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March 27, 2009

If today's economists could write as well as Keynes we might not be in the economic mess in which we find ourselves, argues David Womersley: The Economic Consequences of the Peace - J. M. Keynes

Posted by David Womersley

The Economic Consequences of the Peace
by J. M. Keynes
first published 1919

In The Economist of 21 February 2009, in an article entitled "The Spiral of Ignorance", "Bagehot" identified as one of the features of our current economic discontents the fact that "nobody seems to know what he is talking about". Events have moved with a rapidity and force which has taken commentators by surprise, so that "the financial crisis has stretched and befogged even most economists". The political implications of this are alarming:

The public seems to appreciate that the crunch involves both foreign and domestic forces. But to most people the rest is a mystery. Along with the high anxiety, this uncertainty helps to explain the volatile political impact of the downturn: large numbers of people seem to be amenable to whatever explanation seems freshly plausible.
What are the reasons for this state of public ignorance? We can all agree that the financial products in the eye of the current fiscal storm are fiendishly complicated, and that this in itself poses a formidable barrier to any adequate understanding of what has been going on, and what is likely to happen next. But how has a condition of economic illiteracy arisen in which such products could be traded at all without the supposed experts pausing cautiously over the concealed risks they contained?

The general public is economically illiterate, of course. But something close to economic illiteracy - call it economic tunnel vision - seems to have established itself amongst those who should have known better. And it may be that these two things - the lack of economic awareness on the part of the general public, and the lack of economic common sense amongst the profession - are related. Their common root may be found in the mathematical turn taken by economics as a discipline.

It is perhaps less important to put one's finger on exactly when the language of economics became remorselessly mathematical than to comprehend the implications of that shift. At any rate, it seems to have happened towards the end of the twentieth century, because until the early decades of that century economists spoke to the general reader in language which required no special expertise to be understood (even if, of course, some of the concepts were forbiddingly counter-intuitive).

Hume's essays on economic subjects are not written in a language different from his other essays (and independent-minded economists today can still be found who will insist that all that their colleagues have managed to do since the mid eighteenth century is to add some empirical data to Hume's general insights). Adam Smith's Wealth of Nations is, in eighteenth-century language, a work of polite literature which addressed itself to the literati of its time, not to any specialist group, and which comprised within its intellectual scope the most urgent questions of international politics, as well as economic theory narrowly construed.

Or, given that his name is enjoying a renewed prominence in the present revaluation of all economic values, one might consider Keynes, whose brilliant attack on the vindictiveness and short-sightedness of the Treaty of Versailles, The Economic Consequences of the Peace, was first published exactly ninety years ago.

The Economic Consequences of the Peace is an exciting book to read at any time, but it is particularly exciting to read it today because of the clear evidence it supplies that perceptive and cogent economic expositions can be written by human beings as well as (perhaps that should read "rather than") mathematical adepts. (Only those who have experienced it know how chilling it can be at a college party to hear your hostess say "Now, come and meet the mathematicians.")

Keynes's humanity was all too evident during the Paris Peace Conference, when apparently he conducted an affair with one of the German delegates. But it is also clear in the text of The Economic Consequences of the Peace, which is studded with quotations from Hardy and Shelley, and which contains no number rounded down to less than the nearest million. And just as Keynes was too wise to place any faith in the bewitchments of a spurious numerical exactness, so he was too shrewd to forego the more substantial bewitchments of language.

Keynes's portraits of the victorious leaders, the so-called Council of Four - Clemenceau, the vindictive French peasant; Lloyd George, the Welsh charlatan; Woodrow Wilson, the foolish idealist; Orlando, most witheringly treated in virtue of being hardly mentioned at all - are all wonderful examples of mordant, pitiless satire.

But they are not examples of literary art for its own sake. They are related to, and engage our sympathies on behalf of, a brilliant synopsis of the economic life of the nineteenth century, and how it fed into the dreadful errors of 1919. The keynote of Keynes's exposition is not some recondite mathematical proposition, but rather the interaction between a perennial element of human nature and unprecedented economic circumstances:

The power to become habituated to his surroundings is a marked characteristic of mankind. 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.
Chapter 2, "Europe Before the War", is a wonderful evocation of how stealthily that unnatural and unstable state of economic affairs established itself, and of how the typical European of the second half of the nineteenth century expected it to prolong itself indefinitely into the future:
he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.
The result was a social psychology averse to intimations of catastrophe, and trusting to a vision of the future as simply an indefinite prolongation of current trends. The parallels with public attitudes in the years leading up to the current crisis need hardly be underlined.

The Economic Consequences of the Peace is not, however, simply a diatribe against the Carthaginian settlement imposed on Germany in 1919. Keynes also considered remedies for the ills he diagnosed, and prominent amongst them was a role for economists in shaping public attitudes. Keynes believed that the hidden currents, flowing beneath the surface of history, could be navigated only
by setting in motion those forces of instruction and imagination which change opinion. The assertion of truth, the unveiling of illusion, the dissipation of hate, the enlargement and instruction of men's hearts and minds, must be the means.
This was the public role Keynes prescribed for economists, and from which they as a profession have retreated into mathematical sophistry. Now that the ruinous delusions of that way of proceeding are evident to us all, perhaps the moment has arrived when economists will rise to the challenge Keynes laid down nearly a century ago, and make themselves publicly useful.

David Womersley is Thomas Warton Professor of English Literature, University of Oxford. His previous reviews for the Social Affairs Unit can be read here.

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But surely economists aren't mathematicians in the way that mathematicians are? Aren't they more mathematicians in the way that physicists and engineers are, but without their interest in, and competence at, thinginess? And, above all, without their experience of being able to test their models by performing controlled experiments, and therefore without the intellectual humility that confronting the factual brings, or ought to bring. In fact, perhaps economists' nearest kin are those theoretical physicists whose models seem to be essentially untestable. Though perhaps they occupy a bubble rather than having fomented one.

Posted by: dearieme at March 29, 2009 02:25 PM

Let us not forget, however, that what made Keynes' reputation and continues to serve as his current legacy is his GENERAL THEORY, which is a horribly written book. If the Keynes of the GENERAL THEORY wrote as well as the Keynes of THE ECONOMIC CONSEQUENCES OF THE PEACE (or his biographical essays on various economists for that matter), it is quite possible that we could have been spared decades of Keynesian economics, because many more people would have clearly understood how contradictory and unsatisfying much of his macroeconomic theory is. Additionally, one can trace the beginnings of much modern mathematical macroeconomics back to Keynes and his consumption function.

Posted by: Shawn Ritenour at March 31, 2009 03:59 AM

I assure you that the chill you have felt is as nothing to that one feels on being introduced to the English Literature bods.

Posted by: pedant2007 at April 5, 2009 12:55 AM
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