Keynes: A Very Short Introduction (Very Short Introductions) by Skidelsky Robert

Author:Skidelsky, Robert [Skidelsky, Robert]
Language: eng
Format: mobi, epub
Publisher: Oxford University Press
Published: 2010-10-06T16:00:00+00:00

Chapter 5

Economic statesmanship

Keynes was as creative in administration as he was in theory. For every economic problem which interested him he had ready a ‘Keynes Plan’, drafted at lightning speed. The common feature of these plans – which go back to his proposal for an Indian Central Bank in 1913, praised by Marshall as a ‘prodigy of constructive work’ – is that while always ahead of the intellectual orthodoxy of the moment they could be readily fitted to existing administrative arrangements. Keynes could thus present them as evolutionary developments of existing practice. The partial exception is his endorsement of a centrally directed public works programme in 1929, which would have required a revolution in government. But this was a Lloyd George, not a Keynes, plan; Keynes’s own preference was to channel increased investment through the public utility corporations. He also favoured indirect (financial) to direct (physical) control over the economy, in order to retain the advantages of decentralized decision-making. This brought him into conflict with socialist methods, if not with some aspects of the socialist ideal.

The outbreak of war with Germany on 3 September 1939 posed the kind of economic challenge he could not shirk; and he responded with two articles, ‘Paying for the War’, published in The Times, on 14 and 15 November, and recast and expanded into a booklet, How to Pay for the War, which appeared in February 1940, five months before his return to the Treasury. How to Pay for the War has been hailed as the first major application to policy of The General Theory model of the economy, and so it was. But it also reflected Keynes’s experience as a Treasury official in the First World War.

With full employment assured through the big increase in state orders, the problem Keynes faced in 1939 was to transfer resources to the war effort without undue inflation, disincentive tax levels, or the bureaucratic controls associated with comprehensive physical planning. In the First World War, increased government purchases had caused prices to rise; rising prices had reduced the real incomes of the working class; the ‘windfall’ profits of entrepreneurs were commandeered by the government in the form of taxes and loans. The results were industrial unrest in the later stages of the war; a high cost of government borrowing, which increased the post-war debt burden; and the ownership by the wealthy of the national debt.

The new Keynes Plan was designed to overcome these problems. Its centre-piece was a scheme for ‘deferred earnings’. Excess private purchasing power would be mopped up by a heavily progressive surcharge on all incomes above an exempted minimum, made up of direct taxes and compulsory saving. The latter, credited to individual accounts in the Post Office Saving Bank, would be released in instalments after the war to counteract the expected post-war slump. As Professor Moggridge notes, ‘the scheme had the advantage that it could operate through the existing arrangements for national insurance contributions’. Following criticisms of the original plan, Keynes proposed to ‘provide for

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