'John Maynard Keynes and International Relations: Economic Paths to War and Peace,' by Donald Markwell

by: John M. Mason

Donald Markwell has written a very important book on the place that international relations had in the thinking of John Maynard Keynes. From his work at the Paris Peace Conference in 1919, and throughout the rest of his life, Keynes played a role on the international stage. This activity had a great impact on his intellectual development. Markwell writes that the “students of Keynes have not in any systematic or thorough way studied his thinking from the perspective of international relations.” The author tries to fill this gap with, "John Maynard Keynes and International Relations: Economic Paths to War and Peace" (Oxford University Press: 2006).

The Paris Peace Conference thrust Keynes into an international setting. It also put him in a position in which he could work to create a climate of world peace, something that was very important, not only to himself, but to his group of friends in Bloomsbury who were artists, writers and intellectuals. The fundamental concern for peace colored not only his worldly actions, but also permeated his intellectual efforts to build an economic model that would support his attempts to achieve workable solutions in the real world.

Keynes was an idealist, Markwell argues; an individual who believed that “the system of international relations that had given rise to the First World War was capable of being transformed into a fundamentally more peaceful and just world order.” This pursuit led Keynes through four stages in his life. First, Keynes was a classical economic liberal; second, when he left the Paris Peace Conference in 1919, he was a firm believer that nations had to achieve independence from one another in order to achieve domestic economic goals. Third, he believed that economic isolation and national self-sufficiency were the best ways to achieve peace; and fourth, from 1936 to 1946, he aimed for “an international monetary system that did not pit interests of countries against each other, and if states could and did pursue economic policies to promote full employment then there would be no economic causes of war.”

Markwell shows that this quest was behind the emphasis Keynes put on achieving the full employment of labor.

Something happened to his thinking, however, as he moved from his pre-World War One emphasis on the results of classical, liberal economics to the world view that developed through the Paris Peace Conference. This move was related to the high or rising levels of unemployment in the world at that time, labor unrest, revolution and a threat to the cultural environment that Keynes knew and wanted to keep. The revolutionary spirit was spreading throughout Europe during the decade of the 1910s (the Russian Revolution took place in 1917). The fear of this was on the minds of many attending the Paris Peace Conference: if this spread was not stopped, there would be war, within nations as well as between them.

The focus was on Bolshevism, a political movement that combined elements of nationalism with a fundamental belief that was anticapitalist and sympathetic towards certain nationalistic forms of communism and socialism. Today, it is hard to understand the fear attached to the Bolshevik uprising, but following the Russian Revolution and the Paris Peace Conference Bolshevism seemed to color most discussions of the state of the world. Markwell quotes a letter discussing reparations and the fear that punishing Germany too severely would do great damage considering that the threat of Bolshevism in Germany was ‘hourly growing.’ Another person comments on the spread of Bolshevism from “the Pacific to the Rhine.”

The concern about Bolshevism was deeply disturbing and, according to Markwell, came to play a major role in the formation of Keynes’ thinking. Although Keynes was a liberal, he was neither a member of the Labour Party (for they were not of his class) nor a Marxist (because it was authoritarian). So, this is where we see how economics becomes political economy, which is economics and the study of the role of public policy in influencing the economic and social welfare of political units. In the book we see Keynes combining his political leanings and his intellectual skills to build a theoretical economic model based upon his beliefs about what was needed to save Western society, especially the worlds of Cambridge and Bloomsbury.

Keynes’ starting point was the labor market. Because of all the labor unrest in the world and the threat of revolution he felt that it was necessary for a country to maintain the highest levels of employment. It was also necessary, he believed, to keep ‘nominal’ wages from falling, as would happen if there were unemployment and the market was allowed to clear. Falling wages, he feared, would create labor unrest. Keynes believed that laborers were subject to "money illusion" and only really cared about the nominal level of wages. His economic model building therefore begins with two policy conclusions: full employment and nominal wages that never fell.

There are two consequences of these policy objectives. First, labor can push for increases in nominal wages knowing that efforts will be made to keep workers fully employed. That is, there is a “moral hazard" problem connected with a policy that keeps nominal wages from falling. But, and this gets us to the second consequence, since equilibrium in the labor market depends on real wages, or nominal wages deflated by prices, the inflation of prices can bring about full employment so that nominal wages do not have to fall. Since labor is subject to "money illusion" the decline in real wages needed to achieve full employment will not affect workers. Thus, given these two policy objectives, the Keynesian model can use inflation as the basic method to bring about full employment. The Keynesian model has an inflationary bias, but that didn’t bother him.

The obvious levers that a government can use to achieve full employment were monetary policy and fiscal policy. Monetary policy was the easiest way to create the inflationary environment needed to achieve full employment. However, Keynes observed, there were times when monetary policy wouldn’t work because it couldn’t lower interest rates far enough. Therefore, fiscal policy had to fill the gap and create the aggregate demand necessary to achieve full employment. The important thing was to always err on the side of too much stimulus. Inflation was not the major concern, though the possibility of unemployment, and its consequences, was.

However, Keynes’ training in classical economics had taught him that inflation was bad for the currency of a country. Hence, he became an advocate for fixed exchange rates, instead of flexible ones, and restrictions on international capital flows, so that countries could conduct independent national economic policies. Keynes had experienced, first hand, that nations were going to follow their own paths, regardless of what happened to the world at large. This behavior he observed over and over again throughout the 1920s and 1930s. He even came to accept protectionism and isolationism in the 1930s.

Only the efforts of the Allies in World War Two raised the possibility that international cooperation might be achieved. Then, Keynes worked tirelessly to create the Bretton Woods System, which included the World Bank and the International Monetary Fund.

Markwell shows how the work of Keynes in international relations shaped his policy objectives and, therefore, his economic theorizing. Keynes was a firm believer in peace and the benefits of civilization. He believed that these two states were threatened by the worldwide labor unrest. Consequently, his public service efforts, as well as his intellectual efforts, were aimed at constraining or even overcoming this unrest. That these efforts might result in a perpetual state of inflation within an international framework of fixed exchange rates and constrained capital flows were only unfortunate consequences of achieving peace in the world.

Markwell has been very successful in constructing a narrative of how Keynes navigated through his very busy public life while at the same time he produced an intellectual foundation for his actions. The question we have to ask today is whether or not the intellectual foundation Keynes constructed is consistent with the world we currently live in. Since August of 1971 we have had neither a world of fixed exchange rates nor one with limits on international capital flows. As a consequence, nations have not been able to conduct independent economic policies. Furthermore, the workers of the world are not on the verge of revolution. It seems as if the intellectual foundations of the Keynesian model no longer exist (if they ever did).