conception of economics as a
method of moulding ideas and opinions in an exchange with others, as he
explained in a celebrated passage: “It is astonishing what foolish things
one can temporarily believe if one thinks too long alone, particularly in
economics (along with the other moral sciences), where it is often
impossible to bring one’s ideas to a conclusive test either formal or
experimental” (CWK VII: vii–viii; emphasis added).
In fact, in the often-quoted letter to G.B. Shaw, we find confirming
evidence: “When my new theory has been duly assimilated and mixed
with politics and feeling and passions […] there will be a great change”
(CWK XIII: 492–93). Far from asserting the scientific superiority of his
own theory, he entrusted “politics, feelings and passions” to get the
message through.
2 Introduction
roles: it was the pupil who intervened to correct, tidy up, and sound out the
master’s rationale. There are aspects independently worked on by Kahn
that Keynes subsequently incorporated, adapting them to his aims and
forma mentis, which eventually became part of The General Theory,
readjusting the framework upon which his Treatise on Money had rested.
Kahn was a close collaborator of Keynes in the running of King’s college
finance, in following up on Keynes’s reforms proposals and finally as his
literary executor, taking charge of Keynes’s intellectual legacy.
Chapter 7 follows Joan Robinson’s acquaintance with Keynes, which
began slowly, but developed into a warm friendship and a close
intellectual partnership. She was a member of the “Circus”, the informal
discussion group that met from late 1930 to the Spring of 1931 for the
purpose of pursuing the arguments of the Treatise on Money to their full
implications. Given her involvement with Keynes’s work, she was asked
to comment on the proofs of the General Theory. Keynes was also
supportive of her academic career and once stepped in to prevent others
from harming it. Their relationship also had its dif¿cult moments when
she was defending Kalecki’s work against his criticism, but the
correspondence between them from the mid-1930s onwards shows that he
trusted her judgment and was appreciative of her work. After Keynes’s
death, she became the staunchest supporter of the Keynesian Revolution,
in particular against those she believed to be its “bastard progeny”.
The third section concerns what has been referred to in the literature as
the “return to Keynes” in the aftermath of the 2007–8 financial crisis.
After over twenty-five years of ostracism, spent extolling the efficiency of
free markets and running econometric tests to prove that economic policies
are either ineffectual or even irrelevant, there has been an upsurge in the
wave of references to Keynes in the media. Although this has not been
reflected on the academic scene, still dominated by the macroeconomics of
anti- or pre-Keynesian inspiration that took hold between the 1970s and
1980s, the return to Keynes is certainly welcome. This is the subject of
Chapter 10.
While today’s world is very different from that of twenty – let alone
eighty – years ago, there are notable similarities between the Great
Depression of the 1930s – Keynes’s world – and our contemporary crisis.
A corresponding similarity is to be seen between the economic theory
prevailing before Keynes’s times and that of our own times. There are at
least two reasons why the ideas put forward by Keynes in the 1930s are
still relevant to the world of today. The first, and perhaps the most
important, is the global recession which has dragged on since 2008–9 and
even now is showing only a few timid signs of letting up, forcefully
4 Introduction
References
Keynes, J.M. (1971–1989), The Collected Writings of John Maynard
Keynes (CWK), managing editors E.A.G. Robinson and D.E.
Moggridge, 30 vols., London: Macmillan for the Royal Economic
Society.
CWK VII. The General Theory of Employment, Interest and Money.
CWK IX. Essays in Persuasion.
CWK XIII. The General Theory and After: Part I. Preparation.
Marcuzzo, M.C. (2012), Fighting Market Failure. Collected Essays in the
Cambridge Tradition of Economics, Abington: Routledge.
Marcuzzo, M.C. (2018), “Against Twisting the General Theory” in S.
Dow, J. Jespersen and G. Tily, (eds), The General Theory and Keynes
for the 21st Century, Cheltenham (UK) and Northampton (MA):
Edward Elgar, 16–28.
—. (2017), “Fighting Austerity: Why after 80 Years the General Theory Is
Still Relevant Today”, Brazilian Keynesian Review 3(1): 14–24.
Marcuzzo, M.C and Rosselli, A. (eds) (2005), Economists in Cambridge.
A Study through Their Correspondence, 1907–1946, Abingdon and
New York: Routledge.
PART I
It may both be true that many things said by Keynes [in the General
Theory] had been said, or could have been said, in the old terminology, and
that his scheme has temped its users into certain errors, and yet remain also
true that, on the whole and on balance, his scheme is far superior.
(Harrod 1951: 465)
I must remind the reader that the book is probably the least clear of
Keynes’s contribution to economics.
(Moggridge 1992: 557)
There are many different ways of telling the story of the General Theory of
Employment, Interest and Money, and many different stories to be told
about it.
(Skidelsky 1992: 537)
1. Premise
It is perhaps fitting to mark the 70th anniversary of the General Theory
(GT)1 with an assessment of what we have learned about this work from
1
In 2006 a number of events were held to celebrate the anniversary of the General
Theory and commemorate Keynes’s death ten years later; this burst of activity took
a heavy toll on scholars who had perhaps too readily accepted the invitation to take
part in them, untroubled by the danger of repetitions and overlapping in what they
had to say. This was certainly my case, as I later discovered that by taking part in
these celebrations I had committed myself to writing three chapters on Keynes in a
very short period of time. I have tried my best to make this chapter a complement
to rather than a substitute for the other two companion pieces (Marcuzzo 2006;
2008).
The General Theory in Keynes’s Biographies 9
2
In Moggridge the GT is covered in two chapters amounting to 53 pages, while the
two chapters devoted to it in Skidelsky come to 87 pages.
10 Chapter One
Keynes was an educator. His classroom was England and the world, and
his tools were the newspaper article, the pamphlet, the letter to The Times,
the radiobroadcast, the committee testimony and, occasionally, the
technical books and journal articles addressed to economists. In pursuit of
this mission, he gained knowledge by participating in economic
The General Theory in Keynes’s Biographies 11
3
See Keynes’s often quoted remark: “The study of economics does not seem to
require any specialised gifts of an unusually high order. Is it not, intellectually
regarded, a very easy subject compared with the higher branch of philosophy and
pure science? Yes good, or even competent, economists are the rarest of birds. An
easy subject at which very few excel” (CWK X: 173).
12 Chapter One
4
See for instance what he wrote in 1933: “The decadent international but
individualistic capitalism, in the hands of which we found ourselves after the War,
is not a success. It is not intelligent, it is not beautiful, it is not just, it is not
virtuous – and it doesn’t deliver the goods” (CWK XXI: 239).
The General Theory in Keynes’s Biographies 13
In fact, when it comes to tracing out the influence of his fellow economists
in the process which led Keynes toward the GT, nuances in the accepted
chronology become marked historiographical differences. Skidelsky, like
Harrod,5 plays down the importance of the Circus6 and gives more credit
to Kahn and Hawtrey. Moggridge, on the contrary, takes the view that:
5
“[I]n the writing of the book itself, his main pillar of support was Mr. Richard
Kahn” (Harrod 1951: 451).
6
“Despite much ‘pooled memory’ to the contrary, the Circus seems to have played
a relatively minor part in the development of the General Theory […] the most
important effect of the Circus discussion was to reinforce the impetus Hawtrey
gave Keynes to working out a short-period theory of output […] much more
important than Circus’s collective contribution to Keynes’s progress was Kahn’s
personal contribution” (Skidelsky 1992: 447).
The General Theory in Keynes’s Biographies 15
7
One reviewer of Harrod’s biography acutely remarked that one has “to
disentangle three things: (1) Harrod’s account of Keynes’ economics; Harrod’s
own recent economics; and Keynes account of Keynes’s economics” (Wright
1952: 392).
8
Pasinetti (1977: 60) argues that the ordering of investment projects cannot be
assimilated to the marginal reasoning of neoclassical vintage, being closer to the
Ricardian principles of ordering of land on the basis of degree of fertility; on the
16 Chapter One
contrary, Bonifati and Vianello (1998: 103) argue that Keynes remains faithful to
the marginalist tradition according to which as the rate of interest decreases more
capital – intensive production processes are adopted as an effect of the “scarcity”
principle.
9
“There is little doubt that he would not have rested content in the position that he
had achieved in 1935 anymore than Ricardo, whose mind was also continually
moving forward, would have rested content with the last edition of the Principles”
(Harrod 1951: 473).
The General Theory in Keynes’s Biographies 17
from his early writings to the great system set out in the General Theory”.
No clues, however, are given to the reader about the elements which could
be brought in to confirm or disconfirm the “continuity” thesis.
Moggridge lays great emphasis on Keynes’s intuition in general, and
specifically on working out the GT: “in the development of particular
ideas for the General Theory it is clear that he had intuitively grasped the
essentials of many of them quite early” (Moggridge 1992: 552).
Moggridge insists that for Keynes “intuition ran ahead of analysis”, and
that for him economics required “appeal to intuitions”, not proofs as in
mathematics, alluding here to the wider issue of the methodological
differences in natural and moral sciences to which Keynes attached great
importance.
In the same vein, but in a slightly different sense, Skidelsky points out
to the artistic aspect of Keynes, in particular as far as the GT is concerned;
he described it as a “work of art and imagination as well as economic logic
[...] an invitation to thought rather than a machine for solving crises”
(Skidelsky 1992: 538).
These differences in characterizing Keynes’s intellect add to their
shared belief that the driving force behind it was an urge to persuade and a
deep involvement in policy-making.10 In a related chapter (Marcuzzo
2008), I examined the central role of persuasion in Keynes’s work as a
means to change the environment within which individuals operate – so
that moral and rational motives become the spring of action of the
collectivity as a whole – and to induce behaviour to conform to goals that
were attainable only by moving beyond individualistic motivation or
utilitarian calculation. As Samuel Brittan aptly noted, Keynes “never lost
hope that morality and permeation of ideas could be relied upon to
disseminate enlighten thinking after, at worst, a lag of generation” (Brittan
2006: 182).
There is no doubt that the GT is better portrayed as a study in
persuasion rather than in policy making, offering a set of recipes or rules
to be followed in all circumstances. Skidelsky warns against the dangers of
“reading off Keynesian policy prescriptions from a single book”
(Skidelsky 1992: 319) and in particular the misreading of the GT as a
eulogy of fiscal policy. He argues, however, that notwithstanding
Keynes’s own resistance to “premature formalisation of his theory [...] the
reduction of theory to model was inseparable from its triumph as a tool of
policy” (ibid.: 548).
10
“Keynes was passionately concerned with policy; so were most of those who
took up the General Theory” (Skidelsky 1992: 617).
18 Chapter One
engaged in his own research program which differed in scope and content
from Keynes’s, who is trying to convey the GT to a general public, but
bearing also in mind the professional reader. Skidelsky is the historian
with a superb command in story-telling, very versed in twentieth-century
British culture, who is attempting to give his readers a summary of the
book, taking care of its enduring fascination, the reactions it prompted and
the controversies it still produces.
It would be vain to conclude this comparison by giving marks to each
of the biographers in the attempt to establish which of them best
performed the task of presenting the GT both to the practitioner of the
subject and to the layman. In an article of some years ago, Gerrard (1991:
286) argued that we should not be “worrying about the multiple
interpretations” of the GT since its continuing achievement consists
precisely in the “ability to generate a diversity of research program”.
Similarly, perhaps, we should have no worries about being confronted
with further attempts to frame the GT within the life of John Maynard
Keynes11 as long as new material is brought to the fore. Changing readings
of the General Theory have always been monitored in the professional
literature (see recently Dimand 2010) either by reinstating what was
believed to be its true meaning and message, or by denouncing its
supposed failures and misgivings (see De Vroey 2004). The contribution
of biographers – to place the book in its context, both in the life of Keynes
and in his times – is not a minor task of scholarship, although not
exhaustive. This should also be kept under scrutiny, to monitor what needs
to be discarded or abandoned in their accounts. In the future additional
evidence from various people’s papers, correspondence and manuscripts
may turn up, supporting or disproving the present historical
reconstructions; in history, as in science, there are no results that cannot in
principle be revised.
The layers of interpretation of the book – the original text, Keynes’s
own account, the biographer’s story, and the heaps of reviews assessing
them all – thus make appraisal of it on the occasion of the 70th year since
publication a complicated, but no less intriguing and enticing undertaking.
References
Bateman, B. (2006), “Keynes and Keynesianism”, in R. Backhouse and B.
Bateman (eds), Cambridge Companion to Keynes, Cambridge:
Cambridge University Press, 258–71.
11
For a very recent one see Dostaler (2007).
The General Theory in Keynes’s Biographies 21
*
An earlier version of this paper was presented at the European Conference on
the History of Economics, Lisbon, 1996, and at the Annual Conference of
AISPE, Pisa, 1996, and at an ESHET Conference held in Milan in November
2001. I am grateful to the Provost and fellows of King’s College, Cambridge,
for permission to quote from unpublished letters by Joan Robinson and D.
Papineau for permission to quote from unpublished letters by Richard Kahn. I
am grateful to V. Chick, M. Lippi, A. Rosselli, C. Sardoni and F. Vianello for
helpful comments and suggestions.
The Demise of the Quantity Theory of Money 25
In fact, the demise of the Quantity Theory of Money took Keynes a long
way from his previous views.
In what follows I trace the development of this transition to an
alternative theory to price level determination based on aggregate demand
and aggregate supply. I argue that in the process which led to the new
formulation, Kahn’s construction of the aggregate supply curve, drawn in
the expected proceeds-aggregate output space, was an important step,
because it allowed for a straightforward derivation of the ‘level of prices’
as the ratio of expected proceeds to output. The generalized statement of
26 Chapter Two
2. Prelude
According to Kahn, “Keynes’ long struggle over a period of six years to
produce a version of the Treatise worthy of publication was directed partly
to an escape from the stranglehold of the Quantity Theory of Money in its
crude form.1 In the end Keynes was able to write that ‘The forms of the
Quantity Theory […] on which we have all been brought up […] are but ill
adapted for this purpose’ of exhibiting ‘the causal process by which the
price level is determined, and the method of transition from one position to
another’[…]” (Keynes [1930] 1971: 120).
“Nevertheless” – Kahn continues – “Keynes seems to have been so
much under the spell of the Quantity Theory that he could write about his
Fundamental Equations as though they were ‘versions’ of the Quantity
Theory” (Kahn 1984: 56).
In the Treatise the logic of the Quantity Theory is questioned on two
grounds:
1) the slowness of the adjustment required to bring about the final
equilibrium position renders it almost irrelevant as an explanation
of actual processes;
2) since “a change in the total quantity of money […] is algebraically
consistent for a time with more than one set of consequences”
(Keynes [1930] 1971: 243), the Quantity Theory cannot be
interpreted as exhibiting a causal process.
The Treatise offers only the destruens pars of the criticism of the
Quantity Theory and Keynes was able to provide the alternative approach
only when he “succeeded in getting his theory of money, his theory of
wages and Kahn’s multiplier into a coherent system” (Robinson 1966:
viii). Moggridge dates Keynes’s first formulation of an alternative
explanation of determination of the level of output in the early 1933,2 but
1
On Keynes’s own assessment of the relationship between the Treatise and the
General Theory, see Marcuzzo (2002a).
2
“[…] by early 1933 at the latest the basic output adjustment framework of the
General Theory was in place, as were the theory of liquidity preference and the
notion of the marginal efficiency of capital” (Moggridge 1992: 564–65). See
The Demise of the Quantity Theory of Money 27
Kahn claims that at the time Keynes had not yet have a clear picture of the
alternative approach.3
In fact, an argument similar to that presented in the Treatise is adopted
by Keynes in a letter to Dennis Robertson of May 3, 1933, to reject the
Quantity Theory:
In my present state of mind […] I doubt that either version of the
Cambridge equation is of any serious utility, and I can’t remember that I
have ever come across a case of anyone ever using either of them for
practical purposes of interpretation […]. One can of course write down
quite a number of equations of this type, stating the de facto relationship of
some one thing to some other. But are they of any use for causal
interpretation? All the versions of the Quantity Theory, which make no
distinction between swops and intermediate transactions and genuine
production-consumption transactions, seem to me to tell one nothing.
(Keynes 1979: 18)
Marcuzzo (2002b) for a review of the literature on the chronology of the General
Theory.
3
“By March 1934 clarity had been far from reached over the fundamental
definitions” (Kahn 1984: 114).
4
Some commentators stressed the continuity between the Treatise and the General
Theory as far as the theory of liquidity preference is concerned. Patinkin points to
the instances in the General Theory where mention is explicitly made of the link
with the bull-bear discussion in the Treatise of the relationship between the three
motives in the demand for money (transactive, precautionary, speculative) in the
General Theory and the income-deposits, business deposits and savings deposits of
the Treatise (Patinkin 1993: 650). Trevithick maintains that “many of the
characteristic features of the theory of liquidity preference had been formulated in
A Treatise on Money” (Trevithick 1994: 82).
5
This section is mainly drawn from Marcuzzo (1996a).
28 Chapter Two
6
The claim is substantiated by Kahn himself. In a letter to Patinkin of March 1974,
he described one of the main important results of the 1931 article as “Finally
disposing of the idea that the price level is determined by the quantity of money”
(Patinkin and Leith 1977: 147).
The Demise of the Quantity Theory of Money 29
The multiplier article can be seen then as the first step towards a theory
based on aggregate supply and demand curves, although its application is
limited here to the consumption goods sector. Extension of this analysis to
output as a whole is accomplished in the discussion of the aggregate
supply function as we find it in the lectures given by Kahn in Michaelmas
Term 1932, as recorded in the notes taken by Lorie Tarshis (Tarshis
1979).7
The starting point for the construction of the aggregate supply curve is
the same as in the multiplier article. The difference is that on the vertical
axis we now have the expected proceeds necessary to induce entrepreneurs
to produce a given output, while in the horizontal axis we have the level of
output so that the question – what the price must be – is substituted by
what the proceeds must be, in order that a given quantity be produced.
To derive the aggregate supply curve, we start from determination of
the supply curve of each level of output for a single firm. The supply price
answers the question: given marginal and average costs, associated with a
given level of output, ܱ , what the price must be in order that the firm that
maximizes its profits be willing to produce precisely that level of output?
The level of output, ܱ , will be produced only if profits are at a
maximum; that is to say, only if in ܱ marginal revenue equals marginal
cost.8 Thus, on the basis of the well known relationship between price and
marginal revenue, for a given elasticity of demand measured at ܱ , the
supply price, , is:
݇
ൌ ൬ ൰ ܥܯ
݇െͳ
where ݇ = elasticity of demand and ܥܯ , = marginal costs at ܱ . The
supply curve is then given by,
݇
ܼሺܱ ሻ ൌ ܱ ൌ ൬ ൰ ܥܯ ܱ
݇െͳ
It is worth noting that the above is a general formulation, which does not
require special assumptions about market form or the shape of the
marginal cost curve. Specific assumptions are reflected in the shape of the
supply curve and in the value of its elasticity.
7
An outline of Kahn’s lecture notes can be found in Kahn’s papers, King’s
College Cambridge (henceforth RFK, followed by the catalogue number),
RFK 4/15/4–14.
8
In addition the price must be at least as high as the variable unit cost, otherwise
the entrepreneur would earn more (or, in this instance, lose less) by suspending
production.
30 Chapter Two
ܱ
ୀଵ
݉= number of firms; ܱ = output produced by the jth firm.
The total output of the economy is measured by a production index; to
avoid double counting, intermediate products are of course subtracted
from the total production, so that a measure in terms of value added is
obtained.
The importance of the aggregate supply curve, drawn in the expected
proceeds-aggregate output space, is that derivation from it of the “level of
prices” is straightforward: for each level of output, it is given by the ratio
of expected proceeds to output. This means that the level of price can be
determined by the same forces as the level of output and not by the
quantity of money.
What Kahn had achieved turned out to be an important step in the
development of Keynesian ideas, as Joan Robinson reminded us years
later: “A short period supply curve relating the level of money prices to
the level of activity (at given money-wages rates) led straight from
Marshall to the General Theory.” (Robinson 1969: 582).
The point can not have been fully understood even by the closest
among Keynes’s associates, if in October 1934, Kahn felt the need to
explain it to Harrod:
To my mind it is the most complete nonsense to suppose that the ideal
behaviour of banks can be framed in terms of any propositions involving
level of prices. How prices behave depends on how wage behave, and that
in turn depends on how Trade Unions behave […]. In short, I do not think
in terms of money and prices. In the view of Keynes and his followers the
Theory of Money has ceased to exist. Though of course that is an
exaggeration (it is the quantity of money which determines the rate of
interest), but the exaggeration is a pardonable one.9
9
Letter of Oct. 22, 1934, quoted in Besomi (1999: 46).
The Demise of the Quantity Theory of Money 31
10
JMK stands for J.M. Keynes papers, King’s College, Cambridge.
11
A year and half later, when the building blocks of the General Theory were
firmly laid out, Joan Robinson was so confident in her role that she could write to
Kahn: “[…] of course I am absolutely full of-views about the Treatise. Would
Maynard like me to write him a Preface for the new work showing in what respects
his ideas have altered?” (letter of Sept. 5, 1934; RFK 13/90/2/95). In fact, it was
during that summer that a change occurred in the personal relationship between
Keynes and Joan Robinson. She wrote to Kahn on Aug. 15, 1934: “[…] I see
32 Chapter Two
The point of the article is to show that the aggregate supply and aggregate
demand apparatus can be employed to determine the equilibrium level of
output. Only if the supply of goods is perfectly inelastic will an increase in
the quantity of money result in an increase in prices. But, if over a certain
range the supply of goods is perfectly elastic, “a rise or fall in demand for
goods […] will be met by an increase or decrease in output without any
changes in prices” (Robinson 1951: 56).
Joan Robinson goes as far as arguing that in fact the theory set out in
the Treatise is concerned with determination of the level of output rather
than the level of prices, and that Keynes failed in that book “to realize the
nature of the revolution that he was carrying through” (Robinson 1951:
55).
The article contains an attack on the Quantity Theory of Money
described as a tautology, “devoid of causal significance” (Robinson 1951:
55). The point is illustrated by what Joan Robinson refers to as Kahn’s
“Quantity Equation for Hairpins”.13 It is worth quoting the relevant
passage in full:
Maynard signed ‘yours faithfully’ in type and crossed it out in ink so I can’t really
complain” (RFK 13/90/2/40).
12
Charles Gifford was the student who used the marginal revenue curve in one of
his essay for Austin Robinson, thus arousing the interest of Joan Robinson and
Richard Kahn who then started their joint work on imperfect competition. See
Marcuzzo (1994; 2001).
13
Among Kahn’s papers a handwritten document, containing the notes of the
lecture which Kahn gave to Graduate Club in Chicago in January 1933, has been
found where the Quantity Equation for Hairpins is set out. See RFK papers, file
4/17. Also Dardi (1994: 91) agrees that the “quantity theory for hairpins” testifies
The Demise of the Quantity Theory of Money 33
Let ܲ be the proportion of women with long hair, and ܶ the total number of
ଵ
women. Let be the daily loss of hairpins by each and ܯthe daily output
்
of hairpins. Then ܯൌ and ܸܯൌ ܲܶ. Now suppose that the Pope,
regarding bobbed hair as contrary to goods morals, wishes to increase the
proportion of long-haired women in the population, and asks a student of
economics what he has best do. The student sets out Mr. Kahn’s equation,
and explains it to the Pope. “All you need do”, he says, “is to increase ܯ,
the daily output of hairpins (for instance, you might give a subsidy to the
factories) and the number of long-haired women is bound to increase”. The
Pope is not quite convinced. “Or, of course”, the student adds, “if you
could persuade the long-haired women to be less careless, ܸ would
increase, and the effect would be the same as though the output of hairpins
had increased”.
“to Kahn’s resolution in waving the anti-quantity theory flag at the time when
Keynes and the ‘Circus’ were still groping for a way out of monetary orthodoxy”.
14
Kahn gave a clear statement of the reversed causality between money and prices
as early as 1932 in a paper “Public Works and Inflation” he presented to the
American Statistical Association of Cincinnati, where he wrote “the quantity of
money is an effect, not a cause.” (Kahn 1972: 30).
34 Chapter Two
proportion as the wage-unit, then the level of price depends partly on the
wage unit and partly on the volume of employment.
Keynes then proceeds to discuss the conditions under which the result
of the/strict Quantity Theory – a proportional increase in prices as
consequence of an increase in the quantity of money – actually hold.
First, we have to consider the effect of a change in the quantity of
money on effective demand, and then how the change in effective demand
spends itself in increasing output and prices. In other words, the elasticity
of changes in prices with respect to a change in the quantity of money (݁)
is given by the elasticity of changes in effective demand with respect to
changes in the quantity of money (݁ௗ ) times the elasticity of changes in
prices with respect to changes in effective demand (݁ ).
Formally, we have that:
ܲ݀ ܯ
݁ ൬ൌ ൰ ൌ ݁ ݁ௗ
ܲ ݀ܯ
It is immediately evident that, if effective demand increases in the same
proportion as the quantity of money, that is to say if we assume a constant
ratio between effective demand and the quantity of money, namely if
ெ ௗ
݁ௗ ቀൌ ቁ ൌ ͳ, prices will increase in the same proportion as the
ௗெ
ௗ
increase in effective demand, whenever ݁ ቀൌ ቁ ൌ ͳ, where ܦis
ௗ
effective demand and ܲ is the level of prices.
The derivation of ݁ gives ݁ ൌ ͳ െ ݁ ݁ ሺͳ െ ݁௪ ሻ,15 where ݁ ቀൌ
ே ௗை
ቁ is the elasticity of output in response to changes in employment
ை ௗே
ௗௐ
demand, ݁௪ ቀൌ ቁ is the elasticity of money-wages in response to
ௐ ௗ
15
It is here assumed that at p. 304 Keynes made a slip in the definition of ݁ ,
ௗை ே ௗை
writing ݁ ൌ rather than ݁ ൌ . Otherwise the expression of p. 305,
ை ௗே ை ௗே
݁ ൌ ͳ െ ݁ ݁ ሺͳ െ ݁௪ ሻ, is inconsistent with that of p. 285, where ݁ ൌ ͳ െ
݁ ሺͳ െ ݁௪ ሻ, in the simplified case of ݁ௗ ൌ ͳ. Two explanations have been put
forward in the literature to account for this “inadequate derivation” (Keynes [1936]
1973: 385) of the expression of p. 305. The first is that in the expression of p. 305
Keynes implicitly assumed ݁ ൌ ͳ (Naylor 1968; Chick 1983: 273). The second
explanation, which is favoured here, is that Keynes used the same symbol for two
different definitions of ݁ (Borch 1969). According to the definition given on pp.
ௗை ே ௗை
284–85, ݁ଵ ൌ ೢ , according to the second, which is assumed here, ݁ଶ ൌ ை ௗே.
ை ௗ ೢ
ೢ ௗை ೢ ௗே ே ௗை
Since ݁ଵ ൌ ൌ ൌ ݁ ݁ଶ , there is no contradiction between the
ை ௗೢ ே ௗೢ ை ௗே
two expressions. The slip, however, does not impair the logic of the argument.
The Demise of the Quantity Theory of Money 35
ௗே
changes in effective demand and ݁ ቀൌ ቁ is the elasticity of change in
ே ௗ
employment in response to a change in effective demand. We then have:
ܲ݀ ܯ
݁ ൬ൌ ൰ ൌ ݁ௗ ሾͳ െ ݁ ݁ ሺͳ െ ݁௪ ሻሿ
ܲ ݀ܯ
ൌ ݁ௗ ሺͳ െ ݁ ݁ ݁ ݁ ݁௪ ሻ
The above expression, according to Keynes, “can be regarded as a
generalized statement of the Quantity Theory of Money” (Keynes [1936]
1973: 305).
Thus the quantitative result is made dependent upon the values of four
critical elasticities:
݁ௗ = liquidity factors, which determine the demand for money in each
situation;
݁௪ = labour factors, which determine the extent to which money-wages
are raised as employment increases;
݁ , ݁ = physical factors, which determine the rate of decreasing
returns as more employment is applied to the existing equipment.
Thus, if the public hold a constant proportion of their income in
money, ݁ௗ ൌ ͳ; if money wages are fixed,݁௪ ൌ Ͳ; if constant returns
prevail, ݁ ݁ ൌ ͳ; if there is full employment either of labour or
equipment, ݁ ݁ ൌ Ͳ (Keynes [1936] 1973: 306).
ெ ௗ
In fact, there are many conditions under which is equal to 1; for
ௗெ
instance, as we have seen, if ݁ௗ ൌ ͳ and ݁௪ ൌ ͳ, but also:
either
if ݁ௗ ൌ ͳ, ݁௪ ൌ Ͳ and ݁ ݁ ൌ Ͳ;
or
if ݁ௗ ൌ ͳ and ݁ ൌ Ͳ
and of course a variety of other combinations.
However, “on plausible assumptions relating to the real world”,
according to Keynes, it is very unlikely that the elasticity of the price level
with respect to a change in the quantity of money will turn out to be equal
to 1, and therefore it is “safe to make the generalization [that] as a rule [is]
less than unity” (Keynes [1936] 1973: 306).
The really important result achieved by Keynes is not, of course, to
have chimed what any defender of the Quantity Theory of Money would
readily concede, but to have provided us with description of a transmission
mechanism in which behavioural relationship are ordered according to a
clear chain of causes and effects. As Kahn later put it, the novelty of the
36 Chapter Two
6. Concluding Remarks
Keynes’s generalization of the Quantity Theory of Money follows a line of
reasoning similar to that employed in the theory of income determination:
the Quantity Theory of Money results apply under very special conditions:
far from being a general proposition, it can be applied in very special
circumstances, which rarely occur in the real world.
It could be argued that the attempted reconciliation with the tradition,
as in many other instances of Keynes’s tactics against the orthodox view,16
ended up as serving its rehabilitation. Rather than stressing that the
Quantity Theory of Money results apply under very special conditions, the
Neoclassical synthesis first, and the so-called Neo-Keynesian models later,
swept those very special assumptions under the carpet so that the very
point Keynes was making against the Quantity Theory of Money was
completely missed.
The generalized statement of the Quantity Theory of Money presents a
transmission mechanism from monetary to real factors that can be broken
down into a series of steps, which may lead to very different outcomes.
For instance, an increase in the quantity of money may not generate a
proportional increase in effective demand; the increase in effective
demand may not give rise to a predictable rise in wages, and the rise in
output and employment and prices may occur in various combinations so
that there is not only one possible outcome.
Moreover, changes in the supply of money bring about changes in the
interest rate only if the schedule of the liquidity preference is represented
as a well-defined curve or a stable relationship. Kahn, in his Liquidity
Preference article, stressed “the unsuitability of thinking of a schedule of
liquidity preference as though it could be represented by a well-defined
curve or by a functional relationship expressed in mathematical terms or
subject to econometric processes” and held Keynes responsible for giving
way “to the temptation to picture the state of liquidity preference as a
fairly stable relationship” (Kahn 1972: 90).17
16
Harcourt and Sardoni (1994) rightly argue that part of Keynes’s strategy to gain
acceptance for his new ideas was to accept as many assumptions of the classical
theory as possible, then deriving conclusions at variance with it.
17
Dardi rightly argues that “hints may be found, especially in Kahn’s later
writings, which point to long-standing differences between him and Keynes on the
The Demise of the Quantity Theory of Money 37
To sum up, costs conditions and the degree of competition set the
increase in prices necessary for an increase in production to take place, if
constant returns do not prevail, so that firms maximize their profit, but it is
the level of expected demand which sets the level of production, and an
increase in the level of expected demand is not synonymous with increase
in the quantity of money.
The chain of causes and effects is misrepresented in the so called
AD/AS model which became popular in the 1990s. An increase in the
quantity of money always shifts the AD curve up and to the right, except
in liquidity trap, since a higher money supply in real terms makes the
interest rate fall, and investment and income increase. Then, in order to see
what happens to the price level the aggregate supply curve is brought in.
The AS curve is presented, in the long run, as perfectly inelastic at the
“natural rate of unemployment” or at the NAIRU level, whereas in the
short run it is presented as upward sloping, because of fixed nominal
wages and/or misperceptions of price changes by workers and firms. It
follows that how the increase in the quantity of money spend itself on
prices and output is made dependent on the elasticity of the aggregate
supply curve.
However, the shape of the AS curve reflects conditions in the labour
market rather than the structure of costs in the economy. Any increase in
prices, associated with changes in income and employment is mainly
accounted for by an increase in money wages, more or less proportionally,
according to the assumptions made on the behaviour of labour productivity
and mark up. It is thus apparent that the AS curve is nothing more than a
travesty of the empirical regularity known as the Phillips curve (Marcuzzo
1996b).
On the contrary, we saw that the aggregate supply function (ASF)
devised by Kahn – and adopted by Keynes in relation to employment
levels18 – is a relationship between different levels of output and those
expectations of proceeds that would induce entrepreneurs to make them
available. Its position and shape is determined by the marginal costs of the
various firms that make up the economy and the elasticities of the
demands for the products of these various firms, whereas Keynes’s
aggregate demand function (ADF) shows the level of proceeds the firms
expect to realize from the sale of their outputs. Their intersection gives the
very foundations of monetary theory and on the most appropriate ways of dealing
with the influence of monetary theory on the rate of interest” (Dardi 1994: 91).
18
If average labour costs are constant and marginal labour costs are a constant
fraction of marginal costs, then the supply functions against output and
employment have the same characteristics. See Tarshis (1979: 377).
38 Chapter Two
References
Besomi, D. (1999), The Making of Harrod’s Dynamics, London:
Macmillan.
Borch, K. (1969), “Another Note on Keynesian Mathematics”, Economic
Journal 79(313): 182–83.
Chick, V. (1983), Macroeconomics After Keynes: A Reconsideration of the
General Theory, London: Philip Alan.
Dardi, M. (1990), “Richard Kahn”, Studi Economici, 41: 3–85.
—. (1994), “Kahn’s Theory of Liquidity Preference and Monetary Policy”,
Cambridge Journal of Economics 18(1): 91–106.
Dornbusch, R. and Fisher, S. (1990), Macroeconomics, New York:
McGraw-Hill.
Harcourt, G.C. and Sardoni, C. (1994), “Keynes’s Vision: Method,
Analysis and ‘Tactics’”, in: J.B. Davis, (ed.), The State of
Interpretation of Keynes, New York: Kluwer Academic Publisher,
131–52.
Kahn, R.F. (1972), Selected Essays on Employment and Growth,
Cambridge: Cambridge University Press.
—. (1984), The Making of Keynes’s General Theory, Cambridge:
Cambridge University Press.
19
In the case of the supply curve in relation to aggregate output (AFS-O), we have
seen that it is given by the slope of the straight line joining the corresponding point
on the ASF-O to the origin. In the case of the supply curve in relation to aggregate
employment, (ASF-N) the slope of the line from any point on the function to the
origin represents the ratio of value added to the level of employment (Tarshis
1979: 380).
The Demise of the Quantity Theory of Money 39
1. Premise
One of the difficult tasks, which any scholar of Keynes’s writings is
confronted with, is that of tracing the relationship between the General
Theory and the Treatise. To this controversial matter, which has spawned
a large literature, I would like to contribute with a further element which
does not seem to have received as much attention as others, namely an
investigation into Keynes’s own assessment of the relationship between
his two books.
Keynes was convinced that there was a fundamental continuity
between the Treatise and the General Theory. Throughout the process
which led him from the former to the latter book, he repeatedly claimed
that the Treatise analysis was in fact compatible with that of the General
Theory and that he had made the new argument only “much more accurate
and instructive” (Keynes [1936] 1973a: 77).
In fact, the transition from the Treatise analysis, as presented in the
Fundamental Equations and that of the General Theory, as incorporated in
the principle of effective demand, required the introduction of new
concepts and a change in definitions, which eventually made the latter
approach quite distinct from the former. However, Keynes wanted his
readers to believe that “under the surface […] the essential ideas are the
same” (Skidelsky 1992: 442), and presented his new book as a “natural
evolution” in his line of thought (Keynes [1936] 1973a: xxii).
42 Chapter Three
ܳଶ ൌ ܫെ ܫԢǡ
ܳ ൌ ܳଵ ܳଶ
ൌ ܫെ ܵǤ
There are different effects on the system, according to how profits are
spent. In the “widow’s cruse” example (Keynes [1930] 1971: 125), if
entrepreneurs spend their extra-profits on consumption goods, the positive
gap between the cost of investment goods and saving widens: the price of
consumption continues to increase, and so do profits. When profits are
positive entrepreneurs have an incentive to increase output and
employment; if losses occur, both output and employment will be reduced.
However, adjustment of output is not the object of the analysis in question,
From the Fundamental Equations to Effective Demand 43
1
“You have over a short period something of the nature of a supply curve which
tells you that for a given level of prime profit [i.e. the difference between gross
receipts and prime costs] there will be a given level of output, that if you have a
certain amount of prime profit, that would be sufficient to bring a certain quantity
of potential output over the prime cost level […] so if you have a supply curve
which is valid over the short period only […] you could only increase employment
and output by increasing prime profit” (Keynes 1973b: 368).
2
According to Moggridge’s dating (Keynes 1973b: 380), this is the “earliest” of
the fragments of the 1931–2 period of writing. Moggridge’s dating of the early
General Theory fragments was questioned by Patinkin (see Patinkin 1993: 654–
56). I do not see enough evidence supporting Patinkin’s claims.
From the Fundamental Equations to Effective Demand 45
This result was reached on the “presumption” (Keynes 1979: 41) that
changes in saving, following a change in investment, rather than offset,
reinforce the effects of the change in investment on profit and output. The
main argument was that changes in investment and output were positively
correlated: an increase in output is equal to an increase in sales receipts
(= income); an increase in investment is equal to an increase in sales
receipts (= income) minus expenditure on consumption; consumption and
income are positively correlated, therefore changes in investment and
changes in output have the same sign. This “proof” was challenged by
Kahn, Austin and Joan Robinson who signed a Manifesto and offered an
“alternative” (as Keynes put it) or “complementary” (as Joan Robinson
had it in her subsequent correspondence) solution (Keynes 1973b: 378).
The authors of the Manifesto claimed that demonstration would be better
handled “by the method of supply and demand” (Keynes 1979: 43). The
increase in investment – they argued – leads directly to an increase in the
level of output because it raises the demand for consumption goods;
assuming as given the supply conditions of these goods, the new level of
output of consumption goods and thus the aggregate level of output can
immediately be determined.7
Keynes was reluctant “to scrap all my present half forged weapons”
(Keynes 1973b: 378), as he wrote to Joan Robinson, but shortly afterwards
he gave in. In the lectures of Michaelmas Term 1932, when he changed
the title of his course to “The Monetary Theory of Production”,8 he took
up the “method” of the Manifesto. However, once again he pledged that “a
change in demand as a whole relatively to supply as a whole due to
deficient disbursement […] is the same thing as what in my Treatise on
Money, I have called an excess of saving over investment” (Keynes 1979:
53).
7
In 1980 Joan Robinson reviewed the vol. XXIX of the Collected Writings of J.M.
Keynes, where the Manifesto was first published. She argued that: “[…] Keynes, in
his lectures, was still using the cumbersome Treatise definitions, which turn on a
difference between saving and investment, but he was using them to get the same
results”. (Robinson 1980: 391).
8
Of these lectures there survive fragments from 10 October and 14 November.
From the Fundamental Equations to Effective Demand 47
9
In retrospect Kahn was startled by this proposition: “It is disconcerting in these
October [sic] lecture notes to read of the rate of interest ‘such as to cause saving to
be in excess of investment’” (Kahn 1984: 113n).
10
In the retrospective evaluation of his “multiplier” article, Kahn wrote: “I was
handicapped having to translate my thinking into the definitions of the Treatise”
(Kahn 1984: 100).
From the Fundamental Equations to Effective Demand 49
11
In fact, there is no evidence on whether the fragments corresponding to the first
and second 1933 draft table of contents (Keynes 1979: 63–75) were written during
the summer, but it is a plausible inference.
50 Chapter Three
expectations”, while ܳ is relevant for the short period (Rymes 1989: 107;
Keynes 1979: 72).
The Fundamental Equations had by now (Rymes 1989: 109) become:
ܻ ൌ ܧ ܳ ൌ ܥ ܫൌ ܦ,
12
Dimand (1986) noticed that the Treatise profits are always ex post windfalls
magnitudes, except for one passage (Keynes [1930] 1971: 143) in which they are
considered as an ex ante measure of profitability.
From the Fundamental Equations to Effective Demand 51
In March 1934, Keynes was convinced that the book was by then
“nearing completion” (Keynes 1973b: 422). From this period, we have the
versions of chapters 6–12 of the index to the book, which now bore the
title The General Theory of Employment, Interest and Money, written
before his journey to the United States in June 1934, and the provisional
versions of chapters 8–9 written over the summer.13 In those drafts he
insisted on compatibility with the Treatise analysis, by referring to
entrepreneur’s windfall profits or losses as the difference between
effective demand and income (Keynes 1973b: 425) and explaining the
change in the definitions of income and saving as “a change of
terminology and not a change of view” (Keynes 1973b: 476).
The issue of explaining the relationship between the new book and the
old one arose again. On 29 November 1934, he wrote to a Spanish
correspondent, Luc Beltram:
[…] in a work of mine which will probably come out in about a year’s time
I deal with the underlying theory on what at any rate on the surface, would
appear to be lines rather different from those adopted in my Treatise on
Money. Under the surface, however, the essential ideas are the same.
(Skidelsky 1992: 442)
The General Theory was finished in late December 1935. In the final
version, Keynes carefully indicated where his new argument departed
from the old. First, there was the change in the definition of income:
[…] I should at once remind the reader that in my Treatise on Money I
defined income in a special sense. The peculiarity in my former definition
related to that part of aggregate income which accrues to the entrepreneurs,
since I took neither the profit (whether gross or net) actually realised from
their current operations nor the profit which they expected when they
decided to undertake their current operations, but in some sense (not, as I
now think, sufficiently defined if we allow for the possibility of changes in
the scale of output) a normal or equilibrium profit; with the result that on
this definition saving exceeded investment by the amount of the excess of
normal profit over the actual profit.
(Keynes [1936] 1973a: 61)
13
By the autumn of that year he was using chapters 2–14 of the first drafts of the
General Theory for his lectures (Keynes 1973b; Rymes 1989).
52 Chapter Three
5. Conclusion
Throughout the writing of the General Theory, Keynes was at pains to
make the new approach compatible with the Treatise. First, he presented
the argument, reached probably at the end of 1931, according to which
changes in the volume of output and employment “depend upon the
14
My method there was to regard the current realised profit as determining the
current expectation of profit.
From the Fundamental Equations to Effective Demand 53
References
Barens, I. (1989), “From the ‘Banana Parable’ to the Principle of Effective
Demand: Some Reflections on the Origin, Development and Structure
of Keynes’s General Theory”, in D.A. Walker (ed.), Perspectives on
the History of Economic Thought, vol. II, Twentieth-Century Economic
Thought, Aldershot: Edward Elgar, 111–32.
Dimand, R.W. (1986), “The Macroeconomics of the Treatise of Money”,
Eastern Economic Journal 12(4): 431–41.
—. (1988), The Origins of the Keynesian Revolution, Aldershot: Edward
Elgar.
Kahn, R.F. (1984), The Making of Keynes’s General Theory, Cambridge:
Cambridge University Press.
Keynes, J.M. ([1930] 1971), A Treatise on Money, as reprinted in D.E.
Moggridge (ed.), The Collected Writings of John Maynard Keynes, vol.
V, London: Macmillan.
—. ([1936] 1973a), The General Theory of Employment, Interest, and
Money, as reprinted in D.E. Moggridge (ed.), The Collected Writings
of John Maynard Keynes, vol. VII, London: Macmillan.
—. (1973b), The General Theory and After: Preparation, vol. XIII of The
Collected Writings of John Maynard Keynes, D.E. Moggridge (ed.),
London: Macmillan.
—. (1979), The General Theory and After. A Supplement, vol. XXIX
of The Collected Writings of John Maynard Keynes, D.E. Moggridge
(ed.), London: Macmillan.
Moggridge, D.E. (1992), Maynard Keynes. An Economist’s Biography,
London and New York: Routledge.
Patinkin, D. (1976), Keynes’s Monetary Thought: A Study of Its
Development, Durham: Duke University Press.
—. (1982), Anticipations of the General Theory? And Other Essays on
Keynes, Chicago: University of Chicago Press.
—. (1993), “On the Chronology of the General Theory”, Economic
Journal 103(418): 647–63.
Robinson, E.A.G. (1986), Symposium to celebrate the 50th anniversary of
the publication of Keynes’s General Theory, Cambridge, mimeo.
Robinson, J.V. (1980), “Review of The Collected Writings of John
Maynard Keynes, Vol. XXIX: The General Theory and After. A
Supplement”, Economic Journal, 90(358), 391–93.
Rymes, T.K. (1989), Keynes’s Lectures, 1932–1935, Ann Arbor:
University of Michigan Press.
From the Fundamental Equations to Effective Demand 55
1. Introduction
In this chapter, I examine the central role persuasion – in the two-way
sense of persuading and of being persuaded – played in Keynes’s work,
for it is crucial to an understanding of his behaviour in all of his
multifarious endeavours. In the process of both elaborating and
transmitting ideas, persuasion calls for ability in reasoning, the gift of
arousing passions, and a particular flair in personal relationships –
qualities that Keynes possessed to the utmost degree. But why was
persuasion so important for him? Biography played a part, insofar as
Keynes was embedded in the milieu of the highly educated British class,
for which clubs, debating societies, and learned fellowships represented
the bulk of social life. More fundamentally, however, persuasion was
essential to his conception of economics as a method of moulding ideas
*
I am grateful to Nerio Naldi, Annalisa Rosselli, Eleonora Sanfilippo, Anna
Simonazzi, and Giordano Sivini for comments and suggestions. The usual
disclaimers apply.
1
Quoted in Skidelsky 2000: 407. Richard Leffingwell, an American lawyer, was at
the time Director of J.P. Morgan.
2
Quoted in Skidelsky 2000: 438.
Keynes and Persuasion 57
3
For instance, Keynes wrote to Robertson: “I certainly date all my emancipation
from the discussion between us which preceded your Banking Policy and the Price
Level” (Keynes to Robertson, 13 December 1936, CWK XIV: 94). And he wrote
of Kahn that “he is a marvellous critic and suggester and improver – there never
was anyone in the history of the world to whom it was so helpful to submit one’s
stuff” (Keynes to Joan Robinson, 29 March 1934, CWK XIII: 422). On the
collaboration with Kahn, see Marcuzzo 2002; on the collaboration with Robertson,
see Sanfilippo 2005.
58 Chapter Four
I. May–July 1941
II. September–October 1943
III. June–August 1944
IV. October–December 1944
V. September–December 1945
VI. March 1946
In the first mission, between May and July 1941, Keynes was to assist
the British Treasury in application of the Lend-Lease Act, the US program
providing supplies to Britain “not in exchange for money but
acknowledged by some ‘consideration’ to be negotiated later” (Moggridge
1992: 652). Keynes was to assist in resolving some of the issues related to
the scope and application of Lend-Lease, such as the financing of
expenditures already incurred by Great Britain before 1941 and the
liquidation of British assets overseas, which the Americans insisted upon
as a condition for aid. In fact, the main purpose of Keynes’s mission was
to secure American financial help to increase Britain’s reserves, which by
then had slumped to a critical level.4
In the second mission, between September and October 1943, Keynes
was entrusted with the task of preliminary discussions on what was known
as Article VII of the Lend-Lease agreement, that is, the terms
(“consideration”) under which aid was being given. The conditions
required by the Americans amounted to Britain giving up her imperial
preference system, in force of which the reciprocal tariff concessions
between Britain and the Dominions implied de facto discrimination
against products of countries outside the British Empire.
The third mission, between June and August 1944, was intended to
finalize the criteria for the establishment of the International Monetary
Fund and the International Bank for Reconstruction and Development, and
to link these criteria with principles to be incorporated in a commercial
treaty that would see an end to both the imperial preference and the US
tariff systems. The Bretton Woods Conference (1–22 July), with 730
4
Keynes’s own arguments were set out in a memorandum of 27 October 1940,
drawn to assist British Treasury official Frederick Philipps in preparation for his
visit to Washington (CWK XXIII: 13–26).
60 Chapter Four
3. Envoy or Negotiator?
Lionel Robbins, who joined Keynes on three of the US missions, wrote:
“He was not always a good negotiator […]. But as an envoy he was
supreme” (quoted in Skidelsky 2000: 110). According to the Oxford
Dictionary, an envoy is “a messenger, especially one sent on a special
mission”, while a negotiator is “someone who confers in order to come to
an agreement”. Robbins’s distinction seems, therefore, to suggest that
Keynes showed greater ability in voicing the British point of view than in
sealing agreements favouring British interests. Robbins’s position appears
closer to Skidelsky’s than to Moggridge’s, and it prompts a closer
examination of Keynes’s behaviour during these six missions.
As we have seen, the purpose of the first mission was to make Britain
not entirely dependent on Lend-Lease but to grant it financial and
economic freedom of action; the means to achieve this was to increase the
level of its gold and dollar reserves without stripping it of much of its
foreign assets. On 16 May 1941, Keynes presented his plan, whereby the
US Treasury was to refund Great Britain one-third of the advances already
paid on contracts outstanding before Lend-Lease and to employ Lend-
6
“[Keynes] held fast to the illusion that what Britain deserved could be made to
happen and […] infected the labour government with his optimism” (Skidelsky
2000: 386).
7
“London had also made a serious tactical mistake in not including commercial
specialists in the original team, although they had attached a Board of Trade
official to the team at the last moment. […] Keynes saw trade and aid as being
linked but thought that they could be kept separate in the initial stages of financial
talks” (Moggridge 1992: 802).
8
“Keynes’s grand scheme depended on first securing a financial deal, and he was
confident of being able to handle commercial policy, if it arose, in general terms;
much later, perhaps a trade official or two, even a team, might join the
negotiations” (Pressnell 2003: 683).
62 Chapter Four
Lease to eliminate Britain’s current deficit with the United States. The
proposal was firmly rejected by the US Secretary of State, Henry
Morgenthau, and Keynes was forced to change strategy; thus, while still
endeavouring to put as many US imports as possible on Lend-Lease, he
proposed a commercial loan against collateral of British-owned activities.
The US Treasury accepted, on the condition that it receive a daily report
on the Bank of England’s level of reserves, which were not allowed to rise
above a given figure.
As far as “consideration” was concerned, Keynes was confronted with
two opposite views of what the United States should get in exchange for
Lend-Lease: The US Treasury, by controlling Britain’s reserves, aimed to
render the country financially dependent on the United States; the State
Department, on the other hand, aimed to dismantle the imperial preference
system.9
Keynes had initially presented a draft in which reference was made to
reducing trade barriers and trade discrimination in pursuit of a “free and
healthy” flow of trade (CWK XXIII: 128–40), but it was vetoed in London
by the Chancellor of the Exchequer, Kinsley Woods. Keynes then
reluctantly drafted a second proposal, following Churchill’s and Woods’
guidelines, in which Britain’s post-war commitments to changing its trade
policy were deliberately left vague and undefined (CWK XIII: 162–65).
Eventually, the initiative was taken by the State Department, which
produced a draft in which Article VII invoked measures that “shall provide
against discrimination in either the United States of America or the United
Kingdom against the importation of any produce originating in the other
country” (CWK XXIII: 174). Against Keynes’s protestation that no trade
concessions should be made before the financial arrangements were
cleared, the door was thus thrown wide open to American control over
Britain’s balance of payments.
Discussion of Article VII was the core issue of Keynes’s second
mission, which, in fact, revolved around the future of the international
monetary system. Keynes went to America with the hope of reaching a
compromise between Harry White’s plan (Stabilization Fund) and his own
(Clearing Union), which were simultaneously published in Washington
and New York on 7 April 1943. Each was the product of different visions
of the banking function of the new institution and expressions of the
contrasting interests of the United States and Great Britain.10 Most of the
9
On the vital importance of the United States gaining access to British-controlled
markets, see De Cecco 1979.
10
According to DeLong (2002: 160), “When Keynes disagreed with White, he
usually lost the point because of the greater power of the United States. […] But
Keynes and Persuasion 63
compared to the common view of the institutions to be built and of the goals to be
accomplished, the differences between Keynes and White, while important, are
orders of magnitude less important than the broad areas on which they agreed”.
Skidelsky (2000: 253) takes the opposite view, going so far as to suggest that
White was a Soviet spy who “wanted to cripple Britain in order to clear the ground
for a post-war American-Soviet alliance”. The evidence of the charges against
White has been questioned by Boughton (2001).
11
Points agreed upon were the form of the ultimate statement, the size of the
International Monetary Fund, the scarce currency clause, the mechanisms for
altering the gold value of the units of account (Unitas), withdrawals from the fund,
and selection of the currencies to be drawn from the fund. Points still to be agreed
upon were the size of the initial gold subscriptions to the fund, its role in the event
of exchange rate changes and in members’ capital account transactions, terms of
repurchase of a member’s own currency, and the monetization of Unitas.
64 Chapter Four
The Final Act, which Keynes came to accept on the last day of the
conference, was to be ratified by the governments involved. It was obvious
that alterations would have been almost impossible to make. As
Moggridge points out, “The only alternative to rejecting the whole
agreement was to join the new institutions and seek an amendment or an
interpretation from the Executive Directors, after the organisation came
into operation” (1992: 748). How to persuade Parliament and how to pave
the way to “interpretations” favourable to his vision of the working of the
fund became one of Keynes’s main concerns in the following months.
The central issue in the fourth mission was the checks America was
imposing on Britain’s gold and foreign exchange reserves, which the UK
was intent on holding against the sterling balances of various countries
(mainly India and the Middle East) accumulating in London as a result of
the heavy military expenses incurred by Britain in those parts of the world.
As Keynes was at pains to explain to Morgenthau: “For five years we, and
we alone, have been responsible for practically the whole cash outgoings
for the war over the vast territories from North Africa to Burma” (CWK
XXIII: 166).
The United States insisted that, if British reserves rose above a given
level, it was proof that Lend-Lease was excessive. Keynes’s position, on
the contrary, was that an increase in dollar reserves resulting from US
financial help was the only way to offset the growth of the sterling
liabilities accumulated.
The fifth mission was undoubtedly a dramatic experience that took a
heavy toll on Keynes’s health and well-being. The Lend-Lease program
had been cancelled a fortnight before, after Japan’s surrender, and it was
really a case of going back to Washington begging for help. The strategy
envisaged by Keynes for this goal was based on points and principles set
out in a memorandum of 18 March 1945. The Americans were to be
persuaded to share, as an act of justice, the burden of war sacrifices
disproportionately incurred by Great Britain.12 An American grant in the
form of a “free gift” would allow Britain to return to normal peace
conditions in production and consumption and would ease its way into
multilateralism in international trade and payments. Without financial aid
by the United States – the direst prospect, which Keynes dubbed
12
“It is only by a more comprehensive settlement, which attempts to offer
everyone what is reasonable, and so far as we can make it, fair, that the financial
consequences of the war can be liquidated. This is the aim, namely, that as
between the partners to the war, its financial consequences, in so far as they affect
future economic intercourse between them, should be so far as possible liquidated”
(CWK XXIV: 291–92).
Keynes and Persuasion 65
13
“A policy of economic isolationism and of economic rupture with the United
States and Canada (and with a large part of the rest of the world also) could only
be practicable if we had regained the financial reserves we have lost, and if we
were prepared to live for several years after the war with rigid domestic controls
and strict rationing of consumption, and with an organisation of foreign trade after
the Russian model” (CWK XXIV: 256).
14
“We cannot be sure of shouldering such a burden with success, and we might
find ourselves in a chronic condition of having to make humiliating and
embarrassing pleas for mercy and postponement” (CWK XXIV: 278).
15
An economist at the Treasury.
16
The Permanent Secretary of the Treasury.
66 Chapter Four
17
George Bolton of the Bank of England and Ernest Rowe-Dutton of the Treasury.
18
See, for instance, Harrod (1951: 496): “In the course of years he had made
himself a supreme master of debate. That fine command of prose, manifested in his
writings, was no less evident in oral discussion. […] As a master of words Keynes
was without peer in Washington or Bretton Woods”. See also Robert Bryce (1988:
150): “In 1944 [Keynes] came twice to Ottawa as a representative of the British
Treasury […] he was a very skilled negotiator, a very persuasive and fluent
expositor; indeed his exercise of fluency and charm was so powerful that the
Canadian ministers preferred to take their decisions after they had met with him
rather than while they were still under his spell.” I am grateful to Robert Dimand
for drawing my attention to Bryce’s account.
Keynes and Persuasion 67
19
Joint Statement by Experts on the Establishment of an International Monetary
Fund (CWK XXV: 379–92 and Appendix 4). The version signed in Washington
on 13 October 1943, went through seven drafts (Editorial note, ibid., 392).
20
Explanatory Notes by United Kingdom Experts on the Proposal for an
International Monetary Fund (CWK XXV: 437–442). Keynes justified the need
for these in a letter to the Chancellor of the Exchequer: “The experts, who are
publicly stated to have agreed this paper as being satisfactory, are surely entitled to
offer some explanation why” (J.M. Keynes to J. Anderson, 16 April 1944, in CWK
XXV: 436).
21
Overseas Financial Policy in Stage III (CWK XXIV: 256–95).
68 Chapter Four
other single factor to destroy the world’s economic balance and to prepare
a seed-bed for foul growths.
(CWK XXVI: 4)
The second, and more important, pillar was that there was no viable
choice:
What alternative is open to us which gives comparable aid, or better, more
hopeful opportunities for the future? I have considerable confidence that
something very like this plan will be in fact adopted, if only on account of
the plain demerits of the alternative of rejection.
(CWK XXVI: 15)
Here Keynes’s persuasion strategy relied on two levers. The first was
selecting the arguments that would appeal to the self-interest of the party
22
At the time, Treasury representative in Washington.
Keynes and Persuasion 69
that he was addressing at the time. The second was searching for a
framework in which each side’s interests could be made to coincide as
parts of the same general interest. As he explained to Wilfrid Eady,23 who
was also unconvinced of Keynes’s strategy in negotiating post-war
American financial assistance: “[The appeal to Justice] is wider
conception about the way in which the financial consequences of the war
should be liquidated” (J.M. Keynes to W. Eady, 13 June 1945, in CWK
XXIV: 360).
Keynes appeal to justice to persuade the Americans to share the burden
of the cost of the war was a rhetorical device to present as a mutual
interest that which, in the minds of the two parties involved in defending
the US and UK viewpoints, appeared to be conflicting interests. The
substantive reason for putting forward his proposal of a “free gift” from
the United States stemmed, however, from a firm belief that settling the
British external debt by the application of a strictly commercial point of
view, as the Americans were determined to do, would have a worldwide
deflationary effect. This position is similar to the one Keynes took with
regard to German reparations in the aftermath of the First World War.
Ironically, the Marshall Plan, which the Americans introduced
immediately after the end of the war to inflate the European economy, was
a Keynesian remedy; but, to American politicians, it had the virtue of not
being geared to British interests. The literature is divided on this issue.
Skidelsky endorses the view that Keynes was fighting against the US
intention to destroy Britain as a great power, while American economic
historian Brad DeLong rejects the idea that Britain could ever have
remained a great power, no matter how much Keynes might have been
able to extract in terms of financial aid from the United States.24
Finally, we come to Keynes’s address to the House of Lords on 18
December 1945 (CWK XXIV: 605–28), delivered barely twenty-four
hours after he had disembarked from the Queen Elizabeth at Southampton
to seek Parliamentary ratification of the loan and the Bretton Woods
23
Since 1942, the Second Secretary of the British Treasury.
24
“Britain imported seventeen billion pounds’ worth of goods during World War
II, of which America paid in Lend-Lease and in post-World War II Marshall Plan
and MSA [Mutual Security Agency] aid for seven billion. Had America paid for all
seventeen billion pounds, then Britain would have had an extra ten billion pounds’
worth of overseas assets at the end of World War II. At a 5 percent real return on
overseas investments, this would have boosted post-World War II British GNP by
4 percent. Would Britain with 4 percent more GNP have been a truly ‘great’
power, the post-World War II leader of the western alliance? No. […] It would
have had no more workers and factories more productive than Britain did in
reality” (DeLong 2002: 162).
70 Chapter Four
5. Conclusions
Success in persuasion requires the thorough grasp of public feelings and
sentiment which, by the end of his life, Keynes had fully acquired, above
all in the context of his intellectual and political milieu. In the 1940s he
Keynes and Persuasion 71
References
Boughton, J.M. (2001), “The Case Against Harry Dexter White: Still Not
Proven”, History of Political Economy 33(2): 219–39.
Bryce, R. (1988), “Keynes during the Great Depression and World War
II”, in O.F. Hamouda and J.N. Smithin (eds), Keynes and Public Policy
after Fifty Years, vol. I, Economics and Policy, Aldershot: Edward
Elgar, 146–50.
De Cecco, M. (1979), “Origins of the Post-War Payments System”,
Cambridge Journal of Economics 3(1): 49–61.
DeLong, B. (2002), “Review of Robert Skidelsky, John Maynard Keynes:
Fighting for Britain 1937–1946”, Journal of Economic Literature
40(1): 155–62.
Harrod, R.F. (1951), The Life of John Maynard Keynes, London:
Macmillan.
Kahn, R.F. (1976), “Historical Origins of the International Monetary
Fund”, in A.P. Thirlwall (ed.), Keynes and International Monetary
Relations, London: Macmillan, 3–35.
Keynes, J.M. (1971–1989), The Collected Writings of John Maynard
Keynes (CWK), managing editors E.A.G. Robinson and D.E.
Moggridge, 30 vols., London: Macmillan for the Royal Economic
Society.
CWK VII, The General Theory of Employment, Interest, and Money.
CWK IX, Essays in Persuasion.
CWK XIII, The General Theory and After: Part 1. Preparation.
CWK XXIII, Activities 1940–1943: External War Finance.
CWK XXIV, Activities 1940–1946: The Transition to Peace.
CWK XXV, Activities 1940–1944: Shaping the Post-War World. The
Clearing Union.
Marcuzzo, M.C. (2002), “The Collaboration between J.M. Keynes and
R.F. Kahn from the Treatise to The General Theory”, History of
Political Economy 34(2): 421–47.
Keynes and Persuasion 73
CAMBRIDGE ARCHIVES
CHAPTER FIVE
1. Introduction
Richard Kahn, Joan Robinson and Nicholas Kaldor were economists who
played an essential role in disseminating and winning approval for the
ideas of Keynes. They all had special relations with him and were in
constant touch with his ideas. From the post-war period until the end of the
1970s all three, in their own ways, had fundamental roles in shaping the
Cambridge that attracted students and scholars in great number from all
over the world. They epitomized what is generally understood as the
Keynesians, at least as far as Cambridge, UK, was concerned.
R.F. Kahn was Keynes’s “favourite pupil”,1 his main support in the
making of the General Theory, collaborator in King’s College
administration and literary executor.
J.V. Robinson was regarded by some as the icon of the legitimate
Keynesians against the bastard progeny of Keynes, populariser and
proselytiser, contender in the capital controversy and champion of
eclecticism in her reliance on Marx, Kalecki and Sraffa in opposing the
*
We are grateful for copyright permission granted by Professor D. Papineau (Kahn
papers), the Provost and the Fellows of King’s College, Cambridge (Joan
Robinson papers) and A.P. Thirlwall (Kaldor papers). We are also grateful to F.
Stewart, Kaldor’s daughter, for granting permission to quote from her speech at her
father’s memorial.
1
As Keynes himself described him in a letter to his wife Lydia in 1928 (see
Marcuzzo 2002a: 422).
The Cambridge Keynesians 77
2
The book presents the results of research on the correspondence between Keynes,
Kahn, J. Robinson, Robertson, Harrod, Sraffa, Pigou, Kaldor, Shove and Hayek
from 1907 to 1946, with detailed tables of the extant letters. This chapter draws
heavily on it.
3
These issues are examined, as far as Kaldor and Robinson are concerned, in King
(1998) and, in relation to Robinson and Kahn, in Rosselli (2005a).
78 Chapter Five
1. Published Writings
2. Unpublished Writings
3. King’s College: Student, Fellow, Bursar, Keynes’s Trustee
4. Cambridge University, Faculty of Economics and Politics: Chairman,
Appointments Committee Member, Examiner, Supervisor of Research
Students, Lecturer
5. National Institute of Economic and Social Research
6. Ministry of Supply
7. Board of Trade
8. Organization for European Economic Cooperation
9. United Nations Food and Agriculture Organization
10. Department of Economic Affairs
11. House of Lords
12. RFK’s Subject Files
13. Correspondence
14. Drafts, Off-Prints and Books by Others
15. Finances
16. Joan Robinson
17. Rachel Rostas
18. Diaries and Address Books
19. Holidays
20. Health
21. Religion, Israel
22. Clubs
23. Photographs
24. Family papers
4
A very few items from his personal papers, together with most of his library and
collection of off-prints, are at present conserved at the Asahikawa University,
Hokkaido, Japan.
The Cambridge Keynesians 79
5
Biographical information about Kahn’s life and work can be found in Kahn
(1984), Harcourt (1991), Pasinetti (1991).
6
Joan Robinson wrote to Kahn on 24 January 1933: “I have read your book thus
currently. It’s certainly a very impressive work. I hope you are going to let me help
you with polishing it up” (RFK 13/90/1/75).
7
The Italian version is in Kahn (1999).
The Cambridge Keynesians 81
which was given to one of the authors of this paper, published in a small
book in Italian (Kahn 1988), but still unpublished in English.
2.3. Correspondence
Of Kahn’s major correspondents, Keynes and Joan Robinson certainly had
the lion’s share, correspondence with the former amounting to 602 letters
and with the latter to over 1300. The women he was personally involved
with come second, followed by relatives, colleagues and a few
acquaintances. As far as the economists are concerned, the earlier
correspondents include: V. Edelberg,10 R.F. Harrod, H. Johnson, N.
Kaldor, N. Laski, J. Meade, A.C. Pigou, D.H. Robertson, E.A.G. Robinson
and G.S. Shove. Of the later period, correspondents include P. Garegnani,
B. Ohlin, L. Pasinetti, R. Skidelsky and R. Solow.
The distribution of the extant correspondence, as expected, is heavily
skewed towards recent years, the bulk of it dating to the late 1970s and,
above all, the 1980s, with the exception of the colleagues mentioned
above, family and lovers.
It is impossible to provide here a detailed account of the
correspondence preserved in Kahn’s archive, its interest ranging from the
biographical to the scientific; we must perforce limit ourselves to a
sample. We chose a group of 37 letters that Kahn wrote to Joan Robinson
during his visit to the United States between late 1932 and April 1933,11
selecting them from the hundreds kept in Kahn’s archive as offering a
good example of the wealth of information that might be drawn from
perusal of his correspondence. First, these letters give us a picture of
academic life in the USA in the early 1930s as seen through the eyes-of a
Cambridge don. They point up the lack of communication that still existed
in those years between the academic worlds on the two sides of the
Atlantic and reveal the gulf in styles and approaches to research and
teaching. Secondly, they show how economic theory, as developed in the
USA at the time, was perceived by a born and bred Keynesian economist
like Kahn. Thirdly, they give us insight into the personalities of the two
correspondents and their closest interlocutors.
Kahn’s letters are a series of long accounts dispatched from Chicago,
where he spent a few weeks; from Harvard, where he was guest of Taussig
and Schumpeter; and from New York, where he spent the last month of his
10
Victor G. Edelberg, economist, studied at the LSE under Robbins’ supervision.
In the 1930s he wrote on the Ricardian theory of profit and on capital theory.
11
For unknown reasons these letters are kept in Kahn’s rather than in Joan
Robinson’s archive.
The Cambridge Keynesians 83
visit. His first impression of the United States was not favourable, and
changed little during his stay. Of the academic life he endorsed neither the
research organization nor the teaching methods. He felt that too much
money went on providing professors with secretaries and research
assistants (engaged in what he considered a futile pursuit of data) and too
little on creating an environment that would in both spirit and substance
favour the exchange of ideas and a serene quest for knowledge.
Above, all it was the didactic methods that failed to convince him, the
students having no opportunity for discussion with their professors apart
from the seminar Schumpeter held with his pupils at Harvard. As he wrote
to Joan Robinson at the end of his visit to Chicago: “But what annoys me
is the isolation in which most of these young men do their economics.
Several of them have complained to me of the difficulty of working under
such asocial conditions” (24 January 1933, RFK 13/90/1/75). There was
no forum for debate like the Keynes Club or the Marshall Society in
Cambridge, and everyone seemed utterly to ignore his neighbour:
Take, for instance, the case of Chamberlin’s book. He has been working on
it for at least six years. And yet I can find nobody who can give me the
inkling of an idea of what the book is going to contain. I have no doubt that
Chamberlin is well endowed with “research assistants” (I shall come to
that phase of this lunatic asylum later.) But that is the whole point. The
pursuit of learning is regarded as a business, to be discussed with
underlings at “conferences’, rather than as a social art which pervades
one’s whole life.
(17 February 1933, RFK 13/90/1/132–4)
At Harvard Frank Taussig, then 72 years old, made the greatest impression
on him, while of the younger generation – practically his own – it was the
recently arrived Leontieff who appeared to him as “very definitely a man
to watch” (15 February 1933, quoted in Rosselli 2005a: 265).
His impressions in New York were far more agreeable: “Wesley
Mitchell had a lunch party for me at Columbia, and he struck me this time
as a rather superior type of American professor, genial and moderately
human! [Harold] Hotelling is a perfect dear which is just as it should be”
(23–24 March 1933, quoted in Rosselli 2005a: 266).
At the same time, the state of economic science and in particular of
monetary theory seemed hopeless to Kahn, fresh from the Circus debates
and involved in the work on the future General Theory of Keynes. While
deflation was reaching its worst, the only remedies proposed were
balancing the budget and reducing the gold content of the dollar. After
attending a conference, he wrote:
My God, it was nearly all the most doctrinaire sort of nonsense about how
hard it is to inflate the currency and what about reducing the gold value of
the dollar (without any suggestion that its rate of exchange was what
mattered). If a business man were to deliver the best of those papers to the
Marshall Society we should feel we had been sold a pup. These people are
living in the Dark Ages. If I were not a coward I should there and then
have made up my mind to devote the rest of my life to a crusade against
the Quantity Theory. In no other way could I do more to better the lot of
mankind.
(8 January 1933, RFK 13/90/1/36–40)
And he bitterly reached the conclusion: “why is it that the only people in
the world with whom conversation on so-called monetary subjects
conforms to the most rudimentary canons of common sense all live in
Cambridge?” (10 February 1933, RFK 13/90/1/105–7).
Greater satisfaction came from his meetings with business people who
he kept interviewing in the hope of finding a solution to the problem of
price determination:
My experience so far has been extremely limited, but I am now absolutely
convinced that every business man is at a kink (a pretty kinky kink too) on
his demand curve, or thinks he is. This creates a quandary. It is quite true
that it does not pay either to raise or lower the price. But what on earth
determines the position of the kink? This is going to be my main
theoretical problem.
(27 February 1933, quoted in Rosselli 2005a: 266)
The Cambridge Keynesians 85
The catalogue of her papers reflects these activities, drafts and original
typescripts of some of her published works forming the bulk. Of her entire
production, however, the extant material amounts to only a small fraction.
As far as her first and most famous book, the Economics of Imperfect
Competition (Robinson 1933), is concerned, extant is a draft of the
Introduction (JVR i/3.3), which was probably kept because it contains
Keynes’s suggestions and corrections. Nothing is left of her other books
(Robinson 1937; 1942; 1956; 1960; 1962a; 1962b; 1966; 1970; 1971;
Robinson and Eatwell, 1973). Of the published articles, it is mostly the
material relative to the recent ones (after 1970) that has been preserved.
Oral tradition has it that on her retirement, when she was obliged to leave
her office in the Cambridge Faculty Building, she destroyed almost all her
papers.
12
Kaldor recollects that after the outbreak of the war “Pigou, as Chairman of the
Economics Faculty, arranged for a special series of lectures to be given by
Cambridge economists entitled ‘The Great Economists’, each of which was
assigned to a different economist who would be considered as a ‘specialist’ on that
person or subject […] Joan Robinson was asked to lecture on Jevons, a less happy
choice; […] and it was the obvious choice to ask Piero [Sraffa] (as editor of
Ricardo’s Collected Writings) to speak on Ricardo” (NK 3/138). These
recollections are contained in an interview that Kaldor gave to one of the authors
of this chapter and which was published in Italian (Kaldor 1986).
The Cambridge Keynesians 87
Three other manuscripts are worth mentioning. First, there are the notes
for a talk to undergraduates on Nazism in Europe, dated 17 November
1941 in Robinson’s handwriting (JVR iii/1). The talk, given in one of the
worst moments of the war, is a hymn to the ideal of liberalism, interpreted
as “the ideal of human equality, of the rule of law, of government by
reason and compromise instead of by force and fear”. Confronted by
Hitler’s tyranny, she spurs the audience to “raise the standards of freedom
and justice” and free Britain from the “anonymous, silent, bloodless
tyranny of money and privilege [which] denies education to the mass of
our own people”. Given the circumstances, the talk is full of passion, but
admirably devoid of any hint of jingoism. Robinson invites her audience
to learn and understand: “We must learn to feel, when we hear these tales
of horror, not ‘this is how Germans behave’, but this is what human nature
can become”.
Secondly, there is a set of lecture notes, entitled Short Period Model,
probably drafted in the early 1960s. These are written in a sort of
shorthand form, to sketch out the content of the lectures. The first part
looks at the differences between (a) family economy, (b) planned
economy, and (c) capitalist economy as far as the forces beyond
accumulation and the pace of growth are concerned. In a capitalist
economy the crucial role is played by technical progress. The last part of
the lectures deals with the short period, described as a “snap-shot of [an]
economy at a moment of time”, and analyses the effects of changes in
investment, consumption, prices and money wages on the system
(JVR iii/8).
Also extant is a much later set of notes on the Cambridge Tradition,
which was the basis for a course she was persuaded to give in Cambridge
after her retirement, in the Michaelmas Terms 1976–81. The number of
lectures apparently varied from year to year, but the archive yields only
the notes for four of these lectures. In JVR iii/16.1, 16.3, 16.4 there is an
analysis of Marshall’s thought, deemed “necessary to understand Keynes”.
The Marshallian heritage in Keynes is seen as the “sense of an actual
economy moving through historical time” and the “short period idea’. She
wrote that “For Marshall [short period is the] time it takes to get back to
normal profits after an unforeseen change. For Keynes [it is a] given
position with plant, organization of industry, utilization function”.
Marshall comes out better in comparison with Walras because Marshall
lacks a model with “transactors with endowments and in which all
88 Chapter Five
3.3. Correspondence
There are about 490 correspondents listed in this section of the catalogue,
although most of them are represented by only one extant letter. It is
always hard to judge how much of a correspondence has been preserved
by chance or as the result of deliberate choice. If the latter was the case
with Joan Robinson, the variety of authors whose letters she thought worth
keeping would confirm what a younger friend of the latter part of her life
once wrote: “Joan’s gift for friendship was perhaps where she found her
greatest freedom and pleasure, cutting right across class, culture, age”
(Narasimhan 1983: 217). In her archive we find letters from all over the
world, from women friends from school days at St. Pauls’ School for Girls
in London or student years in Cambridge, who kept in touch long after.
The major correspondents, besides friends, family and relatives, include:
S. Adler,13 H.R. Altounyan,14 D.G. Champernowne, M.H. Dobb, R.F.
Harrod, F.A. Hayek, J.R. Hicks, R.F. Kahn, N. Kaldor, M. Kalecki, J.M.
Keynes, A. Lerner, A.C. Pigou, K. Raj,15 P.A. Samuelson, G. Shove, J.
Schumpeter, and P. Sraffa.
Here again we chose to focus on a small fraction of the correspondence
preserved in her archive: the letters that Gerald Shove wrote to Joan
Robinson in the years 1931–33 of the making of The Economics of
Imperfect Competition. Their interest derives from the paucity of
information we have on the scientific contribution of Gerald Shove, whose
role as teacher and researcher in the true Marshallian tradition was
acknowledged by many in Cambridge (Kahn 1987; Austin Robinson
1977). However, we have scant evidence to assess his role in the
Cambridge debates, since Shove wrote much, but published little, as Kahn
wrote in his obituary (Kahn 1947), and all his papers were destroyed after
his death, as he had wished.
13
Salomon Adler, economist, expert on China, translated into English some of
Mao’s writings.
14
Ernest H. Riddal Altounyan, poet and doctor who practised in Syria; his most
famous poem was dedicated to Lawrence of Arabia.
15
Kakkadan Nandanath Raj, economist, set up the Delhi School of Economics and
the Centre for Development Studies in Trivandrum. He published on the Indian
and other Asian economies.
The Cambridge Keynesians 89
Since then, any step forward made by Joan Robinson in her career and in
the development of her ideas aroused Shove’s discontent, anxiety and
somewhat aggressive reactions. When Joan Robinson gave her first course
of lectures on Monopoly, Shove informed Robinson of the topics he
intended to expound in his course in the following term and inquired
whether she had already dealt with any of them (2 December 1931,
JVR vii/412/8–9 and 48–50). Shove was particularly anxious that
Robinson might invade one of his favourite fields of teaching, diminishing
returns, and particularly those that originate from the heterogeneity of
factors of production. It seems that Robinson assuaged Shove’s anxiety by
telling him that her treatment differed in many respects.
In June 1932, Shove heard from Kahn that Robinson was revising the
first draft of her book extensively and this, again, made him suspicious (9
June 1932, JVR vii/412/20–21). This time Robinson reacted angrily to his
insinuations. We do not have her letters (she must have sent three at least)
but the tone of Shove’s replies (17, 23 and 24 June 1932, JVR vii/412/22–
29) becomes ever humbler and more apologetic. After further reassurances
that Robinson had not changed her mind significantly, he concluded that
“so far as I am concerned the incident is dead, buried, bricked-over,
90 Chapter Five
forgotten and (if there is anything to forgive) forgiven” (23 June 1932,
JVR vii/412/26–8). However, he was still convinced that Robinson had
wronged him when she began “preparing for publication and lectures a
treatment of Diminishing Returns very similar to mine” (17 June 1932,
quoted in Rosselli 2005b: 361), without consulting him. At any rate, he
was aware of his own limitations and declined Robinson’s offer to wait for
the publication of his book: “It is very kind and generous of you to offer to
postpone publication, but please don’t. I shall probably never publish and
anyhow I should hate to keep you back” (ibid.).
Again, when Joan Robinson published her first article (Robinson 1932)
where she first presented the long- and short-run equilibrium conditions
for a firm under imperfect competition, Shove interpreted the article as an
attack against himself and convinced Keynes to publish a comment that, as
usual, he gave to the printer at the very last moment. Robinson was given a
few hours and very little space to write a rejoinder; Shove, having put her
into such a difficult situation, wrote her a letter immediately afterwards
full of sympathy for what she had to go through (16 February 1933,
JVR vii/412/34).
The same schizophrenic attitude, between aggression and admiration,
was to be found a few months later when Shove at last brought himself to
read The Economics of Imperfect Competition. He wrote her a letter of
congratulations, but when the review came out it proved not exactly
enthusiastic. It was her “technique” that he did not like, her recourse to
heroic assumptions in order to make the problems manageable in
mathematical terms: “an essay in geometrical political economy” (Shove
1933: 660), as he called the book.
Can we tell from these letters that Shove’s grievances had some
grounds? He was right in seeing many overlaps between their fields of
research, both having an interest in classifying the possible sources of
increasing costs and factor productivity, but the similarities end here. They
may have reached the same results, but along completely different routes.
1. Writings, 1912–89
2. Lectures and conference papers, 1932–86
3. Correspondence, 1926–86
4. Academic career, 1925–79
5. National Institute of Economic and Social Research, 1937–46
6. United States Strategic Bombing Survey, British Bombing Survey Unit,
1939–73
7. United Nations, 1945–71
8. Royal Commission on the Taxation of Profits and Income, 1910–55
9. Economic Advice to foreign governments, 1947–82
10. Economic Advice to Labour governments, 1961–78
11. Labour Party, Fabian Society, Trade Union Congress, 1959–86
12. Press cuttings, 1960–86
13. Diaries, 1963–76
14. Personal, family and financial papers, 1940–86
16
On Kaldor’s life and activities, see also Pasinetti (1979) and Targetti (1992).
17
Targetti’s bibliography, which builds upon Thirlwall (1987), by admission of the
author does not include Kaldor’s “numerous letters to The Times (which over the
The Cambridge Keynesians 93
thirty years between 1932 and 1986 numbered around 260)” and his articles for
many newspapers, excluding those re-published in his collections of essays
(Targetti 1992: 363).
94 Chapter Five
which Ricardo is said to excel – and to the role given to the rate of profit
in determining the pace of accumulation.
Thirdly, a manuscript entitled “The General Theory and the open
economy”, for a lecture scheduled for 14 November 1986, which Kaldor
could not deliver since he died on 30 September 1986. Here we find an
interesting formulation of the principle of effective demand in terms of the
capital account and income account of a balance sheet, and the distinction
between decisions “arising out of the contemplation of a capital account,
and those arising from his [the individual’s] preferences and decisions on
income accounts”. Keynes’s principle of effective demand is seen as
implying a two-stage process: “autonomous decisions to increase
expenditure on currently produced goods on capital account, and second,
consequential changes in incomes and hence on expenditures on income
account” (NK 2/170/1–14).
4.3. Correspondence
Thirty-five boxes of correspondence are extant; files 1–121 are catalogued
individually and in alphabetical sequence, while files 122–46 are linked to
countries. The catalogue substantially preserves the filing system followed
by Kaldor himself. One file labelled “economics, important letters”
contains the correspondence with L. Robbins, F. von Hayek, J. Hicks,
F.W. Taussig, M. Allen, F. Machlup and P. Rosenstein-Rodan and goes
back to the 1930s. Some of these correspondents also appear later, above
all J. Hicks, with whom exchange was continuous over the years, while
with Robbins and Hayek relations deteriorated dramatically in the late
1930s. The Cambridge economists figure prominently among the
correspondents (Pigou, Robertson, Joan Robinson, Kahn). Of the other
British economists, some (Ralph Hawtrey, James Meade, Roy Harrod)
merit files of their own, while others are included in the numerous files
having to do with the academic and political activities of Kaldor.
Our choice is once again constrained, and by no means easy. We focus
here on the issue which saw Kaldor – in the span of just a few years,
1934–36 – opposing Hayek and drawing closer to the Cambridge stance
against laissez-faire and the perfect competition assumption.
In 1935 Hayek and Kaldor exchanged two typescript notes in a
controversy on imperfect competition, prompted by Kaldor’s article in
Economica in 1935, in which Kaldor argued that strategic interactions
between firms in an environment of free entry, market imperfection and
increasing returns might lead to “technical wastage’, since the productivity
of factors “will be less than it would be if each producer produced a
The Cambridge Keynesians 95
18
“I think the problem of imperfect competition is harder, and less important than
you do”, wrote John Hicks to Joan Robinson three months after the publication of
The Economics of Imperfect Competition (15 June 1933, JVR vii/200/1). And he
maintained the same point later, when reviewing the matter for his Monopoly
article (Hicks, 1935): “I think the real difference between us” – he wrote to her –
“is that you are more optimistic than I am about the application of the theory of
96 Chapter Five
5. Working in Archives
The widespread interest in working and researching archives that we have
seen blossoming among historians of economics and also economists in
recent years has already yielded a rich crop of literature, as these Palgrave
volumes witness. Perhaps the time is now ripe to assess this activity and
measure the value-added it holds for the profession; we offer a small
contribution in this direction.
We can start by asking what the main motivations are behind research
on the papers of Great Economists of the more or less recent past
imperfect competition, just because you think that theory is simpler than I do”
(letter 28 February 1935, JVR vii/200/25). See Marcuzzo and Sanfilippo (2007).
The Cambridge Keynesians 97
(disregarding here the no less valuable research on the papers of the less
famous). To answer this question we need to ascertain whether or not
those papers have already been used for scholarly investigation. Prima
facie, it would seem that if indeed they have, then precious little would be
left for further research. On the other hand, we are faced with the striking
fact that not even the publication of 30 volumes of the Collected Writings
of J.M. Keynes and three biographies of the man have as yet slowed down
the flow of visitors to King’s College Modern Archives to peruse his
papers. Its former archivist has given a vivid account of the stream of
people working on Keynes’s papers, their queries and curiosities:
So, installed in the archives, how do these new converts to the delights of
documentary research conduct themselves? They make their notes by hand
or laptop, which are, depending on the strength or otherwise of their
English, succinct precis or laborious transcripts. Their document selection
is either methodical or serendipitous; sidetracking diversions may uncover
gems. They are reverential, excited (one academic who shall be nameless
always speaks of “fondling the files”), or indifferent to the mystique of the
original document that bears Keynes’s own autograph.
(Cox 1995: 173)
The other case is when research on an author is still in progress and his/her
papers are an “unploughed field”. Sraffa’s papers – to confine ourselves to
the Cambridge tradition – are a case in point (Smith 1998). Scholars are
lured by the mystery of his life and the scantiness of his publications; his
papers promise to make Sraffa more accessible and understandable than he
was in person or through his few published writings.
Joan Robinson is a similar case, although she published a lot and left
little/unpublished. A full-size biography of her still remains to be written,
leaving a void in an area of great interest to many of her followers,
admirers and critics.
So far we have stressed the role of archives in filling the gaps in our
knowledge of the personal and intellectual lives of Great Economists.
Undoubtedly no significant biography can be written without spending
long hours on documentary research, but what is their value in increasing
our grasp of the theories of the authors concerned? How are we to answer
the critics who view these activities as a sort of antique collecting?
There are, we would suggest, two legitimate answers. First, theories
should always be referred to their context. By context we mean the set of
questions which framed them, the intellectual interlocutors to whom they
were addressed and “the state of the art” at the time of their conception.
Papers and correspondence afford insight into the motivations behind the
choices of a particular set of questions, assumptions or tools. These are not
98 Chapter Five
19
Letter from Sraffa to Charles P. Blitch, 6 October 1975, in possession of the
recipient. We are grateful to Nerio Naldi who kindly gave us a photocopy of this
letter.
The Cambridge Keynesians 99
References
Cox, J. (1995), “Keynes: An Archivist View”, History of Political
Economy 27(Annual Supplement): 163–75.
Harcourt, C.G. (1991), “R.F. Kahn: A Tribute”, Banca Nazionale del
Lavoro Quarterly Review 44(176): 15–30.
Hicks, J. (1935), “Annual Survey of Economic Theory: The Theory of
Monopoly”, Econometrica 3(1): 1–20.
Ingrao, B. and Ranchetti, F. (2005), “Hayek and Cambridge: Dialogue and
Contention. The Correspondence with Kahn, Kaldor, J. Robinson and
Sraffa”, in M.C. Marcuzzo and A. Rosselli (eds), Economists in
Cambridge. A Study through Their Correspondence, 1907–46,
Abingdon and New York: Routledge, 392–413.
Kahn, R.F. (1931), “The Relation of Home Investment to
Unemployment”, Economic Journal 41(162): 173–98.
—. (1937), “The Problem of Duopoly”, Economic Journal 47(185): 1–20.
—. (1947), Obituary of G.F. Shove, King’s College Annual report
(unsigned but attributed to RFK).
—. (1954), “Some Notes on Liquidity Preference”, The Manchester School
22(3): 229–57.
—. (1958), “Evidence” Submitted to the Radcliffe Committee, Q.10938-
1102.4 in Radcliffe Committee on the Working of the Monetary
System, Minutes of Evidence, London: HMSO.
—. (1959), “Exercises in the Analysis of Growth”, Oxford Economic
Papers 11(2): 143–56.
—. (1971), “Notes on the Rate of Interest and the Growth of Firms”, in
R.F. Kahn (1972), Selected Essays on Employment and Growth,
Cambridge: Cambridge University Press, 208–32.
—. (1972), Selected Essays on Employment and Growth, Cambridge:
Cambridge University Press.
—. (1983), L’economia del breve periodo, Torino: Boringhieri.
—. (1984), The Making of Keynes’s General Theory, Cambridge:
Cambridge University Press.
—. (1987), “Shove, Gerald Frank”, in J. Eatwell, M. Milgate and P.
Newman (eds), The New Palgrave, London: Macmillan, 327–28.
—. (1988), Un discepolo di Keynes, (an interview) ed. M.C. Marcuzzo,
Milan: Garzanti; English version: “A Disciple of Keynes”, Department
of Economics Discussion Paper No. 29, Modena: University of
Modena.
—. (1989), The Economics of the Short Period, London: Macmillan.
—. (1999), Concorrenza, occupazione e moneta, Bologna: Il Mulino.
100 Chapter Five
1. Introduction
The correspondence between Maynard Keynes and Richard Kahn, as we
have it at present, consists of 611 letters, only 68 of which are published in
the Collected Writings of J.M. Keynes (CWK) (see Table 6.1). In
presenting this material I focus on those aspects which may help to clarify
the nature and scope of their friendship and collaboration. Inevitably, most
biographical elements relate to Kahn rather than Keynes, on whom a vast
literature is extant (see Moggridge 1992; Skidelsky 1983; 1992; 2000). It
is in fact hoped that this work may also serve as a preliminary study of
Richard F. Kahn, “that elusive figure who hides in the preface of
Cambridge books”, as Samuelson put it (JVR papers, i/8/1).1
1
This sentence can be found in the “Introduction” by J. Robinson to the Italian
edition of R.F. Kahn’s Essays on Employment and Growth (Kahn 1972) which was
published in Italian but not in English. This original is in JVR papers, XI/8.
2
For instance, Keynes pencilled an essay by Kahn, dated 4 November 1927, with
the comment: “I think you have a real aptitude for Economics” (RFK papers,
XI/3). A few months later, on 27 April 1928, he marked another essay with the
following words: “Very good – almost a perfect answer” (RFK papers, XI/3).
Again, a couple of days later, he wrote to his wife: “Yesterday my favourite pupil
104 Chapter Six
Kahn wrote me one of the best answers I ever had from a pupil – he must get a first
class” (JMK papers, PP/45/190/4/46).
3
“Under the influence of Marshall’s Principles, I chose The Economics of the
Short Period. In making my choice I was encouraged by Shove and Piero Sraffa.
Keynes happily acquiesced. Neither he nor I had the slightest idea that my work on
the short period was later on going to influence the development of Keynes’s own
thought. But there are no traces of Keynesian thought in the dissertation itself”
(Kahn 1989: x–xi; see Marcuzzo 1994).
Keynes and His Favourite Pupil 105
They met from Michaelmas Term 1930 to May 1931. Much has been
written about the influence of the Circus in bringing about the transition
from the Treatise to the General Theory, but there is no consensus in the
literature.
One of the crucial elements in the transition – adoption of the theory of
aggregate demand and aggregate supply to determine the short period level
of prices – was attributed by Keynes to the approach taken by Kahn in his
“multiplier article” (CWK VII: 400n), where the level of price is
determined by the same forces as the level of output and not by the
Quantity of Money. Kahn has argued that Keynes’s long struggle to escape
from the Quantity Theory won through only in the transition from the
Treatise to the General Theory, claiming for himself (and the Circus) an
important role.6
The point stressed by Keynes in the Treatise was that determination of
the price level of consumption goods is entirely independent of
determination of the price level of investment goods. This point was
contested by Kahn in a set of letters in 1931 (letter 405, 5 April 1931,
CWK XIII: 203–6; letter 380, 17 April 1931, CWK XIII: 206–7; letter
271, 7 May 1931, CWK XIII: 212–13; letter 265, 15 August 1931, CWK
XIII: 218–19), when he sought to persuade Keynes to accept the criticism
raised also by Robertson, Pigou and Sraffa. Shortly after Kahn’s last letter
on the subject, Keynes surrendered (CWK XIII: 225).
Keynes made an important step forward from the Treatise in the Harris
Foundation lectures given in June 1931. There he adopted a new
conception, the aggregate supply curve, which he explicitly attributed to
Kahn. The supply curve, Keynes said, “tells you that for a given level of
prime profit [i.e. the difference between gross receipts and prime costs]
there will be a given level of output” (CWK XIII: 368). The Harris
Foundation lectures show Keynes shifting the emphasis from the Treatise
analysis of aggregate profits as the difference between investment and
saving, affecting the level of prices, to Kahn’s short period analysis of
aggregate profits as the difference between gross receipts and prime costs,
affecting the level of output.
By the end of the summer of 1931 it had become clear to Keynes that
the “fundamental equations” approach needed revision and, as a result of
6
Keynes cannot have entirely shared the idea of having been for such a long time a
believer in the Quantity Theory, since many years afterwards he wrote to him: “I
enclose as a specimen the letter I wrote on Christmas Eve, 1917, which is
interesting for two reasons – […] (ii) the fact that even then I was thinking in terms
of supply and demand and not of the quantity theory of money!” (letter 83, 27 May
1940).
Keynes and His Favourite Pupil 107
These lectures were attended by Kahn, Austin and Joan Robinson, who
presented Keynes with an “alternative” to his proof of the positive
relationship between variation in investment and variation in output based
on the “method of supply and demand”, as they called it. Keynes’s proof
was as follows: an increase in output is equal to an increase in sales
receipts (ൌ income); an increase in investment is equal to an increase in
sales receipts (ൌ income) minus expenditure on consumption;
consumption and income are positively correlated, and therefore changes
in investment and changes in output have the same sign. The alternative
proof was based on the argument that an autonomous increase in
investment leads to an increase in the demand for consumption goods.
Since by assumption supply conditions are independent of changes in
demand, determination of consumption and therefore of income (ൌ ܥ )ܫ
is straightforward.7
The General Theory had begun to take shape.
7
Keynes took up the alternative “method” in his lectures the following autumn,
where we find him using the expression “demand as a whole relatively to supply as
a whole” (CWK XXIX: 53; Rymes 1989: 55).
108 Chapter Six
8
“The American edition of the pamphlet […] also incorporated material from
Keynes’s article ‘The Multiplier’ which appeared in the New Statesman of 1 April
1933” (Editorial note, CWK XIII: 412).
Keynes and His Favourite Pupil 109
saving ൌ investment
This truth is far too important (and far too seldom recognised) to be
concealed in a mist of subtle definition.
(letter 388, October 1935, CWK XIII: 637)
Keynes duly accepted his advice (compare General Theory, CWK VII: 63
with the third proof, CWK XIV: 424) and Kahn’s formulation entered the
final version of the book.
7. Finances
In the spring of 1937 Keynes fell seriously ill and for months all matters –
especially College finances and University business – had to be handed
over to Kahn. Kahn had already assisted Keynes in his capacity as First
Bursar of King’s;11 during Keynes’s illness matters related to College
11
Keynes became Second Bursar in November 1919 and from 1924 until his death
in 1946, First Bursar. Kahn was appointed Second Bursar in 1935. On Keynes’s
death Kahn succeeded him as First Bursar. Kahn’s abilities were highly praised, as
Keynes wrote to him: “The following reaches me from the Estates Committee
(don’t confess I sent it you): ‘It may interest (though not surprise) you to hear from
outside that Kahn’s handling of the Committee, with its immense agenda, was
masterly, alike for lucidity, persuasiveness and speed; a very fine performance’”
(letter 296, 26 July 1937). In November 1937, Keynes wrote to Kahn with
gratitude: “now that Audit has come and the fulfilment of the worst part of your
Keynes and His Favourite Pupil 111
finances and their own financial investments were dealt with by mail. In
fact, almost half of the surviving letters are from 1937 and 1938,12 the bulk
of them consisting of discussion of personal and College finances.
Investment activities for the College consisted of farming, property
transactions, securities, currencies and commodities. Keynes’s personal
investments covered the same range of assets, but on a smaller scale and in
a different composition.
It is difficult to give a full account of their dealings, but we can
consider a few aspects. On each issue they exchanged detailed
information, comparing their respective evaluation and assessment.
Although the final decision usually rested with Keynes, he invariably
sought Kahn’s approval. He taught Kahn – who was in any case by nature
so inclined – to keep updated with detailed knowledge of every aspect of
the matter in hand. For instance, he wrote to him with regard to
commodities speculation:
I feel ashamed to have given you so much trouble over commodities. But,
as you are discovering, it is a business which needs hard work; and it does
not turn out right over a period of years unless one attends to the details,
which, cumulatively, add up to quite a lot.
(letter 377, 14 July 1937)
tasks, I must write to thank you for all your labours and for how well you have
done them. Also I very much appreciated being kept in such close touch with
everything, and only hope that this has not added too much to your work” (letter
411, November 1937).
12
From 18 June to 23 September 1937, Keynes stayed at the clinic at Ruthin Castle
in Wales.
112 Chapter Six
My […] policy […] assumes the ability to pick specialities which have, on
the average, prospects of raising enormously more than an index of market
leaders […]. It is largely the fluctuations which throw up the bargains and
the uncertainty due to fluctuations which prevents other people from taking
advantage of them.
(letter 2078, 5 May 1938, CWK XII: 100–1)
Keynes had helped Kahn with a loan of £500 in January 1934, when he
was in financial difficulties arising from family problems and unlucky
speculation in the German market. Four years later, Kahn was able to write
to Keynes:
Keynes and His Favourite Pupil 113
I think you would like to know that my net assets, after deducting all loans,
including yours, are still (just) positive […]. It has, of course, been touch
and go, and without your great kindness I should by now have been done
for.
(letter 163, 27 March 1938)13
8. University
The other issue that occupied the correspondence during the time when
Keynes’s illness prevented him from attending to his normal occupations
was University business. Two problems in particular needed careful
handling. The first was the question of giving J. Robinson a full-time
lectureship in 1938. Some members of the Board opposed it, but Kahn
succeeded in the end thanks also to Pigou’s stand in her favour. Keynes
wrote to Kahn:
I am extremely relieved that the matter of Joan’s lectureship looks like
being settled. For, if it had fallen through, it really would have been a case
for armed insurrection. I am very glad that Pigou took the right line.
Indeed, I expected him to do so. But how the other wretches can have
failed to recognise that outside Cambridge she is unquestionably one of the
most distinguished members of the staff, without the slightest doubt within
the first half dozen, I cannot imagine. I wish I had been there to support
you.
(letter 171, 19 February 1938)14
13
Half of the loan was repaid in October 1938 (letter 130, 7/12 October 1938).
14
This was not the first time that Keynes had to step in to prevent J. Robinson
from being ostracised. It also happened in 1935, when her lectures on “Money”
met strong opposition from some members of the Faculty and Keynes had to send
letters around to win her case (see Marcuzzo 1991; 2003; see also Sanfilippo 2005:
69; Marcuzzo and Sardoni 2005: 176; Carabelli 2005: 208; Naldi 2005: 339).
114 Chapter Six
newspaper articles and possibly getting some minor commercial job. That
is the alternative with which he is faced.
(letter 177, 27 January 1938)
Keynes gave his help, although he had mixed feelings about Kalecki’s
approach. He wrote to Kahn:
I have been greatly interested by his article in the latest Econometrica. I am
not clear that he is perfectly right or that he has exploited his idea to the
greatest possible advantage. But the idea itself seems to me an
extraordinarily interesting and pregnant one. I am considering writing a
comment on and development of what he has done. (I only wish he would
not adopt such an appalling method of exposition. His Mathematics seems
to be largely devoted to covering up the premises and making it extremely
difficult to bring one’s intuition to bear).
(letter 157, 30 April 1938)
15
See letters between Kahn and Kalecki in July 1939 (RFK papers, 5/1/146–47;
149–58; 159–62; 163–69).
Keynes and His Favourite Pupil 115
9. War
Great Britain declared war on 3 September 1939. Keynes was anxious to
secure Kahn a post as wartime Civil Servant in the Treasury, but initially
there was opposition because he was “so clearly associated with Keynes,
who at this time was still regarded with suspicion” (Kahn 1988: 28).
Eventually a post was found for Kahn at the Board of Trade, under the
Chairmanship of Oliver Lyttelton, and he started working there in
December 1939, reporting to Keynes in a gloomy mood (letter 93, 17
December 1939). In May 1940 they corresponded on the issue of exchange
control; Keynes sent him a draft of the report on the issue he was writing
for the Treasury (CWK XII: 163–71) and got from Kahn “as usual, most
valuable criticism” (letter 84, 26 May 1940).
A few months later Kahn discovered that: “The Treasury (in the shape
of an official of the establishment Department – not Sir Horace Wilson)
agreed to my appointment only on condition that I had nothing to do with
currency questions!” (letter 77, 30 June 1940). Keynes took this
information light-heartedly: “Either all questions are currency questions,
or none are. So I suggest you adopt the latter interpretation” (letter 75, 3
July 1940).
The Board of Trade covered a very wide administrative field. It was
responsible for trade at home and for exporting abroad. Since at the
outbreak of the war only 10 per cent of all goods required for consumption
were produced within Britain, the first task of the Board of Trade was to
find a consistent policy to reduce the consumer goods available on the
market. The reduction in consumption was necessary to conserve shipping
space, materials and manpower for war purposes, to free foreign exchange
for vital purchases of war materials and civilian necessities abroad and to
assure the fair distribution of limited resources. Within a year after the
outbreak of the War, it had become clear that in order to reduce
consumption sufficiently the Government had to resort to direct rationing
for food and clothing. In this area Kahn gave an important contribution
(see Kahn 1988: 36–37).
Initially, he felt that he did not have complete support from Keynes on
the need to create unemployment, by releasing labour from civilian
occupations in order to make it available to war production, and he
complained to Keynes, who immediately reacted:
I am not at all against your policy of creating unemployment. Far from it. It
is a question of pace; and also I was talking in the context of creating
unemployment to the detriment of exports, which is rather a different thing
116 Chapter Six
from home consumption. I am all for your policy, so far as the home
consumer is concerned.
(letter 81, 2 June 1940)
16
“I expect you will greatly enjoy the trip, but whether the gain to the Middle East
will be equal to the loss of the Board of Trade, I am not sure” (letter 62, 24 August
1941).
118 Chapter Six
However, Kahn soon grew dissatisfied with his position and the way
matters were being handled between London and Cairo, and asked
Keynes’s help to be sent back home (letter 42, 16 August 1942). Keynes
was supportive:
I expect you are taking much too dark a view of the position and that you
will feel differently after a change and a holiday. All the same, I expect
you have done all that is possible to do there, and I am strongly of your
opinion that it would be a good idea to come home, where you are badly
wanted.
(letter 41, 28 August 1942)
Approval from London was held up for a while, but eventually granted.
17
See letter 1727 from JMK to NK, 15 January 1943: “Kahn is expected in
London tomorrow – he is believed to have reached Lisbon”.
18
Keynes was at the time involved in the process of reshaping the post-war
academic economic research and teaching in Cambridge, which he felt was badly
needed. He wrote to Kahn: “It is a great misfortune for an economist to have been
brought up on economics, and I should like to return to the old custom of always
selecting for Professorships those who had no previous acquaintance with the
subject” (letter 16, 3 April 1944).
Keynes and His Favourite Pupil 119
References
Beherens, C.B.A. (1955), Merchant Shipping and the Demands of War,
London: HMSO.
Carabelli, A. (2005), “A Lifelong Friendship. The Correspondence
between Keynes and Shove”, in M.C. Marcuzzo and A. Rosselli (eds),
Economists in Cambridge. A Study through Their Correspondence,
1907–1946, Abingdon and New York: Routledge, 196–215.
Kahn, R.F. (1972), Selected Essays on Employment and Growth,
Cambridge: Cambridge University Press.
—. (1976), “Historical Origins of the International Monetary Fund”, in
A.P. Thirlwall (ed.), Keynes and International Monetary Relations,
London: Macmillan, 3–35.
—. (1984), The Making of Keynes’s General Theory, Cambridge:
Cambridge University Press.
—. (1987), “Shove, Gerald Frank”, in J. Eatwell, M. Milgate and P.
Newman (eds), The New Palgrave, London: Macmillan, 327–28.
120 Chapter Six
1
They signed it as “The Manifesto of the Trumpington Street School” from the
name of the street where Austin and Joan lived in Cambridge.
2
Sraffa reacted with some uneasiness (see Rosselli and Besomi 2005: 313).
Fighting for Keynesian Revolution 151
Naturally, you cannot raise the point, but if Maynard hints that he would
like you to look at his stuff, I do wish you would. I must confess that I am
a bit appalled at the prospect of having the sole responsibility thrust on to
me after my return.
(letter 574 from RFK to JVR, 2 March 1933)
A few months later she was able to write “a kind of interim report on
how far the Keynesians had got by that time” (J. Robinson 1951: viii); in
that article – published in October 1933 under the title “The theory of
money and the analysis of output” – she repeated her criticism of the
“widow’s cruse” reasoning in the Treatise as being valid only under the
assumption that “an increase in demand for consumption goods leads to no
increase in their supply” (J. Robinson [1933b] 1951: 55).
By 1934 J. Robinson was relying ever more on Keynes’s advice:
I am expecting to produce a baby in the Summer. I do not think myself that
this ought to be considered relevant to the question of lecturing – but I
quite see that there is another point of view. I haven’t told any of our
colleagues except Kahn and Piero. Do you think it might be left to dawn on
the other gradually or ought it to be mentioned when my lectures are
discussed?
(letter 1787, 26 March 1934)
your approval in general for the book” (letter 1824, 14 November 1936,
CWK XIV: 148).
As for her second book, Keynes did not initially welcome the idea of a
popular version of the General Theory with great enthusiasm, as he was
“against hurry and in favour of gestation” (letter 1827, 2 December 1936,
CWK XXIX: 185–6). But his reaction did not dissuade her. In March 1937
(letter 1829, 6 March 1937) she announced to him that she was revising it
and Keynes (letter 1830, 25 March 1937, CWK XIV: 149) again fought
shy of the idea, letting her know that he was thinking of presenting the
General Theory in a different way. She defended her project as a teaching
device for non-first-class students, in a light-hearted tone:
I do not regard my proposed book as of the smallest importance (either
way) in the development of ideas. With your consent I will get on with it. I
am having a baby in October, so this seems suitable light work for the
summer.
(letter 1832, 22 April 1937)
2nd year man who is hoping to get a II.2. You want the reader, emerging
dazed from D.H.R., to feel that you represent simplicity and commonsense.
(letter 1845, 23 March 1938, CWK XXIX: 169)
The difficult situation between Keynes and his circle on the one hand
and Robertson on the other is reflected in the exchange of the summer of
1938. In a letter J. Robinson complained about a sentence Robertson had
included in an article of his – eventually published in the September issue
of the Economic Journal – to the effect of accusing her of “affirming
without qualification that the desire to save does not promote investment”
(letter 1847, 30 July 1938, CWK XXIX: 181–2). Keynes agreed with her
that it would be much better if Dennis were to leave out that unprovoked
reference to you. I do not see any possible object in attributing to you an
opinion which you certainly do not hold. I will see what I can do about it.
(letter 1849, 3 August 1938)
misprints which I had overlooked. Indeed I’d give you high percentage
marks for that; for the number found by me that you missed was extremely
small. The book is now finished, all but preliminary matter, last sheets are
index which still have to be passed for press, and it is being printed off. I
think that it should be published very early in February. As you guessed
author’s melancholy did come on at the last. In the final proof reading it
seemed so flat and stale. But you have cheered me and so does Kahn, who
has been here for Christmas.
(letter 1803, 27 December 1935)
between saving (ܵ) and investment ( )ܫin an open economy. She claimed
that:
For an open system ܵ ൌ home ܫ foreign ܫ, i.e. ൌ home investment േ
balance of trade. Home securities are being put on the market at a rate
equal at home ܫ. Home saving is forthcoming at a rate equal to home ܫേ
balance of trade therefore the home demand for home securities exceeds
or falls short of the supply according as the balance of trade is positive or
negative.
(letter 1816, 5 November 1936, CWK XIV: 141–2)
In the end Robinson decided to cut “all the controversial matter” and
thanked him for preventing her “from publishing a half-baked version”
(letter 1823, 13 November 1936, CWK XIV: 147–8).
One year later a much more serious area of disagreement between them
arose regarding Robinson’s analysis of accumulation and technical
progress. In her 1936 long-period article she had presented an analysis of
employment on the basis of the elasticity of substitution between factors,
defined as the proportionate change in the ratio of the quantities of factors
employed divided by the proportionate change in the ratio of their prices,
which she had originally presented in her Economics of Imperfect
Competition.
According to her analysis, in the long period the amount of
employment is the result of “the contrary pulls of increased total output
and increased output per head” (J. Robinson 1937a: 87). Therefore a fall in
the rate of interest that has no direct effect on the amount of employment if
savings are a function exclusively of the level of income, produces an
indirect effect by the substitution of capital for labour and the subsequent
change in the distribution of income (the share of labour will increase if
the elasticity of substitution is less than one). This in turn affects the
propensity to save and the multiplier, due to the different saving habits of
rich and poor.
In the same article she also analysed the effects of inventions on the
distribution of income, i.e. whether inventions reduce the share of labour
Fighting for Keynesian Revolution 159
of using the plant more intensively and this is an element in the situation
on which invention may have little or no bearing” (ibid.).
Robinson was unshaken by this criticism and retorted that she was not
talking of the “elasticity of substitution in response to an invention, but of
the value of that elasticity after an invention has occurred”. Keynes, too,
remained adamant:
I cannot see how the elasticity of substitution between capital and labour,
after adjustment has been made to the new situation, has any bearing at all
upon whether, in the usual sense of the term, an invention is capital-saving
or labour-saving.
(letter 1839, 6 October 1937)
Later she claimed that she “began to read Capital, just as one reads any
book, to see what was in it” (J. Robinson 1966: vi). M. Dobb was one of
her “tutors”,3 but Kalecki was the main influence. She wrote that Piero
Sraffa used to tease her, saying that she “treated Marx as a little-known
forerunner of Kalecki” (ibid.). In a couple of years she produced a slim
volume on Marx, An Essay on Marxian Economics, which raised a dust in
academic and non-academic circles. Kalecki’s comment on her book was
very appreciative:
I think that your analysis of Marx is very valuable: it has shown that one
conception in his writing is quite consistent; while Marxists who wanted to
show that everything is right and consistent failed to show even that.
(Michal Kalecki to JVR, 30 July 1942, JVR papers, vii)
Keynes, too, expressed a favourable opinion of the book, but was not
persuaded. As he saw it, J. Robinson was trying to make sense of what in
fact was nonsense, that is to say Marx’s economics (letter 1864, 20 August
1942). In the discussion that followed, Robinson conceded to Keynes that
perhaps Marx was not a great thinker (letter 1865, 21 August 1942); this
3
See the exchange of letters with Dobb between January and May 1941 in JVR
papers, vii.
162 Chapter Seven
obviously contrasts with what she came to believe in the years to follow
(see Marcuzzo 2001).
Keynes was not involved in academic matters during wartime, but he
was often consulted on them: in the correspondence we find, for instance,
a report by J. Robinson of Sraffa’s progress in the preparation of the much
overdue edition of Ricardo’s works (letter 1859, 1941); a request to
Keynes to support an application to the National Research Institute (letter
1882, 3 September 1941). Another interesting exchange on academic
topics occurs in 1942 (letters 1867 and 1868, 7 and 9 December 1942).
Robinson informed Keynes that there was a proposal for him to succeed
Pigou in Marshall’s chair of political economy in Cambridge; Keynes
refused to take such a possibility into consideration, judging that he would
not be able to stay in Cambridge permanently after the war.
Finally, in 1944, we have an exchange concerning the creation of a
fund to support Erwin Rothbarth’s widow. Rothbarth was a German
refugee who was killed in action over Holland; he was associated with the
“Cambridge Research Scheme” (see below) and was very close to Kalecki.
And in fact the Kalecki affair is the last important issue to review in this
correspondence.
5. Kalecki
In 1936 J. Robinson received a letter from Kalecki, who at the time was
visiting the London School of Economics, commenting on one of her
articles (J. Robinson 1936a), but originally published in the Economic
Journal in June 1936. Later she gave a lively account of their first
encounter:
He told me that he had taken a year’s leave from the institute where he was
working in Warsaw to write the General Theory. In Stockholm someone
gave him Keynes’s book. He began to read it – and it was the book that he
had intended to write. He thought that perhaps further on there would be
something different. But no, all the way it was his book. He said: “I
confess, I was ill. Three days I lay in bed. Then I thought: Keynes is more
known than I am. These ideas will get across much quicker with him and
then we can get on to the interesting question, which is their application.
Then I got up.”
(J. Robinson 1979: 186)
She said she had very soon realised that Kalecki’s analysis was indeed
as important as Keynes’s, and took upon herself the task of “playing the
trumpet for him” (ibid.). She even indulged in some wishful thinking and
wrote to Kahn: “Do you think that Kalecki will induce Piero to take the
Fighting for Keynesian Revolution 163
A few months later Kalecki presented the main findings of his research
work with the Cambridge Scheme, in the form of reports on individual
industries and an “Interim Summary of Results”. Contrary to expectations,
these reports were received with scepticism by J. Robinson, Kahn and
Keynes, who objected to the methodology employed. Kalecki resigned
from his Cambridge job, at the end of 1939 moving to Oxford, where he
joined the University Institute of Statistics. Initially Robinson reported to
Kahn that “Kalecki has swallowed the Oxford job without a murmur”
(letter 1462 from JVR to RFK, 14 January 1940); however, six months
later she noted: “I get a short and bitter letter from Kalecki from time to
time. Anyway he seems well dug in at Oxford” (letter 1546 from JVR to
RFK, 27 July 1940).
However, a year later, another incident occurred in relation to an article
Kalecki had sent to Keynes, which Robinson vigorously defended against
Keynes’s attack. In this article Kalecki set out to study the effects of
164 Chapter Seven
Moreover, for both the actual and the reference system he assumed
constant marginal costs, imperfect competition and undercapacity
utilisation. The result of the comparison was that the effect of technical
progress is not to increase output, but to save labour; output is influenced
only through the channels of investment, oligopoly and the general price
level.
Keynes was thoroughly unhappy with the approach and wrote to J.
Robinson in a very negative key: “after a highly rational introduction of a
couple of pages my first impression is that it becomes high, almost
delirious nonsense” (letter 1893, 4 February 1941, CWK XII: 830). He
complained that many of Kalecki’s assumptions were “latent and tacit”, if
not probably “self-contradictory” and in particular that of undercapacity
utilisation “rather odd”. Robinson reacted firmly: “I am prepared to stick
up for Kalecki” and explained that there is another meaning of long-period
– besides the classical one – and that in imperfect competition
underutilization of capacity is a normal situation” (letter 1892, 4 February
1941, CWK XII: 830).
The exchange continued in the following days in a fairly tense mode,
Keynes accusing Kalecki of writing “subject to a whole contraption of
secrete knowledge, atmosphere and assumption” (letter 1895, 18 February
1941, CWK XII: 832) and Robinson insisting that “Kalecki is explaining
mysteries, not creating them” (letter 1896, 24 February 1941, CWK XII:
833); she attempted to persuade Keynes of the importance of Kalecki’s
results, in showing that “capital-using inventions do not reduce the share
of labour in the Nat. Div.” (ibid., CWK XII: 833), but to no avail.
At this point Robinson volunteered to help Kalecki revise his article,
and as a result Keynes agreed that it was “enormously improved in its
present form and is not open to my previous criticisms, at any rate of
presentation” (letter 1897, 4 March 1941, CWK XII: 833). However, he
remained unconvinced of the argument and decided to send the article to
Kaldor for another opinion. Kaldor’s reaction was equally negative: “The
Fighting for Keynesian Revolution 165
6. Conclusions
The correspondence between J. Robinson and Keynes examined here
shows that, although not always in agreement with her, Keynes trusted
Robinson’s judgement, was appreciative of her work and took account of
her opinion. For her part, J. Robinson, always respectful of Keynes’s
authority, was rarely intimidated by him and often held her own position
without giving ground. The correspondence also witnesses J. Robinson’s
effort to bring new elements into the Keynesian revolution and to induce
Keynes to follow an approach to problems that she regarded as better
suited to convey the fundamental ideas of his “revolution”.
At times she would try to lead him to a line other than the one he had
chosen, and on several occasions attempted to get Keynes to change his
mind on specific issues, as we have seen. After Keynes’s death, especially
under the influence of Kalecki and Sraffa, she sought to bridge the
Keynesian revolution with other non-mainstream lines of approach from
the classical and Marxian tradition. In later works she implied that in the
1930s and 1940s she and Kahn had grasped the true revolutionary
implications of Keynes’s theory while Keynes was more reluctant to break
radically and definitively with the past tradition. By contrast, the
correspondence between Keynes and Robinson shows that, with the
possible exception of the 1932–33 period, the roles were quite the reverse,
with J. Robinson trying to develop analysis along more traditional lines,
while Keynes appears to have been bolder in defending a radically
alternative approach to orthodoxy. Such is the case with J. Robinson’s
attempt to extend Keynes’s General Theory to the long period, or her and
Kahn’s allegiance to the Marshallian apparatus, as shown by their reliance
on the elasticity of substitution among factors, marginal and average
curves, and so forth.
It is true that, after Keynes’s death, J. Robinson tried to bridge
Keynes’s theory with other non-neoclassical strands of thought, while
166 Chapter Seven
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between Keynes and Shove”, in M.C. Marcuzzo and A. Rosselli (eds),
Economists in Cambridge. A Study through Their Correspondence,
1907–1946, Abingdon and New York: Routledge, 196–215.
Harcourt, G.C. (1990), “Joan Robinson’s Early Views on Method”,
History of Political Economy 22(3): 411–27.
Kalecki, M. (1939), Essays in the Theory of Economic Fluctuations,
London: Allen and Unwin.
Kalecki, M. ([1941] 1991), “A Theorem on Technical Progress”, Review
of Economic Studies 8(3): 178–84; as reprinted in M. Kalecki,
Collected Works of Michal Kalecki. Capitalism: Economic Dynamics,
vol. 2, J. Osiatynski (ed.), Oxford: Clarendon Press, 107–16.
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Keynes (CWK), managing editors E.A.G. Robinson and D.E.
Moggridge, 30 vols., London: Macmillan for the Royal Economic
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Editorial.
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the Short Period Analysis”, in M.C. Marcuzzo, L. Pasinetti and A.
Roncaglia (eds), The Economics of Joan Robinson, London:
Routledge, 11–28.
—. (2001), “Joan Robinson: une quête passionnée de la rationalité”, in
G.C. Harcourt (ed.), L’économie rebelle de Joan Robinson, Paris:
L’Harmattan, 27–51.
Fighting for Keynesian Revolution 167
—. (2002), “The Collaboration between J.M. Keynes and R.F. Kahn from
the Treatise to the General Theory”, History of Political Economy
34(2): 421–47.
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through Their Correspondence, 1907–1946, Abingdon and New York:
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—. (2005b), “Robertson and the Great Divide. The Correspondence with
Kahn, Kaldor, J. Robinson and Sraffa”, in M.C. Marcuzzo and A.
Rosselli (eds), Economists in Cambridge. A Study through Their
Correspondence, 1907–1946, Abingdon and New York: Routledge,
371–91.
Robinson, J. (1932a), “Imperfect Competition and Falling Supply Price”,
Economic Journal 42(168): 544–54; reprinted in J. Robinson (1951),
Collected Economic Papers, vol. I, Oxford: Basil Blackwell.
—. (1932b), Economics is a Serious Subject. The Apologia of an
Economist to the Mathematician, the Scientist and the Plain Man,
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of Economic Studies, 1: 22–8; as reprinted in J. Robinson (1951),
Collected Economic Papers, vol. I, Oxford: Basil Blackwell, 52–58.
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168 Chapter Seven
*
I am grateful to Anna Carabelli, Victoria Chick, Mario Cedrini, Marcello De
Cecco, Robert Dimand, Luca Fantacci, Craufurd Goodwin, Tiziana Masucci, Nerio
Naldi, Anna Rossi-Doria and Giordano Sivini for reading and commenting on the
previous drafts. I have not always followed their suggestions, but they have been
very useful.
Reason and Reasonableness in Keynes 179
1
As has been pointed out (Amato and Fantacci 2009: 185, my translation):
“Moreover, the unilateral alteration of the conditions previously agreed upon
constituted, for Keynes, unscrupulous violation of that sacredness of international
conventions in the name of which the Allies had declared war on the invader of
neutral Belgium.”
182 Chapter Eight
himself with these means to alert against the risks and dangers of high
unemployment, growing foreign debt drastically squeezing consumption,
mortifying national identity on sanctioning the subjection of one country
to another.
Keynes never abandoned the ideal of a civilisation based on individual
freedom but not at the expense of collective good; in vain, all too often, he
sought to demonstrate that this was not practicable if founded solely on the
pursuit of private interest – whether of individuals or of nations –
following a homo homini lupus rationale in a market without rules or an
international organisation devoid of institutions deputed to settle conflicts.
In the Consequences the need is summed up thus (CWK II: 60):
[…] particular interests and particular claims, however well founded in
sentiment or in justice, must yield to sovereign expediency.
Let us now look more closely into Keynes’s reasoning in relation to the
issue dealt with in the Consequences, namely the Treaty of Versailles,
which brought an end to one of the bloodiest wars Europe had seen, and
how the victors set about addressing the economic and social devastation
in the aftermath to set things aright.
The conceptual and political crux of the peace of Versailles lay in the
victors’ demands that the defeated should bear the cost of the war, to sap
the strength of a powerful and dangerous enemy forever by crippling the
sovereignty and economic influence of Germany and, at the same time,
burdening the country with the cost of reparations, as if its productive and
financial potential had remained intact at the pre-war level.
But let us see in detail how Keynes came to this conclusion. His
estimates of the war damage – deriving from close, painstaking
examination – are summarised in the following figures (all in millions of
pounds sterling): Belgium (500), France (800), United Kingdom (570),
Other Allies (250) for a total of 2,120. Set not only on claiming reparation
for material damage, France and the United Kingdom, riding the wave of
hate and vengefulness, were also determined to include in the reparations
of pensions and benefits to be provided at home, bringing the overall bill
to about 8,000 million pounds sterling.
In defence of such a sum, which Clemenceau and Lloyd George
rhetorically held sufficient to satisfy the public sentiment and their
electorates, was the hypocritical conviction that this was also what
Germany – whose economic power was to be overthrown – was
effectively able to pay.
But, according to Keynes’s estimates, how much would Germany have
in fact been able to pay? Taking into account the immediately transferable
184 Chapter Eight
And yet today Keynes’s remedies strike us as far from having any
chance of being taken up as they were at the time. Asking the United
States to forgo the repayment of loans granted above all to France and the
United Kingdom, to sustain the war effort as precondition to ask these two
countries to forego reparations from Germany, and actually proposing and
inter-ally loan to get the economies moving after the devastation of four
years of destructive fury, attests to Keynes’s great economic wisdom, but
also, perhaps, to a certain political naivety.2 On the other hand, it might be
seen as an example of that appeal to “reasonableness” that could be
interpreted in modern terms of reciprocity (as in Rawls, for instance) or,
more probably, associated with that concourse of ideas upon which
Bloomsbury thrived.
2
According to De Cecco “at the Paris conference strangling economic conditions
were imposed on Germany [… but] there was no intention to respect them […]
what happened at the peace table was dictated not by the stupidity or wickedness
of the protagonists, so much as the need to give the masses which their political
classes had drawn into the war proof that the sacrifices had not been in vain” (De
Cecco 1983: 18–19, my translation). Keynes, according to this thesis, became
aware only “dimly of the scandalous ‘political exchange’ that was taking place”
(ibid.: 20).
3
In the pungent description by the most authoritative biographer of Bloomsbury,
Michael Holroyd, “all couples were triangles who lived in squares” (Holroyd 1967:
413).
186 Chapter Eight
Virginia Woolf wrote that it was “a book that influences the world
without being in the least a work of art: a work of morality” (quoted in
Goodwin 2007: 275), but even more significant is her letter to Benedict
Nicholson, of 24 August 1940: “Maynard is Bloomsbury. He wrote the
[Economic] Consequences of the Peace” (quoted in Goodwin 2007: 290).
Reason and Reasonableness in Keynes 187
5
The US programme (voted in 1941) to supply the UK with what it needed “not in
exchange for money but acknowledged by some ‘consideration’ to be negotiated
later” (Moggridge 1992: 652).
Reason and Reasonableness in Keynes 189
own (i.e. individual) conception of what is good and just. Thus being
reasonable is a moral quality lacking in those who behave in a solely
rational way.6
This, according to Habermas, is the source of the distinction between
moral and ethical questions (Habermas 1995: 125):
Questions of justice or moral questions admit of justifiable answers –
justifiable in the sense of rational acceptability – because they are
concerned with what, from an ideally expanded perspective, is in the equal
interest of all. Ethical questions, by contrast, do not admit of such impartial
treatment because they refer to what, from the first-person perspective, is
in the long run good for me or for us – even if this is not equally good for
all.
6
“What rational agents lack is the particular form of moral sensibility that
underlies the desire to engage in fair cooperation as such, and to do so on terms
that others as equals might reasonably be expected to endorse” (Rawls 1993: 51).
Reason and Reasonableness in Keynes 191
7
Stacy-Marie Ishmael in the Financial Times, 4 May 2009.
192 Chapter Eight
York premises, inviting all the major investment banks of Wall Street. It
was Friday 12 September. Hosting the meeting were Hank Paulson
(Dartmouth and Harvard MBA), US Treasury Secretary, and Tim Geithner
(Dartmouth and Johns Hopkins MA), President of the New York Fed. It
was immediately made clear that the Bush administration held that it was
not up to the taxpayers but rather to the Wall Street banks to throw the
rope to haul Lehman Brothers up from the precipice.
Subsequently Paulson defended himself asserting that given the Fed
statute the government could not grant loans without collateral (which
Lehman Brothers could not provide), and the point was also borne out by
Bernanke, Chairman of the Federal Reserve, in an interview a few weeks
later.8
However, accounts of the meeting reported by the press and emerging
from the official statements give a rather different picture of Paulson’s
reasons why Lehman could not be saved. As he himself put it to the
journalists on that Monday 15 September when application was submitted
for recourse to Chapter 11, the US bankruptcy law which allows firms
using it to restructure in receivership: “I never once considered it
appropriate to put taxpayer money on the line.” The US government would
not come in to save firms on the brink of bankruptcy because it “would
just invite more foolish risk-taking. It would create a ‘moral hazard’.”9
Moral hazard applies to that behaviour which seeks to maximise gains,
characterised by risk propensity or scant care about avoiding or
minimising losses, encouraged by the conviction that State intervention
would be inevitable in the case of failure.
But let us return to that Friday 12. In the Lehman Brothers premises
the CEO Dick Fuld (University of Colorado and New York Stern Business
School) was waiting in his office convinced that the game was going in his
favour. Six months before, JP Morgan had saved Bear Stearns with a Fed
loan (Tim Geithner playing a leading role), and in early September the Fed
had taken over control of Fannie Mae and Freddie Mac, the two giants of
the real estate mortgage market, also on the brink of bankruptcy. If they
did not manage to find a buyer – for weeks Fuld had been desperately
searching for one – after the South Koreans withdrew from negotiations, it
8
“A public-sector solution for Lehman proved infeasible, as the firm could not
post sufficient collateral to provide reasonable assurance that a loan from the
Federal Reserve would be repaid, and the Treasury did not have the authority to
absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by
another firm” (at https://money.usnews.com/money/blogs/the-home-
front/2008/10/15/ben-bernanke-why-we-didnt-bail-lehman-out).
9
E. Thomas and M. Hirsh, “Paulson’s Complaint”, Newsweek, 24 May 2009.
Reason and Reasonableness in Keynes 193
was widely believed (not only by Lehman, but by many banks the world
over) that the Fed or the government would certainly intervene. Fuld was
not invited to the meetings, and his vice Bart McDade was leading the
Lehman delegation (Sorkin 2009: 306). Fuld was continuing his quest in
the market environment. One possibility was to make a proposal to the
Bank of America, and Fuld immediately set about contacting the
Chairman, Ken Lewis, but at the very same time Lewis was finalising an
agreement with John Thain, Chairman of Merrill Lynch, to acquire that
bank. He would not call Fuld back; Lehman Brothers was not able to offer
the system of retail brokers that the Bank of America was interested in.
Subsequently it came to light that it had been Paulson who prompted
Thain – a Goldman Sachs work associate – to meet Lewis for the possible
acquisition of Merrill Lynch. It is worth adding that an inquiry of the
Committee on Oversight and Government Reform is now (June 2009) in
progress,
[…] investigating the events surrounding Bank of America’s acquisition of
Merrill Lynch and the role the Federal Reserve Board (the Fed) and the
Department of the Treasury played in that transaction.10
On Sunday morning Fuld played his last card with Barclays, the big
British bank, but there was the complication that nothing could be ratified
without the shareholders’ assembly; Paulson no longer answered Fuld’s
phone calls. So it was that when McDade brought an end to the “weekend
of fear” with the Fed and government top officials that Sunday,
bankruptcy had to be declared before the European and Asian markets
opened the following day, and there was nothing left to do.
Thus Hank Paulson, nicknamed “the hammer” – a non-smoking
teetotaller, Christian Scientist and keen bird watcher, of the Harvard and
Goldman Sachs tribe, got the better of Dick Fuld, nicknamed “the gorilla”,
a floor trader with state-school education who attended MBA evening
classes, and a gambler with a penchant for risky bets. Was this a clash
between two ethical codes, two world views,11 or simply the liquidation of
a rival in the world of investment banking that was to be restructured?
10
At www.oversight.house.gov.
11
At the time of writing (7 June 2009), the magazine Time carried out an opinion
poll among its readers on the 25 people to blame for the financial crisis, and among
them appeared the names of Fuld and Paulson; of the two, the more blameworthy
according to the number of votes was the Treasury Secretary.
194 Chapter Eight
This was the indictment launched by Dick Fuld, who stated before the
Waxman Committee12 on 6 October 2008:
On the same day Lehman Brothers prepared to file for bankruptcy, the
Federal Reserve significantly broadened the types of collateral all banks
were able to pledge to the Federal Reserve to create additional liquidity,
the lifeblood of our system, and the Federal Reserve also adopted, on a
temporary basis, the type of exemption that Lehman Brothers had applied
for earlier. Had these changes been made sooner, they would have been
extraordinarily helpful to Lehman Brothers. A few days later, the Federal
Reserve took expedited action to approve applications of Goldman Sachs
and Morgan Stanley to become bank holding companies.
It was Ben Bernanke (Harvard and MIT), who had studied the Great
Depression bank crashes in depth and upheld the effectiveness of the New
Deal regulations,13 who prevented total collapse by opening the Fed
coffers – with loans amounting to $1 trillion – and persuading Paulson to
go before a recalcitrant Congress to gain consensus for exceptional
measures.
The week-end after the one so fateful for Lehman Brothers, AIG was
saved by the government with an outlay of $85 billion and control of an
equity stake of 80% of the capital. Just a month later, the considerations
that had stood in the way of saving Lehman Brothers did not apply, or no
longer applied. Bernanke submitted two arguments to justify intervention,
in this case, by the Fed:
In the case of AIG, the Federal Reserve and the Treasury judged that a
disorderly failure would have severely threatened global financial stability
and the performance of the U.S. economy. We also judged that emergency
Federal Reserve credit to AIG would be adequately secured by AIG’s
assets.14
With regard to the first point, the Fed and Treasury deemed that in the
case of Lehman Brothers bankruptcy would not have “severely threatened
global financial stability and the performance of the U.S. economy”;
12
Statement of Richard S. Fuld before the United States House Committee on
Oversight and Government Reform, Causes and Effects of the Lehman Brothers
Bankruptcy, 6 October 2008 (at www.oversight.house.gov).
13
“It might be argued that the federally directed financial rehabilitation – which
took strong measures against the problems of both creditors and debtors – was the
only major New Deal program that successfully promoted economic recovery”
(Bernanke 1983: 273).
14
At https://money.usnews.com/money/blogs/the-home-front/2008/10/15/ben-
bernanke-why-we-didnt-bail-lehman-out.
Reason and Reasonableness in Keynes 195
15
According to Zingales, “the doubts about the value of its assets combined with
the high degree of leverage created a huge uncertainty about the true value of this
equity. It could have been worth $40 billion or negative 20” (United States House
Committee on Oversight and Government Reform, at www.oversight.house.gov).
16
The conclusion of a recent and very well documented account of the events is:
“it cannot be denied that federal officials – including Paulson, Bernanke, and
Geithner – contributed to the market turmoil through a series of inconsistent
decisions. They offered a safety net to Bear Stearns and backstopped Fannie Mae
and Freddie Mac, but allowed Lehman to fall into Chapter 11, only to rescue AIG
soon after. What was the pattern? What were the rules? There didn’t appear to be
any...” (Sorkin 2009: 535).
196 Chapter Eight
References
Amato, M. and Fantacci, L. (2009), Fine della finanza. Da dove viene la
crisi e come si può pensare di uscirne, Rome: Donzelli.
Bell, C. (1928), Civilization, London: Chatto and Windus.
Bell, Q. (1968), Bloomsbury, London: Weidenfeld and Nicholson.
Bernanke, B.S. (1983), “Nonmonetary Effects of the Financial Crisis in
the Propagation of the Great Depression”, The American Economic
Review 73(3): 257–76.
Reason and Reasonableness in Keynes 197
1. Introduction
There is a widespread tendency to portray Keynes as the founding father
of the Welfare State and to claim that the Keynesian revolution provided
the justification for the need of a large public sector in the economy.1 As
the literature has amply shown, there are scant grounds for these claims.
*
Earlier drafts of this chapter were presented at Hitotsubashi University, London
School of Economics, Federal University of Rio de Janeiro, and Storep Conference
in Lecce; I benefited from comments by the participants to these occasions, in
particular A. Komine, who was very helpful in correcting inaccuracies and
omissions in the first draft. I am also indebted to Alex Saunders for excellent
research assistance and to an anonymous referee. An abridged version of the
chapter is published in Italian in Marcuzzo (2006), where a tentative list, together
with a selection of the correspondence between Keynes and Beveridge, can be
found.
1
There is a vast literature containing such claims, an extreme example being
Buchanan and Wagner (1977): see, for instance, the following assertion: “The
200 Chapter Nine
legacy or heritage of Lord Keynes is […] political bias toward deficit spending,
inflation, and the growth of government” (ibid.: 24).
2
“Keynes challenged laissez-faire as a policy well before he had developed a
critique of the orthodox economic theory of the self-adjusting tendencies of the
free market” (Meade 1990: 21).
3
“It is simply unreasonable to claim that [the] growth in government is the logical
consequence of Keynes’s views on the functions of government, as distinct from
those of his followers” (Peacock 1993: 28); “Keynes was concerned that
expansionary fiscal policies should not give rise to mounting budget deficit”
(Dimsdale 1988: 334).
Whose Welfare State? Beveridge versus Keynes 201
acceptance amongst the general public and was endorsed by the British
government.
Section 2 reviews the main issues faced today in defining the Welfare
State; section 3 compares Keynes’s and Beveridge’s ideas on
unemployment and social insurance; section 4 examines some aspects of
their relations as they emerge from the extant correspondence.
4
The background to it is given in Harris ([1977] 1997).
5
The 1944 White Paper, Social Insurance, accepted most of these
recommendations.
6
This was just the final and mature stage of Keynes’s thinking on this matter. On
the earliest stage, mainly his contribution to Britain’s Industrial Future, see
Moggridge (1992: 458–60).
7
The 1944 White Paper, Employment Policy, committed the government to “the
maintenance of a high and stable level of employment”.
Whose Welfare State? Beveridge versus Keynes 203
8
“Beveridge in the late 1930s had scornfully rejected Keynes’s analysis of
unemployment and there is no documentary evidence to suggest that he had
changed his mind by 1941–42” (Harris [1977] 1997: 427).
9
Beveridge presented his comments at the Hayek seminar at the London School of
,Economics, but he was disappointed by its reception, as he wrote to Beatrice
Webb in a letter of 9 July 1936: “I did not myself get quite as much as I had hoped
out of the seminar discussion in the way of telling me whether my criticisms were
right or wrong” (BEV 2/B/35/3).
Whose Welfare State? Beveridge versus Keynes 205
10
Reference to the Beveridge papers (BEV), held at British Library of Political and
Economic Science, is given according to their archival classification.
206 Chapter Nine
happen or to have happened if his theory is true, what will not happen if it
is false.
(Beveridge 1937: 464)
11
However, Beveridge did not entirely endorse Robbins’s formalistic programme.
See his comments to The Nature and Significance of Economic Science: “To be
content with deducing the implications of scarcity, is to reduce economics either to
the formality of one-dimensional geometry or (if we choose to multiply hypothesis
as to data in preference to collecting data) to the futility of a parlour game” (BEV
II/B/39/5).
12
Keynes was keen to have his ideas tested “in conversation” with others.
However, his interlocutors had to be attuned to his thinking or show a critical but
sympathetic attitude. See Marcuzzo and Rosselli (2005).
Whose Welfare State? Beveridge versus Keynes 207
13
We have a glimpse of Keynes’s pessimistic mood in general about the reception
of his book, in the letter Beatrice Webb sent to Beveridge after reading the latter’s
comments to the General Theory, “I lunched […] with Keynes’s the other day, and
found him very depressed about the reception of his book, and the hopeless
disunity of opinion among abstract economists” (BEV 2/B/35/3).
14
Keynes’s suggestions were heavily dependent on contemporary estimates of
post-war national income, which were at their infancy and largely controversial.
For a discussion of the gap between the “pessimistic” (Henderson’s and the
Treasury) versus the “optimistic” side (Stone and Keynes), see Moggridge (1992:
707–8).
208 Chapter Nine
are provided”, since he believed that “this is the only way by which to
preserve sound accounting, to measure efficiency, to maintain economy
and to keep the public properly aware of what things cost” (CWK XXVII:
225).
So while Keynes was appreciative of the “new features” of
Beveridge’s Plan, namely “the extension of the social security benefits and
contributions to the whole of the population, and not merely to the present
contributory classes” (CWK XXVII: 252), he was concerned with the
budgetary aspects of it. From the strictly economic point of view he was
keener to make “public investment a counterweight to fluctuations of
private investment” (CWK XXVII: 381), seeing “narrow limitations” in
any plan aimed “to stabilize consuming capacity in dealing with
depressions” (Keynes to James Meade, 8 May 1942, CWK XXVII: 206).
Both Keynes and Beveridge were concerned with the moral and social
problems deriving from unemployment, but while Beveridge stressed the
need to ensure everybody against the vagaries and fluctuations of
economic activity, Keynes believed that “to provide an adequate material
standard of life” was not the “real problem of the future”. He saw it rather
as “how to organize material abundance to yield up the fruits of a good
life”. For Beveridge, it was the human fight against scarcity, the plague of
cycles in production and business confidence – as unpredictable as
weather and natural calamities, as he saw them. Social insurance was
meant to disjoint individual coverage from general economic performance.
For Keynes it was the fight “to persuade [his] countrymen and the world at
large to change their traditional doctrines” (CWK XXVI: 16). By making
the future dependent on the economic success of an active social
investment policy it would free individuals from the deprivations deriving
from unemployment.
The two pillars of the Welfare State – distrust of market forces and,
with it, reliance on government intervention to bring about full
employment on the one hand, and lack of confidence in the power of
liberalism to achieve economic security and social stability on the other,
again making the case for government intervention — were formulated
independently and, perhaps, even in opposition to one another. Beveridge,
the Fabians’ heir, relied on neoclassical economic theory while Keynes,
the revolutionary economist, relied on reformed liberalism for his social
policy.
Whose Welfare State? Beveridge versus Keynes 209
15
The excellent paper by Dimand (1999) is somehow more focused on Beveridge
than Keynes; while Komine (2010) addresses the issue of the integrated
perspective on the welfare state by Beveridge, rather than comparing the two
approaches, thus leaving perhaps room for the present investigation.
210 Chapter Nine
16
The book (Beveridge 1931) included contributions by Benham, Bowley,
Gregory, Hicks, Layton (the only one not a member of the staff of the School),
Plant, Robbins and Schwartz. A substantial contribution was made by Dennis
Robertson, who pulled out of the project only in August 1931. (I am indebted to a
referee for pointing this out.)
Whose Welfare State? Beveridge versus Keynes 211
17
The position had first been offered by Sydney Webb to Keynes, who turned it
down. See McCormick (1992: 13).
212 Chapter Nine
Keynes had wished to make his maiden speech in the Lords debate on
the Beveridge Report on February 24; he was prevented from doing so by
the political sensitivity of the issues involved, which made him fearful of
“disobliging” the Treasury, which had got itself “into a hideous mess over
this Report”, as he explained to his mother on the eve of the appointed
date (CWK XXVII: 256). The draft of his speech is, however, extant, and
it reveals Keynes’s whole-hearted commitment and political support. The
main point stressed there is (a) “there is no cheaper scheme on the map”;
(b) “[it] is a relatively cheap scheme for the early period” (CWK XVII:
258). The crucial question for Keynes was whether the country could
afford the future commitments which the scheme entailed. And his answer
once again stressed the view that in the future “the economic problems of
the day […] will lie in solving the problems of an era of material
abundance not those of an era of poverty” (ibid.: 261).
The extant letters of the last two years of Keynes’s life are interesting
because they show their attitudes towards the White Paper on Employment
Policy (1944), which later became known as being inspired by Keynes and
Beveridge. Keynes was organizing a meeting at the Royal Economic
Society to discuss it and invited Beveridge to contribute to the subject in
the Economic Journal (JMK to WHB, 31 May 1944, BEV 9/B/30).
Beveridge accepted and added, “As regards what I think about the White
Paper […] I do most heartily congratulate you and the economists on the
distance to which you have moved the government. I shall do what I can to
help to move them still further” (WHB to JMK, 5 June 1944, BEV
9/B/30).
On his return voyage from the United States, Keynes read Full
Employment in a Free Society and reported to Beveridge that he found it
“extremely good” (JMK to WHB, 16 December 1944, CWK XXVII: 380).
Beveridge had hopes to be able to discuss points Keynes raised (WHB to
JMK, 8 January 1945, BEV 2/B/44/1), but the extant letters do not reveal
whether they ever did.
Finally, we have the last exchange relative to nominations to the
British Academy, section IX, Economic Science. In 1942 Beveridge had
suggested Robbins and Cole (WHB to JMK, 17 January 1942, BEV
BA/1/80); in 1944 he agreed to put forward Hayek, but with scant
enthusiasm since he felt he should have proposed Joan Robinson, who was
“really much better than Hayek” (WHR to JMK, 28 February 1944, BEV
2/B/43/1).
Beveridge had really made a full turnabout and as far as economic
ideas were concerned he had become closer to the most radical amongst
214 Chapter Nine
the Keynesians than to the holder of the torch of free market and
liberalism.
5. Conclusion
In December 1942, a few days after the Beveridge Report was published,
Beveridge married Juliet (Jessie) Mair, the controversial Secretary of the
LSE and his cousin’s widow, who had been a close friend for many years.
In a volume of recollections, she recorded that Keynes’s wedding present
was the 1691 edition of W. Petty’s Political Arithmetic, with the following
inscription: “To Sir William Beveridge this book by the founder of his
(and my) craft on the occasion of his contriving social security for the rest
of us and not forgetting himself” (J. Beveridge 1954: 127).
The playful tone of Keynes’s inscription seals the understanding
reached between Keynes and Beveridge after their disagreement over free
trade and the General Theory.19
While Keynes was able to be in tune with Beveridge’s proposals at the
time of his Report, Beveridge was unable to do the same with Keynesian
theory when the General Theory appeared. I surmise that this was due to
the revolutionary aspect of Keynes’s theory, which took quite a long time
to be accepted and absorbed. His path-breaking ideas were unacceptable to
anyone accustomed to viewing questions of economics with the lenses of
scarcity and allocative constraints. This may explain why Keynes was not
too much bothered by the financial burden of a generalized insurance
scheme since he believed that it would force the country to adapt its
attitude to the future. “If we approach it with cringing and timidity, we
shall get what we deserve. If we march on with confidence and vigour the
facts will respond” (CWK XXVII: 260). This, it seems to me, is the
intellectual and political legacy of Keynes: building the future on
confidence, rather than deficit spending.
19
It is worth recalling here how in September 1931 in her diary Beatrice Webb
contrasted Keynes and Beveridge: “In London, we lunched with Beveridge, who
heartily dislikes Keynes and regards him a quack in economics. These two men are
equally aloof from the common man, but they have little appreciation of each
other; Keynes, the imaginative forecaster of events and speculator in ideas, his
mind flashing into the future; Beveridge bound down to the past, a bureaucratic
statistician, intent on keeping intact the inequality between the few who could
govern and the many who must be governed, and believing in the productivity of
the acquisitive instinct.” (Quoted in Caldwell 2004: 174n).
Whose Welfare State? Beveridge versus Keynes 215
References
Barr, N. (2004), The Economics of the Welfare State, 4th ed., Oxford:
Oxford University Press.
Bateman, B. (1996), Keynes’s Uncertain Revolution, Ann Arbor:
University of Michigan Press.
Beveridge, J. (1954), Beveridge and His Plan, London: Hodder and
Stoughton.
Beveridge, W.B. (ed.) (1931), Tariffs: The Case Examined, London:
Longman.
—. (1937), “The Place of the Social Science in Human Knowledge”,
Politica 2(9): 459–79.
—. (1942), Social Insurance and Allied Services, London: HMSO.
—. (1944), Full Employment in a Free Society, London: Allen and Unwin.
Bridel, P. and Ingrao, B. (2005), “Managing Cambridge Economics: The
Correspondence between Keynes and Pigou”, in M.C. Marcuzzo and
A. Rosselli (eds), Economists in Cambridge: A Study Through Their
Correspondence, 1907–1946, London: Routledge, 149–173.
Buchanan, J. and Wagner, R. (1977), Democracy in Deficit, New York:
Academic Press.
Caldwell, B. (2004), Hayek’s Challenge: The Intellectual Biography of
F.A. Hayek, Chicago: The University of Chicago Press.
Cutler, T., Williams, K. and Williams, J. (1986), Keynes, Beveridge and
Beyond, London: Routledge.
Dimand, R. (1999), “The Beveridge Retort: Beveridge’s Response to the
Keynesian Challenge”, in L. Pasinetti and B. Schefold (eds), The
Impact of Keynes on Economics in the 20th Century, Cheltenham (UK)
and Northampton (MA): Edward Elgar, 221–39.
Dimsdale, N.H. (1988), “Keynes on Interwar Economic Policy”, in W.
Eltis and P. Sinclair (eds), Keynes and Economic Policy: The
Relevance of the General Theory after Fifty Years, Basingstoke:
Palgrave Macmillan, 317–39.
Eichengreen, B. (1984), “Keynes and Protection”, Journal of Economic
History 44(2): 363–73.
Harris, J. ([1977] 1997), William Beveridge. A Biography, 2nd ed.,
Oxford: Clarendon Press.
Hicks, J.R. (1982), “Introductory: LSE and the Robbins Circle”, in J.R.
Hicks (ed.), Money Interest and Wages, vol. 2. pp. 3–10.
Howson, S. and Winch, D. (1977), The Economic Advisory Council 1930–
1939: A Study of Economic Advice During Depression and Recovery,
Cambridge: Cambridge University Press.
216 Chapter Nine
RE-EMBRACING KEYNES:
SCHOLARS, ADMIRERS AND SCEPTICS
IN THE AFTERMATH OF THE CRISIS
1. Premise
While there has never been a real halt in the flow of scholarly literature,
undoubtedly the 2008–09 crisis has seen an upsurge in the wave of
references to Keynes, in the media, the economic press and political
discourse.
The number of admirers has gone up and for the first time in a very
long time those who look back to Keynes have outnumbered the sceptics.
On the other hand, the Keynes revival has brought back to the fore doubts
and objections to the relevance of Keynes’s arguments to contemporary
problems and issues.
In this chapter I investigate which aspects of Keynes’s analysis and
recommendations economists wish once again to see accepted and
implemented and which are still rejected and misunderstood. I am also
concerned to find out whether the “return to Keynes” plea is matched by
original research into his work and how much is sheer rhetoric or relies on
second-hand knowledge.
Re-embracing Keynes 219
2. Government Deficit
The standard “return to Keynes” argument is the need for fiscal stimulus to
boost the economy from the depths of recession. The burden of the deficit
is not seen as the main drawback of government intervention, but a
necessary measure to address a failure in aggregate demand.
There are still many economists who oppose this view, as witnessed by
the manifesto sponsored by the Cato Institute and signed by 237 American
economists (the most renowned among them being M. Bordo, J.
Buchanan, J. Cochrane, E. Fama, S. Horwitz, D. McCloskey, A. Meltzer,
E. Prescott, V. Smith, R. Whaples, and L. White) who refused to endorse
the statement made by President Obama in January 2009 that “we need
action by our government, a recovery plan that will help to jumpstart the
economy”. The signatories declared:
Notwithstanding reports that all economists are now Keynesians and that
we all support a big increase in the burden of government, we the
undersigned do not believe that more government spending is a way to
improve economic performance. More government spending by Hoover
and Roosevelt did not pull the United States economy out of the Great
Depression in the 1930s. More government spending did not solve Japan’s
“lost decade” in the 1990s. As such, it is a triumph of hope over experience
to believe that more government spending will help the US today. To
improve the economy, policymakers should focus on reforms that remove
impediments to work, saving, investment and production. Lower tax rates
and a reduction in the burden of government are the best ways of using
fiscal policy to boost growth.1
1
See the manifesto available at: https://object.cato.org/sites/cato.org/files/pubs/pdf/cato
_stimulus.pdf.
2
Among them C. Goodhart, M. Desai, J. Vickers, D. Newbery, H. Pesaran, K.
Rogoff, T. Sargent.
220 Chapter Ten
3
“UK economy cries out for credible rescue plan”, Sunday Times, 14 February
2010.
4
Among them M. Miller,V. Chick,P. De Grauwe, B. DeLong, S. Dow, J. P.
Fitoussi, G. C. Harcourt, A. Kirman, R. Rowthorn, M. Sawyer.
5
Among them D. Hendry, A. Blinder, R. Solow, D. Vines.
6
“First priority must be to restore robust growth”, Financial Times, 18 February
2010.
7
“Sharp shock now would be dangerous”, Financial Times, 18 February 2010.
8
For instance it is acknowledged that the present situation of Britain, Greece,
Spain (in 2010 running a deficit of over 13 and 11 per cent respectively), Ireland,
Portugal and Italy (with figures of over 12 per cent, 8 per cent and 5 per cent) may
stand in the way when invoking public expenditure to sustain aggregate demand.
Re-embracing Keynes 221
9
In December 2009, Spanish unemployment rose to 19.3 per cent, (the highest in
more than a decade), the nation’s jobless rate soaring to twice the Eurozone
average. Unemployment in Greece reached 9.8 per cent in October 2009. See
http://www.banknoise.com/2009/12/la-disoccupazione-in-italia-confrontata-con-gli-
altri-paesi-europei-usa-e-giappone.html.
10
The countries within the European Union have agreed to a “Stability and Growth
Pact” (SGP), which arbitrarily limits national government deficit spending to 3 per
cent of gross domestic product (GDP), whilst limiting overall public debt as a
percentage to GDP of 60 per cent.
11
The contemporary “austerity debate” is summarized in the article “Why the
battle is joined over tightening”, Financial Times, 18 July 2010.
222 Chapter Ten
12
A recent study relative to 30 countries, concluded that “there is mixed evidence
on the effectiveness of fiscal stimulus packages in generating employment gains in
a recession” (Jha 2009: 25).
224 Chapter Ten
Income Income
Total fiscal Employment effect Employment effect
Employment multiplier multiplier
package with income with income multiplier
elasticity of effect effect
(% of multiplier 0.5 1
growth (multiplier of (multiplier of
GDP) (% age change) (% age change)
0.5) 1)
Argentina 3.9 0.01 1.95 0.02 3.9 0.04
Australia 2.5 0.56 1.25 0.70 2.5 1.4
Belgium 0.5 0.57 0.25 0.14 0.5 0.29
Brazil 0.2 0.68 0.1 0.07 0.2 0.14
Canada 2 0.44 1 0.44 2 0.88
Chile 2.3 0.28 1.15 0.32 2.3 0.64
China 13 0.17 6.5 1.11 13 2.21
France 1.1 0.57 0.55 0.31 1.1 0.63
Germany 2.8 0.05 1.4 0.07 2.8 0.14
Hungary 3.8 0.03 1.9 0.06 3.8 0.11
India 0.3 0.36 0.15 0.05 0.3 0.11
Indonesia 1.2 0.43 0.6 0.26 1.2 0.52
Italy 0.3 0.74 0.15 0.11 0.3 0.22
Japan 2.3 –0.24 1.15 –0.28 2.3 –0.55
Korea 2.7 0.38 1.35 0.51 2.7 1.03
Re-embracing Keynes 225
Income Income
Total fiscal Employment effect Employment effect
Employment multiplier multiplier
package with income with income multiplier
elasticity of effect effect
(% of multiplier 0.5 1
growth (multiplier of (multiplier of
GDP) (% age change) (% age change)
0.5) 1)
Malaysia 7.9 0.67 3.95 2.65 7.9 5.29
Mexico 4.7 0.67 2.35 1.57 4.7 3.15
Netherlands 0.8 0.7 0.4 0.28 0.8 0.56
New Zealand 0.8 0.6 1.9 1.14 3.8 2.28
Norway 0.6 0.26 0.3 0.08 0.6 0.16
Philippines 3.7 0.76 1.85 1.41 3.7 2.81
Portugal 1.1 0.4 0.55 0.22 1.1 0.44
Russia 1.1 0.13 0.55 0.07 1.1 0.14
Saudi Arabia 11.3 1.11 5.65 6.27 11.3 12.54
South Africa 1.2 –0.23 0.6 –0.14 1.2 –0.28
Spain 0.8 0.72 0.4 0.29 0.8 0.58
Switzerland 0.3 0.1 0.15 0.02 0.3 0.03
Thailand 2.8 0.38 1.4 0.53 2.8 1.06
United Kingdom 1.3 0.37 0.65 0.24 1.3 0.48
United States 5.6 0.2 2.8 0.56 5.6 1.12
Vietnam 0.9 0.35 0.45 0.16 0.9 0.32
Source: Jha (2009).
226 Chapter Ten
sound finance; and each of these activities has played its part in progress –
failing something better.
(Ibid.: 130; emphasis added)
There are two points here. The first is that “it would, indeed, be more
sensible to build houses and the like; but if there are political and practical
difficulties in the way of this, the above would be better that nothing”
(Ibid.: 129). The political difficulties arise mainly from “the education of
our statesman on the principles of the classical economics” (Ibid.). The
second point is that expenditure on “useful things” may not be as effective:
“Two pyramids, two masses for the dead, are twice as good as one; but not
two railways from London to York” (Ibid.).The argument is that the
decreasing marginal efficiency of investment, “unless the rate of interest is
falling pari passu”, sets a limit to the possibility of increasing the stock of
wealth by means of “useful” forms of loan expenditure.13 Waste results not
when expenditure is directed to objects which are not “useful”, but when
they are not “economically” viable.
The purpose of increasing aggregate expenditure is to generate income
and employment, and this may not be sufficient to increase the stock of
useful wealth. In Keynes’s argument, financial availability is not the
constraining factor in the augmentation of objects which “could serve the
needs of man”, as are the constraints of their diminishing of marginal
utility and the provisions for user and supplementary costs to maintain
them.
13
“‘Loan expenditure’ is a convenient expression for the net borrowing of public
authorities on all account, whether on capital account or to meet a budgetary
deficit. The one form of loan expenditure operates by increasing investment and
the other by increasing the propensity to consume” (CWK VII: 128n).
228 Chapter Ten
14
In Minsky’s words, “the intrinsically irrational fact of uncertainty is needed if
financial instability is to be understood” ([1970] 1982: 120).
15
According to Roncaglia (2009: 496 n18) the distinction between risk (cases
involving quantitative probabilities) and uncertainty (cases in which probabilities
are non-measurable) is to be found in Knight rather than in Keynes.
16
According to Bordo et al. (2001), between 1945 and 1971 the world experienced
only 38 financial crises, while from 1973 to 1997 it went through 139 such crises.
230 Chapter Ten
20
“Both the New Classical and New Keynesian complete markets macroeconomic
theories not only did not allow questions about insolvency and illiquidity to be
answered. They did not allow such questions to be asked” (Buiter 2009).
232 Chapter Ten
5. A Research Agenda
The economics of Keynes is not just about government spending and
injection of liquidity in times of crisis, but also about international
cooperation on matters of finance, primary commodities, and international
payments to provide the appropriate framework to a market economy. It is
21
See Wray’s nice description of the “message”:
Entrepreneurs produce what they expect to sell, and there is no reason to
presume that the sum of these production decisions is consistent with the
full-employment level of output, either in the short run or in the long run.
Moreover, this proposition holds regardless of market structure – even
where competition is perfect and wages are flexible. It holds even if
expectations are always fulfilled, and in a stable economic environment. In
other words, Keynes did not rely on sticky wages, monopoly power,
disappointed expectations, or economic instability to explain
unemployment. While each of these conditions could certainly make
matters worse, he wanted to explain the possibility of equilibrium with
unemployment. (Wray 2007: 3).
Re-embracing Keynes 233
22
“In the short run one does not win by picking the company most likely to
succeed in the long run, but by picking the company most likely to have high
market value in the short run” (Akerlof and Shiller 2009: 133).
23
A preliminary inquiry can be found in Fantacci et al. (2012) and in Fantacci et
al. (2010).
Re-embracing Keynes 235
track of the theoretical basis that supports them, and again squandering the
opportunity to exploit to the full the richness of Keynes’s thought.
6. Conclusions
According to Wolf (2008), there are “three broad” lessons to be derived
from Keynes’s teaching. The first is to discard the notion of “efficient
markets” and to endorse the notion of uncertainty; the second is to accept
that the economy cannot be analysed or managed in the same way as an
individual business; the third is to disown the belief that individual self-
seeking behaviour guarantees a stable economic order.
Will these lessons find their way back into the corpus of economic
teaching and research agenda?
The boost to aggregate demand through government expenditure and
injection of liquidity into the system to fight depressions and offset credit
crunches are policy recipes also invoked by people of non-Keynesian
persuasion, whose searches for alternatives to mainstream economics look
in different directions. Thus, a new research agenda is needed to provide
food for thought to those sceptics who doubt the utility of Keynes’s ideas
in rebuilding an alternative paradigm, and also to admirers who have little
and narrow acquaintance with Keynes’s writings.
While “the return to Keynes” wind is certainly to be welcomed, it may
not outlive the present crisis. Scholars and admirers of Keynes may fail to
persuade sceptics and opponents, and there is no telling whether a new
generation of economists will take today’s lesson to heart. The hope is that
Max Planck’s dictum (1950: 33) quoted in Kirman (2009) applies not only
to a “new” but also to an “old” theory: “a new scientific truth does not
triumph by convincing its opponents and making them see the light, but
rather because its opponents eventually die, and a new generation grows
up that is familiar with it”.
References
Akerlof, G, and Shiller, R. (2009), Animal Spirits. How Human
Psychology Drives the Economy, and Why It Matters for Global
Capitalism, Princeton: Princeton University Press.
Barba, A. and Pivetti, M. (2009), “Rising Household Debt: Its Causes and
Macroeconomic Implications – A Long-period Analysis”, Cambridge
Journal of Economics 33(1): 113–37.
Becker, G. (2009), “How to Increase Employment”, available at
236 Chapter Ten
https://www.becker-posner-blog.com/2009/11/how-to-increase-
employment--becker.html.
Blanchard, O. (2008), “The State of Macro”, MIT Department of
Economics Working Paper no. 08-17, August, Cambridge: MIT Press.
Bordo, M., Eichengreen, B., Klingsbiel, D. and Martinez-Peria, M. (2001),
“Is the Crisis Problem Growing More Severe?”, Economic Policy
16(32): 51–82.
Bresser-Pereira, L.C. (2009), “The Global Financial Crisis and After: A
New Capitalism?”, FGV EESP Working Paper no. 240, São Paulo,
Brazil: Escola De Economia De São Paulo da Fundação Getulio
Vargas.
Brittan, S. (2010), “The Impoverished Fiscal Debate”, Financial Times, 8
October.
Buiter, W. (2009), “The Unfortunate Uselessness of Most ‘State of the
Art’ Academic Monetary Economics”, Financial Times, 3 March,
available at
http://www2.econ.iastate.edu/tesfatsi/UselessnessOfMacro.WBuiter20
09.pdf.
Colander, D., Föllmer, H., Haas, A., Goldberg, M., Juselius, K., Kirman,
A., Lux, T. and Sloth, B. (2009), “The Financial Crisis and the
Systemic Failure of Academic Economics”, 98th Dahlem Workshop
on Modeling of Financial Markets, Dahlem, Germany, available at
https://www.files.ethz.ch/isn/98185/ Kap_1489.pdf.
De Cecco, M. (2010), “Keynes and Modern International Finance
Theory”, in B.W. Bateman, T. Hirai and M.C. Marcuzzo (eds), The
Return to Keynes, Cambridge: Harvard University Press, 225–40.
De Grauwe, P. (2010), “The Return of Keynes”, International Finance
13(1): 157–63.
Fantacci, L., Marcuzzo, M.C. and Sanfilippo, E. (2010), “Speculation in
Commodities: Keynes’s ‘Practical Acquaintance’ with Future
Markets”, Journal for the History of Economic Thought 32(3): 397–
418; also reprinted as chapter 13 of the present volume.
Fantacci, L., Marcuzzo, M.C., Rosselli, A. and Sanfilippo, E. (2012),
“Speculation and Buffer Stocks: The Legacy of Keynes and Kahn”,
European Journal for the History of Economic Thought 19(3): 453–73;
also reprinted as chapter 12 of the present volume.
Jha, V. (2009), “The Effects of Fiscal Stimulus Packages on
Employment”, Employment Working Paper no. 34, Geneva:
International Labour Organization.
Keynes, J.M. (1971–1989), The Collected Writings of John Maynard
Keynes (CWK), managing editors E.A.G. Robinson and D.E.
Re-embracing Keynes 237
WHATEVER HAPPENED TO
THE KEYNESIAN MULTIPLIER?
1. Premise
The focus of this chapter is the issue of the two-way link between
economic thinking and facts. I will not attempt to address the complex
issue of how theories are confirmed or falsified, here I wish only to
explore the circumstances that prompt the return of ideas previously
discarded or forgotten because they are believed to have been either
disproved or surpassed by a better theory. The point has been nicely
argued in a recent paper:
Understanding in economics does not proceed cumulatively. We do not
necessarily know more today than we did yesterday, tempting as it may be
to believe otherwise. So-called “lessons” are learnt, forgotten, re-learnt and
forgotten again. Concepts rise to prominence and fall into oblivion before
possibly resurrecting. They do so because the economic environment
changes, sometimes slowly but profoundly, at other times suddenly and
violently. But they do so also because the discipline is not immune to
fashions and fads.
(Borio 2012: 1)
This “Keynesian consensus” lasted for almost thirty years until it was
seriously challenged by the Monetarist assault of the late 1960s. Building
on his (and Franco Modigliani’s) earlier work on the consumption
function, Milton Friedman cast doubts on the efficacy of fiscal policy.
Both the permanent income hypothesis and the life-cycle approach to
consumption were shown to be empirically better supported than the
decreasing marginal propensity to consume out of current income
envisaged by Keynes, therefore leaving little room for the working of the
multiplier.
The monetarist Counterrevolution was pushed further by Robert Lucas
and the New Classical economists well into the 1990s, with feeble defence
by the New Keynesians, who relegated the efficacy of the multiplier to the
very short period when prices and wage rigidities prevented the system
from getting into full employment equilibrium. Keynesian economics was
put in mothballs, as Lucas recorded:
One cannot find good, under-forty economists who identify themselves or
their work as “Keynesian”. Indeed, people even take offence if referred to
as “Keynesians”. At research seminars, people don’t take Keynesian
theorizing seriously anymore; the audience starts to whisper and giggle to
one another.
(Quoted in Mankiw 2006: 34)
Well into the 2000s the profession remained converted to the new wisdom,
and free market economics ruled the roost in the profession, while anti-
government intervention sentiments remained strong in institutions like
the World Bank and the IMF and in influential media such as the
Financial Times and the Economist. The classical arguments against short-
term policy interventions – the lags in making economic policy and further
lags in the implementation and effects after the policy is enacted – coupled
with Lucas’s assumptions on the countering effects of expectations and
actions of rational agents who observe the government’s policy process
had made it appear practically impossible for policymakers to time fiscal
policy actions to stabilize the economy. So the author of a recent overview
of the empirical studies on the multiplier could conclude that “Before
2008, the topic of stimulus effects of fiscal policy was a backwater
compared to research on monetary policy” (Ramey 2011: 673).
However, empirical estimates of the multiplier did not deliver the answer
either. According to a recent summing up:
The range of the spending multiplier estimated using these various
approaches is from 0.4 to 1.5, with some estimates even lower than 0.4 and
Whatever Happened to the Keynesian Multiplier? 245
some estimates larger than 1.5. However, most fall in the 0.4 to 1.5 range.
This is a huge range because it includes 1.0.
(Alesina 2012: 431)
2
See Marcuzzo (2013: 4).
246 Chapter Eleven
Giancarlo Corsetti et al. (2012: 521, 528) put it in even stronger terms,
asserting that “Output and consumption multipliers […] become quite
sizeable during times of financial crisis”, thereby providing “evidence in
support of fiscal stimulus during financial crises”.
Eventually both the IMF and the European Union in October 2012
followed suit:
our results indicate that multipliers have actually been in the 0.9 to 1.7
range since the Great Recession. This finding is consistent with research
suggesting that in today’s environment of substantial economic slack,
monetary policy constrained by the zero lower bound, and synchronized
fiscal adjustment across numerous economies, multipliers may be well
above 1 […]. More work on how fiscal multipliers depend on time and
economic conditions is warranted.
(IMF 2012: 43)
The IMF study (2012) showed that the actual value of the multiplier is
twice or even three times that assumed in the growth estimates, namely in
the range of 0.9 to 1.7 rather than 0.5. The recession had brought back
values of the multiplier close to 1, from the average value of 0.5 for the
advanced economies during the three decades leading up to 2009.
The reasons why the multiplier is well above 1 today are given as
“monetary policy constrained by the zero lower bound and synchronized
fiscal adjustment across numerous economies” (Ibid.: 43). The first reason
is just a repetition of the “old” argument that private investment is not
“crowded out” at zero lower bound interest rate. The second argument is
that synchronized fiscal contractions of the same extent do not impact on
current accounts and therefore prevent real depreciation and current
account improvement from occurring. Both the arguments explain the
multiplier effect of fiscal consolidation on output, taking into account the
secondary effects (no crowding out and no trade expansion).
Others have argued “that standard macroeconomic theory implies that
private-sector spending is determined by the expected future path of short-
term interest rates and not just the current level of the overnight rate”,
which is the only rate currently close to zero (Swanson and Williams
2012: 2). By stressing the role of expectations, news and credibility, the
value of the multiplier can be made to stay below 1, also with zero bound
interest rate. In fact, in modern macroeconomics the essential element is
information, not needs, habits or distribution, which are the Keynesian
forces behind the multiplier.
On the other hand, it is argued that in the abnormal financial conditions
of the crisis, credit constraints were more binding; so “households could
be expected to behave in a more ‘Keynesian’ fashion, with less reference
to ‘permanent income’. This would tend to result in a larger multiplier”
(Chinn 2012: 12).
In contrast, Shapiro (2012: 110) makes a different analysis of the
pattern of consumption in a financial constrained and debt-ridden
economy:
Debt-financed consumer spending is quite different from income-financed
spending. The latter can continue as long as income is earned, whereas the
debt financed spending cannot. Consumers have to pay interest on the debt
they contract, and this interest can be paid in only one of two ways: out of
their incomes or through incurring more debt. In either case, the interest
payments on the debt will reduce purchasing power, and though the
recipients of this interest may spend some of it on consumption, they are
likely to be financial firms and wealthier households, neither of which
spends much of their earnings.
Whatever Happened to the Keynesian Multiplier? 249
Most of the interest paid out of household income will go back into
finance, used for the purposes of financial investments or speculations, so
that while consumer credit can increase consumer spending in the short
run, raising it above the level of household incomes, it cannot do so in the
long run. Its long-run effects are […] the same as an increase in household
saving: they reduce effective demand, worsening rather than ameliorating
the employment problems of capitalist economies.
6. Conclusions
Keynes dedicated three chapters (8, 9, 10) of the General Theory to the
propensity to consume and to the multiplier. He listed the objective and
the subjective factors underlying motives to spending, but concluded that
expenditure in consumption “depends in the main […] on the volume of
output and employment” (CWK 7: 96). He always insisted that
250 Chapter Eleven
working hard to rectify them, while maintaining fealty to all that was
legitimate, timeless and dependable in neoclassical economics; and three,
the best response would be to renounce neoclassical economics altogether,
and start anew with some other tradition of economic thought.
(Mirowski 2013: 240)
The reader will by now have guessed to which category the present
author belongs, in good company with Pascal Bridel, to whom this
contribution is dedicated.
References
Alesina, A. (2012), “Fiscal Policy after the Great Recession’, Atlantic
Economic Journal 40(4): 429–35.
Bailly, J. (2008), “Consumption, Investment and the Investment
Multiplier”, in C. Gnos and L. Rochon (eds), The Keynesian
Multiplier, Abingdon: Routledge, 127–50.
Barro, R.J. (2009), “Government Spending Is No Free Lunch”, Wall Street
Journal, 22 January.
Borio, C. (2012), “The Financial Cycle and Macroeconomics: What Have
We Learnt?”, BIS Working Papers no. 395, Basel: Bank for
International Settlements, available at
https://www.bis.org/publ/work395.pdf.
Chinn, M.D. (2013), “Fiscal Multipliers” in Darlauf S. and Blume L.
(eds), The New Palgrave Dictionary of Economics, London: Palgrave
Macmillan, available at
http://www.ssc.wisc.edu/~mchinn/Fiscal%20Multipliers.pdf.
Corsetti, G., Meier, A. and Muller, G. (2012), “What Determines
Government Spending Multipliers?”, IMF Working Paper no. 12/150,
Washington (DC): International Monetary Fund, available at
https://www.imf.org/~/media/Websites/IMF/imported-full-text-
pdf/external/pubs/ft/wp/2012/_wp12150.ashx.
Davies, G. (2012), “High Fiscal Multipliers Undermine Austerity
Programmes”, Financial Times, 21 October.
de Long, B. and Summers, L. (2012), “Fiscal Policy in a Depressed
Economy”, Brookings Papers on Economic Activity (Spring): 233–74
European Commission, (2012), “2012 Report on Public Finances in
EMU”, Brussels: European Union, Economic and Financial Affairs,
available at
http://ec.europa.eu/economy_finance/publications/european_economy/
2012/pdf/ee-2012-4.pdf.
252 Chapter Eleven
KEYNES AS SPECULATOR,
INVESTOR AND REFORMER
CHAPTER TWELVE
SPECULATION IN COMMODITIES:
KEYNES’S “PRACTICAL ACQUAINTANCE”
WITH FUTURES MARKETS
1. Introduction
In this paper we address the subject of Keynes as a speculator. We look
first at the primary sources of information, which, in the main, are in the
form of unpublished letters and broker’s statements, by no means easy to
interpret. Secondly, we look at the theory Keynes sparingly presented in
his writings, but which nevertheless is grounded on his first-hand
knowledge of speculative behaviour. Thirdly, we examine the focus on
speculation in commodities, which had great weight in Keynes’s portfolio,
and have chosen a particular commodity – wheat – for our investigation.
The sources, and in particular the correspondence with Kahn in 1937–38
and Buckmaster & Moore’s statements, are discussed in section 2, within
the framework of Keynes’s investment activity, as we know it from
Volume XII of The Collected Writings of John Maynard Keynes (hereafter
CWK). Rather than reconstructing Keynes’s theory of speculation, we
present those elements (and particularly the idea of a “normal
backwardation”) that we consider relevant to an understanding of his
behaviour regarding, and his theory of, commodity futures markets
(section 3). The scope of this paper is concerned with speculation in
commodities, although some remarks may have more general implications.
Speculation in Commodities 257
1
On his death, he left about £450,000, including the value of pictures and books
(Harrod 1951: 297–298). The Chest Fund was also a success story: its capital
appreciation from the initial investment of £30,000 amounted to £380,000 by the
time of Keynes’s death (Harrod 1951: 388).
2
The letters are included in the Keynes Papers and Kahn Papers kept at King’s
College Modern Archives, Cambridge. A description of the entire correspondence
and a complete list of the archival references is provided by Marcuzzo (2005, also
in chapter 6 of the present volume).
3
Keynes’s health problems started at the end of summer 1936, and got
progressively worse until his collapse in May 1937. On 18 June he was taken to
Ruthin Castle, North Wales, a private sanatorium “for the treatment of illness and
the maintenance of health” (Skidelsky 2000: 4), where he remained until 23
September. He then went to London, and on 30 September moved to Tilton
Speculation in Commodities 259
of 1938 – obliged him to delegate Kahn to deal with much of his normal
work: this circumstance gave rise to an extraordinarily intense exchange
between the two – resulting in almost 300 letters – mainly dealing with
investment decisions in various activities, ranging from farming and real
estate to securities, currencies, and commodities – which give us a glimpse
of Keynes’s actual practice during this time.
In the months immediately following Keynes’s illness, he grew to rely
on Kahn (who, since 1935, had been assisting Keynes in his capacity as
First Bursar of King’s College) for the management of his financial affairs.
In particular, Kahn executed Keynes’s instructions on all matters related to
college finances and Keynes’s own financial investment; he regularly
provided prospects and figures regarding Keynes’s and King’s accounts,
especially in relation to the Chest Fund (see, for example, the letter from
Kahn to Keynes, 12 September 1937, in Keynes Papers, KC/5/6/104).4 He
also helped Keynes in keeping up relations with the stockbrokers in
London, such as Buckmaster & Moore and Laurence Keen & Gardner
(see, for example, the letter from Keynes to Kahn, 25 June 1937, in Kahn
Papers, RFK/13/57/167), and in the management of the college properties
(estates and farms); Keynes appointed him director of the Tilton Company
(letter from Keynes to Kahn, 2 July 1937, in Kahn Papers,
RFK/13/57/173).
Examination of their entire exchange yields some additional
information on Keynes’s investment activity, the kinds of financial
instruments he adopted, and how he used them. In particular, the letters
provide information on the types, proportions, places, and characteristics
of Keynes’s investments in the period considered.5 He operated mainly on
the London Stock Exchange and Wall Street, but also on those markets in
which different commodities were traded. To give but a few examples of
Keynes’s intense investment activity in that period, he was involved in
trading in shares (ordinary and preferred) of big companies such as
Imperial Airways and General Motors, public utilities such as Electric
(Moggridge 1992: 608). All these circumstances, even with Kahn in place, meant
Keynes, for some time, was unable to respond as quickly as he normally would to
changing events. This had an impact on his investment activity of that period.
4
References to the Keynes Papers and to the Kahn Papers are given following the
classification of their respective catalogues at King’s College Modern Archives,
Cambridge.
5
In addition to information concerning investments on his own account, this
correspondence also offers some clues as to the operations on the account of
King’s College. It appears that Keynes gave the same orders on both accounts, but
on a different scale: the dealings for the college were generally 30–50% smaller.
260 Chapter Twelve
6
More general information and data on Keynes’s securities investments are
provided in tables 3–6 in CWK XII: 11–14.
7
Data are drawn from statements covering the investment positions of J.M.
Keynes and Tilton C. on 7 June 7 1937 (Keynes Papers TC/5/2/154–157). Values
Speculation in Commodities 261
for various types of investments (and percentages over total investments) are:
$1,271,639 = £259,518 (36%) of US shares and stocks; £128.734 (18%) of UK
securities; £101,485 (14%) of foreign exchange (future sales); £232,807 (32%) of
commodities. Total forward purchases of wheat are valued at £80,704 (34% of
commodity investments).
8
The latter record also Keynes’s holdings in US and UK securities and his
positions on forward exchange markets.
262 Chapter Twelve
rest on the assumption that, on average, speculators can forecast the future
better than producers, traders, and consumers.
This leaves the possibility that speculators enter into forward contracts,
not in the expectation of price changes and, hence, of windfall profits, but
rather to provide an insurance against unexpected price changes, in
exchange for a pre-determined remuneration. In Keynes’s words, “the
speculator in the great organised ‘futures’ markets [...] is not so much a
prophet (though it may be a belief in his own gifts of prophecy that tempts
him into the business), as a risk-bearer” (Keynes 1923: 260, italics in the
original).
This hypothesis does not require that buyers and sellers in forward
contracts entertain different expectations over prices at the date of
maturity. On the contrary, it assumes that, given common expectations,
sellers are willing to settle at a forward price lower than the expected
price: to swap the prospective, uncertain proceeds of their sales for a
lower, but certain, amount. In this interpretation, forward contracts
perform the function of insurance policies and futures markets appear as
the place where producers seeking to hedge meet speculators willing to
insure them. According to Keynes, the systematic remuneration of the
speculator in commodity futures arises from the fact that “for the sake of
certainty, the producer, not unnaturally, is prepared to accept a somewhat
lower price in advance than what, on the balance of probability, he thinks
the price is likely to be when the time comes” (Keynes 1923: 261).
This statement may be translated in the following equation,11 where the
risk premium ( )ݎpaid by the hedger to the speculator is measured by the
difference between the expected price ( )ܲܧand the forward price ( )ܲܨfor
the same future date:
This equation, however, cannot calculate the risk premium, since price
expectations are not observable. Keynes introduces, therefore, the
assumption that the latter are distributed normally around the actual future
spot prices:
My method of arriving at the former [the calculation of the risk premium]
is to assume that market opinion of the future course of prices, as
expressed in current quotations, is as likely to err in one direction as in the
11
This formalization is not made by Keynes, but it is useful to highlight the
assumptions upon which his reasoning rests. It adopts the symbols introduced by
Blau (1944).
264 Chapter Twelve
ܾ ൌ ܵܲ െ ܲܨ (4)
12
We are indebted to M. Dardi and P. Mehrling for help in presenting the
distinction between backwardation and risk premium.
Speculation in Commodities 265
In other words, in a period of excess supply, the forward price will have to
cover the carrying costs of the commodity and will, therefore, exceed the
current spot price by a corresponding amount. However, as Keynes
immediately specifies, this does not imply that the cost of hedging
becomes zero (or even negative). On the contrary, the forward seller will
continue to pay a risk premium: “the quoted forward price, though above
the present spot price, must fall below the anticipated future spot price by
at least the amount of the normal backwardation” (Keynes 1930: 129).
266 Chapter Twelve
Figure 12.1. Backwardation on the forward market and price variations on the spot
market
ܲܨൌ ܵܲ ܿ (7)
At the same time, the forward price will continue to fall short of the
future spot price by an amount corresponding to the risk premium, and
hence to the otherwise normal backwardation (ܾ כൌ ݎǢsee Figure 12.2):
Even in this case, the speculator will reap systematic gains by selling
the commodity previously purchased forward. However, there are two
differences with respect to the normal case: 1) due to the imbalanced
market and the price fluctuations, it will be more difficult to make
predictions, and the speculator will be bearing a higher risk for the same
Speculation in Commodities 267
premium; and 2) due to the carrying costs, forward purchases will be more
expensive than spot purchases, and will expose the speculator to a loss if
spot prices fail to increase according to expectations. Although it may still
be possible to earn a systematic positive income simply by bearing risk,
the possibility that this may result in a loss due to unexpected price
fluctuations is now both more likely and more costly.
13
Keynes’s proposals for the establishment of international buffer stock schemes
are analysed in Fantacci et al. (2012).
14
The distinctive features of Liverpool grain trade are described by Forrester
(1931).
272 Chapter Twelve
1 2 3 4 5 6 7 8 9 10 11 12
Liverpool X X X X
London* X X
Chicago X X X X
Winnipeg X X
* The maturities for London refer to futures on Manitoba wheat.
15
It is not easy to establish to which source Keynes refers in each individual case.
In the case of the “American reports,” it could be The Wheat Situation, issued
periodically by the US Department of Agriculture, or the Wheat Studies published
by the Food Research Institute at Stanford University; in the case of the “Canadian
report,” it could be The Monthly Review of the Wheat Situation by the Agricultural
Branch of Canada’s Bureau of Statistics (letter from Keynes to Kahn, 11 July
1937, in Kahn Papers, RFK/ 13/57/182–4).
276 Chapter Twelve
exactly the best course of action. Indeed, it appears that Keynes carried out
alternatively three different types of speculation:
(1) long commodity futures, aimed at earning the normal risk
premium;
(2) time-varying long commodity futures, so as to have larger
exposures when the premium is large relative to the risk, and
smaller exposures when the premium is small relative to risk. (This
strategy might also involve closing a position on one specific
market and/or commodity if the risk premium was too low
compared to other investments, as Keynes eventually did for wheat
in October 1937);
(3) outright speculation on future prices or price differentials, when
one thinks the market is making a mistake. (This strategy would
suggest assuming a short position rather than a long one, or
hedging a long with a short position on a different market; i.e., to
make a straddle).17
Figure 12.4. Tilton Company forward purchases of Liverpool wheat futures for
various maturities (loads)
17
A straddle is the combination of two opposite positions on two different markets
(and possibly two different dates) with a view to closing the positions
simultaneously, speculating on the price differential.
Speculation in Commodities 279
6. Conclusion
Speculation in commodities was a “business” that required “hard work” –
as Keynes wrote to Kahn on 14 July 1937 (in Kahn Papers,
RFK/13/57/193–4) – and a thorough, constantly updated knowledge of the
market conditions for each commodity traded. This comment also applies
to any scholar wishing to study speculative activity behaviour in any
particular commodity, to grasp fully what is peculiar to that particular
commodity and market.
Our purpose with this paper was to make some contribution towards an
understanding both of wheat futures in the 1930s and of Keynes’s trading
in them by examining original and unpublished sources, and presenting his
scattered and often shorthand instructions in a more coherent and
comprehensible form; this is just a preliminary inquiry since more “hard
work” is needed to expand the scope and the time period under
consideration.
As for the relation between Keynes’s actual behaviour as speculator
and his theory of speculation, we claim neither that his behaviour proved
his theory, nor even that he followed his own theory in his speculative
activities. We have seen that normal backwardation applies only to well-
specified circumstances and, moreover, our sample is too narrow to make
the test feasible. For the same reasons, we have not attempted to evaluate
how successful Keynes was as a speculator in wheat futures; we have
tried, rather, to provide a means to assay a material drawn from an ore that
is rich and potentially rewarding for those willing to invest in it, but
hitherto very costly to dig out. By providing a sample of it, we hope to
Speculation in Commodities 281
attract other scholars into the venture and thus to enlarge our knowledge of
commodity futures in general and wheat futures in particular in the 1930s.
This, in turn, will better equip us to interpret the evidence.
However, we can conclude that, within the extant literature, our
investigation affords a clearer understanding of another trait of Keynes’s
multifaceted mind, and further substantiates his remark to Hawtrey: “I do
speak on this matter, not merely as a theorist, but from an extremely wide
practical acquaintance with commodity markets and their habits” (Keynes
to Hawtrey, 6 January 1936, in CWK XIII: 627–628). Investigation into
this “practical acquaintance” is the task we have undertaken here.
References
Blau, G. (1944), “Some Aspects of the Theory of Futures Trading”, The
Review of Economic Studies 12(1): 1–30.
Brennan, M.J. (1958), “The Supply of Storage”, The American Economic
Review 48(1): 50–72.
Capone, G. (ed.) (1939), The World Wheat Situation in 1938–39, Rome:
International Institute of Agriculture, Bureau of Statistics.
Chua, J.H. and Woodward, R.S. (1983), “J.M. Keynes’s Investment
Performance: A Note”, The Journal of Finance 38(1): 232–235.
Cootner, P.H. (1960), “Returns to Speculators: Telser versus Keynes”, The
Journal of Political Economy 68(4): 396–404.
Emery, H.C. (1896), Speculation on the Stock and Produce Exchange of
the United States, New York: Columbia University.
Erb, C.B. and Harvey, C.R. (2006), “The Strategic and Tactical Value of
Commodity Futures”, Financial Analyst Journal 62: 69–97.
Fantacci, L., Marcuzzo, M.C., Rosselli, A. and Sanfilippo E. (2012),
“Speculation and Buffer Stocks: The Legacy of Keynes and Kahn”,
European Journal for the History of Economic Thought 19(3): 453–43;
also reprinted as chapter 13 of the present volume.
Forrester, R.B. (1931), “Commodity Exchanges in England”, The Annals
of the American Academy of Political and Social Science 155: 196–
207.
Gray, R.W. (1961), “The Search for a Risk Premium”, The Journal of
Political Economy 69(3): 250–260.
Gray, R.W. and Rutledge D.J. (1971), “The Economics of Commodity
Futures Markets: A Survey”, Review of Marketing and Agricultural
Economics 39(04): 57–108.
Harrod, R.F. (1951), The Life of John Maynard Keynes, London:
Macmillan.
282 Chapter Twelve
1.
While it is known that Keynes was a speculator who traded on behalf of
himself, his friends and his college, perhaps it is less appreciated that his
theoretical writings concerning speculative behaviour are grounded on his
first-hand experience as an investor (in particular, in commodity futures,
which had great weight in his portfolio) and that some of his policy
recommendations – the buffer-stocks scheme in particular – stem from his
experience in playing on those markets (see Kregel 2010).
If we look at Keynes’s investment in practice, we see that a huge quota
of Keynes’s investment was in agricultural commodities, like wheat and
maize (see Keynes 1971–1989, The Collected Writings of John Maynard
Keynes [hereafter CWK] XII: 20–21), but also in the mineral sector,
especially in copper, tin and lead; Keynes held shares in gold and diamond
American mining companies and in refining and mining companies for the
production of paraffin oil. He operated mainly on the London Stock
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 285
Exchange and Wall Street, but also on those markets in which different
commodities were traded through futures contracts.
Large variations in the price of the commodities traded are the reason
explaining the rise of a futures market, which is supposed to transfer the
ensuing risk from producers and consumers (typically the “hedgers’) to the
professional “speculators’. The role of the speculator in the great
organized futures markets is that of a risk-bearer, that is, to provide an
insurance against unexpected price changes, in exchange for a
predetermined remuneration. His remuneration, in Keynes’s own words,
arises from the fact that:
for the sake of certainty, the producer, not unnaturally, is prepared to
accept a somewhat lower price in advance than what, on the balance of
probability, he thinks the price is likely to be when the time comes.
(CWK XII: 261)
1
Kahn Papers are preserved in the Modern Archives of King’s College,
Cambridge. Documents in Kahn Papers are referred to as RFK followed by the
archive reference.
286 Chapter Thirteen
as second Bursar of King’s College, later when he took over the running of
Keynes’s and the College’s finances during the heart failure crisis that
kept Keynes out of bounds for months in 1937–38. The correspondence
they exchanged over those months (about 300 letters) is a precious source
of information about their dealings and their views (Fantacci et al. 2010).
With the outbreak of the war in 1939, both Keynes and Kahn had their
dealings stopped by the foreign exchange restrictions and by their
involvement in government jobs. Their intellectual exchange, however,
continued (see Marcuzzo 2005: 33) and, drawing on their knowledge of
the workings of commodity futures, shifted towards the search of ways to
stabilize prices of primary commodities through coordinated intervention.
In this endeavour they built upon a broader debate among economists
and specialists, running since the early 1920s, concerning the policies to
be implemented in order to counteract the large fluctuations in prices of
raw materials and foodstuffs (particularly wheat) that occurred especially
after World War 1.2 All of these contributions underlined the effects that
wide fluctuations in production and prices of those commodities could
have on the trade cycle, and compared the outcomes of different
stabilization schemes, such is price policies run by private corporations
(e.g. US Steel Corporation) or direct large-scale dealings in commodity
markets by the governments. Different views were expressed about the
role to be assigned to public intervention and its effectiveness in this
specific field.
In 1926 Robertson also addressed this issue. He came to elaborate a
“semi-automatic” mechanism for state control of stocks (based on
reduction of stocks when prices increase and there is an insufficient supply
and accumulation of stocks in the opposite case) as an anti-cyclical tool
through his analysis of business cycles, which dated back to the years of
his A Study of Industrial Fluctuation (Robertson 1915). In that work,
Robertson deeply analysed the so-called “agricultural theories” of the
cycle (W. Jevons 1884; H. Jevons 1910; Moore 1914), which linked
economic activity fluctuations to the cycles of agricultural crops due to
climatic conditions and established a causal relation between periods of
poor harvests (and consequent reduction of purchasing power of the
agricultural producers for acquiring both consumption and investment
goods) and slumps. These theories were partially criticized by Robertson
(1915: 75–106), who stressed that the relation between agricultural
2
The question of stabilizing the prices of primary products was discussed in some
evidences before the Royal Commission on Food Prices (in December 1924–
January 1925), and in several articles in the Economic Journal (MacGregor 1924;
Lewis 1925) and the Quarterly Journal of Economics (Berglund 1923).
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 287
3
Robertson referred to “Short Lacking” in the former case and “Long Lacking” in
the latter (Robertson 1926: 84 ff.).
288 Chapter Thirteen
4
Keynes commented on a Memorandum on Post-War Tin Position by the Ministry
of Supply and the suggestion for a scheme of buffer stock to be implemented that
Kahn had sent him (17 April 1944 in RFK 13/57/488–9).
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 289
2.
From 1926 to 1943 Keynes repeatedly advocated government storage of
foodstuffs and raw materials, and from 1938 onward elaborated various
buffer-stocks schemes, as a means to stabilize prices.5 His active
engagement in speculation in commodity markets probably added weight
to his general view on market instability and the need to correct it, when it
manifested itself in a low level of employment and economic activity,
from whatever causes (low investment, liquidity trap, imbalance between
supply and demand of primary commodities).
The continuity of his interest for the matter and the originality of his
contributions have been already stressed by Dimand and Dimand (1990),
but the crucial role played within his conceptual framework by buffer-
stocks schemes as a fundamental means towards economic stability needs
to be further investigated.
In 1926 Keynes made his first public endorsement of state control of
stocks in an article for The Nation and Athenaeum, “The Control of Raw
Materials by Governments”.6 In fact, in this article, a complete scheme of
buffer stocks is not yet fully developed. To be precise, replying to the
indiscriminate condemnation of government intervention recently made by
Herbert Hoover, then US Secretary for Commerce, Keynes discussed the
5
It is worth noting that just one year before, in 1937, the League of Nations Raw
Materials Committee examined some proposals concerning the implementation of
buffer stocks schemes (see the Report of this Committee quoted in International
Labour Office 1943, Introduction: xxii).
6
In the same year, as we have seen in Section 1, Robertson suggested his buffer-
stocks scheme, so it is hard to think that Keynes and Robertson did not compare
their views on this matter, although, in their surviving correspondence of that
period, there is no direct evidence of a discussion on this specific point (Sanfilippo
2005). Tonveronachi (1981: 521) and Sabbatini (1989: 56, fn. 5) argue that
Robertson first theorized this type of scheme and Keynes (1926) is not mentioned.
290 Chapter Thirteen
8
The functioning may be compared with the fixing of target-zones for exchange
rates, the stabilizing properties of which have been shown, for example, by
Krugman (1991).
9
The existence of a link between the two plans in Keynes’s intention is confirmed
by the numerous cross-references that may be found in both.
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 295
10
Hayek Papers are preserved at Stanford University, CA, USA.
296 Chapter Thirteen
3.
It fell on Richard Kahn, with a considerable amount of work and effort, to
revive and develop Keynes’s original idea, and he had no better success.
The opportunity was given to him by an invitation from Gerda Blau (Chief
of the Commodities Branch of the Economics Division) to work as a
consultant for the Food and Agriculture Organization (FAO), which in
1952 showed interest in stabilization schemes for commodities. Soon after
Kahn signed a contract to produce a monograph on “Buffer-Stock
Techniques” by the end of 1952. The deadline was not met, but in the
summer of 1953 Kahn sent to Rome the table of contents of a book in 11
chapters and a first instalment of four chapters. These were
enthusiastically praised by Gerda Blau11 (“one of the best things that
happened to FAO in a long time”), who granted him a further
postponement of the deadline. The composition of the book went on until
1959; periods of renewed interest and intense work on Kahn’s part
alternated with periods when lack of FAO funds hampered the project,
while Gerda Blau was growing increasingly sceptical about the possible
acceptance of the proposal. The book was never finished. The first four
chapters were extensively revised in 1954 and the following years, with
the addition of new material, and their (probably) final version is
preserved among Kahn’s papers.12 Also extant is a shorter and later
version of the book, in five chapters, which draws heavily from the longer
one and was prepared sometime after 1956. The manuscript is in Joan
Robinson’s handwriting and it is clearly still unfinished. No evidence has
been found to explain Joan Robinson’s role in the composition of the
book, although her intervention is not surprising in view of their
longstanding collaboration (Rosselli 2005).13 We know only the end of the
story, when Kahn finally gave up the project in December 1959 and
communicated it to Gerda Blau (RFK 13/13/28).
Although the book was never finished, from what has come down to us
we can reconstruct Kahn’s contribution. In both the “long” and the “short”
versions, Kahn strongly argues in favour of stabilizing the prices of
primary commodities, each in its own market, but through international
11
Letter from Gerda Blau to Richard Kahn, 25 July 1953, FAO Archive, Gerda
Blau Files.
12
Neglected for years, the manuscript was first commented on by Palma (1994).
13
Lack of correspondence between Joan Robinson and Richard Kahn on this
subject, and the fact that Gerda Blau’s files for the years 1953 to 1958 are not
extant, make a precise reconstruction impossible. However, more details can be
found in Fantacci and Rosselli (2009).
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 297
of the commodity at a price that is about to fall, with great losses if the
belief of the market turns out to be justified.
As Kahn summarizes, the above scheme implies “heads the market
wins, tails the buffer stock loses” (RFK 2/12/2/92). The Buffer Stock can
avoid losses only by changing the buying price whenever it has the feeling
that the whole world stock will be unloaded on to it, but this destroys the
sense of security that it should create, given that there “is little security in
a floor which drops from under your feet whenever you try to set foot on
it” (RFK 2/12/2/91). If these are the consequences of fixing buying and
selling prices,14 it is better for the management of the Buffer Stock to have
free discretionary powers. If, however, it is compelled by diplomatic and
political reasons to fix a floor and a ceiling, these must be set wide apart
and operations at prices between them must be allowed.
The Buffer Stock managers must behave like cautious speculators. The
rule suggested to them by Kahn, clearly based on his experience in the
commodities market, can be summarized in “sell early and buy late”. The
Buffer Stock managers must have their own assessment of the “normal”
price; that is, they must take a long view and avoid or limit to a minimum
operations based on a “short view” that are too risky, just as Keynes had
argued. When the market price is lower than the normal price, they must
wait to buy. If the fall in the price is temporary, they give up the
opportunity of a small profit, but if it is not, they preserve their
ammunition for later intervention, and prevent catastrophic losses for the
producers. When the price rises, they must sell out their stock immediately
and be content with a small margin, without hoping for a further rise and
higher profits. If their intervention stops the price rise, they have attained
their goal; if it does not, they have done their best anyway by slowing
down the rise. What would be unforgivable is to make a profit by selling
after the price has reached its peak and has begun the downturn (as a
private speculator might do).
Given its discretionary powers, the management of the Buffer Stock
requires “courage, skill and even a certain amount of low cunning”
(RFK 2/12/1/94). If it cannot help fixing buying and selling prices, it must
aim “to get the market to have as much confidence as possible in the
steadiness of the dealing prices” as Robertson had pointed out. It must
revise prices unexpectedly, at unpredictable moments in time, if possible
in the direction opposite to what was foreseen. In other words:
14
The argument about the consequences of having fixed a “ceiling” price is
similar.
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 299
those who think that the dealing prices will not be altered should hold that
view with strong conviction, […] in so far as there are some whose
expectation is that the dealing prices will be shifted, in one definite
direction, […] they should hold that expectation with extreme lack of
confidence.
(RFK 2/12/105)
Kahn, like Keynes, advocates buffer stocks for the sake of efficiency:
there is not enough hoarding in the economy, since the speculators, who
perform the useful task of carrying commodities from times of abundance,
when they are produced at low costs, to times of scarcity, when they are
produced at higher costs under diminishing returns, cannot afford the costs
of financing and storage that increase with time and risk. Buffer Stocks
face lower costs, thanks to economies of scale, and can operate at a loss, at
least in the short period. Speculators seek short-term profits and they do
not succeed in stabilizing the prices of commodities and in matching long-
term supply with demand. Therefore the price does not signal the long-
term trend of the market and the productive capacity is never adjusted to
the necessities of trade.
During the boom in the aftermath of World War II, producers of
primary commodities tended to lose the memory of the anguish of the
Depression of the 1930s, but:
the very fact that the general level of prosperity has been so markedly
improved has led to increasing discontent with the evils that remain.
(RFK 2/12/1/6)
share the benefit, in the form of additional demand for their exports to the
producing countries.
(RFK 2/12/1/21)
However, Kahn is well aware that the buffer-stocks scheme has many
limitations. It is not a panacea for all the evils that affect trade in primary
commodities. It can do very little when the decline in prices is the result of
a change in technical conditions of production or in the trend of world
demand. Very little can be done for the producers of natural rubber after
the invention of the synthetic substitute. Their right to a decent standard of
living must be granted by other means, not by keeping the price artificially
high. Above all, the Buffer Stock is not so efficient in stabilizing prices as
its critics suppose and fear. Its unambitious objective is:
to curb irresponsible movements of the price rather than to establish
stability within a narrow range of fluctuations.
(RFK 2/12/2/80)
4.
Over the past 50 years, buffer-stocks schemes have virtually disappeared
from the international agenda and have received only scant attention even
in the theoretical debate. The distribution of foodstuffs and raw materials,
on a global scale, has been determined essentially by market mechanisms,
with a growing importance of futures exchanges. On a national and
regional scale, competition has been partially mitigated by public
intervention, with the purpose of protecting producers, but this has
occurred mostly in the form of tariffs and quantitative restrictions on
production and trade (as in the case of the Common Agricultural Policy in
Europe).
The combination of these mechanisms has resulted in wide fluctuations
of commodity prices, both seasonally and over longer periods (as shown in
Figure 13.1). The consequences of such fluctuations are burdensome for
producers and consumers alike, and become particularly dramatic when
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 301
they affect the price of primary goods, on which the livelihood or the basic
nutrition of an entire population depends.
Despite the persistence of the problems that they were designed to
face, buffer stocks have never been implemented on a significant scale.
The very idea of establishing public storage facilities at an international
level has been completely abandoned in the 1980s, in the wake of a
growing trend towards deregulation and globalization. However, in the
past couple of years, the dogma of “unfettered competition” has been
shaken by the global financial crisis. Even commodity trading, which
typically occurs on the broadest and most sophisticated futures markets,
has suffered unprecedented strains. The capacity of such markets to ensure
an efficient allocation of resources through the smooth functioning
Figure 13.2. Indices of primary commodities prices, 2000 to 2009 (2005 = 100)
of the price mechanism has been radically challenged by the steep rise in
the prices of food, energy and raw materials, and their subsequent fall
(Figure 13.2).
Today, the ideological stance in favour of free markets has
substantially receded, yet simply to be substituted by an opposite, and
perhaps equally ideological, stance in favour of regulation in the form of
more or less admitted protectionist policies. It may be possible, therefore,
and not only opportune, to reconsider the “inability of the market to carry
surplus stocks” that Keynes identified as a major cause of the wide
fluctuations in prices and production, which contributed to worsen the
trade cycle and to deepen interwar depression. And, perhaps, we may be in
the position to appreciate even the remedy proposed by Keynes, as an
ideal complement to the International Clearing Union, and in the same
spirit of a regulation not designed to contrast, to impede or to substitute,
but rather to facilitate private transactions in commodities: the
International Regulation of Primary Products.
When Kahn elaborated on Keynes’s buffer-stocks scheme, he defined
its role and the tasks of its management in detail. The managers must not
rely on mechanical rules, but be guided by “informed opinions” about the
long-run tendencies of the market. They must be as knowledgeable as the
speculators, but they must act only to provide finance to the Buffer/Stock
and aiming at the smooth working of the economy. In other words, they
Speculation and Buffer Stocks: The Legacy of Keynes and Kahn 303
must be speculators for the public interest. The question arises whether
suitable candidates for the task can be found, not so much as their
knowledge of the market, but as their commitment to the public good is
concerned. How can we be reassured that they will not exploit their
position for their own private gain? In the light of the disaster of the
present crisis fuelled by irresponsible market behaviour, it may be a risk
worth taking.
In conclusion, the Keynes–Kahn buffer-stock proposal may seem
audacious, but as Keynes said, referring to the many questions that his
plan raised:
these questions are not easily answered. But it is fair to point out that most
of them apply equally to any schemes for introducing order into
international trade. We may throw our hands in at the start on the ground
that it is too difficult to improve this awkward world. But if we reject such
defeatism – at any rate to begin with and before we are compelled to
acknowledge defeat – then the questions to be asked at so early a stage of
our work need only be whether this particular machinery for introducing
international order is exposed to more difficulty […] than alternative
proposals directed to the same general purpose.
(CWK XXVII: 122)
References
Berglund, A. (1923), “The United States Steel Corporation and Price
Stabilization”, Quarterly Journal of Economics 38(1): 1–30.
Dardi, M. and Gallegati, M. (1989), “Alfred Marshall e la speculazione:
fra vecchia e nuova teoria”, Quaderni di Storia dell’Economia Politica
7: 37–54.
Dimand, R. and Dimand, M.A. (1990), “J.M. Keynes on Buffer Stocks and
Commodity Price Stabilization”, History of Political Economy 22:
113–21.
Emery, H.C. (1896), Speculation on the Stock and Produce Exchange of
the United States, New York: Columbia University.
Fantacci, L. and Rosselli, A. (2009), “Stabilizing Commodities: Buffer
Stock Plans by Keynes and Kahn”, paper presented at the 13th ESHET
Conference, Thessaloniki, University of Macedonia, Greece, 23–26
April.
Fantacci, L., Marcuzzo, M.C. and Sanfilippo, E. (2010), “Speculation in
Commodities: Keynes’s ‘Practical Acquaintance’ with Futures
Markets”, Journal of the History of Economic Thought 32: 397–418;
also reprinted as chapter 12 of the present volume.
304 Chapter Thirteen
1. Introduction
In the first quarter of the twentieth century, options began to be widely
employed in the main financial centres in Europe and the USA for trading
in spot and futures markets. From 1921 onward, Keynes embarked upon
investment in these derivatives mainly – but not exclusively – in the
commodity markets, showing a true fascination for this method of
speculation. This type of financial investment he pursued mainly in the
1920s, with only a few operations undertaken during the 1930s. The
option markets in which Keynes traded were metals – in particular copper,
lead, spelter and, especially, tin. Besides metals, Keynes dealt in options
*
We are grateful to Giulia Bandino and Iolanda Sanfilippo for their excellent
research assistance and to Riccardo Cappelletti, Nicolò Cavalli and Gianluca
Giglio for their help in collecting data. We wish to thank, without implicating
them, Marco Dardi, Ivo Maes, Paolo Paesani, Dimitris Sotiropoulos and two
anonymous referees for helpful comments and suggestions. However,
responsibility for any remaining errors and omissions is ours alone.
308 Chapter Fourteen
1
The secondary literature on option markets in the 1920s is scanty: see Poitras
(2009) and Mixon (2009; 2011), neither of whom specifically address aspects of
commodity option markets.
2
The assessment of Keynes’s general performance as an investor in shares and
speculator in currencies and commodities would require a thorough and detailed
reconstruction of his portfolio over the whole period in which he was active in
those markets, which is part of a wider research project still in progress.
Keynes and the Interwar Commodity Option Markets 309
7
For example, in 1937 capital gains in dollars played the major role (and
represented his main debt source in 1938, when he came in for heavy losses),
which testifies to the marked increase in his financial investment in US securities.
8
Indeed, in that year the income deriving from his investment in commodities
almost doubled that deriving from his speculation in currencies.
Keynes and the Interwar Commodity Option Markets 311
In fact, just three days later, Falk informed Keynes: “I [Falk] have bought
for you 50 tons of copper and 45 of tin” (19 September 1921,
SE/2/1/134).12
Just two months after this opening of a few long positions in tin and
copper futures, Keynes ventured into dealing in metal options. 13 This
9
For analysis of Keynes’s activity in cotton futures, see Cristiano and Naldi
(2014).
10
The classification number is given according to the “Catalogue of Keynes
Papers”, King’s College, Modern Archives, Cambridge, UK.
11
These prices were respectively £156.10s for tin and £69.5s for copper
(SE/11/2/7).
12
The purchase of these two contracts is also registered in Keynes’s ledgers
(SE/11/2/7). The total value of the two contracts amounted to £10,505 (£7,042.10s
for tin and £3,462.10s for copper).
13
From the Keynes Papers we also know that in those times option contracts were
not available for all the commodities exchanged in the UK markets. In December
1921, Buckmaster & Moore, for example, explained to Keynes that according to
the cotton merchant firm Newall & Clayton based in Liverpool: “there is very
rarely a transaction done in [cotton options] here now, nearly all the responsible
312 Chapter Fourteen
happened after a brief by his former pupil at King’s, Rupert Trouton (at
the time also working for Buckmaster & Moore), who, in a note probably
written in autumn 1921, explained how they worked. Trouton wrote:
Metal Options
Options are of two kinds.
i) An ordinary call option at the moment is about 25/- [shillings] for
copper and about £5 for tin. The option entitles the purchaser to
exercise the right, by notification 3 days before the end of 3
months, to take up the metal at the price on the option contract,
which is the price when the option is purchased, of 3 months
forward. If the spot copper is £67 and forward £68 then the 25/-
entitles the purchaser to take up copper at the end of three months
for £69.5.014 (including his initial expenditure on the option).
ii) The type of option which includes “buyer’s option to double” is as
follows. In return for a sum at present about £3 over forward price
for tin the buyer purchases tin much like the ordinary forward
purchase but has the additional right to double the amount he takes
or not, as he pleases, having to notify 3 days before the end of the 3
months what his intention is. This option really amounts to a
combination of two things: an ordinary forward purchase and a call
option. Instead of the call option being arranged separately it is
attached on to an otherwise normal forward purchase. For some
extraordinary reason the price of a call option does not always
equal the surcharge when there is “buyer’s option to double”. At
the present moment the option to double is purchased for 25/- extra
in the case of copper and £3 in the case of tin while the call option
is 25/- for copper and £5 for tin.
(SE/1/2/126–7)
people in this market refuse to trade in them, as they are not recognized by our
Association or in a court of law. We accordingly prefer not to deal in them on your
behalf” (5 December 1921, SE/2/1/143). In fact, we have found evidence of only
one single operation of a put option in American cotton bought on the 8 April 1925
(SE/2/5/75 and 77). In a letter dated 10 March 1924, once again, Buckmaster &
Moore explained to Keynes, who evidently had enquired about this possibility, that
sugar options were not dealt with in the London market (SE/2/4/28). Whereas, in
the same years, we have evidence that Keynes also traded in stock and government
securities options (letters from Buckmaster &Moore to Keynes: 25 April 1923,
SE/2/2/246; 17 March 1924, SE/2/4/35). For a detailed explanation of the working
of the option market in government securities, see the letter from the broker firm
Capel Cure and Terry to Keynes (25 May 1922, SE/2/2/7).
14
We remind the reader of the old British money system: 1 pound = 20 shillings
and 1 shilling = 12 pence.
Keynes and the Interwar Commodity Option Markets 313
15
His investment in the lead market ceased completely in the 1930s, while in
spelter Keynes bought only two double options in October 1934 for hedging his
exposure in futures (TC/4/3/52).
16
At that time, this type of option was also called “straddle” in the USA (see Smith
1922: 46) or “put-and-call” in England (see Higgins [1896] 1906: 7).
314 Chapter Fourteen
higher (in the case of BOD) or lower (in the case of SOD) than the
standard future price in order to include the option premium.
All these types of options, such as the standard call and put, were of
the European type, namely they could be exercised only at maturity.
The price of the option changed according to the type of option and the
metal traded.17 At this stage of our investigation we were unable to detect
any option pricing formula consistently followed and we had to rely on the
information scattered in the ledgers and correspondence, which seem to
indicate a rule-of-thumb fixed amount (ranging from £1 to £3) added to
the three-month future price of the metal.18
The cover necessary to carry a position with a broker varied according
to the instrument and the underlying commodity. For example, in July
1922, Buckmaster & Moore gave Keynes the following quotes:
We expect the following proportions to cover to be maintained intact at all
times on open positions at their current valuation: in exchange 20%, in
Commodities 30%, on Call options Payment in full. We are content that
not only cash balances standing to your credit and securities deposited with
us (reckoned at their current market value), but also book profits on your
open position, should count towards the proportions of cover required.
(SE/2/2/25)
17
For example, on 28 February 1923, Trouton explained to Keynes: “Options are
becoming much more expensive. The Call option on Copper is 32/6 bid; the double
option on Copper is 60/-; the BOD on Copper is at least £1 over three months,
probably more like 25/-. The double option in Tin is £11.10/-; the BOD in Tin is
£4.10. Over three months and the three-month Call in Tin might be got at £6”
(SE/2/2/181).
18
It has been rightly pointed out that the pre-twentieth century option markets
literature analyses historical option pricing determination with modern methods
(Mixon 2011: 4). In fact, “Option markets existed long before option pricing
models. For centuries prior to the development of the Black–Scholes model, option
buyers and sellers negotiated prices at which voluntary trade occurred” (Mixon
2009: 171). See also Sotiropoulos and Rutterford (2014: 10): “sophisticated option
trading was possible long before the perfecting of the B[lack]S[choles]M[erton]
pricing model in the 1970s on the basis of a knowledge spontaneously developed
in a practical form in the everyday life of market participants”.
Keynes and the Interwar Commodity Option Markets 315
first transaction, namely on the strike price times the quantity involved and
0.1% on the value of the second transaction, namely the market price of
the metal traded times the quantity involved. To this, the metal broker’s
commission,19 varying between approximately 0.5% and 1% according to
the metal, had to be added (see SE/11/2/90 and SE/11/2/9).
Here is an example drawn from the ledgers:
On 17 March 1922, Keynes bought a call option for 100 tons of copper
at the strike price of £61 per ton, with expiration date on June 17. The sum
paid by Keynes was £137.10s. On June 15 he exercised the option, since
the price at which copper could be sold was £61.15s per ton. The
commission on the first transaction was 0.001 × £6,100, i.e. £6.2s, the
commission on the second transaction was 0.001 × £6,175, i.e. £6.3s.6d.
To this must be added a commission of 0.5% on the first transaction
due to the metal broker, i.e. £30.10s. Thus the total commission charges
amounted to £42.15s.6d.
So while the difference between the strike price and the market price at
the time when the option was exercised times the quantity involved in the
contract gives a positive difference of £75, when we compute the net profit
by subtracting to this sum the initial cost of the option (£137.10s) plus the
commissions we get a loss of £105.5s.6d.20
In the next sections we will focus on the four markets in which Keynes
was most active in his option trading: copper, tin, lead and spelter. For
each commodity market we present an overview of the open interest of the
various types of options he traded, followed by an analysis of the pattern
of his option dealings and a breakdown of profits and losses.
In particular, for each of the four markets we present a weekly account
of Keynes’s position in options (see Figures 14.1–14.4) according to his
ledgers, where he recorded the date and price at which each position was
opened and closed, the type of option contract and the quantity involved.
In the ledgers we find also the strike price, the total cost of the option
(given by the premium times the quantity involved in the underlying
future) and indication of the cases in which the option was allowed to
expire. The weekly time series of both the spot and the typical three-month
future prices are derived from The Times online archives as recorded for
each Friday, while for the strike price we do not have a weekly series but
only the entry recorded by Keynes himself in the ledgers.
19
The metal brokers quoted in the statements and the correspondence are Vivian
Younger & Bond, Budd and Candover.
20
This is exactly the amount that Keynes registered in the ledger within square
brackets as net loss deriving from this operation (SE/11/2/7).
316 Chapter Fourteen
Then, for Keynes’s dealings in options in each metal (see Table 14.2)
we compute: (i) the value of the gross profits, which are given by the price
differential between the market price and the strike price times the
quantity involved in the underlying futures for all the options exercised,
while they are equal to zero for the options bought which were let expire;
and (ii) the value of the total net profits (calculated by subtracting the total
commission charges and total costs of the options bought from the gross
profits). Considering the data in Table 14.2, it emerges that good price
forecasting (testified by positive and high levels of gross profits) does not
necessarily imply high net profits, simply because of the great burden of
all the transaction costs when buying and exercising the options.
Finally, a comparison between net profits and losses realised by
Keynes in the four markets is provided, together with an appraisal of his
investment strategies and behaviours.
4.1. Copper
Keynes entered the copper option market at the beginning of December
1921, after an initial unsuccessful purchase of one future copper contract.
He would be active in that market until December 1924 (see Figure 14.1),
when he basically suspended his dealings in options; 21 he resumed his
activity with a small-scale operation in futures in the spring of 1929
(SE/11/2/54) and again later in 1937 (February/April and August/
September, TC/4/3/156–163 and TC/4/3/180–186).
21
We have evidence only of one put traded by Keynes on 15 March 1929
(SE/11/2/54).
318 Chapter Fourteen
Figure 14.1. Copper: Keynes’s weekly position in options and prices, December
1921 to December 1924
22
Since one of these two puts – the one bought on 16 October 1924 – was not
exercised (SE/11/2/29) and the other one was traded only in 1929 (see fn. 21), we
can conclude that in the period considered here Keynes did not trade in copper put
options. Furthermore, in neither case were put options associated with long
positions in futures contracts for the purpose of hedging.
Keynes and the Interwar Commodity Option Markets 319
losses deriving from the liquidation of the two futures contracts. On these
he came in for losses equal to the difference between the future price and
the spot price times the total quantity involved, i.e. £1,800, which is
exactly equal to his gain coming from the exercise of the put option. This
is the reason why in the ledger (SE/11/2/19) Keynes links together the two
futures and the double option entries with a curly bracket writing.
As for Keynes’s performance in copper options, from the ledgers we
learn that the period in which Keynes’s investment was most successful
was around March–April 1923 (SE/11/2/17), while in the following year
he bore losses for an amount almost equivalent to the profits previously
made (SE/2/11/24 and 29).
4.2. Tin
Tin was the commodity most traded by Keynes. He entered the market in
September 1921 and carried on trading in it almost uninterruptedly until
1939, when all his commodity dealings were forcefully suspended due to
the outbreak of World War II. Between January 1922 and July 1929 he
was very active in options, alongside large exposures in futures; he then
suspended all trading in this market for 18 months and resumed it in April
1930, continuing until August 1931; he traded options occasionally again
between April and June 1932 and between January and April 1933, when
he practically left the tin option market (see Figure 14.2). He returned
twice a few years later, between June 1936 and January 1937 and between
April 1938 and April 1939, taking up mainly long positions in futures
(TC/4/3/124, 138, 216 and 257).23
When Keynes began trading tin options, futures prices had been rising
since he first entered the market; from £154 in February 1922, they had
reached the £181 level by October 1922, with ample oscillations around
the trend. By March 1923, prices had climbed to the £225 level, suddenly
reverting first to a declining trend, which bottomed at £182 in August, and
then rising again to £292 in March 1924. From then on prices fell, with
wide oscillations to £241 in May 1925, but quickly climbed back to the
previous year’s figure and peaked at £300 in October 1926. They remained
around that level until the middle of 1927 and then began to decline
steadily, reaching £204 in July 1928. When Keynes resumed his option
dealing in April 1930, futures prices were oscillating around £160; when
he left the market they were down to £110. In the last two periods of his
23
We have evidence of only two double options sold by Keynes in July 1936
(TC/4/3/128) and July 1938 (TC/4/3/226).
Keynes and the Interwar Commodity Option Markets 321
activity in tin options, prices were around £107 in mid-1932, but by April
1933 they had returned to the £150–160 figures of 10 years before (see
Figure 14.2).
Keynes realised fairly quickly that tin was a metal with high price
volatility, which made it very difficult to predict both its trend and
deviations from it. The reasons he gave were 2-fold: (i) tin mining and
consumption of smelted tin were highly inelastic, while demand for stocks
became highly elastic as soon as they increased from a low working
minimum; and (ii) reliable information on the level of existing stocks was
lacking. It is not surprising, therefore, that Keynes’s expectations were
formed mainly from guesses on the level of “visible” and “invisible”24
stocks, besides forecasting the level of production and consumption on the
basis of the data available. Moreover, as explained by Cavalli and
Cristiano:
tin represented a very special case among staple commodities. In itself, the
very low level of tin stocks, usually below one month consumption and
sometimes as low as ten-day consumption, made the tin market rather
susceptible of manipulations, because any small amount of privately
owned stocks could suffice to exert an influence on prices. In addition, the
very low level of daily tin turnover in the LME was a further element in
favour of manipulation.
(Cavalli and Cristiano 2012: 65)
In fact, in the 1920s, several “tin pools” were formed to control production
and prices and in May 1925, Keynes himself took a share (SE/2/5/95) in a
private pool.25
Keynes stayed in this market longer and traded more than in any other
commodity, trying to anticipate the ups and downs of prices, with mixed
results throughout the whole period of his investment. He was bullish most
of the time, mainly buying BOD and call options, and only in a few cases
did he hedge his position by buying double options. In the period 1925–
26, he associated the purchase of call options with the sale of put options,
greatly increasing his exposure. After 1927 he did not successfully gauge
prices and thus he incurred great losses, especially in the year 1928.
24
In the terminology of Keynes’s times, they were stocks of tin actually not
available for consumption, because they were ‘in transit’ or ‘afloat’ (Keynes 1983:
468).
25
From the correspondence, we learn that Oswald Falk, Rupert Trouton and Jack
Budd (son of Cecil) belonged to the private pool. From the ledgers, we can infer
that Keynes’s participations lasted until October 1925, while the pool was
presumably dissolved at the end of that year.
322 Chapter Fourteen
Figure 14.2. Tin: Keynes’s weekly position in option and prices, January 1922 to June 1933
324 Chapter Fourteen
This move brought him some profits because the prices went up and
options were not exercised by the buyer. In the period September 1925 to
March 1926, Keynes was a writer of 17 put options, 15 of which were let
expire by his counterpart. A careful analysis of these operations shows an
impressive ability to guess the direction in price movements and to get the
timing right. It is tempting to infer that his hunches seem to have been
sparked by some “insider information” to which he was privy as a member
of the tin pool.
On a few occasions, Keynes followed a strategy of outright positions in
put, as for example in the case of the put he bought on the 21 November
1928 for 10 tons at a strike price of £230, with expiration on 21 February
1929, which he exercised at a profit on the 19 February, when the market
price came to £224.5s (SE/11/2/54).
In other cases he hedged his long positions on futures with double
options, exactly as he did on the copper option market (SE/11/2/21).
However the pattern of high volatility that was typical of tin prices,
while providing scope for speculative activity, exposed him to the risk of
heavy losses when the buying and selling timing did not match the price
swings. Unfortunately, this is exactly what happened. So Keynes’s activity
in the tin options was unsuccessful: he bore substantial losses throughout
the whole period except for a few occasions in 1922 and 1926.
4.3. Lead
Keynes entered the lead option market in July 1922, after six months of
holding a small long position in futures. He suspended his option dealings
in November 1925 to resume them only a few years later, in January 1927
(see Figure 14.3). In October 1927 he gave up dealing in options and
carried on with long positions in futures, which he closed in August 1928
(SE/11/2/50). Options were the contracts most traded by Keynes in terms
of the number of contracts (64) but, contrary to his practice with copper
and tin, in the lead market he traded only two types of options: for almost
all the cases he bought calls and only in four cases (all in spring 1923) did
he take up doubles (see Table 14.1).
Lead was a commodity, Keynes reckoned in the “Memorandum on
Stocks of Staple Commodities”, of which “there were large post-war
accumulations, and stocks of which have been continuously diminishing
from abnormal level” (Keynes 1983: 268) and for which “output could not
be expected to increase to meet the increase in demand, due to the scarcity
of new sources” (ibid.: 291). Although prices had been steadily decreasing
in 1921, Keynes entered the market with clear bullish expectations; until the
Keynes and the Interwar Commodity Option Markets 325
Figure 14.3. Lead: Keynes’s weekly position in options and prices, July 1922 to October 1927
326 Chapter Fourteen
end of 1925 he believed that “stocks were very small”, but in February
1926 he came to the conclusion that “the high prices recently prevailing
have called forth increasing production, sufficient to satisfy the high level
of consumption” (Keynes 1983: 423).
In April 1922 lead future prices climbed to the £23–24 level and
remained there until October 1922. The upward trend continued until
January 1925 when they reached £40 and then slowly reverted with a low
of £30 in May 1925; thereafter they increased to around £37 until
November 1925 (see Figure 14.3). From then onward, the decline in prices
was steady, reaching a low of £23 in August 1927. Keynes’s strategy in
lead options was 3-fold:
(i) Long position in futures and calls. This was his strategy in almost
all his investment in lead options. We find it in July–August
1922, from November 1922 to March 1923 and continuously
from November 1923 to November 1925. This was indeed a
highly leveraged set of speculative bets on price increase, which
Keynes won when he got the timing right (as was often, but not
always, the case). There were several instances in which futures
were sold at a loss and options were not exercised.
(ii) Outright calls positions (mainly in the period August–October
1922 and again in January–September 1927).
(iii) Hedge of long positions in futures with doubles, exercised as put
(only twice in the period September/October 1923).
An example of this strategy is drawn from the ledgers (SE/11/2/19). On 27
March 1923, Keynes opened a long position through a future contract for
200 tons of lead with October delivery (a seven-month future) at a price of
£27.17s.6d; on the same day he bought a double option for the same
quantity and maturity and with a strike price equal to the future price
indicated in the future contract. 26 When maturity approached, the lead
market price was unfortunately lower than the price at which Keynes had
bought his future contract: in fact, on 12 October the spot price was about
£26. On 16 October, Keynes exercised the double as a put and made up for
the loss on the future contract, incurring a loss only equal to the
commissions.27 It is worth noting here that just after the exercise of this
option, the price started to increase.If Keynes had waited only 10 days he
could have had the chance to close his position on the future contract at a
26
According to The Times series, on 23 March 1923 the spot price was £28.
27
Keynes in fact registered in the ledger losses of only £95 and linked the two
operations with a curly bracket (as in the similar cases of copper and tin), writing
beside the entries “offset” (SE/11/2/19).
Keynes and the Interwar Commodity Option Markets 327
profit, since on 26 October the market price reached about £30. The
double could also have been exercised as a call.
Keynes gained huge profits in the first part of 1923, due to the options
he had bought at the end of the previous year; however in the second part
of the year he let almost all his call options expire, incurring substantial
losses, especially from October to December (SE/11/2/17). Between June
and December almost threequarters of all the options traded expired and
some of those he exercised brought him further losses.
Although a great number of the options were not exercised and Keynes
did not seem particularly successful in predicting the trend of prices, his
investments in the lead option market turned out to be successful overall,
thanks to two fortunate periods of huge profits during 1923–24 and 1924–
25.
4.4. Spelter
Keynes entered the spelter option market in July 1922, with no previous
position in futures, and withdrew in November 1923, to return to option
dealing between October 1924 and June 1925 (see Figure 14.4).
In the spelter option market, Keynes traded almost exclusively through
calls (see Table 14.1). 28 Keynes’s bullish expectations in the months
between mid-1922 and at the beginning of 1923 may have relied on his
observation of the sharp reduction in stocks between January and July
1922, which continued also to the early months of 1923 (registered in the
1923 memorandum; see Keynes 1983: 269, 292). In June 1924, Keynes
registered that around January 1924, an inversion in the declining trend in
stocks had occurred (Keynes 1983: 317, 340), followed, from January
1925 onward (Keynes 1983: 405), by a renewed marked fall in the level of
stocks of spelter.
Prices had indeed increased consistently from a level of £25 in March
1922 to a peak of £37 in November, followed by a series of marked
upswings and downswings around a trend of increasing prices, which
came to a halt in January 1925 when they reached the overall peak of £38,
from where they steadily declined to a level of £12 by January 1935.
28
We have evidence of only two double options bought by Keynes in October
1934, for 50 tons each (TC/4/3/52 and TC/4/3/66). These operations represented a
hedging strategy because they were associated with the purchase of a future for the
same total quantity (100 tons) and maturity (see also SE/11/2/57).
328 Chapter Fourteen
Figure 14.4. Spelter: Keynes’s weekly position in options and prices, July 1922 to June 1925
Keynes and the Interwar Commodity Option Markets 329
His strategy in this market had a similar pattern to that of his trading in
lead. He bought outright calls consecutively from July 1922 to November
1923, when he switched to a long position in outright futures (SE/11/2/23).
In October–November 1924 he returned to buy call options and then
combined long positions in calls and futures between March and June
1925 (SE/11/2/32 and 35).
Overall, Keynes was successful in his investment in spelter options,
reaping gains in all the operations carried out in 1922 and until February
1923 and suffering some losses only in the second half of 1923. Then, in
January 1925, he obtained an exceptional profit of more than £1,300,
followed by some losses due to options that he did not exercise
(SE/11/2/29).
30
In the 1920s, the increasing use of rubber in many products that were becoming
of widespread consumption (such as shoes or hoses) together with the initial
development of the automobile industry (and consequently increase in demand for
car tyres) could have justified Keynes’s expectations of an increase in prices due to
growing demand. What seems to have happened, instead, was that the “rubber
boom” induced many countries (especially in East Asia) to enter the market,
creating new plantations and so increasing world production.
31
His investment choices made in those years proved ill-founded because prices
did not increase. At the beginning of 1928, his losses on rubber futures contracts
amounted to about £15,000, accounting for a substantial part of his total losses in
that unfortunate year (Moggridge 1983). Keynes returned to investments in the
rubber market during the 1930s, but again only through futures contracts.
32
Surveying the price movements of linseed oil in New York, we observe a
marked volatility in prices, especially between 1923 and 1925 (see
http://www.nber.org/databases/macrohistory/rectdata/04/m04081a.dat).
Keynes and the Interwar Commodity Option Markets 331
spelter and a gain of £4,815 in lead, for a total net profit of £1,838 (see
Table 14.2).33
These data 34 reveal that Keynes’s investment in metal options was
overall only slightly successful: in general he showed a good capacity to
predict market trends, but the burden of commissions and costs reduced
net profits to below what could be expected.
A rough indicator of Keynes’s ability to predict market trends in each
metal market is the exercise ratio, i.e. the percentage of the options
exercised out of the options bought. In computing this ratio we have
excluded the double options because of the intrinsic characteristic of this
type of option, which is always exercised no matter what is the direction of
price movements. Thus in the case of the doubles, the exercise is not a
good indicator of any particular capacity to predict market trends while it
remains, obviously, true that the purchase of this type of options could
reveal in any case something about Keynes’s predictions, i.e. his
expectations of a high volatility in prices.
33
To give an idea of the magnitude of these values, it is worth recalling that in
1921–24, Keynes’s total annual income amounted on average to about £5,000
(Moggridge 1983: Table 1).
34
Since the BODs and SODs played a relatively small part in Keynes’s option
strategies (copper BODs were five out of 53 operations and only four of them were
exercised, i.e. 7%; tin BODs and SODs were 22 out of 129 operations and only
eight were exercised, i.e. 6%) and since we do not take futures into consideration,
we did not include these contracts in our calculations.
332 Chapter Fourteen
These ratios come to about 65% for copper, 62% for tin, 55% for lead and
70% for spelter,35 for an average value for the whole metal option trading
of about 63%, which was quite high. Keynes showed, on average, a good
capacity to predict market prices in all four markets. It is worth noting that
in the case of lead, he obtained the highest net absolute profits although he
showed a lower predictive capacity than in other markets. This means that
in the case of lead he made huge gains because he was able to anticipate
prices in a couple of very favourable circumstances, not because of an
ability to forecast prices over the whole period. The difference between the
strike price and the market price was what really mattered, since
transaction costs (commissions + premiums) were very high.
A better picture of Keynes’s performance in metal options is provided
by computing the return on investment (ROI)36 in option dealings in each
market. We have calculated it, as a rough indicator, simply as the ratio of
35
There were two call options in lead bought on 13 and 20 November 1924
(SE/11/2/29 and 32) and one in spelter bought on 26 April 1923 (SE/2/11/21),
which Keynes exercised even though they were “out of the money”. We have
excluded them from the numerator of the exercise ratio since the exercise in these
particular cases does not indicate Keynes’s capacity to anticipate price. It remains
to be explained why Keynes exercised these options if they were “out of the
money”. It has been noted that “Out of the money call options, with the strike price
more than the current market price, cost less than the underlying asset, meaning
that they provide leverage exposure to the upside (relatively to the equivalent
expenditure on the asset), and the maximum loss is the upfront payment” (Mixon
2011: 20). This explanation tallies well with the lead and spelter call options, since
there was a sufficient interval between the exercise of the option and the
liquidation of the underlying future contract, which could be done on any day of
the month of the expiration of the option (see, e.g., SE/11/2/74–75 and
SE/11/2/103–104) – unlike copper and tin call options, for which the liquidation of
the underlying future contract had to be done practically on the very day of
expiration of the option (see, e.g., SE/2/110–111 and SE/11/2/83–84).
36
What the “right” way should be to compute this indicator and specifically what
should be considered as “the capital invested” is a matter of dispute in the
literature. In our computation we have followed the view that, in the case of
options, the capital invested is represented by the cost of the option. In fact, in this
analysis of Keynes’s dealings in options, the capital he had effectively advanced
when he bought the option (and which is registered by him in his ledgers) is given
by the total cost of the option, i.e. the premium times the quantity involved in the
underlying future contract. Unfortunately, in the cases of BODs and SODs, Keynes
did not clearly register in the ledgers the premium (the margin paid over or below
the future price) and this makes it difficult to decide how to compute the “capital
invested”. For these reasons we have excluded, also from computation of the ROI,
these peculiar contracts.
Keynes and the Interwar Commodity Option Markets 333
the total net profits/losses to the total capital invested 37 over the whole
investment period in each market (see Table 14.2).
Comparison of these ratios provides better understanding of Keynes’s
performance in his option dealings in the four metal markets. In fact, if we
view profits and losses in absolute terms, Keynes achieved his best
performance in the lead market, as we have seen. But with regard to the
ROI, we observe that the market he had most success in was spelter. In
fact Keynes invested in spelter only 5% of the total capital invested in
metal options, amounting to £48,286, but he gained net profits of almost
£2,900, corresponding to about 35% of his total net profits.
If we compare the ROI in the two markets in which Keynes registered
higher net profits, spelter and lead (see Table 14.2), the big difference is
due not only to the better capacity to predict price movements in the
spelter market (testified by a higher exercise ratio), but also to the fact that
he invested in spelter an amount which was roughly 20% of that invested
in lead, giving spelter profits amounting to 60% of the profits obtained in
lead. As far as tin and copper are concerned, the absolute net profits/losses
and the ROI value confirm that the investment in tin options was decidedly
unsuccessful and only just successful in copper options.
Finally, if we take as a benchmark the annual average yield of consols,
which remained around 4.5% in the 1920s and dropped to an average of
3.5% in the 1930s (see Homer and Sylla 1991: 447, Table 59), we can
conclude that, comparing it with the annual ROI in each metal, Keynes
was not a stellar performer in his metal option dealings overall (see Table
14.3), bearing out a similar conclusion reached by Accominotti and
Chambers (2014) in their analysis of Keynes’s speculation in currencies.38
37
In our computation we have excluded the hedging operations, i.e. the double
options bought the same day (or contiguous days) and with the same maturities (or
contiguous maturities) of a long position on futures contract. Since our concern
here is analysis of Keynes’s behaviour in “pure speculation”, we excluded those
dealings that were undertaken by him only as a means to hedge his positions in
futures.
38
“Over the whole period he traded during the 1920s and 1930s, we estimate
Keynes achieved a considerably lower average return (5.37%) and Sharpe ratio
(0.16) than both carry and momentum. This underperformance was mostly
concentrated in the 1920s. In the 1930s he managed to beat the carry trade [the
strategy of selling the currency with a relatively low interest rate and using the
funds to purchase the currency yielding a higher interest rate] but still unperformed
the momentum strategy and was unable to match the returns on UK stocks and
bonds” (Accominotti and Chambers 2014: 4).
334 Chapter Fourteen
Yields on 2.5%
Tin Spelter Copper Lead
consols
5. Conclusions
We have presented some of the findings of our investigation into Keynes’s
speculative activity in the option market. Mainly, he was active in metals,
notably copper, tin, lead and spelter, with some trading in rubber and
linseed oil. Assembling the data and drawing upon the information to be
found in his papers, which to the best of our knowledge has not been
analysed previously, we were able to present a detailed picture of his
dealings in options in the interwar period.
In particular we gathered information on future, spot and strike prices,
commission charges, premium and gross and net profits for Keynes’s
dealings; on this evidence we were able to assess his performance and
investment strategies.
While we do not claim to provide a complete account of Keynes’s
commodity dealings, we do offer readers some results.
We introduce a distinction that is not generally adopted in the
literature. We calculated the gross and net revenue for each option bought
Keynes and the Interwar Commodity Option Markets 335
and the net revenue as a proxy for performance.39 In this respect we found
that both his ability to forecast prices and his performance were variable in
relation to the different markets and time spans, but we roughly
determined a total ROI40 of 3% and a net profit of £1,838 (see Table 14.2)
over his 12 years of activity in metal options. This very modest success in
commodity option dealings, however, does not seem to have shaken his
general faith in the superiority of the investment in commodities over
other assets, as testified by the comment quoted in the epigraph, which he
made several years later.
From the analysis of his investment activity in options, what general
conclusions can be drawn about Keynes as an investor? At least
throughout the 1920s, Keynes appeared as an informed trader who took
great care in collecting information about the “fundamentals” of the
commodities he traded. This was certainly facilitated by his work for the
London and Cambridge Economic Service, for which he wrote an annual
special memorandum (1923–30), where data on consumption, production
and stocks were systematically analysed. At the same time, the frequent
strategy of leveraging his long positions with a combination of futures,
calls and BODs shows Keynes to have been a risk-loving investor who
seldom hedged his exposure in futures41 and who most of the time was
simply long in call options.
We have not considered Keynes’s dealings in options in relation to his
portfolio, where futures in commodities had the largest share, while
currencies were traded mainly in the early 1920s and shares mainly in the
1930s, but as the chief instrument of his speculative activity. In this
respect, no attempt has been made to evaluate the overall performance of
Keynes as an investor – which requires further data collection and analysis
– but to reconstruct his behaviour and assess the outcome in dealing with a
highly risky and leveraged asset.
Keynes basically gave up his dealings in options in the early 1930s and
this can be interpreted also as a break in his style of speculation, as indeed
is documented in the literature. Chambers and Dimson (2012), analysing
39
“In commodity futures markets a measure of the forecasting ability of
speculators is not hard to find, for it is immediately reflected in their profits and
losses” (Houthakker 1957: 43).
40
It has been computed as the ratio of the total net profits to the total investment in
options in the four metal markets.
41
Only in 15 cases (in a total of 268 options traded) did Keynes hedge his position
in futures with options.
336 Chapter Fourteen
42
Also in Foresti and Sanfilippo (2012), who analysed Keynes’s investment in the
wheat futures markets, a change is shown in Keynes’s speculative style occurring
around the beginning of the 1930s, when he abandoned a short-term type of
investment behaviour (adopted especially in the North American markets), which
aimed at anticipating the reversal in market trends, in favour of a long-term
investment behaviour characterised by the adoption of a rollover strategy of long
positions in futures, mainly on the Liverpool market.
Keynes and the Interwar Commodity Option Markets 337
References
Accominotti, O. and Chambers, D. (2014), “The Returns to Currency
Speculation: Evidence from Keynes the Trader”, VoxEU.org, 18
March, available at
https://voxeu.org/article/returns-currency-speculation-evidence-
keynes-trader.
Cavalli, N. and Cristiano, C. (2012), “Keynes’s Speculation in the London
Tin Market: 1921–1930”, in M.C. Marcuzzo (ed.), Speculation and
Regulation in Commodity Markets: The Keynesian Approach in Theory
and Practice, Rapporto Tecnico no. 21, Dipartimento di Scienze
Statistiche, Rome: Sapienza, Università di Roma, 57–78.
Chambers, D. and Dimson, E. (2012), “Keynes the Stock Market
Investor”, available at
https://www.aeaweb.org/conference/2013/retrieve.php?pdfid=315
Cristiano, C. and Naldi, N. (2014), “Keynes’s Activity on the Cotton
Market and the Theory of the ‘Normal Backwardation’: 1921–29”,
European Journal for the History of Economic Thought 21(6): 1039–
59.
Economist Intelligence Unit, (1958), A History of the London Metal
Exchange, London: The Economist Intelligence Unit Ltd.
Foresti, T. and Sanfilippo, E. (2012), “An Analysis of Keynes’s
Investments in the Wheat Futures Markets: 1925–1935”, in M.C.
Marcuzzo (ed.), Speculation and Regulation in Commodity Markets:
The Keynesian Approach in Theory and Practice, Rapporto Tecnico
no. 21, Dipartimento di Scienze Statistiche, Rome: Sapienza,
Università di Roma, 79–105.
Forrester, R.B. (1931), “Commodity Exchanges in England”, Annals of the
American Academy of Political and Social Science 155: 196–207.
Higgins, L. (1906 [1896]), The Put-and-Call, London: Effingham Wilson,
Royal Exchange.
Holder, M.E. and Kent, R.J. (2011), “On the Art of Investing according to
Keynes”, Journal of Portfolio Management 37(3): 4–6.
Homer, S. and Sylla, R. (1991), A History of Interest Rates, Hoboken:
Wiley and Sons
Houthakker, H.S. (1957), “Can Speculators Forecast Prices?”, Review of
Economics and Statistics 39(2): 143–51.
Keynes, J.M. (1971), The Economic Consequences of the Peace, in E.A.G.
Robinson and D.E. Moggridge (eds), The Collected Writings of John
Maynard Keynes, vol. II, London: Macmillan.
338 Chapter Fourteen
CARLO CRISTIANO
AND MARIA CRISTINA MARCUZZO
1. Introduction
The title of the second volume of Skidelsky’s biography, The Economist
as Saviour (Skidelsky 1992), conveys the idea of Keynes as both a
guardian and a defender of capitalism. There are, however, other aspects to
Keynes which suggest a different depiction, or at least a different
perspective. Such is the case of his activity as investor and speculator,
which was a constant concern throughout his life.
Keynes started up as an occasional investor in the stock market when
he was very young. After 1919, thanks to the proceeds of the best-selling
The Economic Consequences of the Peace (CWK II), his dealings grew in
magnitude as well as scope. Currency speculation became the main
business for a while, leading to a serious loss in 1920, which Keynes had
already helped to recover by 1922, thanks to the revenues coming from
speculation in commodities (metals and cotton) and some still
unsystematic forays into securities. Meanwhile, investment had become
his main source of income. The data on income by source reported by
Moggridge (1983: 12, Table 4) show that commodity speculation took the
lion’s share during the 1920s – a pattern that probably began to change
when Keynes’s second major set-back came in 1928, and then in the wake
of the 1929 crash. Even though Keynes went on trading commodities until
the closure of these markets in 1939, early in the 1930s he shifted to
equities, his main sources of income being capital gains and dividends.
Connected to this is Keynes’s exposure on the American stock market,
which shows up in the 1920s data and then in 1932–1933, before taking on
substantial proportions from 1934. Keynes continued to invest until the
340 Chapter Fifteen
take place in the relative values of money on the one hand and of goods
and real property on the other, which are reflected in the relative values of
bonds and shares […] so that here also the same principle of changing
from one class to another at appropriate times can be applied.
(CWK XII: 33)1
1
Much later, Keynes spoke somewhat contemptuously of this strategy. In a letter
to Kahn of 5 May 1938 he wrote that he had “seen it tried by five different parties
[…] over a period of nearly twenty years” without “a single case of success”
(CWK XII: 100). However, which these “five parties” may be is hard to tell, nor is
it clear for how long and how much this strategy was actually followed by Keynes
himself. Moreover, as we will see, the cycle investment left some traces also in
Keynes’s dealings during the 1930s. Nicholas Davenport, who became a member
of the National Mutual board in 1932, later recalled: “In the money and bond
markets Keynes was able to apply his professional knowledge as an economist and
monetary expert. The National Mutual would place its money on ‘the street’ on a
day-to-day basis when some crisis had driven the money rates sharply upward.
Then it would move into the government bonds market when it foresaw money
rates turning downwards. Finally, it would gather in its capital profits when it
considered the gilt edged market had reached its peak […]. Keynes […] was
something to persuade the actuaries of the life offices to keep equities in their
portfolios as a fixed and permanent proportion of their assets and to contemplate
‘switching’ not only when management problems arose but when economic trends
pointed to a ‘bear’ market” (Davenport 1975: 226–27).
344 Chapter Fifteen
for equities is the review of Smith (1925), published in May 1925 (now in
CWK XII: 247–52). Here Keynes argued that investing in equities was
investing in real values instead of money values, and moreover in a world
in which money depreciation was supposed to be the most predictable
outcome. Another reason Keynes insisted on was that well-managed firms
do not usually distribute all their profits to shareholders. Rather, they
prefer to reinvest this money into business. “Thus there is an element of
compound interest operating in favour of a sound industrial investment”
(CWK XII: 250, emphasis in the original). Chambers et al. (2015a; 2015b)
have shown how, as time went by, the selection of the most “sound
industrial investments”, the ones with the best long-term outlook in spite
of their low current market evaluation, became Keynes’s particular hobby
in the administration of King’s. This entailed that he put relatively large
sums of money into relatively few assets, thus betting on his ability to pick
out the most undervalued assets while eschewing diversification.
Accordingly, the investment policy of Keynes as a mature investor has
been described as rather idiosyncratic, and therefore scarcely compatible
with collective management.
Turning, now, to his personal investment, at an earlier stage Keynes’s
personal investments had, as we have seen, been largely in commodities
and currencies.
In these markets, the kind of “cycle investment strategy” that left traces
in Keynes’s papers around 1924 was a natural approach. It has been
observed (Accominotti and Chambers 2016: 360–61) that Keynes’s
exchange speculation was based on a “discretionary” analysis of “macro-
economic fundamentals as expected changes in official interest rates, the
level of European reparations, international trade and capital flows, and
the inflation outlook when making his currency forecasts”. Moreover,
something similar has emerged upon closer examination of Keynes’s
dealings in commodities. There is evidence that Keynes collected detailed
information about all the commodities he traded, and that, at least
throughout the 1920s, he tried to predict the price trend of each
commodity in the context of his broad outlook on the trade cycle. It is
even possible that their experience in these markets had some influence on
Keynes and Falk when they drafted the Independent prospectus in January
1924, and that they were just trying to extend their experience in
commodities and foreign exchange to the bond and share markets. In any
case, that Keynes could invest on the basis of his predictions about the
cycle looks like a natural spin-off of his economic theorizing. As he wrote
in the Tract on Monetary Reform, “the price level is not mysterious, but is
346 Chapter Fifteen
A key episode occurred when Falk wrote a letter to The Times newspaper
in 1930, urging British investors to fly to the US market as there was no
future in London, and Keynes replied to him in turn with a letter to The
Times. Keynes certainly did so for patriotic reasons, and possibly in
consideration of his public standing. Whether he actually believed that
Falk was wrong is another matter. On the one hand, in the ensuing years
he began to invest in Wall Street on a larger scale (Chambers and Kabiri
2016; Cristiano et al. 2017). On the other, it is also true that he did not
abandon the British stock market.
Rupert Trouton worked with Keynes for the Government during the
First World War, was his student at Cambridge, and had a lot of dealings
with him when he was at Buckmaster & Moore and Laurence, Keen &
Gardner, which were King’s main broker firms. It was Trouton who, in
1921, introduced Keynes to metal options (Marcuzzo and Sanfilippo
2016). He was a cofounder with Keynes and Falk of the AD Investment
Trust and the P.R. Finance Company, where collaboration between
Keynes and Trouton was very close. Trouton was able to reverse the
fortunes of the company after the bad years 1928–1932, and liquidation of
the company in 1934 brought profit to the shareholders (Basberg 2015).
When Trouton set up his own company, Hector Whaling, in 1928, Keynes
remained invested in it, both for himself and for the College throughout its
ups and downs to the very end. Trouton, like Kahn, was an economist
trained by Keynes at King’s and their discussions over investment policy
must surely have had that particular slant which was possibly lacking in
other relationships.
Walter Summerhayes Case was an “American investment banker.
Founder, 1916, president and director of Case, Pomeroy & Co., Inc., a
private New York investment company with a specialised research
organization” (Skidelsky 1992: 690). Since the early 1930s, Case (and his
business house) had become Keynes’s privileged source of professional
analysis and information on specific investments and classes of
investments (at least for the US market). This lasted until October 1937,
when Case committed suicide. As Keynes put it to Kahn, “[i]t was nothing
to do with finance (he had been mainly bearish, particularly in
commodities, and was largely out of markets); and I think it was probably
due to a recurrence of health trouble which he confided to [Lewis]2 (and
few others knew I think) […] , but he thought that he had completely
recovered” (Keynes to Kahn, 7 October 1937, in Richard Kahn Papers,
King’s College, RFK/13/57/252-3).
2
Probably Sir Alfred Edward Lewis, director of the National Provincial Bank and
member of the Economic Advisory Council (Moggridge 1992: 888).
John Maynard Keynes: The Economist as Investor 349
3
See J.M. Keynes, “The nuisance of a telephone. To the editor of the New
Statesman, 23 December 1922”, in CWK XVIII: 100–101.
4
Permission to publish from Keynes Papers, King’s College Library, Cambridge,
UK is gratefully acknowledged.
5
Homestake Mining Company, owner of a gold mine in Dakota, was listed on the
New York Stock Exchange.
6
On Keynes’s investment in Wall Street, see Cristiano et al. (2017).
7
United States Smelting Refining & Mining Co.
350 Chapter Fifteen
For several years I have always felt during a recession that it was worth
hanging on, and, provided one’s cover position was all right, all one had to
do was to wait; so that if I felt the cover position was quite safe, I didn’t
bother. But today I don’t feel like that. I don’t want to have a big loan,
even though the cover position is perfectly good. I’ve not got to the point
of being a bear, but I am much more disinclined to be a bull on borrowed
money.
(Keynes to Kahn, 2 September 1937, RFK/13/57/231–2,
reproduced in CWK XII: 24–25)
8
A copy of this letter was forwarded to Keynes, among whose papers it remained
(see KP IIC/1/1–5).
352 Chapter Fifteen
What Keynes added along the way was a huge amount of detailed
information on a selection of shares from a number of sources, along with
an ever more refined taste (developed by cross-examination as well as trial
and error) for these sources of professional (as distinguished from
confidential) information and business analysis.
On 10 October 1935, for instance, Keynes wrote a letter to Scott
containing four pages of detailed analysis of Austin Motors from both the
industrial and financial points of view. This is only one example of
Keynes’s detailed study of one of his “pets”, but an entire paper could be
dedicated to his long disquisitions with Scott on Austin Motors shares and
a few other equities.
As mentioned above, Scott was not as inclined as Keynes to eschew
the speculative mentality. Nevertheless, their dialogue always remained on
a constructive basis, apparently because Scott adhered to the same idea of
“active investment policy” supported by Keynes. This emerges in all
evidence on perusing not only the letters but also the accompanying
material and the related correspondence, as now collected in the Keynes
Papers. The bulk of this material amounts to hundreds of documents of a
sundry nature, but all relate to the same need, which was to keep up to date
with the markets by constantly gathering evidence.
John Maynard Keynes: The Economist as Investor 353
General Theory, CWK VII: xxiii). Apparently, for Keynes, the same
applied to business too.
True enough, Keynes sometimes complained of the advice received from
his correspondents.10 On the whole, however, Keynes relied on them. In
the same vein, the fact that he sometimes expressed dislike for Board
management may have concealed another fact, namely that he did like to
have frequent exchanges of information and qualified opinions with a
select range of friends and collaborators. What the Keynes Papers
abundantly show is that, for Keynes, investment was a time-consuming
activity in which building up a network of reliable connections and
collecting sound, relevant information was a costly but decisive task. This
he made quite clear in a letter to Scott:
It sometimes seems to me that apart from the noble army of investors who
never read the newspapers I am almost the only person left who has an
investment rather than a speculative mentality!On every Board I sit on the
great majority are influenced far more by the daily fluctuations which they
read of in the newspapers than by reasoned calculation of yield or ultimate
prospects.
(Keynes to Scott, 7 June 1937, KP PC/1/4/306)
10
As, for example, in the following excerpt about the losses incurred by the
National Mutual: “You will notice that these are practically all specialties and
rather obscure concerns, mostly bought on private advice. Omes was due to
Trouton: Carbo Plaster and South African Torbanite to Falk; Enfield Rolling Mills
and Grand Union Canal to [W. Harold] Brett. I am sure experience shows that
private and personal recommendations of this class of security tend to turn out
wrong in the long run” (JMK to F.C. Scott, 7 June 1938, in CWK XII: 66). W.H.
Brett was one of the brokers employed by the Provincial.
John Maynard Keynes: The Economist as Investor 355
businessman (like, for instance, Case). This is especially true of the 1930s.
As an investor, Keynes had now grown up from the amateurish style of the
early 1920s, when Trouton and Falk had to brief him on cotton futures or
metal options. But he was also engaged in a considerable number of
parallel activities as an economist.
As it turns out, Keynes’s portfolio choices may have been the result of
the juxtaposition of his general vision and systematic analysis of the entire
economic system with the information he could actually obtain – this latter
element being, at least to some extent, more a matter of circumstances than
of deliberate choice. The evolution of Keynes’s economic thinking ran
parallel to the development of his business skills, the increase in his
business contacts, and a process of selection of these sources of
information.
11
“Kaffirs” was the name given to the South African gold shares quoted on the
London market. When South Africa abandoned the gold standard in December
1932, the South African pound depreciated, thus boosting the local currency
John Maynard Keynes: The Economist as Investor 357
6. Conclusions
In this paper we have reviewed the growing literature that has in recent
years taken up a somewhat neglected aspect of Keynes’s life as speculator
and investor. In particular, we have pieced together the evidence collected
on his performance, pointing out that much more needs to be researched
before we can conclude that it was in fact “stellar”, as the traditional
account has it.
As far as his investment philosophy is concerned, there seems to be a
general consensus in describing it as characterized by two distinct phases:
the first, from the early 1920s to the early 1930s, guided by the “credit
cycle” approach; the second, which Keynes then turned to and pursued to
the end, a bottom-up strategy. Cycle trading assumed that assets in general
are systematically under- or overvalued at different stages of the trade
cycle, and that decisions to sell or purchase should therefore be based
more on general conditions than on specific knowledge of individual
References
Accominotti, O. and Chambers, D. (2014), “The Returns to Currency
Speculation: Evidence from Keynes the Trader”, VoxEU.org, 18
March, available at
https://voxeu.org/article/returns-currency-speculation-evidence-
keynes-trader.
Accominotti, O. and D. Chambers (2016), “If You’re So Smart: John
Maynard Keynes and Currency Speculation in the Interwar Years”,
The Journal of Economic History 76(2): 342–386.
Basberg, B. (2015), “Keynes, Trouton and the Hector Whaling Company:
A Personal and Professional Relationship”, NHH Department of
Economics Discussion Paper no. 8/2015, Bergen: Norwegian School
of Economics and Business Administration.
Boyle, P., Garlappi, G., Uppal, R. and Wang, T. (2012), “Keynes Meets
Markowitz: the Trade-Off between Familiarity and Diversification”,
Management Science 58(2): 253–272.
John Maynard Keynes: The Economist as Investor 359