what keynes warned about globalization (1)

8/6/2019 What Keynes Warned About Globalization (1)

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What Keynes warnedabout globalizationD A V I D S I N G H G R E W A L

WE are all Keynesians now. The heroof the Great Depression has been sum-

moned in our hour of need and has

begun to appear everywhere: in the

editorials of the financial dailies, thecolumns of weekly magazines, and

even the pages of the American jour-nals of finance and economics where

Keynesianism has usually had a luke-

warm reception. But the new vogue

for Keynes overlooks the fact that

Keyness economic policies were de-

veloped in explicit opposition to what

we now call globalization. Keynes

warned that global economic integra-

tion generates tensions that cannot be

solved by ordinary politics within a

single state. As a result, it can endan-ger international peace. In fact, mak-

ing Keynes an apologist for deficit

spending while ignoring his warnings

on economic integration risks repli-

cating the international conflict that

spurred his thinking in the first place.

The globalization of the past few

decades is not the first such episode

the world has experienced, nor, by many

measures, the deepest. The period

immediately prior to the First World

War was one of unprecedented finan-cial and economic globalization,

though of course it was not then called

by that name. This was the world in

which John Maynard Keynes grew

up, got his education and professional

start and which he saw collapse.

While we tend to think of Keynes in

terms of his academic and institu-

tional work in the 1930s and 1940s,the formative period in his life was

earlier: during the First World War and

the economic problems that plaguedBritain following its return to the stric-

tures of the gold standard in the 1920s.

It was witnessing the military conflictand economic turmoil following a

period of peace and economic integra-

tion that motivated Keyness theories.

Throughout his life, Keynes

struggled to understand how the world

he grew up in what has been calledthe first era of globalization could

have come to such a catastrophic end.

The first globalization was a British-

led movement: it depended on theBritish commitment to what we now

call economic integration, summed upin the slogan of free trade, meaning

the free movement of capital, goods,

and (in an important difference from

today) people.

Keynes had been originally an

ardent advocate of free trade, but, ashe explained in a speech on National

Self-Sufficiency in 1933, his views

had undergone a radical change.1

Like most Englishmen, he had beenbrought upto respect free trade not

only as an economic doctrine which a

rational and instructed person could

1. See John Maynard Keynes, National Self-Sufficiency, Yale Review 22(4), 1933, 755-769 (given as the first Finlay Lecture atUniversity College, Dublin, on 19 April 1933).


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not doubt, but almost as a part of the

moral law. But the experience of the

First World War and the economic

upheavals of the interwar period had

produced a set of circumstances more

consequential for policy-making than

any of the analytic propositions aboutfree trade that he had formerly be-

lieved. New hopes and fears and pre-

occupations had required Keynes to

shuffle out of the mental habits of the

pre-war nineteenth century world

the ideologies of the first globalization

he had once reflexively accepted.

The justification for the first globali-zation had been given by the great

classical proponents of free trade,whom Keynes credited with being

among the most idealistic and disin-

terested of men. Those advocates oflaissez-faire had believed that they

alone were clear-sighted, and that

protectionism was always the off-

spring of ignorance out of self-interest.

They had been confident that they

were solving the problem of poverty,

and solving it for the world as a

whole, and serving, not merely the

survival of the economically fittest,

but the great cause of liberty. Mostimportantly, these nineteenth-century

advocates of free trade had believed

that they were the friends and assur-

ers of peace and international concord

and economic justice between nations

and the diffusers of the benefits of

progress.

Commentators since the eight-

eenth century had been arguing that

free trade would lead to peace by

tying the destinies of nations together

through economic interdependence much as we still hear from optimistic

commentators on globalization today.

It was particularly this idea that

Keyness generation looking back

from the perspective of the 1920s and

30s thought so naive and dangerous,

having seen precisely the opposite.

Rather than forging world peace, the

economically interdependent nations

of Europe had destroyed one another.

The parallel between these dogmasof the prewar nineteenth centuryworld and the rhetoric of post-Cold

War neoliberalism is striking, although

Keynes would have been the last to

suspect that the nineteenth century

view of capitalism would return with

such a vengeance. There are still

those who cling to the old ideas, he

wrote in 1932, but in no country of the

world today can they be reckoned as

a serious force. Instead, the political

demand in the 1930s was to be our

own masters rather than at the mercyof world forces working out, or trying

to work out, some uniform equili-

brium according to the ideal principles,

if they can be called such, of laissez-

faire capitalism. Taming these world

forces required the construction of

a new world order, which Keynes

worked to see implemented in what

were literally his dying days.

The international aspect of

Keyness agenda was partially if

imperfectly instituted in the Bretton

Woods system, which combined deve-lopment and reconstruction aid with

a new world financial order of national

currencies and embedded liberal-

ism.2 Under Bretton Woods, all cur-

rencies were pegged to the U.S. dol-

lar, and the U.S. dollar was anchored

to gold; exchange rates between cur-

rencies were fixed, and subject to

ongoing international negotiation.

The aim was to make economic pro-

duction congruent with national

regulatory oversight while allowinginternational commerce. This congru-

ence was most apparent in finance,

as exhibited in Keyness advocacy of

a switch from the gold standard to a

system of national currencies linked

together through international nego-

tiation.

Keynesian monetary policy

requires national currencies to enablepolitical regulation of the business

cycle, but in order to avoid isolation,

there must be some way to link eco-

nomies togetherwithin rather than

beyond the regulatory purview of the

state. Keynes was not advocating

autarky; he was seeking a remedy for

the problems that had arisen in a glo-

bal economy ungoverned by politics.

His aim was to align production and

politics at the national level, which he

understood meant folding interna-tional commerce into international

diplomacy generally, by instituting

forms of international regulation to

complement domestic oversight of

markets.

A s it turned out, the old ideas didreturn in new form, but only after the

post-war Keynesian order an order

expressly constructed to manage the

fall-out of the first globalization had

been systematically dismantled. Thebeginning of the current episode of

globalization what we might call the

second globalization is usually

dated to roughly the middle of the

1970s, precisely when this post-war

Keynesian order began to break down.

The end of the Bretton Woods system

ushered in a new world order, which

only came fully into its own after the

end of the Cold War. The neoliberal

ideal of a world without walls (in the

words of former Director of the WorldTrade Organization, Mike Moore3 )

stands in direct contrast to the Bretton

Woods regime.2. John Gerard Ruggie, InternationalRegimes, Transactions, and Change: Embed-ded Liberalism in the Postwar EconomicOrder,International Organization 36(2),Spring 1982, 379-415.

3. Mike Moore,A World Without Walls: Free-dom, Development, Free Trade and GlobalGovernance , Cambridge University Press,

New York, 2003.


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The liquidation of the Keyne-

sian system was the victory of several

decades of effort by Wall Street and

the City joined by a host of neolibe-

ral think tanks. It was ultimately rati-

fied in the Washington Consensus

that pushed governmental and inter-governmental organizations toward

privatization, deregulation, and mar-

ket-mimicry. According to the ideo-

logy of this second globalization,

politics had to be withdrawn from pro-

duction. Against post-war Keynesia-

nism, advocates of the Washington

Consensus sought to create an eco-

nomic space purified of political

interference, especially in the deve-

loping world. Markets, on this

account, could be trusted to generatethe right outcomes; states ought to

defer to the magic of the market, as

financial commentator Martin Wolf

called it.4

The first globalization emergedoutside the purview of nation states

because there were no international

institutions at that time able to extend

regulatory control over transnational

commercial actors, at least outside the

large European empires. By contrast,the emergence of the second globali-

zation required the deliberate disman-

tling of the system of governmental

oversight set up on expressly Keyne-

sian grounds, in the wake of the World

Wars. The second globalization did not

lead, however, to a disordered world.

After the United States switched off

the gold standard in 1971, the dollar,

crucially, continued to function as the

worlds reserve currency even while

other currencies floated freely againstit. In this new environment, many

Asian countries maintained informal

pegs to the dollar for purposes of

maintaining a stable exchange envi-

ronment for the purpose of export-

oriented development.

This new regime allowed for therapid economic growth of East Asia including, most recently, coastal

China, but Japan and the East Asian

tigers before that through the sale

of consumer items to the United States

in exchange for increasing amounts

of dollar-denominated debt. It also

allowed the United States to deficit-

spend through booms and busts alike

by relying on foreign purchases of its

debt, taking advantage of the dollars

continued centrality to the world

financial system. The U.S. thusbecame the lender and spender of

last resort: lending abroad to consume

from abroad in a cycle it seems unable

to stop.

This new regime represents

the distorted evolution of post-war

Keynesianism. Under either a gold

standard proper or a functionally equi-

valent gold-pegged standard, U.S.

debt levels would have been revealed

as patently unsustainable several dec-

ades ago: the gold to back up the debt

would simply not have been in thebank. Likewise, under a system of

floating currencies without a reserve

currency, the value of the dollar would

have been tied directly to reciprocal

foreign demand for U.S. goods and

services. It is only in the second glo-

balization following the breakdown of

Bretton Woods that we find the novel

combination of globalized finance

anda world reserve currency that can

be inflated at will.

U.S. debt issuance has increaseddramatically in the current financial

crisis, and it is in this context that

Keynes has been rehabilitated as

a prophet of debt-financed public

spending. Critically, however, the

money being spent is not money that

Americans are borrowing from them-

selves, and will one day pay back (or

fail to pay back) to future generations

of Americans. Rather, the deficit-

spending now under way under-

taken on ersatz Keynesian grounds

depends disproportionately on

money that Americans are borrowingfrom abroad, and will one day pay

back (or fail to pay back) to future

generations of foreign citizens, par-

ticularly Chinese.

China is now the largest holder

of U.S. Treasury bonds: at least $768

billion worth in March 2009, though

some estimates put its total dollar-

denominated assets at twice that.

Together, China and Japan are the

major foreign investors in U.S. pub-

lic debt, half of which is held outsidethe United States. In the current crisis,

America is depending on its creditors

not just to maintain their existing

dollar-denominated debt, but also to

soak up the new Treasury Bills being

printed in Washington. In June,

United States Treasury Secretary Tim

Geithner visited Beijing to reassure

the Chinese government that its dol-

lar holdings remain a sound invest-

ment despite massive new U.S.

borrowing. After his opening speech

at Beijing University, Geithner res-ponded to a question about the sound-

ness of the U.S. dollar declaring,

Chinese assets are very safe. The

comment provoked loud laughter

from the assembled students: they

knew perfectly well that the American

IOUs they will inherit are of deeply

uncertain value.

From eighteenth centuryphilosophessuch as Montesquieu to twentieth-century journalists such as Thomas

Friedman or Martin Wolf, the idea that

economic interdependence leads to

international peace has been a popu-

lar one. Alas, the idea is hard to square

with the historical facts. Keynes

argued the opposite position follow-

4. Martin Wolf, Why Globalization Works,Chapter 4, Yale University Press, New Haven,2004.


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ing his experience of the First World

War:

It does not now seem obvious that

a great concentration of national

effort on the capture of foreign

trade, that the penetration of a coun-

trys economic structure by theresources and the influence of for-

eign capitalists, and that a close

dependence of our own economic

life on the fluctuating economic

policies of foreign countries are

safeguards and assurances of inter-

national peace. It is easier, in the

light of experience and foresight, to

argue quite the contrary.

A famous commentator at the

time, Sir Norman Angell, had argued

on the very eve of the First World Warthat Germany would never attack Brit-

ain, given the interconnections bet-

ween the two economies. (Germany

was Britains second largest trading

partner.) War had become impossible

among modern commercial nations,

Angell claimed: those who thought it

might occur were under a great illu-

sion since military and political

power give a nation no commercial

advantage and it is an economic

impossibility for one nation to seize

or destroy the wealth of another, or forone nation to enrich itself by subjugat-

ing another.5

In retrospect, Keynes was able toidentify what had really been the

great illusion: the fantasy that eco-

nomic globalization would lead to

peace. That fantasy rested on the idea

that rival countries necessarily put

economic prosperity above other val-

ues, such as national honour or com-plex geopolitical commitments. The

First World War revealed otherwise:

economically interdependent coun-

tries were not immune from violence

and, on a different account of why vio-

lence happens, might even be particu-

larly prone to it. Indeed, while Keynes

cited many reasons for limiting eco-

nomic globalization, including for the

sake of what we now call the policyspace available to governments to

intervene in the economy, it was inter-

national peace that was his foremost

concern. Because globalization allows

economic relations to form above and

outside the state, there is no obvious

route to a solution if things go awry (as

might be expected) in complex chains

of production and investment that

cross national borders.

Keynes argued that, The divorcebetween ownership and the real res-ponsibility of management is serious

within a country, when, as a result of

joint stock enterprise, ownership is

broken up among innumerable indi-

viduals who buy their interest today

and sell it tomorrow and lack alto-

gether both knowledge and responsi-

bility towards what they momentarily

own. These are the circumstances

that led to our current financial crisis:

the lack of both knowledge and res-ponsibility for investments that are

only momentarily owned bad debts

securitized, then traded, and used as

leverage for the speculative purchase

of more assets. It is a scenario that

Keynes would have found entirely

familiar, leaving aside, of course, the

more complex financial instruments

that facilitated our recent bubble. But

the division between ownership and

real responsibility becomes an even

more acute problem when globaliza-tion divides ownership and produc-

tion across multiple countries, leaving

no overall political forum in which

conflicts can be managed:

When the same principle [i.e. the

division of ownership and respon-

sibility] is applied internationally,

it is, in times of stress, intolerable

I am irresponsible towards what

I own and those who operate what

I own are irresponsible towards

me. There may be some financial

calculation which shows it to be ad-

vantageous that my savings shouldbe invested in whatever quarter of

the habitable globe shows the great-

est marginal efficiency of capital

or the highest rate of interest. But

experience is accumulating that

remoteness between ownership

and operation is an evil in the rela-

tions among men, likely or certain

in the long run to set up strains and

enmities which will bring to nought

the financial calculation.

Globalization divides up the diffe-rent parts of the productive process

(and the differential gains from it)

among citizens of many different

countries and did so in Keyness

time as well as today. In so doing, it

may increase aggregate welfare, and

it certainly helps investors and those

best positioned to make money in glo-

balized markets. But it also has the

consequence of elevating the market

above politics by moving decisionsabout production to a realm where

they can only be made according to

some financial calculation and for

which there is no straightforward

political remedy should things go

sour. Reflecting on this fact led

Keynes to be wary about global eco-

nomic integration: I sympathize,

therefore, with those who would mini-

mize, rather than with those who

would maximize, economic entangle-

ment among nations.This does not mean that Keynes

was anti-cosmopolitan or illiberal.

He makes his commitment to a libe-

ral and cosmopolitan order clear:

Ideas, knowledge, science, hospital-

ity, travel, he explains, these are the

things which should of their nature be

5. Norman Angell,The Great Illusion: A Studyof the Relation of Military Power in Nationsto Their Economic and Social Advantage, G.P.Putnam, New York, 1911, p. vii.


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international. Sharing these things,

he thought, would not embroil people

of different nationalities in intractable

conflict. The situation is different,

however, with economic production,

and, especially, with finance: let

goods be homespun whenever it isreasonably and conveniently possi-

ble, Keynes advised, and, above

all, let finance be primarily national.

National self-sufficiency might or

might not be the best economic policy,

but it ought nevertheless to be pursued

for the sake of peace. As Keynes

pointed out in dramatic understate-

ment: the age of economic internatio-

nalism was not particularly successful

in avoiding war.

The second globalization todayrepresents a massive failure of natio-

nal self-sufficiency, especially the

demand that finance should above all

be focused nationally. If the U.S. debt

driving it were held domestically, as

Keynes counselled, there might one

day come a reckoning between diffe-

rent generations or different classes of

Americans between those who hold

the massive debt and those who owe it.

The political procedures of the UnitedStates would probably be resilient

enough to contain the process: since

antiquity, the history of democratic

self-government has featured many

episodes of debt forgiveness under-

taken for the sake of national recon-

ciliation. But the average American is

now in debt not just to other, richer

Americans who can be squeezed

politically for debt-relief or redistri-

bution but also to people far away

and who are mostly far, far poorer.The Nobel Prize-winning eco-

nomist Paul Krugman has jokingly

described the U.S. relationship with

China in recent decades as a swap of

toxic debt for toxic toys: They sold

us poison toys and tainted seafood; we

sold them fraudulent securities.6

What this means, joking aside, is that

vast numbers of Chinese peasants

(turned factory workers) have spent

their lives producing goods for con-

sumption in the U.S. in exchange for

American IOUs of dubious value. It

would be unwise to be too sanguineabout this situation, or to assume that

the reckoning the parties will choose

to pursue will be an exclusively eco-

nomic one as Norman Angell, not

Keynes, would have supposed. If we

wish to summon the ghost of Keynes

today, it should not be to provide us

with sorry comfort as the U.S. taxpayer

makes good the bad bets of Citibank

by borrowing yet more money from

abroad.

In some quarters, the Nehruvianlegacy in India is blamed for what is

considered a low rate of economic

growth during the several decades fol-

lowing Independence. A conventional

narrative holds that India failed to

achieve growth commensurate with

that of its East Asian neighbours

because it pursued too devotedly the

national self-sufficiency that Keyne-

sians (including Nehru) advocated.

On this account, Indias recent eco-nomic acceleration can be credited to

the liberalization of the early 1990s,

beginning with the IMF-led interven-

tion in 1991.

This account remains controver-

sial and is inaccurate in several res-

pects: the growth of the 1990s began

earlier with comparatively minor

reforms in the 1980s, when the license

raj was still in effect, and if Indias

growth from independence up to

1990 was not spectacular, it was stillentirely normal when compared

with similar developing countries.7

Besides, evaluating Indias economic

liberalization normatively requires

specifying an appropriate benchmark

by which to compare the outcomes of

different policies and a clearer sense

of how economic growth in the aggre-

gate is related to more pressing con-

cerns about poverty alleviation and

inequality. The debate over the eco-

nomic reforms will go on, but thisseems an opportune time to consider

a different question: how Indias deve-

lopment has (and has not) depended

upon the complex dynamics of the

second globalization.

At the time of writing, India appearsenviably sheltered from the current

financial crisis. Its large domestic

market continues to grow, unchecked

by the recession in the rich countriesabroad. The comparative insulation of

its economy, particularly in finance,

and a relative lack of dependence on

export-led growth now seem less an

unwelcome residue of Nehruvian

statism than an important buffer

against a broken world economy.

What it means to have a short

memory or, at least, a short-term

profit horizon is to forget that what

appears an obstacle in one moment

can turn out to be an important advan-

tage under altered circumstances. ForIndia did not throw its doors wide

open in the mid-1990s, even though

the nature of its planning had changed

to allow more market-orientation.8

And on critical questions of inter-

national economic integration, such

as capital controls and the export-

orientation of its development poli-

cies, India remained comparatively

jealous of its national prerogatives.

This relative insulation from

globalization was much lamented,

6. Paul Krugman, Chinas Dollar Trap, TheNew York Times , 3 April 2009, p. A29.

7. See Brad DeLong, India Since Independ-ence, in Dani Rodrik (ed.), In Search of

Prosperity: Analytic Narratives on Econo-mic Growth, Princeton University Press,Princeton, 2003, pp. 184-204.

8. See Montek Singh Ahluwalia, PlanningThen and Now,Seminar589, September 2008.


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perhaps especially by Indian econo-

mists trained in the United States, who

were taught that an East-Asian style

miracle awaited if only India would

devote itself fully to economic inte-

gration. It is hard to say that this view

was simply wrong we cannot re-runhistory to play out the counterfactual

but it now seems much less con-

vincing than it formerly did. The point

is not simply that India has enjoyed

rapid economic growth without a deep

commitment to international integra-

tion; the untestable retort will then

come that India could have growneven

faster at 12 per cent annually, say,

rather than 10 per cent if only it had

let the markets rip. The point must be,

rather, that India has enjoyed rapideconomic growth without becoming

entangled in a web of international

finance that appears politically dan-

gerous, leaving aside economic calcu-

lations about roads not taken.

Indias holding of U.S. Trea-

sury Bills remains small only $38

billion as of April 2009, though that

is nearly four times what it was only

a year earlier and while it seems a

good time to have a deep domestic

market rather than American debt,

the issue is not really about econo-mics. As Keynes reminds us, the

questions about globalization are

above all political ones and India

may prefer to remain an ally of the

United States rather than its creditor.

The worlds two most important

democracies may be able to remain

better friends by maintaining a pru-

dent economic distance from each

other something that India will need

to consider as it continues to grow

rapidly alongside an increasinglyindebted and anxious United States.

For the moment, it is Chinese stu-

dents alone who must laugh at the

assurances of the U.S. Treasury secre-

tary; perhaps their Indian counter-

parts should be glad they have been

spared a similar privilege.

Staying in tune?V I D Y A S H A H

NOBODY appreciates its great utility.

People will certainly repent one day.

The next decade will kill most of the

leading musicians and scholars. Inthe year 1922, so wrote Pt. Vishnu

Narayan Bhatkande, a seminal figureof Indian musicology, about the steady

decline of Hindustani classical music

in India in a letter to a close friend.1

Nearly nine decades later, despite avastly different and rapidly changing

social world, the refrain that classical

music is deteriorating and suffering

with each passing day, remains. Typi-

cally old is gold and the new or con-

temporary can certainly not meet themark. A combination of rapid social

changes and technological advances,

pitted against the rather organizedstructure that classical music lives

within, makes the situation some-

what confusing and a discussion onthe future of this tradition difficult.

My thoughts, given my own

practice and concerns, are centred on

the world of North Indian classical

music. Where does this music get

located? Music in India is a hetero-geneous reality and the well-known

ethnomusicologist Ashok Ranade

refers to this world of music as a cul-tural federation of sorts. Such an

aerial view might help put in perspec-

tive the present form, patronage andthe manner in which this music has

1. Janaki Bakhle,Two Men and Music: Nation-alism in the Making of an Indian ClassicalTradition, Permanent Black, New Delhi, 2005.

what keynes warned about globalization (1)

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