Introduction
A Roller-coaster Reputation

WHAT IF THE world is in depression – again? Any talk of a ‘slowdown’ now seems risible. Talk of a possible ‘technical recession’ has come and gone. Even sound bites about the ‘credit crunch’ do not measure up. ‘Recession’ has been officially acknowledged – meaning at least two consecutive quarters of decline – in one after another of the major economies. So we have become accustomed to the phrase, from economists, business leaders and politicians alike, that this looks like the worst scenario ‘since the Great Depression of the 1930s’. But what if this is actually a depression of that magnitude? Whatever can we do about it? How on earth can we understand it?

We can start by learning from what happened before. If we are short of ideas ourselves, we may have a new interest in the ideas that came out of the last epoch of depression, unemployment and uncertainty. One name above all keeps on cropping up, not only when economists discuss the situation but in the columns of British and North American newspapers and magazines, and in other media commentary. Often there is a grainy picture of a tall, stooped man with a pasty face, watery eyes, thinning hair and a heavy moustache, a half-familiar figure from a former era of worldwide economic depression – an era that closed when the Second World War peremptorily intervened. It’s Keynes, of course. But who was he and why does his thinking matter to us now?

His is an extraordinary reputation. Through nine decades, he has been celebrated, scorned, respected, appropriated, mocked, venerated, derided, rediscovered – but seldom ignored. The name of John Maynard Keynes first came to wide public attention, on both sides of the Atlantic, in 1920. Still under forty, he became famous not as an academic economist but as the author of a sparkling and influential tract, published in London just before Christmas 1919. The Economic Consequences of the Peace focused public opinion on the defects of the recent Versailles Peace Treaty. Its account had an I-was-there immediacy, a magisterial detachment and a compelling plausibility. Had the British war leader Lloyd George, in his wily Welsh way, really ‘bamboozled’ the upright Presbyterian President Woodrow Wilson about the impossible reparations demanded of the defeated Germans? For when Keynes dramatised the salient issues, this is how he cast the key figures and brought them to life. What he hoped to do for his readers – and what he charged a belatedly penitent Lloyd George with failing to do for the sadly deceived President – was to ‘de-bamboozle’ them about what had really been going on behind the scenes.

The Economic Consequences of the Peace, a slim and readable volume, rapidly became an international bestseller. By April 1920, 18,500 copies had been sold in Britain. This was extremely good for a hardback by a hitherto unknown author, whose name had only crept into the small print of the London newspapers the previous year as one of Lloyd George’s Treasury aides at the Paris peace conference: an obscure Brit with a walk-on role in the negotiations, who appeared for the first time in the New York Times of 27 May 1919 as ‘John M. Keynes’ – a form of his name that he never used. Yet, within a year, the American edition of The Economic Consequences of the Peace had sold 70,000 copies and the New York Times had given a full-page review to a book that was to be roundly denounced almost as often as it was eagerly purchased: ‘in the English-speaking countries it is capable of doing immense mischief by still further clouding the issues of an epoch already sufficiently turbid.’¹

Keynes’s capacity for immense mischief, far from being exhausted by this episode, was only just beginning. He had entered the world stage with a fanfare, prepared to brave the boos and catcalls of a hostile audience if need be, and he subsequently remained in the spotlight, not least in the United States. In London, he was to be mentioned in The Times in about sixty reports or editorials during the 1920s, and in about a hundred during the 1930s. Across the Atlantic, by comparison, his name appeared in the New York Times nearly 300 times in the 1920s – a raft of references to a man whose subsequent career Americans followed with evident attention. Thus when the author of The Economic Consequences of the Peace, later in the 1920s, turned his lively mind and his deadly pen to the problem of unemployment, he already had a platform and an audience on both sides of the Atlantic.

Conditions in the stagnant British industrial system, however, were far different from those in the buoyant American economy, at least until the 1929 crash. As an economist based in the University of Cambridge, Keynes was naturally concerned primarily with the symptoms of depression in his own country. Conservatives liked to claim that protectionism offered a promising alternative, especially if tariffs could be used to bind together the British Empire. Like most economists, Keynes did not take this line, but nor was he happy with an orthodoxy that simply relied on market forces to do the trick. Instead, he boldly entered public debate with the contention that unemployment needed a drastic remedy.

Curiously, the politician whom he was supporting by the mid-1920s was none other than Lloyd George. ‘The man who won the war’, as propaganda for his coalition government had dubbed him in 1918, was the same man who lost the peace in 1919 – or so The Economic Consequences of the Peace had famously argued. Lloyd George was now attempting a comeback, having himself come back to a reunited Liberal Party, of which Keynes was an active member. ‘Has Mr Keynes’s opinion of Mr Lloyd George’s character changed since 1918?’ was the inevitable awkward question at one public meeting. ‘The difference between me and some other people,’ Keynes suavely replied, ‘is that I oppose Mr Lloyd George when he is wrong and support him when he is right.’² It was one among many subsequent occasions on which he was challenged for inconsistency. He never apologised for changing his mind when confronted by different facts or persuaded by better arguments.

Still the enfant terrible, then, Keynes made himself the spokesman for administering a stimulus when the economy was underperforming. We can see it as the launch of a Keynesian agenda that is still debated today. He called the prevailing system one of ‘individualism and laissez-faire’ and attacked it accordingly. Laissez-faire, said Keynes, had done its work. He claimed that it now meant superstitious faith in the market as an end in itself, whereas the actual situation cried out for experimental devices as a means of promoting recovery. In the Britain of the mid-1920s this orthodoxy relied on the self-acting mechanisms of the Gold Standard and Free Trade to do the trick – in the long run.

No, said Keynes, coining one of his most famous phrases: ‘In the long run we are all dead.’³ It was a phrase that he was not to be allowed to forget, if only because opponents have always seized on it to show his alleged preoccupation with the short run. As Margaret Thatcher once commented to the Conservative Party conference: ‘Anyone who thought like that would never plant a tree.’⁴ Keynes’s policies can thus be damned out of his own mouth as short-term expedients that saddle future generations with the inexorable costs of defying the market.

Such arguments came to a head with the decision to put Britain back on the Gold Standard in 1925. Winston Churchill was responsible for this, as Chancellor of the Exchequer. As a layman, he struggled to find his way through a technical argument that he recognised as central to the way that the economy worked. He argued and he listened. Keynes’s advice was politely listened to; then politely dismissed. The return to gold meant that the pound sterling was, in effect, shackled to an exchange rate of US$4.86. To Churchill, this meant being shackled to realities. To Keynes, the new parity was both completely unrealistic and perfectly avoidable, as was implied by the title of his polemical pamphlet: ‘The Economic Consequences of Mr Churchill’ (1925).

As a polemicist, Keynes was already fighting in a big league. His advocacy of public works in Britain, in a campaign where he publicly backed Lloyd George, did not find electoral favour in 1929, but later that year, when depression caught up with the American economy too, his arguments could not be ignored. He seized his opportunities to give copious advice to the British Government. Again he persisted; again the Treasury resisted. One of his own closest collaborators, the Liberal economist Hubert Henderson, turned on Keynes at this juncture, accusing him of minimising budget difficulties, with the icy taunt: ‘I suggest that you are in great danger, if you persist in ignoring the latter question, and implying that capital expenditure can put it right, of going down to history as the man who persuaded the British people to ruin themselves by gambling on a greater illusion than any of those which he had shattered.’⁵

Keynes was unabashed. He went from bad to worse in the eyes of such critics when he showed himself ready to question, not just the Gold Standard and the sanctity of a balanced budget, but the good old Liberal doctrine of Free Trade too. He tried many tacks, whether resourcefully or inconsistently. ‘Where five economists are gathered together,’ so government officials now told each other, ‘there will be six conflicting opinions and two of them will be held by Keynes!’⁶ None of his bright ideas appealed to the Treasury, either under the minority Labour Government which took office from 1929, or under its Conservative-dominated successor, the National Government, which replaced it in the crisis of 1931. Neville Chamberlain, first as Chancellor of the Exchequer and later as Prime Minister, was himself an obvious check on the adoption of a Keynesian agenda.

This ‘world economic blizzard’, as it was aptly termed, knocked Britain off the Gold Standard in September 1931 and swept away Labour and Liberals alike in a subsequent general election. Keynes had thus lost his most sympathetic potential allies in recruiting political support. An expert in losing friends through his own clever remarks, he managed to turn Lloyd George himself into an antagonist by publishing witty passages that he had prudently omitted from The Economic Consequences of the Peace. Hence the inevitable retaliation in Lloyd George’s widely read War Memoirs (1933) calling Keynes ‘an entertaining economist whose bright but shallow dissertations on finance and political economy, when not taken seriously, always provide a source of innocent merriment to his readers’.⁷ When even his most prominent champion spoke in such terms, Keynes’s political stock in Britain was evidently not riding high at the end of 1933, any more than the international economy itself.

‘Say not, the struggle naught availeth’, so we have it on poetic authority, with the final reassurance: ‘But westward, look, the land is bright.’ It was a moment when a new president had taken office in Washington. It was a moment of hope, a time for audacity. In the early months nobody could be sure if this untried Democratic administration knew what it was doing, still less if the measures that it produced would achieve their desired effect. There was an enormous burden of expectation upon the President himself and upon his ability to communicate the thrust of his policies to an anxious public in dire need of reassurance. And he spoke not just to Americans but to a world mired in depression.

What soon became clear was that Franklin D. Roosevelt opted for an active policy, even when it meant disrupting the deliberations of the world economic conference summoned in the summer of 1933. Following the United States’s departure from the Gold Standard, a blunt presidential message rejected the ‘old fetishes of so-called international bankers’, to the predictable consternation of all those who wanted to resurrect the old system. ‘It is a long time since a statesman has cut through the cob-webs as boldly as the President of the United States cut through them yesterday’, Keynes proclaimed immediately in a widely reported newspaper article, saying that Roosevelt was ‘magnificently right in forcing a decision between two widely divergent policies’.⁸

Little wonder that Keynes’s name became associated with the policies of the New Deal. In the New York Times his name was mentioned nearly 400 times in the 1930s and nearly 500 in the 1940s. Such references were not always in flattering terms, with ideological opponents denouncing him as the evil genius of an experiment allegedly heading towards socialism. The way that Keynes put it himself was set out in an open letter to the President, published in the New York Times on the last day of 1933. ‘You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system,’ Keynes told Roosevelt. ‘If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.’⁹

The odd fact is that Keynes was not only more central to the American debates about economic policy than he was in his own country during the 1930s, but also more pivotal than any American economist. This was not because the universities of the United States were lacking in theoretical economists of established reputation, or that their credentials were regarded as inferior to those of Keynes. Almost the reverse is true. Until 1936, when he published The General Theory of Employment, Interest and Money, Keynes’s curriculum vitae looked a little thin if measured against the heavyweight academic contributions of some of his international rivals. The explanation surely lies elsewhere.

Take the example of a great economist, born in the same year as Keynes: Joseph Schumpeter, famous subsequently for his influential concept of ‘creative destruction’ as the means by which capitalism renews itself. Schumpeter was installed at Harvard in the 1930s – yet his own students seemed more fascinated by the theoretical insights that Keynes was now known to be preaching in his lectures in faraway Cambridge. One effect was that the publication of the General Theory was already an event before the event, not least in the other Cambridge, where Harvard students of Schumpeter himself were among those queuing up for their copies. Schumpeter’s criticism was that the General Theory ‘pleads for a definite policy, and on every page the ghost of that policy looks over the shoulder of the analyst, frames his assumptions, guides his pen’.¹⁰

That was no impediment to eager students, often thirsty to imbibe new doctrines with immediate tonic effect. ‘As with the Bible and Marx,’ the young Harvard economist J. K. Galbraith was to comment later, ‘obscurity stimulated abstract debate.’¹¹ Hence the tragic moment in 1939 when Schumpeter had finally published his own two scholarly volumes, Business Cycles, totalling 1,095 pages. At Harvard, a special seminar on this text was organised by his loyal students – or insufficiently loyal, as it turned out. When it met, the ghastly realisation dawned that nobody had read Business Cycles; worse, that they had all read the General Theory; worse still, that everyone was talking about Keynes and not about Schumpeter.

True, the reception of Keynes’s thinking depended partly on its context, which needs to be understood. And this context includes ‘Bloomsbury’ – a district of London that became a code name for the cultural milieu in which Keynes moved. It was known well enough in his lifetime that he was close to Lytton Strachey, whose iconoclastic book Eminent Victorians had taken the literary world by storm in 1918 – though much about their relationship remained unsaid until later. Likewise, Keynes was a friend of two of the most esteemed novelists of their generation, E. M. Forster and Virginia Woolf. The Bloomsbury connection points to the simple fact – to which we shall need to return – that the impact of Keynes’s writings reflected his own skills as a writer.

In Britain, the late 1930s saw the political ascendancy of Neville Chamberlain: hardly good news for John Maynard Keynes. The career trajectory of the Cambridge economist, however, was transformed by the coming of the Second World War, especially the crisis of the summer of 1940, when Britain was pitted in a struggle for national survival under the leadership of Winston Churchill.

It was now that Keynes came to exert hands-on political influence in providing the sinews of war. Suddenly he was no longer just an academic, however famous, but became a policy-maker himself, in the highest echelon of the British Treasury. To anyone who asked exactly what was his job description, the only reply was that he was ‘just Keynes’. He enjoyed unique prestige; he became Lord Keynes of Tilton in 1942; he was given a brief of wide scope in negotiating with the Americans, who alone commanded the resources to sustain the British war effort. First there was the flow of wartime aid under the Lend-Lease agreements; then, with the abrupt end of hostilities in 1945, Keynes negotiated a large dollar loan aimed at floating the British economy through the transition to peacetime conditions.

These American commitments were, as Keynes kept acknowledging, generous transactions. But this was not a zerosum game in which Britain’s gain was America’s loss. The provoking fact was that the war had created boom times for the American economy, and that Keynesian policies were often and rather indiscriminately credited. It would be going too far to claim that Keynes simply wanted to get his hands on the proceeds of a business that had grown by adopting his own strategy; but he could argue in good faith that Americans were not impoverished by their munificence.

In his ideal world, like that of Adam Smith in the late eighteenth century, everyone stood to benefit from a division of labour, in peace as in war. Enlightened self-interest was the bedrock of Keynes’s thinking on international policy. His name was prominently linked with the institution of the Bretton Woods financial system, as set up in 1946, under which, for a quarter of a century after the Second World War, the western world prospered.

In Britain, Churchill’s wartime coalition government committed itself to maintaining ‘a high and stable level of employment’. In the immediate postwar period, the Keynesian logic of this policy gained bi-partisan acceptance. This was partly through a competitive desire between the parties to disavow responsibility for the mass unemployment in the 1930s – a problem to which the solution seemed so obvious in retrospect, once Keynes had disclosed it. ‘The economic ideas of Lord Keynes, which were crystallised very largely as the result of a penetrating analysis of this very situation,’ a Conservative Party spokesman explained, as though in apology for Neville Chamberlain’s ignorance, ‘were not yet matured.’ But the crystallisation – ‘with which I, as a Conservative, agree’ – now made for consensus.¹² ‘The effect of Lord Keynes’ teaching and the wartime experience,’ as a Labour Party spokesman preferred to put it, ‘has been the creation of a very widespread belief in Britain that unemployment can be practically prevented by the full development of a planned economy.’¹³

Keynes was active on government business almost until the moment when his heart, which had made him a semi-invalid since 1937, finally succumbed to years of stress in April 1946. ‘Appalling news of death of Keynes,’ reads the diary entry of one Treasury colleague, Richard (‘Otto’) Clarke, who had often robustly opposed him. ‘Felt bereft, as on the death of Roosevelt.’ Friedrich von Hayek, Keynes’s most formidable academic opponent, wrote that ‘he was the one really great man I ever knew, and for whom I felt admiration’. In London, The Times, still conscious of itself as the semi-official newspaper of record, offered the judgement: ‘To find an economist of comparable influence one would have to go back to Adam Smith.’¹⁴ But would it last? Keynes’s personal magnetism was held in awe. Would his economic theories now lapse into a speedy oblivion once their creator had been fittingly given the final honour of commemoration in Westminster Abbey?

On the contrary. In the subsequent two decades the General Theory came to acquire scriptural authority. Like scripture, it was more often cited than read; and in contradictory senses too; but it became essential at least to feign respect for its authority. Thus the appropriation of Keynes’s name became de rigueur in any mainstream discussion of economic problems, not only in the academy but in the public forum. The most influential thinker in the postwar Labour Party, Tony Crosland, spoke for a generation of liberals on both sides of the Atlantic in the 1950s. ‘The Keynesian techniques are now well understood,’ he assured them, ‘and there is no reason to fear a repetition of the New Deal experience of a government with the will to spend its way out of a recession, but frustrated in doing so by faulty knowledge.’¹⁵

Keynes’s apotheosis was already well under way by the time that Roy Harrod published the major biography of his old friend in 1951. For the next generation, as Harrod realised in writing it, this would stand as the essential insider account of the man, the economist and the international economic statesman. As a result, Harrod wrote under constraint. First he had to submit to some censorship of the government documents that he used. Eminent civil servants pored over Harrod’s drafts, worried above all about anything that would give offence in the United States, Britain’s cold-war ally and still its banker of last resort in a world short of dollars. Harrod faced another dilemma, even worse than whether to publish disrespectful anti-American gibes or reveal a history of radical political sympathies. For what might give more offence in the United States of the McCarthy era than to disclose an even murkier secret – the elite economist as sexual pervert?

Keynes’s homosexuality as a young man was not allowed to taint the pages of the official biography. ‘I knew most details of his homo-sexual interests,’ Harrod wrote later. ‘I did not write blatantly about sex in my book, because at that time it would have been unsuitable; but anyone then, who was alive to the existence of homo-sexual proclivities, would have been able to learn the important facts “between the lines” of my book.’¹⁶ As he well knew, his was a story only apparent to a select few who knew it already. Most of his readers, on either side of the Atlantic, saw nothing to disturb their innocence. It was not until Michael Holroyd set off the vogue for big, candid Bloomsbury biographies with the first volume of his Lytton Strachey (1967) that this further dimension of Keynes’s life became common knowledge.

By then the intellectual and cultural climate was more forgiving to such disclosures. In Britain this was the era of a supposed consensus in economic policy: not simply agreement between the political parties, but an agreement to disagree within limits that each side thought of as Keynesian. ‘It was an interesting mixture of planning and freedom, based on the economic teachings of Lord Keynes,’ was the summary by the influential economic journalist Samuel Brittan in 1964.¹⁷ Harold Macmillan, Conservative Prime Minister from 1957 to 1963, was proud to have been an early convert, as befitted his other role as the great man’s publisher, with the General Theory a nice little earner on the Macmillan backlist.

In the United States, the election of John F. Kennedy in 1960 tested how much the new President had absorbed, twenty-three years previously at Harvard, when he took freshman economics in the year after the General Theory had arrived there. The chronicler of the Kennedy presidency, Arthur Schlesinger, with all the assurance of a fellow Harvard man, was to pronounce Kennedy ‘unquestionably the first Keynesian President’.¹⁸ Certainly the chairman of his Council of Economic Advisors, Walter Heller, was in this mould and was understandably proud that the President commented, after delivering a successful speech defending his tax cuts in late 1962: ‘I gave them straight Keynes and Heller, and they loved it.’¹⁹

Many Republicans, however, remained to be won over. Though the Eisenhower years had seen massive investment in the American infrastructure, this was comfortably combined with the rhetoric of balanced budgets and ritual denunciations of government spending. The Democrats’ inconsistency, especially after Vietnam plundered blood and treasure alike, was to run a war economy in denial about the costs of war. But the American boom of the mid-1960s finally adopted Keynes as a patron saint, presumably on the principle that you have to be safely dead to be canonised. Or perhaps it was a posthumous fulfilment of the time lag postulated in the last pages of the General Theory, where the famous claim that we may unwittingly become ‘the slaves of some defunct economist’ or ‘academic scribbler’ is explained by the fact that ‘there are not many who are influenced by new theories after they are twenty-five or thirty years of age’ so that ideas, when they triumph, ‘are not likely to be the newest’.²⁰

The cover story of Time magazine at the end of 1965 supplied the popular imprimatur: ‘We Are All Keynesians Now.’ The story, prominently and accessibly displayed, assured readers that ideas were powerful and that the world was indeed ruled by little else, just as Keynes had claimed thirty years previously. ‘Now Keynes and his ideas, though they still make some people nervous, have been so widely accepted that they constitute both the new orthodoxy in the universities and the touchstone of economic management in Washington.’ Not only was Heller’s successor as chairman of the Council of Economic Advisors quoted to this effect, so was the economic adviser to Barry Goldwater, the defeated Republican presidential candidate in 1964. This was no less than Professor Milton Friedman of Chicago, ‘the nation’s leading conservative economist’, and it was he who was credited with the headline phrase: ‘We are all Keynesians now.’²¹

Here was a quotation in search of an author – like a lost dog wandering around, ready to lick any proffered hand. For Friedman was not anxious to claim it, and instead offered his gloss on what was evidently an off-the-cuff comment: ‘In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.’²² So the friendless hound remained at loose for a few years before a potential owner was found, with a suitably impressive name to be inscribed on the dog-tag.

Thus the high-water mark for Keynes’s political influence duly came when a Republican president was himself pressed into the assigned role. Richard Nixon had been in the White House for a couple of years when he outlined a budget for 1971–2 that responded to rising unemployment by planning a deficit as a stimulus for the US economy. He therefore took his message to the people. In the ABC television studios, where the President had been interviewed, he told one of the commentators afterwards that he was ‘now a Keynesian in economics’.²³ Never renowned for a felicitous touch in politics, it was Nixon who was to be subsequently credited with the bastardised version – ‘We are all Keynesians now’ – which was to become the epitaph for an era.

No sooner had the hubristic words been pronounced than everything came unravelled. As the 1970s unfolded, the onset of economic troubles led to widespread questioning of whether Keynesianism had really provided a magic tool-kit for running the economy at full employment. The fiscal policies with which Keynes’s name was posthumously associated, concentrating on government’s ability to tax and spend, were now derided. Instead, monetary solutions were sought, focused on the supply of credit and interest rates. This was a very broad shift of priorities, both in analysis and in policy. One remarkable aspect of the controversy about these issues is how far the argument was personalised.

The name that came to rival that of Keynes was that of Milton Friedman. Indeed his own fame was to vary inversely with Keynes’s reputation, which he therefore had a sort of perverse interest in sustaining, all the better to diminish it. If academic economists are asked to name Keynes’s real intellectual rivals within their discipline in the twentieth century, they will often mention Schumpeter, with his vision of creative destruction, or Hayek, with his subtle intuitions about the wisdom of the market. It was Friedman who inherited the other role that Keynes had once occupied, as a publicist with an agenda steeped in prior ideological predilections. But whereas Keynes had exploited his public platform for polemical purposes long before he addressed ‘my fellow economists’ in the General Theory, Friedman trod a more conventional career path. He was the learned professor, who had published dense works on monetary policy. Only later, when the tide of opinion turned, did he establish a popular following and become an improbable media star as the front man of the ‘Chicago School’.

The great landmark is generally supposed to be the speech that Friedman gave on monetary policy in Washington, DC, in December 1967. He gave it as his presidential address to the American Economic Association, so his professional credentials were already recognised. But the notion that Friedman laid down the operational principles of ‘monetarism’ on that occasion does not withstand perusal of what he actually said. In fact he spent almost all of his allotted time in warning what monetary policy could not do, and only in the last few minutes of his lecture did he talk about what it could do. His final advice was that the authorities should stop trying to manipulate employment levels and concentrate on some means of controlling the money supply. So we may now be surprised by the caution and circumspection with which Friedman developed his argument. But its object would have been clear enough to the listening professors: to ‘undermine Keynes’ key theoretical proposition, namely, that even in a world of flexible prices, a position of equilibrium at full employment might not exist’.²⁴

Friedman was Keynes-through-the-looking-glass. Not only in theory but in practical policy options, they stood for opposites, and enjoyed equal and opposite swings of public favour. ‘For years, the maverick views of Milton Friedman, the towering iconoclast of U.S. economics, attracted just about as much ridicule as respect,’ reported Time magazine in 1969, at a time when Nixon was listening to the Chicago School, of which Friedman was now the acknowledged leader. ‘Keynesian economics doesn’t work,’ Friedman forthrightly commented. ‘But nothing is harder for men than to face facts that threaten to undermine strongly held beliefs.’²⁵ Keynes had voiced similar sentiments in his own day. And though Friedman had to endure Nixon’s apostasy in the early 1970s, signs that the monetarists were winning the argument were indisputable by the time that Friedman was awarded the Nobel Prize for Economics in 1976.

In Britain the new political economy of Thatcherism had the doctrine of monetarism and the ethic of fiscal restraint at its heart. It was obviously a response to the combination of rising unemployment and rising inflation in the 1970s – a nightmare conjunction which self-professed Keynesians seemed unable to explain, still less remedy. In the British press, the turn against current Keynesianism could be seen in the widely read columns by Samuel Brittan of the Financial Times and Peter Jay of The Times. Denis Healey, Chancellor of the Exchequer in a Labour government, was exasperated by the mindset he found among his civil servants: ‘In 1974 the Treasury was the slave of the greatest of all academic scribblers, Maynard Keynes himself.’²⁶ Likewise, in 1975, the financial commentator Tim Congdon expressed his frustration in an article in the magazine Encounter: ‘In economics, the revered warrior in all confrontations is still John Maynard Keynes. A quote from Keynes, no matter how slight and trivial, appears to silence opposition.’²⁷

No longer! Thatcher’s closest advisers had the simple watchword: ‘Keynes is dead.’ ‘At the macroeconomic level,’ explained Nigel Lawson, soon to become Chancellor himself, ‘our approach is what has come to be known as monetarism, in contradistinction to what has come to be known as Keynesianism, although the latter doctrine is a perversion of what Keynes actually preached himself.’²⁸ The targeting of the ‘ism’ rather than the man was significant.

Margaret Thatcher said the same, only louder. ‘No, no, no,’ she told one interviewer in 1979, ‘I am afraid Keynesianism has gone mad and it wasn’t in the least little bit what Keynes thought.’²⁹ Nor was this a stray remark – she returned happily to this theme on numerous occasions. In a speech to her party conference in 1984, explaining how the country had gone wrong after 1945, she notably abstained from imputing personal blame. ‘Keynes had provided the diagnosis,’ she said approvingly. ‘It was all set out in the 1944 White Paper on Employment. I bought it then. I have it still.’³⁰ In case anyone challenged her to produce this relic, her famously capacious handbag stood ready. As she said on one occasion in the following year, ‘I often quote Keynes, because Keynes is the most misquoted man.’³¹ By contrast, in her years of power she avoided endorsing Friedman, possibly in the 1970s because his concept of a ‘natural rate of employment’ was politically combustible, probably in the 1980s because he offered criticisms of her government’s monetarist strategy. ‘Well, monetarist policy is far older than Mr Milton Friedman,’ she brusquely told one interviewer in 1982, ‘monetarist policy is as old as money…’³²

Dead or not, Keynes would not lie down. His name appeared over 400 times in the New York Times during the 1970s, and the same during the 1980s, more than in either the 1950s or the 1960s. Even adversarial invocations of his name surely bestow some sort of compliment in an era that was not kind to his doctrines. Just as Thatcherism overthrew the Keynesian consensus in Britain, so the election of Ronald Reagan in 1980 brought a new economic regime to the USA.

To those who had become accustomed to a dichotomy between Keynesian and Friedmanite models, however, this was a baffling development. ‘The rhetoric has been monetarist, but not the practice,’ Friedman himself commented after the first two years.³³ One contrast with Thatcherism was that ‘Reaganomics’ showed itself more tolerant of budget deficits – just what British Keynesianism was accused of licensing in the bad old days, it might seem. The justifying theory was that a tax cut would pay for itself through creating an increase in government revenue. It would do so because the economic growth that would pay the taxes would be generated by the incentive of the tax cut itself. This benign cycle could indeed be given an oddly Keynesian twist. But it rested, of course, on blithe confidence in the response on the supply side. In practice government revenue did not make up the difference but led to persistent deficits.

Faith in the universal efficacy of the market became the big story, the master narrative. And historically high growth rates, sustained from the mid-1990s, inevitably fed a climate of complacency which had little time for the arguments that had dominated the previous half-century. Far from the market seeking stability within a framework provided by government, the terms of the argument were reversed. The market model increasingly became the template for government in an era of deregulation, outsourcing and privatisation. Government, in Reagan’s epochal formula, was not the answer but was itself the problem.

It is unsurprising that, during the past thirty years, the name of Keynes has lost its gilt. True, it was still deployed by Gordon Brown, Labour’s Chancellor of the Exchequer, in reproaching his Thatcherite predecessors at the Treasury. Lawson’s mistake, according to Brown, was that ‘having rejected the crude Keynesianism of the seventies he rejected Keynes’s approach altogether when, instead, the real challenge was to interpret Keynes’s important insights for the modern world’.³⁴

Never wholly forgotten, Keynes was none the less marginalised. He was the man, too clever by half, who had peddled chimerical remedies that were simply not needed, so long as the economy was left to cure itself through the liberating impact of unrestrained market forces. His thinking was dismissed as ‘depression economics’, irrelevant in a world where depressions no longer happened.

And then came the great meltdown of 2008. Incomprehensibly, market forces, on which the rising generation had been taught to rely, failed to deliver the goods, failed to offer self-correction, failed to cope with a self-inflicted crisis of confidence. The media gave a perhaps simplistic view of what was hot and what was not. For about thirty years Keynes’s reputation had languished; in about thirty days the defunct economist was rediscovered and rehabilitated. The British Chancellor of the Exchequer, Alistair Darling, was quick to declare on 19 October: ‘Much of what Keynes wrote still makes sense.’³⁵ That week’s issue of Time magazine decided to blow the dust off its cover story of 31 December 1965, ‘We Are All Keynesians Now’. In exhuming the phrase, it exhumed Keynesianism itself and hardly needed to comment: ‘Now it’s coming back into fashion.’³⁶

Keynes’s roller-coaster reputation stands today at a critical moment which needs history as well as economics to be properly understood. There never was a timeless ‘Keynes’, whom we can demonise or mythologise at whim. Instead the historical Keynes inevitably found his current thinking influenced by the times in which he lived. He came up with ideas about immediate economic policy and also about the very foundations of theoretical economics. He has been often misunderstood, not only by his opponents but also by those who claimed to be his true adherents. The context of his own times and his own life is where we need to begin if we want to understand his continuing relevance and to make sense of John Maynard Keynes.