Reading The Economic Consequences of the Peace: Keynes as Political Economist or Albert Einstein in the Patent Office.


Chip Poirot, Professor of Economics, Shawnee State University.

Outline of remarks intended for presentation at Shawnee State University’s “Faculty Festival of Achievement”, February 19, 2018.

Students or others who are unfamiliar with some of the events, people and ideas may wish to explore these in more detail. I have bolded terms that may be unfamiliar to some. Some of my earlier blog entries at contain  links to some sources that provide a useful introduction to some of these topics. A bibliography of works I have found useful in assembling these remarks is provided at the end.

Preface: Some interesting anecdotes

Professor Joan Robinson, one of Keynes’ close associates at Cambridge reportedly said that she and Keynes’ other associates struggled to get Keynes to understand The General Theory.

Frederick Hayek, a well know free market economist remained friends with John Maynard Keynes. Hayek is reported to have said that while he believed Keynes was in fact a Liberal (in the Classical sense) he did not think that Keynes truly understood the illiberal implications of The General Theory.

But this presentation is about The Economic Consequences of the Peace which was published 16 years before The General Theory.

Introductory: Who was Keynes, and why are we interested in The Economic Consequences of the Peace?

1. Author of The General Theory of Employment, Money and Interest. The EC gives us some very limited insight into how Keynes’ thinking as an economist developed.

2. Keynes worked in the Treasury Department of Britain during WWI and was an economic advisor to the British delegation during the negotiations of the Treaty of Versailles. The work can provide some insights into the end of WWI and the problems of the interwar period.

3. Keynes was Britain’s chief representative to Bretton Woods in 1944. Given 2., we can better understand how and why the Bretton Woods institutions developed as they did.

4.  Keynes was an important person in the 20th century and his influence is still debated today. Did he succeed in doing for economics what Einstein’s General Theory of Relativity did for physics? I will leave that debate aside for today.

1. The EC only gives us some very limited insight into the GT.

a. It does helps us understand Keynes’ overall social philosophy or what the economist Joseph Schumpter termed “pre analytic vision”. Keynes viewed himself as a “man of the left”. Many of his close friends and associates, Bertrand Russell, Michael Kalecki, Pierro Sraffa, Virginia Wolfe were avante garde and overtly socialist and sympathetic to Marx. Keynes’ heart was with the avante garde. But he was suspicious of schemes to radically remake society. When he writes about the Bolsheviks, he echoes Burke on the French Revolution. He is equally critical of fascism. He was a Classical Liberal in the tradition of John Stuart Mill who understood the defects of laissez faire as did John Stuart Mill. His own politics could be said to be on the left of the British Liberal Party. He was open to dialogue with moderates in the Labour Party, but he was very critical of the Labour Union wing and of the Communist wing in Labor.  In terms of contemporary British politics he would be to the left of Tony Blair but to the right of radicals such as Tony Benn. It is difficult to believe he would have any use for contemporary idiots such as Theresa May or Donald Trump.

b.The EC is a very different work than the GT and is also very different from The Treatise on Probability and his Treatise on Money. Whereas these latter works are narrower in focus, the EC is quite broad in scope. In short, the EC is a work in political economy while the TP is a work in mathematics and TM and the GT are works in economics.

c. In so far as Keynes addresses economics directly in the EC, his analysis is conventionally Marshallian. Keynes was not yet a Keynesian. Nevertheless, some distinctly Keynesian ideas about psychology, institutions, expectations and liquidity are clearly present as is Keynes’ concern with practicality and with grounding theory in the facts of the matter. I disagree strongly with Skidelsky’s argument that the EC is about the triumph of economics and technical rationality over politics. The EC is about the interaction of economics, society, and politics and how a sound analysis of the facts of the matter can lead to better outcomes.

2. The EC is a useful source on the problems of the Treaty of Versailles and the interwar period. It is not perfect.

a. It has some use as a primary source. Clearly, it is not exhaustive. Historians would not base a history of the Treaty of Versailles just on Keynes’ account. It is reasonably accurate, though it does reflect Keynes’ own biases and views.

b. The analysis is intriguing and incisive. Keynes’ contrast between Clemenceau’s “realpolitik” and Wilson’s 14 points is quite relevant. Wilson is sometimes portrayed as unrealistic and as having instituted policies that were destabilizing. Keynes argues that Wilson’s ideas are actually more practical than Clemenceau’s realpolitik and that it was Clemenceau’s realpolitik that ultimately led to WWII.

c. Keynes’ analysis of the imbalances created by the settlement and the impact the treaty would have on Germany seems prophetic in hindsight, though it should be noted that others have disagreed. But a near permanent Allied occupation of Germany following WWI coupled with carting off of German factories would have been neither practical nor moral.

d. Like any single work it is not complete and it has its shortcomings. It is primarily focused on the problems of relationships between European nation states and the U.S. This is understandable given the circumstances. But a more complete analysis would need to more systematically address the problems of Imperialism and decolonization. Keynes’s analysis of Imperialism and Class is lacking.

3. When we read the EC in light of Bretton Woods and Keynes’ role at Bretton Woods, it sheds some light on Bretton Woods and more broadly on the whole institutional design adopted after WWII.

a. The Great Depression, the rise of fascism and Nazism, and the catastrophe of WWII are a direct result of the failure to create a workable set of institutions for mutual security and prosperity following WWI.

b. Bretton Woods, the Marshall Plan, the creation of the UN, and later the European Coal and Steel Community, which became the EU, are a unique failure to commit the mistakes of the past. Keynes’ influence on this matter is critical. The ideals of the EU are far preferable to the centuries long civil wars of European nations but that is not the same as accepting what the EU has become.

c. Bretton Woods and other institutions were not and are not perfect. They are created by human beings. There is much to be critical of. Bretton Woods was designed with the goal of creating a stable international environment for Capitalism. But it should also be remembered that the institutions were designed to function very differently and to allow for social democratic solutions to problems. This is very much in keeping with Keynes’ social philosophy. The neo-liberal policies enacted by these institutions from the 1970’s on seem almost by design intended to ignore the lessons of the EC.

A final thought: Quite frankly, Keynes in the EC appears in hindsight to be prophetic. But we have forgotten those lessons as the Bretton Woods Institutions have adopted punitive policies towards developing countries in the debt crisis of the 80’s and more recently towards Greece. The policies are the exact opposite of what Keynes intended the Bretton Woods institutions to do.The EC reflects the best of moderate social democracy informed by Mill’s individualism. It also reflects its limits.


Works Consulted.

Lekachman, Robert. “Introduction” pp. ix-xxxvii in Keynes. John Maynard. 1971. The Economic Consequences of the Peace. Penguin Books, USA.

Keynes. John Maynard. 1971. The Economic Consequences of the Peace. Penguin Books, USA. Originally published by Harcourt, Brace and Jovanovich, 1920. Also available online at

Minsky, Hyman. 2008. John Maynard Keynes. McGraw Hill USA. First published 1975. Columbia University Press.

Skidelsky, Robert. 2005. John Maynard Keynes: 1883-1946. Economist, Philosopher, Statesman. Penguin Books, USA. Abridged version of Robert Skidelsky’s three volume biography of Keynes.

2 thoughts on “Reading The Economic Consequences of the Peace: Keynes as Political Economist or Albert Einstein in the Patent Office.

  1. I’ve enjoyed your blog on, the Consequences of the Peace and had a couple questions regarding Keynes in general.

    1.) I understand how the recession occurred in the first place. I know that as far as fiscal policies, Bush passed the Economic Stimulus Act of 2008 and also the Emergency Economic Stabilization Act of 2008 which established the Troubled Assets Relief Program. Obama passed the American Recovery and Reinvestment Act in early 2009, which many saw as a throwback to Keynesian economics. I also am familiar with the objectives of each.
    My question is on what their impact on U.S. economic performance was. The more research I do, the more confused I’m getting. It of course seems all very political; Liberals interpreting data one way and Conservatives another. Some say it absolutely worked. Some say it failed miserably. Some just keep talking about the federal deficit. Some say it prevented a deeper economic recession or possibly even depression. I’m leaning towards the latter, but I was wondering what your take on these fiscal policies are?

    2.) (This is more of a technical question)The Keynesian Cross is sometimes explained with Aggregate Demand on the vertical axis and sometimes with Planned Expenditures. Are these concepts precisely the same?


    1. Emily,

      These are great questions. Here are some initial cursory thoughts.

      The impact of TARP (Troubled Asset Relief Program) and of ARRA (American Reinvestment and Recovery Act) are difficult to evaluate. That is not to say they are impossible.

      I think part of the problem in economics, or any other social science, is that you cannot ever get a decisive experiment. So it’s always possible for someone to say “you didn’t do it right” or “if you hadn’t done it, things would have been worse” or “there were a lot of other factors that were relevant”. The other issue is it’s not always clear what is being tested. Are we testing a theory or a policy? I think when you evaluate something like the effectiveness of ARRA you have to look at a lot of evidence and you have to look at it carefully. My own view is that there is strong evidence that TARP prevented complete collapse of the financial structure, but to quote a line from the movie Labyrinth “smell bad”. It was like the bog of perpetual stink. There were other alternatives. ARRA is a bit simpler and more direct. At the point that the stimulus money hit the economy, the economy began a slow upward climb. The trick is how do we test the competing hypotheses that the stimulus was “too small” ( it would have been better if it was bigger and more focused on infrastructure) or the hypothesis that it undermined business confidence by increasing the deficit. Testability in economics is hard. It’s complex. And it’s overladen with self serving arguments and often willful denial. Add to this that economics is an imprecise and inexact science. And unllike physics or chemistry, we can never quite the ideology out. I think of those old Wisk commercials but envision them with an economist: have you tried scrubbing and scrubbing and you still can’t get the ideology out of your theory? I trust you see the complexity of the problem. On the other hand, just reducing matters to ideology is in my view, to take an anti-intellectual view. So we struggle on trying hard to evaluate theories as cognitively rational as possible. My own view is that absent TARP, ARRA and the FED’s quantitative and qualitative easing, we would have had a repeat of the 1930’s.

      Your second question: Actual Expenditures are on the vertical axis of the Keynesian Cross. Planned Expenditures should not be on the vertical axis because the point is that actual expenditures may not match planned expenditures. They are two different things. However. because the vertical axis is in $ amounts, we can compare planned to actual. If the two do not match, the economy is in disequilibrium. Equilibrium occurs when plans match the actual outcome. They are only equal in equilibrium. Part of the confusion with the Keynesian Cross is how we present it in Principles courses. We begin with Consumption as the dependent variable and National Income as the independent variable. So we graph Consumption on the vertical axis and National Income on the horizontal axis as a simple slope intercept graph. So far, so good. But then we pull the old switcharoo. We then introduce Investment spending as exogenous relative to National Income but at the same time switch and make National Income the dependent variable and total expenditures the independent variable, and we wonder why our students are confused!

      Liked by 1 person

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