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

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).

Comments

[Dave Wrixon]

"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)."

This is precisely what Krugman and Bernanke are missing!

2009 Oct 23 04:57 AM

[chap08]

"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)."

Wrong. The foundations are as valid as ever, but they do not completely describe any world, let alone the world of today. Meanwhile politicians apply "Keynesian" policies that Keynes would have totally repudiated.

The workers of the world are not on the verge of revolution - but don't assume that they never will be. Today we live in a privileged and peaceful world. We have grown fat on our cheap energy, post WWII prosperity. If we go back to the economic conditions of 1917 Russia, or 1930s Europe, then we will see the rise of extreme politics again. Some variant of communism or fascism will again be seen as the answer to overwhelming problems. Underneath our luxury exteriors, people are the same as they were in 1917 or 1930.

The government made an unholy mess of our bailout and stimulus. But what would have happened if they had done nothing? Would we have all had a nice holiday while the markets cleared? No, the total collapse of the banking system would have led to the total collapse of the economy, and the total collapse of civil society. The same would have happened in other countries. Nations would try and hold themselves together by blaming foreigners for their problems, as they always do. We would have woken from our consumer dream to confront the reality that Keynes wanted so much to prevent.

2009 Oct 23 06:44 AM

[Tony Petroski]

An interesting article Professor Mason.

"Keynes was a firm believer in peace and the benefits of civilization."

I would have added: "In sharp contrast to those who don't believe in peace and deride the benefits of civilization."

You have to hand it to JMK. He had it together.

"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."

Oh to be in Bloomsury.

Did any of Keynes' children carry on after he left us? After all, we're now all Keynesians, and we need guidance, hopefully more than provided in this article.

2009 Oct 23 09:28 AM

[bob adamson]

Well said chap08.

I would only add that Keynes was always atune to economic and political developments throughout his life and adjusted his emphasis and focus to changeng conditions. While today's world is experiencing rapid change, his even more so. That Keynes was able to maintain an underlying consistency in goals and analysis through all the change he expereinced suggests that his ideas should continue to be a source for insight in our times as well.


On Oct 23 06:44 AM chap08 wrote:

> "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)."
>
> Wrong. The foundations are as valid as ever, but they do not completely
> describe any world, let alone the world of today. Meanwhile politicians
> apply "Keynesian" policies that Keynes would have totally repudiated.
>
>
> The workers of the world are not on the verge of revolution - but
> don't assume that they never will be. Today we live in a privileged
> and peaceful world. We have grown fat on our cheap energy, post WWII
> prosperity. If we go back to the economic conditions of 1917 Russia,
> or 1930s Europe, then we will see the rise of extreme politics again.
> Some variant of communism or fascism will again be seen as the answer
> to overwhelming problems. Underneath our luxury exteriors, people
> are the same as they were in 1917 or 1930.
>
> The government made an unholy mess of our bailout and stimulus. But
> what would have happened if they had done nothing? Would we have
> all had a nice holiday while the markets cleared? No, the total collapse
> of the banking system would have led to the total collapse of the
> economy, and the total collapse of civil society. The same would
> have happened in other countries. Nations would try and hold themselves
> together by blaming foreigners for their problems, as they always
> do. We would have woken from our consumer dream to confront the reality
> that Keynes wanted so much to prevent.

2009 Oct 23 02:11 PM

[Socialism cannot compete!]

Keynesian economics is inherently anti-peace, because Big Government by definition encroaches upon individual Liberty. Control is by definition further removed from the average citizen, and that government tends to pursue economic policies according to the interests of those in power rather than ensuring a climate where the individual retains the power to make those choices. Need I mention examples? Look only at our economic policies and how American interests have been subjugated to international globalists, with resulting job losses, to further the cause of the Socialists, the One-World-Governmenters (your Council on Foreign Relations types, etc.), and your heads of global corporations.

"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)."

Sorry, but I'm afraid Keynesianism is quite Marxist, as it is essentially authoritarian -- it amounts to government intruding into markets to force its desired outcome, which may or may not be the one desired by the people.

2009 Oct 23 04:03 PM

[The Geoffster]

“The difficulty lies not so much in developing new ideas as in escaping from old ones.”

- John Maynard Keynes

What irony!

2009 Oct 23 07:24 PM

[Gary A]

Great read. Keynes was a NWO man. He wanted the financial world to control the sovereign nations. Don't get me wrong, sovereignty can be a dangerous thing, but the NWO stole from us with off balance sheet banking. We, as citizens of the United States, cannot ever trust the NWO. International cooperation has resulted in an international ponzi scam devised at Basel 2.

Perhaps if interest and banking were less intrusive, wages could be lower and prices could be lower. All we have now is oil speculation. It will cause people to need a raise to survive.

It is interesting that China sees what the international banking community has done to the US. They will not encourage mass debt on their people. So happens that the Chinese don't trust banks. Good for them. Of course those who believe in decoupling world growth without the American consumer are sadly deceived.

Bottom line, Keynes was trying to make a thoroughbred out of a pig, no offense to pigs. The financial system is doomed to failure, because it is unjust and unfair, and economics is not called the dismal science for nothing.

2009 Oct 24 02:06 AM

[rick12345]

Economics is there to fix the problems caused by exorbitant greed within financial markets.
The international banking system is not to blame for America's woes; If this was the case we would see zero growth around the whole of the developed world. Nobody put a gun to the head of American banks and said " Hey, use the excess liquidty you now have and lend it out to people who can't afford their repayments" or " take the money you should be using for insurance indemnity and invest it in the stock market". These problems, sadly, where "Made in America".

2009 Oct 24 04:08 AM

[Daniel Herkes]

Good review. Thanks for the guide to an interesting read.

2009 Oct 24 07:32 AM

[ETRADERVIC]

Exactly. I would amend your comment to state that, although Economics is still considered an Art by an unfortunate number, a great deal of progress has been made in Economics since Keynes.
The Democrat Party has gone off the deep end and embraced both through-back Economic and Political policies. The Democrat Party is in need of an overhaul. They need to be replaced with candidates that will represent the people.
The Economic positions of the current administration's policies are like physicists promoting Newtonian concepts when everyone else is on Quantum Theory.


On Oct 23 06:44 AM chap08 wrote:

"The foundations are as valid as ever, but they do not completely
describe any world, let alone the world of today. Meanwhile politicians apply "Keynesian" policies that Keynes would have totally repudiated."

2009 Oct 24 08:22 AM

[Gary A]

The international banking system capitalized on America's weakness and the ponzi housing scheme was planned Rick. The international banking system saw an opportunity to fleece investors and borrowers and they went for it. But Americans now so hate banks that it could have backfired.

Bernanke is feeling the heat for allowing all this to happen. He and Greenspan work for the Bank of International Settlements. If you remember that you will remember that banks can be very evil. See dontpaycreditcards.com... for more on this top down class warfare.


On Oct 24 04:08 AM rick12345 wrote:

> Economics is there to fix the problems caused by exorbitant greed
> within financial markets.
> The international banking system is not to blame for America's woes;
> If this was the case we would see zero growth around the whole of
> the developed world. Nobody put a gun to the head of American banks
> and said " Hey, use the excess liquidty you now have and lend it
> out to people who can't afford their repayments" or " take the money
> you should be using for insurance indemnity and invest it in the
> stock market". These problems, sadly, where "Made in America".

2009 Oct 24 12:01 PM

[Gary A]

So Rick, the result may be that we become like Japan, with a savings mentality while the government does the borrowing. The Japanese were badly burned by the rules imposed on their banks at Basel 1. They have not likely forgotten. The Chinese don't trust banks. It is time that Americans also learn this difficult lesson and no longer trust the international banking community. They are not worthy of an ounce of trust.

They don't want the consumer agency to protect the average Joe. They don't want to protect the average guy from their schemes and scams. The quicker Americans learn this the better off they will be.

2009 Oct 24 12:12 PM

[anarchist]

ETRADERVIC , spoken like a true ideologue. It's the "two party system" that is broke, not one party or the other. The electorate is not given a choice we are given carbon copies to vote for. The revolution in the US should be overturning the current campaign system, taking away the total power of the two parties with public campaign financing, the ability of third and forth party candidates to be heard.


On Oct 24 08:22 AM ETRADERVIC wrote:

> Exactly. I would amend your comment to state that, although Economics
> is still considered an Art by an unfortunate number, a great deal
> of progress has been made in Economics since Keynes.
> The Democrat Party has gone off the deep end and embraced both through-back
> Economic and Political policies. The Democrat Party is in need of
> an overhaul. They need to be replaced with candidates that will
> represent the people.
> The Economic positions of the current administration's policies are
> like physicists promoting Newtonian concepts when everyone else is
> on Quantum Theory.
>
> "The foundations are as valid as ever, but they do not completely
>
> describe any world, let alone the world of today. Meanwhile politicians
> apply "Keynesian" policies that Keynes would have totally repudiated."

2009 Oct 24 12:45 PM

[GotLife]

"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."

I suggest every economics and polisci candidate spend time reading world history books devoid of revisionism and a short spell in the political prisoner wing in Cuba, China and North Korea. A similar review and world tour of fascist states would also toughen their analytical skills.

2009 Oct 24 01:22 PM

[American in Paris]

To the contrary, the roots of this economic crisis was laissez faire thinking of which the Republicans are the most hardline advocates.

The toxic waste was made in America and devoured by banks around the world.


On Oct 24 08:22 AM ETRADERVIC wrote:

> Exactly. I would amend your comment to state that, although Economics
> is still considered an Art by an unfortunate number, a great deal
> of progress has been made in Economics since Keynes.
> The Democrat Party has gone off the deep end and embraced both through-back
> Economic and Political policies. The Democrat Party is in need of
> an overhaul. They need to be replaced with candidates that will
> represent the people.
> The Economic positions of the current administration's policies are
> like physicists promoting Newtonian concepts when everyone else is
> on Quantum Theory.
>
> "The foundations are as valid as ever, but they do not completely
>
> describe any world, let alone the world of today. Meanwhile politicians
> apply "Keynesian" policies that Keynes would have totally repudiated."

2009 Oct 24 06:21 PM

[Moon Kil Woong]

This sounds like a good read. Keynes was correct in that some form of international control is needed to prevent cross border exconoic distortions. No doubt he would conclude that affixing currency pegging between nations without a cap to how much debt can a accrue would lead to a loss of economic stability, national independence, self-sufficiency, and price stability, and a natural balance of resouce and labor allocation. In effect, even Keynes the proverbial liberal would realize that the path China and the US have taken with respect to themselves is not only foolish but would inevitably lead to economic and political catastrophe.

Aside from thwe central concepts mentioned in this synopsis, Keynes' concepts of stimulating an economy out of a persistent economic rut has nothing to do with trying to prevent recessions by stimulating into a economic decline. He had no issue with deflation as long as prices and wages fell somewhat in tandem nor if there was some amount of inflation when it was correct in stimulating an economy out of a economic trough.

Since he is not here today I can only speculate that he would argue that prolonging the economic falloff with early stimulus as we are doing today just attenuates the length of unemployment in which the duration is much worse than the absolute level. Thus we are making a bad situation worse and going broke in the proces. In the meantime, back at the economic engine, the international economic imbalances continue to go unfixed driving the world even closer to irrevocable confrontation and turmoil.

Keynes was right in his origonal ideas premised on a belief that countries need a high level of self sufficiency in order insure economic stability and sustainability. The US had it for a long time but gave it up when the Federal Reserve and government powers realized that they could exchange scrip for lower priced products without consequence.

Oh how foolish such a get it for free concept that was. Taking without just compensation leads only to abject poverty at best and possibly indentured servitude. There is nothing for free in economics. In this economic system we have today we are giving up freedom, self-sufficiency, our factors of production, and eventualy will even liberated from the very jobs and wages we need to survive on our own. Our money being owned overseas sooner or later will be transferred into our assets being owned overseas or our ability to borrow and buy overseas being yanked. Both are disasterous.

If Bernake and the administration want to address the real issues, they should look at the deficit, trade imbalances, and the distinct lack of US savings and thus ability to fund the deficit. But I suppose, just like the last administration, they don't do they? And that is the real failure.

2009 Oct 25 12:31 AM

[Slvrizgold]

Maynard Keynes one of the most despicable stealers of wealth of all time. No doubt he is in one of Dante's lower circles of hell now!

2009 Oct 25 01:48 AM

[BRUCE E. W.]

This is a very intelligent presentation of a profile in history that begs to be repeated. Both Polanyi and Keynes were first and formost accurate observers of their world. Their theories were built upon measure and methods that calibrated the dynamics of insight and foresight into predictable outcome. Unlike retrospective measures that can play with teleological and tautology to appear complete, these theorists were engaged in orchestrating corrections.
Modern theorists since the 50s have been still fighting a reactionary cold war. Their ideological foundations are threatened by applications of practical solution if they don't fit the theories themselves. Even now it becomes a process of applying Keynes as if it were a "Brand" over oppositional (cold war "free" world) schools of theory which typically involve pure bred monetarianism.

If you are adjusting the real world to your theories, something in the real world is going to break (if you have the political economic power to impose it). If you adjust the theories to the real world, something in the theories are going to break (if you have the poitical economic will to oppose it).

Times have certainly changed in both scale and scope but also in temporal and spatial dimensions which have intensified and accelerated the geopolitical arena for both better and worse potentials. Communication does permit resolutions but the intensity of flare ups and chronic regional violence is barely reported as economic factors. Class structure has dramatically changed and new levels of highly skilled labor, technocrats and service exchange economies have altered the playing field in critical ways. It would be fascinating to imagine what Polanyi would say about the global network, and hear Keynes project how it orchestrates itself. We have the model, but contentions and interests are blinding us into a lock step set of pretentions and contentions that we tend to defend as postures of laissez faire or status quo without even defining what that means. I don't think Keynes would have had any of it.

I found the statement ..."That is, there is a “moral hazard" problem connected with a policy that keeps nominal wages from falling" very compelling as a sample model of inversion. In yesterday's economy this refered to a manual labor level of wages. Today, this applies more truthfully to the top executives of the pecking order and the "bonus" world of financial rewards and their posse of self-exulted elites. The age of privitized "Central Planning" has arrived; and the statement of record seems to be L'Marche, C'est Moi.

2009 Oct 25 02:01 AM

[Michael Clark]

Please expand on this. Are you speaking about his inflationist theology? Or is there something else?


On Oct 25 01:48 AM Slvrizgold wrote:

> Maynard Keynes one of the most despicable stealers of wealth of all
> time. No doubt he is in one of Dante's lower circles of hell now!

2009 Oct 25 03:41 AM

[Michael Clark]

I don't think there is any way NOT to agree with this. The Republicans need a new message: getting government OUT OF business and letting business police itself has let this time to what it always leads to: greed, theft, corruption and collapse. Now is the time to take power away from bankers and insurance men finally. Small profits in banks and insurance are all that are allowed. Large profits mean they are stealing too much and putting too many people into bankruptcy.


On Oct 24 06:21 PM American in Paris wrote:

> To the contrary, the roots of this economic crisis was laissez faire
> thinking of which the Republicans are the most hardline advocates.
>
>
> The toxic waste was made in America and devoured by banks around
> the world.

2009 Oct 25 03:45 AM