Book One Keynes’s
Unaccomplished
Revolution
Keynes’s Unaccomplished
Revolution
The Federico Caffè Lectures, 1995
A note on Federico Caffè
Federico Caffè (born 1914) was a Professor of Economic Policy at the University of Rome and a National Member of the Accademia Nazionale dei Lincei.
He learned his basic economics from the most representative Italian economists of the inter-war period, who included both liberist, laissez-faire enthusiasts (such as Luigi Einaudi) and more interventionist proponents (such as Enrico Barone). Caffèwas among the early economists in Italy to absorb and teach the economic theories and policies of John Maynard Keynes.
His main interests were in the fields of welfare economics, history of economic thought and economic policy at large. Thanks to deep concern with economic policies he was asked for advice by an influential (albeit small) group of post-war politicians (Partito di Azione). For some years he was also in charge of some economic studies on behalf of the Bank of Italy.
As a bachelor, he devoted the whole of his life primarily to teaching, lecturing and supervising his university students,instilling in them a deep sense of devotion and admiration. After retirement,in May 1984, he happened to go through dramatic personal vicissitudes. He lost, in quick succession, the most beloved members of his family and almost at the same time, in tragic circumstances, a number of his most brilliant pupils andaffectionate colleagues (Ezio Tarantelli and Fausto Vicarelli being among the most well known).
But those were also years in which he had to face the strongest attacks on the whole conception of economic theory and policy that he had been teaching consistently, particularly the welfare economics of Keynesian inspiration, of whose correctness and relevance he remained profoundly convinced. He upheld his views vigorously, both in his lectures and in his writings, openly stressing what he called ‘autonomy of thought’, even ‘against reality’, claiming that the latter may not always be rational or acceptable. (Defending the Welfare State was his last book.)
His last contact was a brother, who lived with him. They bid each other good night on the evening of 14 April 1987. Earlythe following morning, one may presume, he silently slipped out, unnoticed, leaving his watch, passport and wallet on his bedside table. Nobody has seen him or heard of him since.
L’apporto del pensiero keynesiano riceve [qui]
un rilievo prevalente . . . come rivoluzione
intellettuale incompiuta . . .1
Federico Caffè
(from: The Foreword to In Difesa del ‘Welfare State’)
The subject which I have chosen for these lectures, in honour of Federico Caffè, concerns events that led to the formation and development of the Cambridge School of Keynesian Economics. I hope it will not be taken as presumptuous to link them with the preoccupations that characterised the very last years of the person whom we are honouring. They may not even be extraneous to his disconcerting disappearence.
The ‘Keynesian revolution’, as it was instantly called in Cambridge, England, did not come easily to Italy, at least until the postwar period. But there were precursors and Federico Caffè was one of them. He was also one of those who remained faithful to Keynes’s scientific revolution to the end, steadily defending Keynesian theories and policies even when, in the 1980s, they came under heavy attack from many sources, while at the same time the major protagonists of that intellectual drama, which characterised the cultural environment of Cambridge during and after the Keynesian period, were disappearing one after another. I am obviously referring to the ‘indestructible’ Joan Robinson, as Caffè defined her in his farewell article (Caffè, 1990), to Nicholas Kaldor, to Richard Kahn, and to Piero Sraffa, all of whom disappeared in the 1980s. In this frame of reference, it is by no means surprising that Federico Caffè himself chose to disappear in 1987.
I shall try to investigate the intellectual inheritance that this group of economists has left to us, and to trace their endeavours since its origin. This may well help to indicate new directions. People inevitably disappear, but ideas remain, and may become fruitful at a distance, even in directions which their authors originally would not have suspected.
I shall begin by recalling the essential features of the intellectual crisis that took place in Cambridge in the very early 1930s and led Keynes to abandon the positions stated in what had been his major scientific work, the Treatise on Money, and to write a new, ‘revolutionary’ book (The General Theory of Employment, Interest and Money). The drama connected with this crisis continues to attract attention. Not only does it appear as one of the most fascinating events in the history of economic thought, but it has become one of those events, the correct interpretation of which may have far-reaching implications for the way economics itself is to be intended and pursued today. The interpretations have become many.2
If one looks back from the end of the twentieth century, one realises that – in comparison with the plurality of radically different strands of economic theories that took shape in the nineteenth century (notably, Classical economics, Marxian economics, Marginalist economics) – the really new theories proposed in the twentieth century were remarkably few. There has been an extraordinary and unprecedented proliferation of models, devices and applications of statistical and mathematical tools, but proposals of originally and fundamentally new theories have been undeniably scarce. Thus Keynes’s theories risk emerging almost as the only really novel strand of economic theory that is going to characterise the twentieth century.
But even this is not uncontroversial. Were they really a novelty? The answer, which seemed so obvious immediately after World War Two, does not appear so obvious today. The enormous amount of material that has come to light, with the publication of thirty volumes of ‘Collected Writings of John Maynard Keynes’, with the recent voluminous new biographies of Keynes (Moggridge, 1992, Skidelsky, 1983, 1992, 2000) and with the full availability of all Keynes’s papers, has had a curiously ambiguous effect.3 On the one side, a mass of material has become available that documents the steps through which, in a very short time, Keynes changed his mind from economic tradition to economic ‘revolution’. On the other side, the sheer number of Keynes’s pre-General Theory publications (indeed the majority of them), and the many documents that have become available on how he was educated as a (traditional) economist, inevitably direct attention towards the enormous number of writings that preceded his conversion to the General Theory and to the way in which he learned to think. A human being, even of extraordinarily flexible mind, may change opinion on many problems, but more rarely is he or she able to change his/her way of thinking. It is not inconceivable that one may be able to claim that, within an inevitably incomplete new theoretical framework, Keynes reached solutions to many new problems by applying to them methods of reasoning that he had formed many years earlier and had applied to various problems in his previous (traditional) works. This may be shown sometimes even against his statements, or even against his determined will.
Curiously enough, at the same time as putting together statements, arguments and pieces of evidence showing the ‘revolutionary’ character of The General Theory, one can easily carry out an assembling exercise of pre-General Theory pieces that may be used to fill gaps that one finds in The General Theory. One may assemble (perfectly orthodox) arguments that Keynes had used earlier in similar contexts. In this way, one may even conclude that, essentially, there was nothing new, in spite of the claims to the contrary. In a nutshell, ‘it was all in Marshall’, whose othodoxy was, after all, on many points not unambiguous.
In the present work I shall use an external interpretative clue to claim that a genuine effort was made to break with tradition. The effort was real and radical. It was strongly aimed at a ‘scientific revolution’. It may not have been successful. But this is the source of so many other questions.
It was Keynes himself who, at a certain point, began to talk of his change of mind as a ‘revolution’. In a much-quoted passage from a letter to George Bernard Shaw, dated 1 January 1935, slightly more than a year before the actual publication of The General Theory, he was writing:4
To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about economic problems.
(Keynes, 1973a, p. 492)
The turnabout that caused this state of mind was in fact quite dramatic. Keynes had been, in all his career as a university teacher at Cambridge, what we today would call a ‘monetary’ economist. He lectured on the pure theory of money. He had written a lucid and successful Tract on Monetary Reform. He had completed a Treatise on Money, on which he unsparingly bestowed his efforts for eight years. His colleagues had been waiting for this work, which was expected to be the crowning of his career. The work appeared, at last, in two volumes, in October 1930. Quite extraordinarily, only a few months after publication, when Keynes had not even seen all the book reviews, he began to entertain acute doubts. He stimulated the formation of a discussion group among the most brilliant young economists he could put together at Cambridge – the well-known Cambridge Circus, led by Richard Kahn and composed of Joan Robinson, Austin Robinson, Piero Sraffa, and – as a temporary visiting member – James Meade.5
The vicissitudes of those months must have been excruciating for Keynes, as he became convinced that the othodox theory he had learned, and had actually been teaching for many years, since the beginning of his career, was flawed; in fact so irremediably flawed that his Treatise on Money could not be corrected. It is important to realise that this cannot have been a pleasant experience for a man of Keynes’s stature, at the age of fifty. Among other things, it caused him a break of personal friendships with many of his colleagues. Only a deep convinction of the enormous importance of a new discovery can justify the way he acted.
It was quite different for the young people around him, among whom the excitement suddenly grew to a high pitch. All the indications we have, all impressions that are conveyed by the correspondence among the members of the Circus and Keynes, and by all documents of that period now published in Keynes’s ‘Collected Writings’ are of an extraordinary excitement, of a deep conviction of having reached a great discovery. Keynes and his pupils give the clear impression of being convinced of living through an exceptional, unique experience of great importance to the future of economics. They use a language that implies the achievement of a new vision rather than the realisation of a single, even important, scientific contribution. They talk of at last ‘seeing the light’. To take just one example, it is interesting to read the account that Richard Kahn gave, four decades later, of a weekend which was arranged for discussion with London School of Economics (LSE) graduate students, in the summer of 1933. He tells us of how Abba Lerner changed his mind and was at last brought to understand (Kahn, 1984, pp. 182–183). To indicate what was to be understood, Kahn uses the words ‘the General Theory’, even in his recent reminiscences, for lack of a better term.
At that time, the members of the group themselves were not quite sure of what ‘the new thing’ ultimately implied. They were unable to give it clear expression. It appeared to be so fundamental, so much of a break with established thinking, that it was almost impossible to express it in a few words.
But what really was it? And when did it exactly happen? The answers to these questions have remained controversial to this day. Curiously enough, it seems less controversial to narrow down to a short period of a few months the time at which the great event happened than to state what exactly the event was.
I therefore face, first of all, the less controversial part of the question.
Many efforts have been put into specifying the succession of the key events that characterised those early years of the 1930s in Cambridge (see, as notable examples, Moggridge, 1973, Patinkin, 1993). I may recall them synthetically.
Keynes’s Treatise on Money was published in October 1930 (the Preface is dated 14 September). We know that, by that time, discussions had been going on for more than a year on the effects of public works. These discussions had followed the (unsuccessful) proposals made by Keynes (and Hubert Henderson) in the pamphlet Can Lloyd George Do It? (1929). In July 1930, Keynes had made Richard Kahn the joint secretary (with Colin Clark) of a Committee of Economists (on the Economic Advisory Council) and Kahn had begun to work on these problems. The following month (August 1930, see Kahn, 1984, p. 91), while on holiday in the Alps, Kahn discovered the multiplier. On his return, Kahn passed on his notes to Keynes. An early draft of the multiplier paper was presented to the Committee of Economists in October 1930. This means that, in the autumn of 1930, almost simultaneously with the publication of the Treatise on Money, Kahn’s early arguments on the multiplier began to circulate. (Kahn’s multiplier paper was then published in the June 1931 issue of the Economic Journal 6).
The Cambridge Circus was precisely formed at the end of that year (1930) as a consequence of these discussions. The purpose was explicitly that of discussing Keynes’s just-published book and of suggesting improvements. But very soon things went far beyond that. It is not easy to reconstruct the events of those months when the Circus effectively met (end 1930 to June 1931). Donald Moggridge, in the process of editing Keynes’s Writings, has made a remarkable effort to put together reminiscences of the surviving members of the group (see Keynes, 1973a, pp. 337 and ff.). This account is extremely valuable but must be approached with caution: human memories are faulty and may play curious tricks. Moreover, the method used is not without defects – it is inevitably bound to give more relevance to those people who have been prepared to talk more. Yet, though with qualifications and caution, what emerges is remarkable.
At the same time, a connected, parallel drama was unfolding. Keynes had been delivering a regular course of lectures to Cambridge undergraduates on `the pure theory of money'. This had been going on for many years, always in the Michaelmas (i.e. autumn) term. In 1930, the lectures were cancelled. This appeared to be due to the extra efforts Keynes had to undertake in order to bring his major book, the Treatise on Money, to publication in the middle of his usual heavy engagements in London (though the book was actually finished by September, i.e. before the beginning of term). The presumption was that the course of lectures would be resumed the following year. But that was the year of the Circus discussions! When Autumn 1931 came, the lectures were not given; they were postponed to the Easter (i.e. spring) term, 1932.
Spring 1932 came, Keynes did resume, at last, his course of lectures, with the usual title, ‘The pure theory of money’. But the young economists who had formed the Cambridge Circus did not remain passive – they attended those lectures. Keynes was apparently taken by surprise. He reported to his wife, Lydia, in a note, mentioned by Moggridge [Keynes, 1979, p. 35], that Kahn, Sraffa, Joan and Austin Robinson had come to ‘spy’ on him! And that audience did react. Not only did they argue (see Keynes, 1979, p. 35), but they did something rather unusual. Kahn, Joan and Austin Robinson decided to write a manifesto (dated May 1932) addressed to Keynes. They made a series of objections, which quite clearly related to arguments that had been submitted to Keynes already, but were only partly accepted. The objections concerned problems relating to the mechanisms of adjustments in terms of quantities rather than in terms of prices, but they reveal a diffused uneasiness. The writing of a manifesto by itself reveals that there was some strong disagreement on fundamentals. It had all the character of a decision to take a collective stand, as if Keynes was dragging his feet and was reluctant to take some fundamental step. The manifesto brought a sort of showdown.