JDN 2456589 PDT 15:46

A review of The Economic Consequences of the Peace by John Maynard Keynes.

The bad news: Most of the book is spectacularly boring to read, as Keynes deluges us with economic figures. I’m an aspiring economist, and even my eyes began to glaze over. Chapters IV, V, and VI can be safely skipped entirely.
One interesting thing about the figures is how small they seem; he recommends reparation funds of only $5 billion—and thinks even this may be too high—while the figures in the treaty he considers preposterous are on the order of $10 to $20 billion (actually he says “£200 milliard” etc., because he is an early-20th-century British gentleman, but I did the conversion for you). Germany’s GDP is now $3.4 trillion, so how can $20 billion be such a burden? Well, there’s been a lot of growth and a lot of inflation since 1920. Germany’s GDP at that time was about $20 billion. (This is about the GDP of modern-day Zambia.) So Keynes’s figures are absolutely correct. The actual reparations received were only about $3 billion, which is right about what he said would happen.

The good news: It really gets interesting when he starts making predictions. The predictions he makes are right, almost every last one of them—and they were made in an environment when everyone else was calling him mad. Reading the last few chapters, in which he predicts the dire outcomes of the Treaty of Versailles and the disasters it will lead to in the 20th century, you would think you were reading a history of the 20th century—except he is writing this history before it happened. I made a list of the events he clearly and specifically predicted:

1. Weimar hyperinflation: “A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a price level out of the reach of all but the rich, the worthlessness of money becomes apparent, and the fraud upon the public can be concealed no longer.” “It is impossible at the present time to say what the mark will be work in terms of foreign currency three or six months or a year hence, and the exchange market can quote no reliable figure.”
2. Balkanization: “Economic frontiers were tolerable so long as an immense territory was included in a few great Empires; but they will not be tolerable when the Empires of Germany, Austria-Hungary, Russia, and Turkey have been partitioned between some twenty different independent authorities.”
3. Change of the League of Nations into a new body: “[...]that is no reason for any of us to decry the League, which the wisdom of the world may yet transform into a powerful instrument of peace, and which in Articles XI-XVII has already accomplished a great and beneficent achievement.”
4. Obstruction due to international veto power: “Does not this provision reduce the League […] into a body merely for wasting time? If all the parties to the Treaty are unanimously of opinion [...] it does not need a League and a Covenant to put the business through.”
5. The European Union: “A Free Trade Union, comprising the whole of Central, Easter, and South-Eastern Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt, and India, might do as much for the peace and prosperity of the world as the League of Nations itself.”
6. World War 2: “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can they delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation.”

He didn’t actually get everything right.
1. He overestimated the League of Nations: “These Articles, which provide safeguards against the outbreak of war between members of the League and also between members and non-members, are the solid achievement of the Covenant. These Articles make substantially less probable a war between organized Great Powers such as that of 1914. This alone should commend the League to all men.”
2. He also failed to predict the rise of Stalinism: “As I write, the flames of Russian Bolshevism seem, for the moment at least, to have burnt themselves out, […]” “I see few signs of sudden or dramatic developments anywhere.” But even then, he allows the possibility: “A victory for Spartacism [i.e., fascism] in Germany might well be the prelude to Revolution everywhere: it would renew the forces of Bolshevism in Russia, and precipitate the dreaded union of Germany and Russia;”
3. He predicted the collapse of the European food supply: “The danger confronting us, therefore, is the rapid depression of the standard of life of the European populations to a point which will mean actual starvation for some (a point already reached in Russia and approximately reached in Austria).” This absolutely would have happened if not for the invention of the Haber-Bosch process and the industrialization of food production. Indeed, he even allows for that result, but is too cautious to predict it: “I assume that there is no revolutionary change in the yield of Nature and material to man’s labor. It is not impossible that the progress of science should bring within our reach methods and devices by which the whole standard of life would be raised immeasurably, and a given volume of products would represent but a portion of the human effort which it represents now.” In a later work, Economic Possibilities for our Grandchildren, he actually expands upon this concept into a (highly, uncannily accurate) prediction of the 21st century economy.
4. He errs most when disagreeing with himself, saying: “Thus the extraordinary occurrences of the past two years in Russia, that vast upheaval of Society, which has overturned what seemed most stable—religion, the basis of property, the ownership of land, as well as forms of government and the hierarchy of classes—may owe more to the deep influences of expanding numbers than to Lenin or to Nicholas; and the disruptive powers of excessive national fecundity may have played a greater part in bursting the bonds of convention than either the power of ideas or the errors of autocracy.” I am far more inclined to agree with a statement he made later in the General Theory: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. ”

He has an extremely high view of America, at a level that I would find almost unseemly among an American citizen: “After the United States came into the war her financial assistance was lavish and unstinted, and without this assistance the Allies could never have won the war, quite apart from the decisive influence of the arrival of the American troops.” “The ungrateful Governments of Europe owe much more to the statesmanship and insight of Mr. Hoover and his band of American workers than they have yet appreciated or will ever acknowledge.” “If I had influence at the United States Treasury, I would not lend a penny to a single one of the present Governments of Europe. They re not to be trusted with resources which they would devote to the furtherance of policies in repugnance to which, in spite of the President’s failure to assert either the might or the ideals of the people of the United States, the Republican and the Democratic parties are probably united. But if, as we must pray they will, the souls of the European peoples turn away this winter from the false idols […] and substitute in their hearts for the hatred and the nationalism […] thoughts and hopes of the happiness and solidarity of the European family,—then should natural piety and filial love impel the American people to put on one side all the smaller objections of private advantage and to complete the work, that they began in saving Europe from the tyranny of organised force, by saving her from herself.”
Then again, this is… a basically accurate prediction. The Marshall Plan absolutely was a concerted effort by the United States to save Europe from itself, and it worked spectacularly well. Is America really that great? I think in practice we fail to live up to our ideals; but then, what other nation is founded upon such ideals at all? We are the first nation on Earth to actually be founded, not for the advantage of a king, not in the name of a race or a religion—but in the name of an ideal, a principle of democracy and liberty based directly on Enlightenment philosophy. Perhaps we really are so great, or could be, did we not so often stumble in our own hypocrisy.
In his most distasteful moments, he comes across as intensely elitist; he speaks often of the foolishness of peasants and the great achievements of entrepreneurs “These ‘profiteers’ are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot be get rich quick whether they wish it or desire it or not. If prices are continually rising, every trade who has purchased for stock or owns property and plant inevitably makes profits.”
He does have great compassion for the people of Germany, however: “The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.”
He understands enlightened self-interest in a way that even modern game theorists don’t: “If there is any force in this mode of thought, expediency and generosity agree together, and the policy which will bet promote immediate friendship between nations will not conflict with the permanent interests of the benefactor.” “The more successful we are in snapping economic relations between Germany and Russia, the more we shall depress the level of our own economic standards and increase the gravity of our own domestic problems.”

On the whole, Keynes is unmistakably brilliant, and his long-term predictions have a level of accuracy that is especially shocking in an age when modern neoclassicists could not see 2008 coming even in 2006. If nothing else, that alone should make us Keynesian.
Just skip Chapters IV-VI.