Home > Uncategorized > Thoughts on Zachary Carter’s The Price of Peace

Thoughts on Zachary Carter’s The Price of Peace

from Dean Baker

I just finished reading Carter’s book and I will agree with the general assessment. It is an outstanding book that brings together much useful material on the life and influence of Keynes.

While I am of course familiar with Keynes’ history and the history of Keynesianism, there is much that I learned here. In particular, I am impressed with the importance he gives Joan Robinson in spreading the ideas of Keynes, especially to followers from the United States.

When I first start taking economics, I hugely appreciated Robinson’s writing. She both did very important analytic work, especially her pathbreaking analysis of imperfect competition, but was also tremendously witty in her popular writing. I will always remember her great comment on unemployment (paraphrasing): “The only thing worse than being exploited by capital is not being exploited by capital.”

Anyhow, I am happy to see her given the starring role in the spread of Keynesian thought, especially given that, as a woman, she had a huge amount to overcome in a field that was, and is, tremendously sexist.

Carter also provides a fascinating account of the friendship/rivalry between John Kenneth Galbraith and Paul Samuelson. While these luminaries spent decades together in Cambridge, I was not aware of their personal history.

If I have any quibbles with the book, it is probably with its run through of the last fifty years and the decline of Keynes’ radical vision in economics. There are certainly some items I would give a bit more attention, like the decline of the labor movement, but covering fifty years of U.S. history in 100 pages is a major undertaking.

There are two items that do need some correction. First, from a labor market perspective, the recession following the collapse of the 1990s stock bubble was not mild. While the economy quickly rebounded in 2002 from a recession that did not even have two consecutive quarters of negative growth (the standard definition for a recession), the economy continued to shed jobs all the way through 2002 and most of the way through 2003. It did not recover the jobs lost in the downturn until February of 2005, four full years after the pre-recession peak. At the time, this was the longest period without job growth since the Great Depression. In other words, bursting bubbles have real consequence, as John Kenneth Galbraith had warned.

The other item is considerably more important. Carter buys the often-told story that bailing out the banks in the Great Recession saved us from a Second Great Depression. No biographer of Keynes should ever say anything like this.

First and foremost, Keynes taught us how to get out of the first Great Depression. The secret is spending money. If the government had gone on a huge spending spree in 1930, in response to the initial crash, instead of waiting to go full Keynesian in response to World War II, we never would have had the first Great Depression.

If we had let the market work its magic on Citigroup, Goldman, and the rest, there is no doubt that the initial downturn would have been worse. But if we responded with a massive public investment program in clean energy, health care, child care and other areas, we quickly would have recovered. And, we would have eliminated a massive source of economic waste in the bloated financial sector. It is also worth noting that the bloated financial sector is a major generator of inequality. It is where many of the seven, eight, and even nine figure paychecks can be found.

We should be clear; the bailout was about saving the very rich and their institutions. We could have rescued the economy just fine without them.

This gets me to the question that Carter poses at the end as to why the radicalism at the core of Keynes vision withered away after he died. Carter partially endorses Joan Robinson’s answer that Keynes was too naïve in believing good ideas could triumph on their own.

While this is undoubtedly in part true, I would add a bit to this in saying that Keynes and his followers were not quite radical enough in their ideas. Specifically, they were too willing to accept the idea of a natural market, that is somehow pre-existing, but may require the intervention of the government to achieve both full employment and important public goals. This acceptance lends way too much legitimacy to the critiques posed by Hayek, Friedman, and other neo-liberal opponents of Keynesianism.

The point is that the government structures the market in very fundamental ways. It can and does structure it differently through time in ways that have an enormous impact on the distribution of income.

To take my favorite example, patent and copyrights are government-granted monopolies that redistribute an enormous amount of income upward. I put the figure in the neighborhood of $1 trillion a year, or roughly half of all corporate profits. The United States would still be a capitalist economy without these government granted monopolies, although we would have a far more equal distribution of income.  As I like to say, in the world without patent and copyright monopolies, Bill Gates would still be working for a living.[1]

To take another example, the government sets the rules of corporate governance. In the United States we have a structure of governance that makes it extremely difficult for shareholders to rein in the pay of CEOs and other top management. This is another source of massive inequality as the ratio of CEO pay to the pay of ordinary workers has exploded from just around 20 to 1 five decades ago, to around 200 to 1 today.

Incredibly, many on the left seem to think that the soaring pay of top executives is about maximizing shareholder value, even as returns to shareholders have been relatively weak in the last two decades. Even stories about insider trading, which obviously benefits top management at the expense of the corporation, do not shake this view. Anyhow, a capitalist system that made it easier for shareholders to rein in CEO pay is still very much a capitalist system.

I could cite other ways in which we have shaped the market to redistribute income upward (this is the main theme of Rigged [it’s free]), but the point should be clear. The neo-liberals are not arguing for the market as an alternative to government intervention, they are arguing for a particular structure of the market that ensures that a grossly disproportionate share of income goes to those on top.

The left gives away a huge amount in the ideological battle when it allows neo-liberals to be champions of the market, as opposed to being recognized for the champions of policies that give money to the rich. The market has real uses, and there is an inherent appeal to much of the public for the idea of leaving things to the market, rather than government bureaucrats. By contrast, saying that we want to structure the market to give as much money to the rich as possible has much less appeal.

The neo-liberals are about the latter, and the left has given them way more legitimacy than they deserve by implying that they actually have an abstract commitment to the market as a matter of principle. Exposing this deception may not be sufficient to turn the tide and bring back Keynes radical vision, but the failure to expose it is serious political and economic malpractice.

[1] Carter does mention this issue briefly in reference to trade deals and the WTO, but does not pursue the larger implications.

  1. ghholtham
    July 27, 2020 at 5:44 pm

    Much to agree with here but one caveat. Bailing out financial institutions could not have been avoided simply by increasing public expenditure. If the payments system seizes up and people and pension funds lose their assets because financial institutions collapse society will be in big trouble. The point is that the controllers of financial institutions should have been made to pay at the very least with the loss of their positions and shareholders should have lost money but the customers and people with deposits in banks had to be protected and that means preventing collapse of the institutions. You can argue that financial institutions need radical reform and the opportunity to reform them was largely missed after the crisis. I would agree. But washing your hands of them in the crisis itself would not have been sensible.

    • July 30, 2020 at 5:49 pm

      I agree with this, but my caveat (thinking outside Gerald’s box) is that the institutions are to be identified neither with the banks nor with the people running them, for they include the understanding of money. This can be changed without changing the personnel if the personnel change their understanding, from believing valuations already have value, to accepting that bank accounts show spending of credit and the earning of credit by giving service (which includes giving credit – e.g. at point of sale – where needed). More realistically, financial institutions can be changed by changing only those personnel who are not prepared to change their understanding.

      In hospital, I’ve just taken the opportunity to reread A N Whitehead’s “Science and the Modern World” (1926, my copy Penguin, 1938, 1970 reprint at https://www.amazon.co.uk/Science-Modern-World-Alfred-Whitehead/dp/0684836394). I found it like a specification of all the work I had been involved in myself: very difficult to ready because he is trying to envisage things like information science which hadn’t yet been invented, and having to make up his own language to do so, whereas I have been trying to give examples and analogies.

      It was probably sixty years since I last studied this, and perhaps I’m now saying what I learned from his way of seeing, all those years ago, and disagreeing with some of it because things have changed (like the understanding of electrons and Einstein). What surprised and exited me most was finding Francis Bacon and criticism of David Hume at the root of it, though I didn’t actually discover Bacon until comparatively recently. But here’s what I now find the Amazon blurb saying: “Presaging by more than half a century most of today’s cutting-edge thought on the cultural ramifications of science and technology, Whitehead demands that readers understand and celebrate the contemporary, historical, and cultural context of scientific discovery”. He’s not only into science but into evaluating it along with aesthetics, ethics and religion (even if on this last his own scientific misconceptions show). Perhaps the title of the last chapter will emphasis its relevance here: “Requisites for social progress”.

      I think it was Ikonoclast who some little time ago asked me if I had any books he could read to get a grip of what I was talking about. I had to say I hadn’t, because the work ended up in things like the internet and iphones: in paradigms rather than books. But here we have a specification written before the events by one of the three acknowledged principals (with Frege and Russell) in the mathematisation of dynamic logic: even if it could take me months to show how its language of aesthetics, ethics and religion translates into my examples and evolving flow diagrams.

  2. Ken Zimmerman
    August 10, 2020 at 4:30 pm

    My concerns with Keynes have always been the same two items. First, that labor is or should be a market. Why isn’t labor distribution, choice, pay, etc. a religious commitment? Or a tribal commitment? Or a political movement? Or, some form of legal arrangement? Even in modern capitalist societies labor includes parts of each of these. But overwhelmingly it is an economistic analogy that prevails. Generally, this analogy is drawn from capitalism as a market. This is not natural or inevitable. It is a human judgement. We need to investigate this judgement more closely. Rather than being propagandized to take it for granted. Brilliant as he was, Keynes here accepted the proverbial pig in a poke. An apropos mistake I expect for a largely capitalist age. Second, appeasement is not a workable policy when it comes to Fascists. We learned this lesson at the beginning of World War II. And we have re-learned it several times since. But Keynes’ solution to the Great Depression was to appease those who created the Depression. My view is that long prison sentences and nationalization of most banks and large corporations (temporarily at least) would have stopped the problem from reoccurring. And provided strong moral leadership for the nation. As regulatory structures and legal penalties designed to protect America from domestic and foreign (and foreign disguised as domestic) political and economic attacks are torn down, perhaps permanently, appeasement has led us to the edge of a fall into Fascism. “Bailing out” banks may seem a viable solution when one considers economic actions as separate from and different from other actions in society. But it is idiotic when banks are seen for what they are. One institution among others emerging from American culture. Treating banks as more important and/or more powerful than the other institutions in that culture begins a dangerous path for the whole society. One consequence of which is our current political, religious, moral, educational, and economic mess in America.

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