Some Versions of Keynes on Protectionism
A short and incomplete history
In his 1969 Presidential Address to the International Economic Association, Paul Samuelson recalled a conversation he had with the mathematician Stanislav Ulam at Harvard:
'He used to tease me by saying, 'name me one proposition in all of the social sciences which is both true and non-trivial'. This was a test that I always failed. But now, some thirty years later, on the staircase, so to speak, an appropriate answer occurs to me: the Ricardian theory of comparative advantage; the demonstration that trade is mutually profitable even when one country is absolutely more - or less - productive in terms of every commodity'
Apart from being an enjoyable bit of economic lore, I have often wondered what other economists would have made of Samuelson's epiphany. In the case of John Maynard Keynes the answer would have been highly sensitive to the period of his career in which the question was put to him. In this blog I will attempt to trace, in very rough outline, three phases in Keynes' thinking on free trade and the instruments of protectionist policy.
Early Years: Trivial and True (1903-1926)
Keynes graduated from Cambridge a strong advocate for free trade and laissez faire more broadly, and remained so all the way through the First World War and into the early 1920s. His views were influenced by, among others, Alfred Marshall, who was one of the signatories to the 1903 'Economists' Manifesto' that challenged Joseph Chamberlain's proposals to erect a tariff barrier for all foreign goods entering the British Imperial territories. Marshall later came to regret his involvement in the manifesto and the whole 'Imperial Preference' affair, largely because he felt it was unwise for a professional economist to enter into contentious policy debates. Keynes had no such scruples and spent most of his career in the midst of public controversy. When he wrote on trade issues in his early years, for example in an article in the Manchester Guardian in January 1923, his argument tended to emphasise the triviality of the case against protectionism:
'We must hold to free trade, in its widest interpretation, as an inflexible dogma, to which no exception is admitted, wherever the decision rests with us. We must hold to this even where we receive no reciprocity of treatment… I include in free trade the abandonment of any attempt to secure for ourselves exclusive supplies of food and material…'
One could go so far as to call this style the rhetoric of triviality. Keynes' most memorable performances in this mode was his second article on 'Free Trade' in the 01 December 1923 issue of The Nation & the Athenaeum:
'If protectionists merely mean that under their system men will have to sweat and labour more, I grant their case… By cutting off imports we might increase the aggregate of work; but we should be diminishing the aggregate of wages. The Protectionist has to prove not merely that he has made work, but that he has increased the national income. Imports are receipts; and exports are payments. How, as a nation, can we expect to better ourselves by diminishing our receipts? Is there anything that a tariff could do, which an earthquake could not do better?'
However, from the middle of the 1920s, that easy confidence in the economic argument for free trade starts to disappear, being replaced with a more ambivalent attitude. A landmark in this period is the essay 'The End of Laissez-Faire' (1926) where Keynes made his formal declaration of dissent from the mainline of classical economic theory and, in particular, from the idea that markets are capable of smooth self-adjustment under all conditions. The essay is not directly concerned with trade but does attack the philosophical assumptions that undergird the case for the complete and frictionless integration of international markets. This, at least, was the opinion of the Swiss banker Felix Somary, an ardent anti-protectionist, who heard Keynes deliver the speech to an audience in Berlin, and described it as 'a lot of vulgarities that the nationalists greeted with fervour'.
Middle period: Pragmatic Protectionism (1926-1933)
Barry Eichengreen has argued persuasively that Keynes drifted away from a pure form of laissez faire as he became increasingly concerned with the related problems of unemployment and price stability in an economic system constrained by the gold standard. From the publication of 'A Tract on Monetary Reform' (1923) through to the return of the gold standard in 1925, Keynes warned that the policy of fixing sterling at pre-war parity would precipitate a sharp deflationary cycle and so push the economy into crisis. With unemployment rising, Keynes saw tariffs as the unique policy instrument through which, in Eichengreen's words, 'reflation might be rendered consistent with continued maintenance of the gold standard'. For as long as it was settled policy for the government to defend pre-war parity at all costs, tariffs would have to be considered as a matter of necessity. And so, by March 1931, Keynes was openly advocating for a 10% average revenue tariff in order to address what he described as a general 'breakdown' in the 'machinery by which we buy and sell to one another':
Compared with any alternative which is open to us, this measure is unique in that it would at the same time relieve the pressing problems of the Budget and restore business confidence. I do not believe that a wise and prudent Budget can be framed to-day without recourse to a revenue tariff. But this is not its only advantage. In so far as it leads to the substitution of home-produced goods for goods previously imported, it will increase employment in this country […] Free Traders may, consistently with their faith, regard a revenue tariff as our iron ration, which can be used once only in emergency. The emergency has arrived…'
The only problem with Eichengreen's position is that Keynes continued to explore the use of tariffs after the 'gold constraint' disappeared. It is true that in a letter to The Times immediately after the 1931 devaluation, Keynes states quite explicitly that tariff barriers were 'no longer necessary' as other, less crude, reflationary policies could now be taken up by the Government. But in 1933, when he was invited to deliver the first Finley Lecture at University College Dublin, the topic he chose to address was that of 'National Self-Sufficiency', and the terms in which he defended protectionism were new and far more expansive. Keynes did not fully repudiate his prior faith but saw in it an example of that 'bundle of obsolete habiliments one's mind drags round even after the centre of consciousness has been shifted'. The 'shift' here refers to the general realisation in the decade following the war that the international system had failed to deliver either prosperity or peace, the two promises of nineteenth century economic liberalism:
'The decadent international but individualist capitalism, in the hands of which we found ourselves after the war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous; - and it doesn't deliver the goods. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed'.
Free trade was still undeniably an engine for prosperity as it encouraged international specialisation along Ricardian lines. But it was also an amplifier of shocks and a source of instability. Further, capital intensive, mass-production meant that for many goods the question of 'natural' comparative advantage was being nullified. Machinery could run with equal efficiency in Greece and Greenland. The basic argument of 'National Self-Sufficiency' can be summarised thus: that having reaped the benefits of a period of strong liberalisation, the cost of a moderate form of protectionism was now low enough that it could be feasible:
'National self-sufficiency, in short, though it costs something, may be becoming a luxury which we can afford, if we happen to want it'
The reasons for 'wanting it' were instrumental. Protectionism was not a policy to be pursued for its own intrinsic rightness, but as the means, if needed, of enabling new experiments in political economy that could deliver more intelligent, beautiful, just and virtuous social arrangements. Running through all of this was Keynes' growing discontent with the 'dreadful heresy', that all human deliberation should be a function of un-analysable market forces and ‘business arithmetic’, which I discussed in a previous post. The example Keynes' gives of a case for strategic protectionism is his proposal for raising the rate of investment in capital goods. As he saw it, the rate of interest was too high to be consistent with realising the full possibilities of economic wealth 'afforded by the progress of our technique'. Leaving normal financial forces to find an equilibrium close to the level of investment that Keynes considered optimal would take too long, and may never happen without constraining those forces. Some degree of isolation could then be justified so long as it was part of a larger, rationally-determined policy to create 'an environment in which other ideals can be safely and conveniently pursued'. Of course, the test of those new ideals would still be whether they could survive after the same barriers had ultimately been removed. The underlying message to the audience in Dublin was that there were no longer any 'inflexible dogmas' of the sort Keynes propounded in the Manchester Guardian; that everything, including his own speculations about the potential uses of tariffs, needed to be submitted to 'bold, free and remorseless criticism'.
The Later Years: True and not altogether trivial (1933-1946)
'National Self-Sufficiency' was the most forceful case Keynes ever made for protectionist measures; so far as I can tell he never used the same arguments again. From the middle 1930s when his efforts were taken up with drafting, modifying and then defending the theoretical innovations of the General Theory, he rarely turned his mind to the tariff question. Later with the onset of the Second World War trade was violently disrupted as strategic controls were introduced on either side of the Atlantic and trade lines were throttled by the threat of submarine attack. Keynes' main interests in this period, leading up to Bretton Woods, was to design a new international monetary system that would preserve stable patterns of trade and avoid the instability of chaotic exchange rate fluctuations. Where the tariff question arises in these larger plans for renovating global finance, Keynes is still very much the pragmatist, favouring an overall tendency of tariff reduction and non-discrimination, while maintaining that the United Kingdom should retain the power to introduce barriers if the principles of symmetry were infringed, or some issue of special commercial planning urgently required it.
Shortly before his death in 1946, Keynes - now Baron Keynes of Tilton - was called on to speak to the question of Anglo-American financial arrangements in the House of Lords. His answer gives you a picture of where his mind had finally settled after its long and erratic peregrinations through international economic theory:
'…much of these policies seem to me to be in the prime interest of our country, little though we may like some parts of them. They are calculated to help us regain a full measure of prosperity and prestige in the world's commerce. They aim, above all, at the restoration of multilateral trade which is a system upon which British commerce essentially depends. You can draw your supplies from any source that suits you and sell your goods in any market where they can be sold to advantage. The bias of the policies before you is against bilateral barter and every kind of discriminatory practice. The separate economic blocs and all the friction and loss of friendship they must bring with them are expedients to which one may be driven in a hostile world, where trade has ceased over wide areas to be co-operative and peaceful and where are forgotten the healthy rules of mutual advantage and equal treatment. But it is surely crazy to prefer that.'
Not quite Samuelson's view that economics 'puts its best foot forward when it speaks out on international trade'; but not that far away, either.
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A Coda - The Three errors of National Self-Sufficiency
‘National Self-Sufficiency’ is a difficult text; the arguments are interleaved in strange and often misleading ways, and there are cross-winds from Keynes' other writings and intellectual preoccupations at the time that muddy the picture. The Keynesian rhetoric is still in full force; but the Keynesian insight is clouded. However, the conclusion of his address, in which he outlines the three dangers that attend all applications of protectionist measures, is golden and perennial wisdom. I will finish with a precis of those dangers:
'Silliness - the silliness of the doctrinaire' - 'We have… to count the cost down to the penny which our rhetoric has despised. An experimental society has need to be far more efficient than an old established one, if it is to survive safely. It will need all its economic margin for its own proper purposes and can afford to give nothing away to soft-headedness or doctrinaire impracticability. When a doctrinaire proceeds to action, he must, so to speak, forget his doctrine.'
'Haste' - 'Paul Valery's aphorism is worth quoting: - "political conflicts distort and disturb the people's sense of distinction between matters of importance and matters of urgency." The economic transition of a Society is a thing to be accomplished slowly… The sacrifices and losses of transition will be vastly greater if the pace is forced. I do not believe in the inevitability of gradualness, but I do believe in gradualness. This is above all true of a transition towards greater national self-sufficiency and a planned domestic economy. For it is of the nature of economic processes to be rooted in time. A rapid transition will involve so much pure destruction of wealth that the new state of affairs will be, at first, far worse than the old; and the grand experiment will be discredited. For men judge remorselessly by early results.'
'Intolerance' - '…The new economic modes, towards which we are blundering, are, in the essence of their nature, experiments. We have no clear idea laid up in our minds beforehand of exactly what we want. We shall discover it as we move along, and we shall have to mould our material in accordance with our experience. Now for this process bold, free and remorseless criticism is a sine qua non of ultimate success.’