The G20 and the Means to Prosperity

In March 1993 John Maynard Keynes published a series of four articles in the Times entitled “The Means to Prosperity”.

They generated widespread discussion at the time, and like all Keynes' great writings have a freshness and vitality to them which ring through the years to address the problems today of a world still reverberating from a near calamitous financial meltdown in October 2008.

A world which is also witnessing change and potentially even larger and major adjustments as an OECD (and especially a Europe) caught up both socially, intellectually, and financially in a previous life and memories integrates inevitably with a dynamic future oriented non-OECD led by China and lagged China in the form of India who demographically portends to be doubled the size of China perhaps 2050. And a world agonizing over a coordinated policy response to climate change, perhaps for now partially (or even wholly) delayed by climatic scepticism. And the world of the immediacy of media coverage of horrifying destruction in Haiti; and a world of uncoordinated policy response in bank taxation. And a world of what is next?

Keynes begins his great essay by setting out in an initial section what he heads “I. The Nature of the Problem”. He says it is “our poverty” from the events between 1929 and 1933. He then says later that “the time seems ripe for recognizing the possibilities of action”. He then moves to section II, Internal Expansion, and cogently sets out what in the General Theory of 1936 was to be the Keynesian Multiplier.

In section III, “The Role of the Budget” he shows how expansion of the economy generated through his multiplier would raise tax revenues. In section IV, “The Raising of Prices”, he notes that reversing the deflation of the time is the declared policy of the British government, and also of the representatives of the empire assembled at Ottawa to raise prices. He then sets out how to do this, and argues his ways are consistent with the broad approach of internal expansion.

He then moves to a further section V which he titles "A Proposal for the World Economic Conference". It is this remarkable section which rings in the ears of any designers of the new G20 arrangements emerging from the crucible of the mid-October meeting of G8 Finance Ministers at the height of global concerns over financial meltdown which now continue to reverberate.

I have written several parallel pieces on the current G20 situation and where things stand. I will not repeat here, merely summarize Keynes and comment.

Keynes call for a World Economic Conference was made in 1933. It took a war and an intervening 11 years before he saw his call fulfilled at Bretton Woods. Faced with an ad hoc randomly roaming G20 process which de facto is bit by bit writing some form of vague hard to interpret sort of global economic constitution, I share Keynes' call, and hope and pray that it does not take 11 more years. I also pray that it does not also take a war.

By way of commentary, Keynes said that "For the Conference to occupy itself with pious resolutions concerning the abatement of tariffs, quotas and exchange restrictions will be a waste of time. Insofar as these things are not the expression of deliberate national or imperial policies, they have been adopted reluctantly as a means of self protection, and are symptoms, not causes, of the attention on the foreign exchanges.

It is clear to the heart of conferences to pass pious resolutions deploring symptoms, whilst leaving the disease untouched. It should be the role of the British government to make a reality of this forthcoming Conference by concrete proposals which would go to the root of the disease. I merely note that a central G20 action in the 2009 April London meeting was to call for a standstill on protection.

By way of side note I would add that this marvelous Churchillian prose is written as part of what later was grouped by Keynes' biographers as "Essays in Persuasion". In these he argued strongly for his personal opinions; which he sharply differentiated from his Economic Analysis.

He was to note in the introduction to the Cambridge Handbook of Economics Series of which he was the first general editor to note that "The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions". I concur with Keynes in this critical dichotomy.

Keynes stressed the need to raise prices and stimulate the world economy by an increase of what he called "loan-expenditures throughout the world". He said that "the first and perhaps most obvious means is that of direct foreign loans, in the style to which we have been accustomed to in the past, from the strong financial countries which have a favourable foreign balance or excessive reserves of gold, to the weaker debtor countries".

In G20 discussion, the focus through the Sustainability Initiative is to reduce perhaps hard to measure and also perhaps hard to define global imbalances rather than reallocate reserves as Keynes advocated.

Today this reallocation would come from poorer than average but rapidly growing economies, and even more heavily resource extractors in the Gulf, to (for now) richer (and considerably richer) economies in the OECD faces major adjustment measures from the crisis and structural change and growth in Asia. I am not sure what Keynes would have to say about the seeming inequity of this approach applied in modern circumstances, but it is interesting he went there first.

His second approach was ("and more promising") "for this or countries to re-create loan-expenditures at home (Keynes emphasis)". He then says that "insofar as it leads to expenditure on imported goods it will set up similar favourable repercussions abroad, and will strengthen the position of the countries from which we buy, both to make reciprocal purchases and also to augment their own loan-expenditure". It will have set the ball rolling.

He then moves on to the third and central component of his action plan. He says (again in truly magnificent prose that I have doubts that any contemporary economist could match):

“We have reached the point where combined international action is the essence of policy. We have reached, that is to say, the field and the scope of the World Economic Conference. The task of this Conference, as I see it, is to devise some sort of joint action of a kind to allay the anxieties of central banks and to relieve the tensions on their reserves, or the fear and expectation of tension. This would enable many more countries to reach the first of stages... the stage at which bank credit is cheap and abundant. We cannot, by international action, make the horses drink. That is their domestic affair. But we can provide them with water. To revise the parched world by releasing a million rivulets of speculating power is the primary task of the World Conference.”

Keynes was living in a different, and to me, far less complicated world than today. His call was to lead to Bretton Woods, and the cracks in the Bretton Woods and the financial crisis has given us the G20, which is six month meetings in shifting locations with no rudder of a long-term target.

Keynes did not have the same focus on longer-term structural problems as well as short-term stabilization that the G20 is now seemingly acquiring. But his call echoes today.

Keynes was not only a great economist, he was an eloquent and powerful persuader of his causes.

But with his words reverberating through the years and also the afterglow of the most serious near global meltdown since the second world war, I find myself echoing Keynes call for a World Economic Conference. And it is needed (and in my view) urgently today not 10 years from now. And if we have one, I suggest we have a pre-conference on Keynes and the writings of all the great economists which are seemingly neglected in the current generation of economic thinking. Jevons, Marshall, Malthus, Edgeworth and more. They are all in Keynes Essays in Biography. And we have to great American economists of Irving Fisher, James Tobin, Milton Friedman, and more. And there are great Chinese thinkers, now interpreted in China has also economic thinkers such as Lao Tze, and Mahatma Gandhi who said prophetically that there is more than enough in this world for everyone's needs, but not enough for everyone's greed. Which also reverberates today in discussion of the crisis.

I remain convinced that by going backwards intellectually it will help us (not the only thing, I agree) perhaps go forward. And where to hold the World Economic Conference... where else... Haiti... after Huntsville.

Email the writer: