Tuesday 9 July 2024

Keynes's 'Economic consequences' caused the Second World war.

Keynes great contribution to the Great War had to do with pushing for the disastrous Gallipoli campaign. This is because he had tried, but failed, to manipulate the futures market for wheat (prices were rising because the Turks were blocking Russian exports) so as to contain food price-inflation. He thus backed a harebrained scheme to capture the Dardanelles so as to permit Tzarist Russia to resume grain exports which would restore their credit worthiness and raise the price of their bonds- which the Brits held a lot of. Keynes, a vain man, never acknowledged that his mistake was to assume 'ceteris paribus'. He knew India would have a bumper wheat harvest but he could use the power of the Raj to pretend the reverse was the case. This meant that wheat futures bought by his agents could be dumped at the right time to cause the price to crash. Sadly, 'ceteris' was not 'paribus'. There was a drought in Australia and hail storms in Argentina. The Indian Viceroy decided to ban the export of wheat for fear that high food prices would create discontent from which the Indian revolutionaries would benefit. Luckily, going forward, there were record harvests in Canada and the USA.

Keynes, like most economists decided that he hadn't got his sums wrong.  The truth must be that here were 'diminishing returns' to global agriculture and so what happened on his watch was inevitable- rather than the product of ignorance and arrogance. What he failed to see that preaching this gospel- according to which colonial powers like UK and France could always get food from their colonies but that Germany would starve- Keynes was endowing credibility on the German General Staff's maximal program later carried out by Hitler. 

Why was it not obvious that Keynes was a cretin? Every line he ever wrote was either foolish or false or both foolish and false.

The power to become habituated to his surroundings is a marked characteristic of mankind.

No. Nobody became habituated to fighting in the trenches or getting slaughtered by Ludendorff's troops. Man can become habituated to comfortable surroundings. If they are uncomfortable he tries to change them or moves elsewhere. More armies would have mutinied had there been no armistice. 

Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century.

It had stopped living under it five years previously. Germany had only got on to the Gold Standard after it got French reparations.  Free Trade had only prevailed in England itself in the mid nineteenth century. 

We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly.

Very true. The King Emperor was planning to visit his cousin the Kaiser before going off for a nice cruise with his great pal the Tzar.  

On this sandy and false foundation we scheme for social improvement

Lenin was scheming for social improvements with Rasputin and the Tzarina 

and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

This cretin didn't get that there had been great military conflict in Europe. Most European Royal families had disappeared. How fucking stupid was Keynes?  

Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built.

It was Austria-Hungary which was deluded as was the Tzar and the Caliph. The German people and the French people and the Italian people survived. It was multi-ethnic Empires which disappeared- even that of Britain. 

But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live.

There was no path back on to the Gold standard for countries which now had no fucking gold. Perhaps some new very delicate and complicated organization could have been imposed by vast armies of occupation. But no such armies existed. Three years after Keynes wrote this, the Chief of the Imperial General Staff said the Army didn't have enough men to hold even England against a Bolshevik insurrection, forget about Ireland or Egypt or India.  


In England the outward aspect of life does not yet teach us to feel or realize in the least that an age is over.

Keynes simply wasn't very observant. Women and men who didn't meet the property or residence qualification got the vote in 1918. The electorate increased in size from 8 million to 21 million. The Labor party was now sure to displace the Liberals.  

We are busy picking up the threads of our life where we dropped them, with this difference only, that many of us seem a good deal richer than we were before.

This nutter wrote this a few months before the big depression of 1920-21 hit the US and UK.  

Where we spent millions before the war, we have now learnt that we can spend hundreds of millions and apparently not suffer for it.

There was a big deflation. Britain did suffer from it. Debt servicing and other transfers inhibited productivity enhancing capital formation. Also, taxes were too low to maintain a credible offensive doctrine as became clear in the Thirties. Keynes was babbling nonsense.  

Evidently we did not exploit to the utmost the possibilities of our economic life. We look, therefore, not only to a return to the comforts of 1914, but to an immense broadening and intensification of them. All classes alike thus build their plans, the rich to spend more and save less, the poor to spend more and work less.

Keynes's official position had cosseted him. He did not understand that 'Geddes axe' was destroying the economic basis of a vast military upper middle class. Moreover, the burden of transfer payments and the anxiety to cut Income tax (which Churchill did only to be rebuked by Keynes) meant that coal and steel and ship building and other heavy industries took a hit. Because of the accelerator effect, there would be massive structural unemployment. True, Germans and the Austrians etc. would have it worse. 

But perhaps it is only in England (and America) that it is possible to be so unconscious.

US GNP declined by about 7 percent during the post-war depression.  

In continental Europe the earth heaves and no one but is aware of the rumblings. There it is not just a matter of extravagance or "labor troubles"; but of life and death, of starvation and existence, and of the fearful convulsions of a dying civilization.

Europe's civilization wasn't dying. Its social order, in the East, had been severely affected but, as the Great War showed, that social order had a fucking death wish. Keynes believed that 'the flames of Russian Bolshevism' had 'burnt themselves out'.  I suppose he thought England and France and maybe the US and the Japanese would defeat Lenin and some sort of constitutional Regency would be established in Russia. Within four years of Keynes's writing this it became obvious that Britain and France could not prevail over Lenin or Ataturk or even in Ireland or Egypt. Gandhi, in India, could keep British 'dyarchy' in business but the Raj was a zombie enterprise. 

Keynes's one big prediction in 'Econ consequences' is that the terms of trade would move in favor of primary, particularly food, producers. Basically he was propounding the doctrine the German General Staff had already espoused- viz. Germany would starve unless it secured vast agricultural land to its East and the oil of Romania and Odessa etc. Essentially, Keynes had been brainwashed by a German Jewish economist- or, since he didn't have a brain, let us simply say that he plagiarized that stamp of stupidity. 

When first the virgin soils of America came into bearing, the proportions of the population of those continents themselves, and consequently of their own local requirements, to those of Europe were very small.

But America was substituting capital for labor in agriculture. Fossil fuel was replacing horse-power. This meant exportable surpluses would rise not fall. But what America was doing, Europe could do too. Instead of feeding agricultural laborers and horses and spending a lot of time collecting and spreading manure, European farmers could use tractors and chemical fertilizers etc. 

As lately as 1890 Europe had a population three times that of North and South America added together. But by 1914 the domestic requirements of the United States for wheat were approaching their production, and the date was evidently near when there would be an exportable surplus only in years of exceptionally favorable harvest.

The US had encouraged its farmers to get into debt and overproduce during the Great War. Subsequently, they were left in the lurch which is why US exports declined during the prolonged farm crisis of the Twenties and Thirties. But Argentina and Canada were only too happy to take up the slack.  

Indeed, the present domestic requirements of the United States are estimated at more than ninety per cent of the average yield of the five years 1909-1913.[5] At that time, however, the tendency towards stringency was showing itself, not so much in a lack of abundance as in a steady increase of real cost. That is to say, taking the world as a whole, there was no deficiency of wheat, but in order to call forth an adequate supply it was necessary to offer a higher real price.

No. What mattered was the cost and speed of transport. If the wheat 'sprouts' during the course of the voyage, it is unusable.  

The most favorable factor in the situation was to be found in the extent to which Central and Western Europe was being fed from the exportable surplus of Russia and Roumania.

Keynes was confirming the German General Staff's belief that Germany would starve unless it grabbed land from its East. 


In short, Europe's claim on the resources of the New World was becoming precarious; the law of diminishing returns was at last reasserting itself and was making it necessary year by year for Europe to offer a greater quantity of other commodities to obtain the same amount of bread;

No. Europe was supplying higher value to weight commodities. The terms of trade were moving in its favor against primary producers. That's why Argentina didn't stay on track to become the wealthiest country in the world.  

and Europe, therefore, could by no means afford the disorganization of any of her principal sources of supply.

Who can? Only a subsistence economy doesn't have to worry about 'disorganization'. But, in bad years, many of its people may starve or have to run away.  

Much else might be said in an attempt to portray the economic peculiarities of the Europe of 1914.

Much more could be said about how quickly parts of Europe could increase output of basic products. Still, bureaucrats could make bad decisions, like killing of the pigs in Germany in the belief they were co-eaters.  

I have selected for emphasis the three or four greatest factors of instability,—the instability of an excessive population dependent for its livelihood on a complicated and artificial organization,

Nope. That 'organization' was largely market based, not bureaucratic. During the War, this changed greatly in some countries.  

the psychological instability of the laboring and capitalist classes,

there was no such thing. Both wanted more money so as to buy more nice shiny stuff. Workers could do so by forming Trade Unions to gain 'countervailing power' over employer cartels. Governments, responding to pressure from voters (though the franchise was restricted in most countries) were gradually introducing a basic welfare safety net. 

and the instability of Europe's claim, coupled with the completeness of her dependence, on the food supplies of the New World.

This could be reversed. The Great War showed this. The European Union is currently food self-sufficient.  

What is alarming about Keynes's book is that he does not seem to understand that Wealth is the stock of assets necessary to yield a particular expected income stream. It isn't money in the bank or even the market value of your portfolio (because of Knightian uncertainty). The Great War had shown that a lot of 'wealth' was worthless tinsel- e.g. Tzarist bonds. Furthermore it had exposed increased British weakness by reason of its falling behind technologically and its stagnating productivity in traditional heavy industries. What England needed to do, to remain wealthy, was massively increase spending on Research and Development. Moreover, like France, it needed an effective offensive military doctrine. People like Keynes were too arrogant and complacent to understand this. They thought England could enjoy an eternal golden afternoon of declining effort and increasing rewards if only everybody embraced free trade under fixed exchange rates such that the terms of trade remained frozen for all time. 



In the chapters of this book I have not generally had in mind the situation or the problems of England. "Europe" in my narration must generally be interpreted to exclude the British Isles. England is in a state of transition, and her economic problems are serious. We may be on the eve of great changes in her social and industrial structure. Some of us may welcome such prospects and some of us deplore them. But they are of a different kind altogether from those impending on Europe. I do not perceive in England the slightest possibility of catastrophe or any serious likelihood of a general upheaval of society. The war has impoverished us, but not seriously;—I should judge that the real wealth of the country in 1919 is at least equal to what it was in 1900. Our balance of trade is adverse, but not so much so that the readjustment of it need disorder our economic life.[157] The deficit in our Budget is large, but not beyond what firm and prudent statesmanship could bridge. The shortening of the hours of labor may have somewhat diminished our productivity. But it should not be too much to hope that this is a feature of transition, and no one who is acquainted with the British workingman can doubt that, if it suits him, and if he is in sympathy and reasonable contentment with the conditions of his life, he can produce at least as much in a shorter working day as he did in the longer hours which prevailed formerly. The most serious problems for England have been brought to a head by the war, but are in their origins more fundamental. The forces of the nineteenth century have run their course and are exhausted. The economic motives and ideals of that generation no longer satisfy us: we must find a new way and must suffer again the malaise, and finally the pangs, of a new industrial birth. This is one element. The other is that on which I have enlarged in Chapter II.;—the increase in the real cost of food and the diminishing response of nature to any further increase in the population of the world, a tendency which must be especially injurious to the greatest of all industrial countries and the most dependent on imported supplies of food.

But these secular problems are such as no age is free from. They are of an altogether different order from those which may afflict the peoples of Central Europe. Those readers who, chiefly mindful of the British conditions with which they are familiar, are apt to indulge their optimism, and still more those whose immediate environment is American, must cast their minds to Russia, Turkey, Hungary, or Austria, where the most dreadful material evils which men can suffer—famine, cold, disease, war, murder, and anarchy—are an actual present experience, if they are to apprehend the character of the misfortunes against the further extension of which it must surely be our duty to seek the remedy, if there is one.
In the chapters of this book I have not generally had in mind the situation or the problems of England.

British economists should not worry about Britain's own safety or prosperity. They should prescribe stupid solutions to the World's problems.  

"Europe" in my narration must generally be interpreted to exclude the British Isles. England is in a state of transition, and her economic problems are serious. We may be on the eve of great changes in her social and industrial structure. Some of us may welcome such prospects and some of us deplore them. But they are of a different kind altogether from those impending on Europe.

No. They were the same. German air-planes and submarines meant that England was part of Europe. But Europe needed an offensive military doctrine. Scolding foreigners for being too goddam foreign was utterly futile as was suggesting that America should pay for everything while deeply repenting having got rid of Mad King George.  

I do not perceive in England the slightest possibility of catastrophe or any serious likelihood of a general upheaval of society.

Nor had he 'perceived' the Great War would be so fucking horrible.  

The war has impoverished us, but not seriously;—

Keynes would have gone bankrupt, because of currency trading, in 1920 if he hadn't been bailed out. 

I should judge that the real wealth of the country in 1919 is at least equal to what it was in 1900.

Britain's 'real wealth' turned out to be much lower that expected in both 1900 and 1919 because nobody expected that it would have to fight a total war within 20 years. 

 The forces of the nineteenth century have run their course and are exhausted.

No. What was running its course was British naval supremacy. Sadly, even Churchill didn't get that Britain should not cut taxes rather than spend it on the Navy.  

The economic motives and ideals of that generation no longer satisfy us: we must find a new way and must suffer again the malaise, and finally the pangs, of a new industrial birth. This is one element. The other is that on which I have enlarged in Chapter II.;—the increase in the real cost of food and the diminishing response of nature to any further increase in the population of the world, a tendency which must be especially injurious to the greatest of all industrial countries and the most dependent on imported supplies of food.

So, Germany needs to conquer Poland and Ukraine and grab the oil of Romania and Odessa etc. 

But these secular problems are such as no age is free from. They are of an altogether different order from those which may afflict the peoples of Central Europe. Those readers who, chiefly mindful of the British conditions with which they are familiar, are apt to indulge their optimism, and still more those whose immediate environment is American, must cast their minds to Russia, Turkey, Hungary, or Austria, where the most dreadful material evils which men can suffer—famine, cold, disease, war, murder, and anarchy—are an actual present experience, if they are to apprehend the character of the misfortunes against the further extension of which it must surely be our duty to seek the remedy, if there is one.

The remedy was to tell Old Etonians to fuck the fuck off. Economics is about raising productivity not talking complacent bollocks. But Economics must concern itself with providing the 'sinews of war'- i.e. establish a sufficient threat point to deter aggression. 

Why did the Treaty of Versailles fail? The answer is that America pulled out and thus 'collective security' was off the table. Also, Germany, Bolshevik Russia and Turkey were able to collaborate. The Turks defeated the Greeks and their sponsors, Britain and France. The Bolsheviks prevailed over the 'Whites' who were supported by Britain, France and Japan. The Germans played 'extend and pretend' under Weimar but became, in effect, a military dictatorship after the Crash when foreign loans dried up. Then Hitler killed General Schleicher and pushed forward the Army's maximal program with great ruthlessness, but also stupidity. Keynes actually said, in the German edition of his 'General Theory', that the Nazis could make a better fist of 'Keynesian' policies than democracies like the US and UK. 

One reason the Left warmed to Keynes was that he firmly opposed sanctions or military interference against the Bolsheviks. But, within a year of his writing 'Economic consequences', the Soviet-Polish war broke out. Had the Russians taken Warsaw, there was the strong prospect of Soviet support for a Communist takeover of Germany itself. Britain's worst nightmare was a Russo-German alliance. Thanks to Munich, that nightmare came true. To be fair, Keynes would have preferred Chamberlain to have called Hitler's bluff. The problem was that Poland was not averse to helping itself to a piece of Czechoslovakia before it was its turn to be devoured by Hitler and his new good buddy Stalin. Thankfully, Hitler was crazy enough to go to war with both the USSR and the USA. Britain's leaders may have been stupid and complacent but Hitler was yet more ignorant and crazy. 

 

No comments: