Shattered Consensus. James Piereson
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food. The end of the postwar regime need not bring about the end of America. On the contrary, it could open a dynamic new chapter in the American story. The journey is likely to be difficult, but Americans are obliged to remain optimistic even as they contemplate impending upheavals. The United States has survived such upheavals in the past, and a case could be made that the nation has grown and prospered as a result. It could do so again.
The Political Economy of the Postwar Order
John Maynard Keynes and the Collapse of the Old Order
John Maynard Keynes was a liberal revolutionary who aimed to place the capitalist order on new economic, political, and cultural foundations. Not solely an economic theorist, he was a political economist in the tradition of Adam Smith, John Stuart Mill, Schumpeter, and Hayek. His theories pointed toward a far-reaching revision in the relationship between the state and the economy in capitalist systems. While the institutions of government inherited from the eighteenth and nineteenth centuries had been designed to check the power of the state for the purpose of protecting liberty, Keynes assigned new power to the state in order to promote stable economic growth and full employment.
The Keynesian revolution in economics thus implied a second revolution in politics, to circumvent both the constitutional and the cultural barriers to state action that had been erected in the era of classical liberalism. The “Keynesian state” is larger and far more interventionist than the forms of government anticipated by Adam Smith, the authors of the U.S. Constitution, and nearly all of the influential statesmen and theorists of the nineteenth century. Many of the core conflicts of our time grow out of the friction between Keynes’s vision of a managed economy and the constitutional order crafted to achieve quite different and far more limited goals.
Keynes was sensitive to the historical nature of the capitalist system as it evolved through different phases, created new institutional forms, and adapted to crises and new challenges. He questioned whether it was still appropriate to use theories formulated in 1800 or 1850 to account for the economic realities of the 1920s and 1930s. The “age of laissez-faire,” he wrote in the 1920s, had been brought to an end first by the development of large corporations and labor unions, and then by the destructive effects of the world war. If the old order was dead, then a new one must be built on a different intellectual basis. This was the campaign that Keynes engaged in during his stints in public service and in the books and articles that he wrote between 1919 and his death in 1946.
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A thinker of the widest interests, Keynes wrote on subjects ranging from Isaac Newton to modern art, and interspersed his treatises on economics with sage references to history, politics, and psychology. His biographer Robert Skidelsky asserts that he was as much a moralist as an economist.1 Keynes, he wrote, searched for a vision of capitalism that promoted both efficiency and justice in equal parts. In an essay on Alfred Marshall, his mentor at the University of Cambridge, Keynes wrote that the “master economist” must possess many gifts: “He must be a mathematician, historian, statesman, and philosopher, in some degree. No part of man’s nature or his institutions can be outside his regard.”2 Nor was Keynes an “armchair” or merely academic theorist; he participated actively in every important political debate that took place in Great Britain during the tumultuous years from the outbreak of World War I through the close of World War II. Progress in economics, he maintained, must arise from the interplay between theory and urgent practical problems.
Keynes thus began working out his theories on the necessity of refashioning the capitalist order while he served as a member of the British delegation to the Paris Peace Conference in 1919. For Keynes and his generation, the Great War of 1914–1918 demolished the foundations of European civilization. The old order in Europe had been built upon a network of interlocking principles and ideals: Protestantism and Victorian morals in culture; nationalism, empire, and monarchy in politics; laissez-faire, free trade, and the gold standard in economics. The big question after the war was whether those principles and institutions could survive in a new era of sovereign debt, despair and dashed hopes, debauched currencies, and a permanently changed balance of world power.
Keynes set forth his reflections on the war and the damage it did to the social order in The Economic Consequences of the Peace, the no-holds-barred attack on the Treaty of Versailles that he wrote in a few months in 1919 after the peace conference had concluded.3 He predicted that unless the treaty was revised, it would lead to financial ruin across Europe and possibly to another, more destructive war. The book was an immediate bestseller, turning Keynes into an international celebrity. It ran through five editions and was translated into eleven languages within a few years. Today it is regarded as one of the more important and controversial books published in the twentieth century, for in it Keynes not only criticized the treaty but declared the obsolescence of the prewar order in Europe along with its associated institutions, ideals, and cultural assumptions.
He began the book with an insightful chapter titled “Europe before the War,” a melancholic reflection on a golden age blasted away on the battlefields of France and Belgium. “What an extraordinary episode in the economic progress of man that age was that came to an end in August, 1914,” he wrote.4 Keynes marveled at the progress made across the continent after Germany began to emerge as a world economic power following its unification in 1871. Before then, most states except for Great Britain were largely agricultural and self-sufficient. Trade was carried on mainly within local markets. After that time, industry and population grew steadily as trade quickened across Europe, widening the sphere of prosperity and the reach of modern comforts. The gold standard maintained stable currency values and facilitated trade and capital flows. By 1914, Keynes wrote, “the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.”5 The generation that grew up before the First World War saw the world remade by the explosion in capitalist enterprise. It was the first era of globalization. Europe, led by Great Britain, France, and Germany, was the center of the world’s economic order.
Germany played a leading role in this surge in trade and wealth. Its population increased from 40 million to nearly 70 million between 1870 and 1914, much faster than the populations of France and Great Britain. (In 1914, Britain had a population of 46 million, and France, 40 million.) German industrial output expanded at an even greater pace, spurred on by the speedy and efficient introduction of the factory system. By 1900, Germany was a main European supplier of pharmaceuticals, electrical equipment, steel, and coal. Germany quickly became an important trading partner for every other European nation, including Great Britain.
Keynes identified a cause of this rapid growth in a moral and psychological disposition among all classes to save and invest new wealth rather than to exhaust it in consumption. The wealthy, in particular, were responsible for the accumulation of capital because “they were not brought up to large expenditures, and preferred the power which investment gave to them to the pleasures of immediate consumption.”6 They had “the cake,” so to speak, but on the condition that they abstained from eating it, or at least from eating all of it. (After all, the wealthy of that era lived in lavish homes, usually several of them.)
One of the reasons the prewar economy worked as well as it did was that the wealthy classes were at once the “savers” and the “investors.” The founding entrepreneurs still owned and managed their enterprises. The laboring classes accepted this arrangement because the proceeds from their labor were continuously plowed back into the building of more factories and railroads. Much of this surplus was invested in the United States, which in turn sent back surplus foodstuffs to support Europe’s growing population. Yet rapid population growth both in Europe and in America put pressure on agricultural prices. Keynes saw this trend as a destabilizing factor