(Inspirations – a series that is reproduction of interesting speeches and writings. It is not about a writer’s block – i keep battling those – but more because these are readings / writings that inspired me at a certain point in life – and they still resonate.)
It’s a bit difficult to study for a degree in Economics – in a place like London – and not get awed by the power of intellect of John Maynard Keynes.This is despite the fact that the time period in which I studied, was the time that Milton Friedman’sbrand of Monetarist economics was on the ascendant – pushed by his two powerful acolytes – Ronald Reagan and Margret Thatcher.
Did i favour one theory or the other – at that point of time? I really don’t think so – i was too young, and hadn’t had enough exposure to make an informed decision – on either. But, the idea of a totally free market with no checks and balances bothered me – even then. It wasn’t any great intellectualization on the pro’s and con’s of freedom – but more empirical than that – when the teacher left the class, lots of students would cheat, when she was there only the most desparate would – therefore something without any checks seemed kind of dodgy to me then. But, vocalizing doubts gets you laughed at – then, even more so, -silence is often the preferred option !
And, then I read John Maynard Keynes – not the boring stuff they taught at university – about National Income the multiplier and the rest, -that was stuff you had to imbibe, appreciate, write an exam – and, it was not the sort of stuff that inspired 18 year old. The essay i read by JMK wasThe End of Laissez Faire – a 1926 speech, which was then published as a pamphlet . If i was to be honest – and if you can’t be honest on your blog, where else can you be? – i don’t think that i understood everything that I read then. Nor had I heard many of the names that he was referring to – this was before you could google names and appear intelligent in your bibliography But, when I read it and there was this intellectual click – eyes opened, brain began functioning and the works !! It was like revelation – i wasn’t anymore the outsider – the only one not enamoured by Thatcher in my class. One of the greatest brains that the last century had known, would have been appalled by her. And, not by her economics, but by her morality, or lack of !
it is amusing that the only primary copy that I can find online is on the panarchy website – a fact, I am sure, that that would have made him chuckle
What i admire is various strands that he weaves together to counter Laissez Faire as an economic policy. He begins by looking at the reason for its evolution & popularity .
First the corruption and incompetence of eighteenth-century government, many legacies of which survived into the nineteenth. The individualism of the political philosophers pointed to laissez-faire. The divine or scientific harmony (as the case might be) between private interest and public advantage pointed to laissez-faire. But above all, the ineptitude of public administrators strongly prejudiced the practical man in favour of laissez-faire – a sentiment which has by no means disappeared. Almost everything which the State did in the eighteenth century in excess of its minimum functions was, or seemed, injurious or unsuccessful.
Suddenly very boring economic equations had a background, Ricardo made sense and i understood that entire branch of economics that I used to see and go blank. Revelation i said, didn’t I ? I pulped on the linkages between Darwinsm and economic policy.
By the time that the influence of Paley and his like was waning, the innovations of Darwin were shaking the foundations of belief. Nothing could seem more oppose than the old doctrine and the new – the doctrine which looked on the world as the work of the divine watchmaker and the doctrine which seemed to draw all things out of Chance, Chaos, and Old Time. But at this one point the new ideas bolstered up the old. The economists were teaching that wealth, commerce, and machinery were the children of free competition – that free competition built London. But the Darwinians could go one better than that – free competition had built man. The human eye was no longer the demonstration of design, miraculously contriving all things for the best; it was the supreme achievement of chance, operating under conditions of free competition and laissez-faire. The principle of the survival of the fittest could be regarded as a vast generalisation of the Ricardian economics. Socialist interferences became, in the light of this grander synthesis, not merely inexpedient, but impious, as calculated to retard the onward movement of the mighty process by which we ourselves had risen like Aphrodite out of the primeval slime of ocean.
And, then this – which is something I have tried to follow all my life :
A study of the history of opinion is a necessary preliminary to the emancipation of the mind. I do not know which makes a man more conservative – to know nothing but the present, or nothing but the past.
1926 – when he gave the speech was 3 years before the great crash – what he says is kind of prophetic.
Economists, like other scientists, have chosen the hypothesis from which they set out, and which they offer to beginners because it is the simplest, and not because it is the nearest to the facts. Partly for this reason, but partly, I admit, because they have been biased by the traditions of the subject, they have begun by assuming a state of affairs where the ideal distribution of productive resources can be brought about through individuals acting independently by the method of trial and error in such a way that those individuals who move in the right direction will destroy by competition those who move in the wrong direction. This implies that there must be no mercy or protection for those who embark their capital or their labour in the wrong direction. It is a method of bringing the most successful profit-makers to the top by a ruthless struggle for survival, which selects the most efficient by the bankruptcy of the less efficient. It does not count the cost of the struggle, but looks only to the benefits of the final result which are assumed to be permanent. The object of life being to crop the leaves off the branches up to the greatest possible height, the likeliest way of achieving this end is to leave the giraffes with the longest necks to starve out those whose necks are shorter.
Corresponding to this method of attaining the ideal distribution of the instruments of production between different purposes, there is a similar assumption as to how to attain the distribution of what is available for consumption. In the first place, each individual will discover what amongst the possible objects of consumption he wants most by the method of trial and error ‘at the margin’, and in this way not only will each consumer come to distribute his consumption most advantageously, but each object of consumption will find its way into the mouth of the consumer whose relish for it is greatest compared with that of the others, because that consumer will outbid the rest. Thus, if only we leave the giraffes to themselves, (1) the maximum quantity of leaves will be cropped because the giraffes with the longest necks will, by dint of starving out the others, get nearest to the trees; (2) each giraffe will make for the leaves which he finds most succulent amongst those in reach; and (3) the giraffes whose relish for a given leaf is greatest will crane most to reach it. In this way more and juicier leaves will be swallowed, and each individual leaf will reach the throat which thinks it deserves most effort.
This assumption, however, of conditions where unhindered natural selection leads to progress, is only one of the two provisional assumptions which, taken as literal truth, have become the twin buttresses of laissez-faire. The other one is the efficacy, and indeed the necessity, of the opportunity for unlimited private money-making as an incentive to maximum effort. Profit accrues, under laissez-faire, to the individual who, whether by skill or good fortune, is found with his productive resources in the right place at the right time. A system which allows the skillful or fortunate individual to reap the whole fruits of this conjuncture evidently offers an immense incentive to the practice of the art of being in the right place at the right time. Thus one of the most powerful of human motives, namely the love of money, is harnessed to the task of distributing economic resources in the way best calculated to increase wealth.
It would be logical to think, at this point, that he is advocating socialism or even protectionism – but he beleived them to be even more flawed than Laisse Faire
…..protectionism on one hand, and Marxian socialism on the other….these doctrines are both characterised, not only or chiefly by their infringing the general presumption in favour of laissez-faire, but by mere logical fallacy. Both are examples of poor thinking, of inability to analyse a process and follow it out to its conclusion. The arguments against them, though reinforced by the principle of laissez-faire, do not strictly require it. Of the two, protectionism is at least plausible, and the forces making for its popularity are nothing to wonder at. But Marxian socialism must always remain a portent to the historians of opinion – how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men and, through them, the events of history. At any rate, the obvious scientific deficiencies of these two schools greatly contributed to the prestige and authority of nineteenth-century laissez-faire.
I criticise doctrinaire State Socialism, not because it seeks to engage men’s altruistic impulses in the service of society, or because it departs from laissez-faire,or because it takes away from man’s natural liberty to make a million, or because it has courage for bold experiments. All these things I applaude. I criticise it because it misses the significance of what is actually happening; because it is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago.
And finally, the argument against :
Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately
His solution :
I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State-bodies whose criterion of action within their own field is solely the public good as they understand it,
I come next to a criterion of Agenda which is particularly relevant to what it is urgent and desirable to do in the near future. We must aim at separating those services which are technically social from those which are technically individual. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.
My third example concerns population. The time has already come when each country needs a considered national policy about what size of population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.
With Keynes coming back into vogue, post the mess that the US system created – and almost engulfed the financial systems of the whole world – this particular work of Keynes is worth reading. The point is not that Government get in and make soap or toothpaste or run airlines- but provide that which the market will not address – because there is no profit to be made ! From simple things like transportation to remote parts of the nation, to providing connectivity to the citizen in the back of beyond; from addressing issues like caste and poverty to addressing education in poverty stricken parts of the country; from building roads where no one can pay a toll – they can’t afford to – to providing access to finance for those who will not pass credit checks of private banks.
For those who use the name of Keynes for more State control or more protectionism – go back and read Keynes – he advocated neither. For, those who want to apply him as is – don’t be funny ! 2009 is not 1929 the world has changed. Adapt, interpret and apply his thought – not his recommendations, which were for a different era.
I for one, am not for the license raj, nor am I for absolutely free markets,but see a great private public partnership the way ahead.I believe that the State in a modern democracy – has to act as a Chairman. They really shouldn’t be getting involved in operational details – but set the agenda, delegate- outsource to private, Non Governmental or even atutonomous governmental agencies – and monitor, evaluage, correct or take corrective action, and deliver. The government has to learn to be a good Manager. If the Governent were to get involved in operational details – nothing will move, there will be no progress. The Government shouldn’t do – it should get things done.