Opinion: Keynes still valuable

By Neville Bennett Writing in December 1930, John Maynard Keynes was not sure how far the recession would go: he suspected there might be a deep depression but he called the situation a "slump". He began his essay with the immortal phrase "We have magneto trouble." While others were wailing about the end of capitalism, he said there was no major problem that some tuning could not put right. His essay, "The Great Slump of 1930", is relevant today because we do not know how deep our slump will become. We live in an age when students do not read sources. Students do not read the prose of a Darwin, Durkheim, Descartes or Defoe. They read a textbook account which simplistically sums up the so-called essence of their thought, before peremptorily summing up their limitations. One fantasizes about how the author of a "reader" or text would cope with one of the great brains in the flesh. Keynes was the most brilliant mind of his generation. He was able to run Treasury, guide Britain through two world wars, be an outstanding teacher and publicist, write more economic theory than any other economist ever, and be an architect of international economic systems. He had a commanding presence that won deference from presidents and prime ministers. While he was alive, he was treated with awe and people crossing swords did so at their peril. Nevertheless, since his death some writers have treated his ideas disrespectfully. I invite readers to encounter the refreshing bubbling brook of his marvelous mind. Keynes had every faith in capitalism. He tells his readers that the world was in a colossal muddle, a nightmare, because it had blundered in control of a delicate machine. "The result is that our possibilities of wealth may run to waste for a time"”perhaps for a long time" ... but ... "We are as capable as before of affording for everyone a high standard of life." Keynes's words were prophetic then and now:  the extreme violence of the slump had left 10 million unemployed in the US, UK, and Germany. The catastrophe was because a price fall, resulting in primary producers selling below cost, and almost every industry failing to earn "enough profit to make it expand - which is the test of progress." A vicious circle developed where primary producers cut production and lacked the money to buy manufactures. Most governments and business (including NZ) pressed for wage and cost cuts but Keynes argued against this because the world had created immense debt after 1914. Every price fall "increases the burden of this debt". Moreover, "if wages are cut, the community's purchasing power is reduced by the same amount as the reduction in costs". Neither an output restriction nor a wage reduction would restore equilibrium. Moreover, "Agriculturists and householders throughout the world, who have borrowed on mortgage, would find themselves the victims of their creditors" "¦ (there may be insufficient time) "to prevent a series of bankruptcies, defaults and repudiation which would shake the capitalist order to its foundations? Here would be a fertile soil for agitation"¦" Why was there a slump? Keynes argues that in a boom, business receipts exceed costs, while in a slump that "their costs exceed their sale-proceeds". This happened because. when goods come onto the market, profit or losses depended on the costs of production. These, and indeed the whole communities' earnings, were divided between expenditure on consumption goods and capital goods. The incomes of the public are also divided between expenditure on consumption goods and savings. Profits could be restored by the public spending more on consumption goods or by business producing more capital goods. But if the public are reluctant to buy capital goods, the capital goods-makers would make a loss, and fewer capital-goods would be made. The makers of consumption-goods would also make losses, and general unemployment will ensue. A downward spiral will follow and matters will get worse and worse until something happens to turn the tide. In marvelous prose, Keynes artistically adds:

This is an unduly simplified picture of a complicated phenomenon. But I believe that it contains the essential truth. Many variations and fugal embroideries and orchestrations can be superimposed; but this is the tune.

The fundamental cause of the trouble is the lack of new enterprise due to an unsatisfactory market for capital investment. Since trade is international, an insufficient output of new capital-goods in the world affects the prices of commodities everywhere and hence the profits of producers in all countries alike. Why was capital-goods production too low? Credit was too expensive. Lenders had got used to high rates, and they distrusted many regions, imposing risk premiums "so great as to strangle new enterprises altogether". In those last two years, the USA and France (2 of the 3 world creditor nations) had ceased extending international loans. Borrowers were also cautious. The fall in prices was disastrous for those that had borrowed, and anyone who postponed new enterprise gained by the delay. The risk that frightened lenders also affected borrowers. As is happening now in global-scale banks, Keynes said that in 1930 the savings of lenders "are being used up in financing business losses and distress borrowers, instead of financing new capital works". In a prophetic passage Keynes rightly warned there could not be a recovery until the ideas of lenders and productive borrowers were brought together again. Lenders should be ready to lend on easier terms and over a larger geographic field, and borrowers had to recover their good spirits. The gap was wider than at any time in history. If it could not be bridged the slump would become a depression lasting for years doing untold damage to material wealth and social stability. As the future architect of Breton Woods, he would today be urging his god-children the World Bank and IMF into greater action. He was also aware of the need for the central banks "to join together in a bold scheme to restore confidence in the international long-term loam market." That would revive activity, prices, and profits everywhere.