To Joan’s disappointment, Keynes “was not much interested in the theory of imperfect competition” and refused to be convinced that monopoly was a major cause of periodic shortfalls in effective demand.44 After warning his publishers at Macmillan that they probably wouldn’t find the book exciting, Keynes nonetheless urged them to publish it. The Economics of Imperfect Competition appeared in the fall of 1933. Robinson’s book was an instant critical success, garnering numerous respectful, and even some superlative, reviews. Schumpeter, who had already called her “one of our best men,”45 responded instantly to Kahn’s suggestion that he promote her new book. In his review, Schumpeter praised Robinson for “genuine originality” and concluded that the book gave her “a claim, certainly to a leading, perhaps to the first place” among economic theorists in this area, placing her ahead of Kahn and Sraffa as well as Chamberlin.46
Robinson had an enormous edge over Sraffa and Kahn. Both suffered from severe writer’s block, and Sraffa was so disabled by severe anxiety that he could not deliver lectures. She, on the other hand, was a superb speaker and writer who, once she found that she had something to say, was one of the most prolific in her discipline. As soon as the final correction had been made on her manuscript, she plunged into a series of articles and reviews.
Less than a year after Imperfect Competition was published, Joan gave birth to her first child. “How well you do things,” gushed her friend Dorothy Garratt in May 1934. “A discovery in economics and a baby girl.”47 Robinson was elated by her succès d’estime. That September, when Kahn went to Tilton to work on Keynes’s new book, she wrote to him, asking cheekily, “Would Maynard like me to write him a preface for the new work showing in what respects his ideas have altered?”48 Given that most of her interactions with Keynes had been via Kahn or by letter, her suggestion was nervy, even more so considering that Kahn was the only member of the Circus who had made an original contribution (the multiplier) to Keynes’s new theory. Nonetheless, there was no doubt that she had clearly won Keynes’s respect as an economist. A few years later, he acknowledged that Robinson was “without a doubt within the first half dozen” economists at Cambridge, a group that included Pigou, Sraffa, Kahn, and Keynes himself.49
• • •
Andrew Boyle, the Scottish journalist who in 1979 exposed Anthony Blunt as the fourth member of the notorious Cambridge Five Soviet spy ring, claims that Robinson was a founding member of the first Communist cell at Cambridge. It was supposed to have been organized by Maurice Dobb, the economics lecturer who would soon recruit his student and later spy Kim Philby in 1931.50 But Boyle, who corresponded with Robinson, gives no sources. Geoffrey Harcourt, who knew Robinson toward the end of her life, dates her infatuation with Stalin—her “radicalization” as he puts it—to 1936.51
That year Robinson’s views were unquestionably in a violent state of flux. When she reviewed John Strachey’s The Theory and Practice of Socialism in mid-1936, she was critical of Strachey’s argument that Soviet-style central planning was the cure for the Great Depression. She did not call Strachey’s logic “an insult to my intelligence,” as Keynes had, but she took him to task for conflating flaws in mainstream economic theory with fatal defects in the economic system. “We cannot be recommended to overthrow merely because its economists have talked nonsense about it,” she quipped.52
Six months later, Robinson seems to have had a conversion. She described capitalism as “a system which allows effective demand to fall off amongst a population which is overcrowded and underfed, which meets unemployment with schemes to restrict output and can offer no help to distressed areas except orders for armaments.” Marxist dogma might be “over simple,” she admitted, but at least it didn’t stifle “simple common sense.” Indeed, she regarded Marxism as an effective vaccine “against the sophistications of laissez faire economics.”53
In May 1936, her friends the Garratts had introduced Joan to a couple who were visiting Cambridge from Aleppo, Syria, the setting for Agatha Christie’s best seller Murder on the Orient Express. Dora Collingwood was an English landscape painter whose father was a noted archaeologist, artist, and secretary to John Ruskin, the art historian. Her husband, Ernest Altounyan, was an Anglo-Armenian doctor. Dorothy Garratt described him as “a very strange but attractive person, living at an emotional level which made me feel very suburban.” He was in his mid-forties, myopic, graying, but with “a good forehead and nose,”54 an insinuating voice, and all sorts of romantic friends, including Arthur Ransome, the children’s author, and T. E. Lawrence, aka Lawrence of Arabia. The latter had recently died in a motorcycle crash, and Altounyan told Robinson that he had hoped to find a publisher for his epic poem celebrating their friendship. Robinson offered to read it and send it to her uncle. Altounyan was terribly impressed and grateful. They began exchanging notes. By the end of the month, he was writing confidentially that she was “by far the loveliest thing that has happened to me in England” and that meeting her had been “intoxicating.”55
Altounyan loved to dance, and one of his daughters said that “he tried to live his whole life as a kind of dance and got depressed and frustrated if he was prevented from doing so.” He was also bipolar. From Aleppo, he began writing Robinson long, rambling love letters. Robinson, meanwhile, was proofreading the poem. Eddie Marsh, Keynes, and a dozen other literary friends pronounced it dreadful, but Robinson persisted until she finally badgered the editor of Cambridge University Press into publishing it.
On March 12 of the following year, one month before the publication of Altounyan’s poem, Joan boarded the Orient Express at Victoria Station. Two months pregnant and traveling alone, she resembled Mary Debenham in Christie’s novel: “There was a kind of cool efficiency in the way she was eating her breakfast and in the way she called to the attendant to bring her more coffee, which bespoke a knowledge of the world and of traveling . . . She was, he judged, the kind of young woman who could take care of herself with perfect ease wherever she went. She had poise and efficiency.”56 Joan was reunited with Altounyan in Aleppo before proceeding to Jaffa and Tiberius, in Palestine.
She saw him alone a second time on April 14, on her return trip. By then, seeing him surrounded by an untidy, unhappy household, she may have begun to feel that her lover’s appeal had been largely of her own imagining. Reviews were very scarce for his poem, Ornament of Honor. The Palestine Post hailed him a “Tennyson minor.”57 When she returned to Cambridge, the old ménage à trois with Austin and Richard Kahn again became the emotional pivot in her life. “In another age she would have been on a camel, riding through the desert,” Frank Hahn, an economist, once observed. “A part of her personality was simply upper-class refusal to go with the herd; a need to distinguish herself from the herd.”58
One year after her second baby was born and weeks after Hitler seized Czechoslovakia, Robinson suffered a serious attack of mania. She spent many months in a sanitarium. By the time she got out of the hospital, Austin had been assigned to war work in Whitehall, and a physical separation ensued. One by one her colleagues were enlisted. Eventually, Kahn too had to leave Cambridge. He was eventually posted to Cairo and wound up spending most of the war there. Robinson stayed behind in Cambridge.
Chapter XII
The Economists’ War: Keynes and Friedman at the Treasury
In War we move back from the Age of Plenty to the Age of Scarcity.
—John Maynard Keynes, 19401
The outbreak of war gave Hayek and Keynes an opportunity to make peace. Both had hoped that war could be avoided, but neither had any illusions about accepting Hitler’s “peace” offers. Both hoped and believed that the United States would enter the war. Otherwise, by the time Germany collapsed, Hayek said, “the civilization of Europe will be destroyed.”2 Both saw the war as a defense, not only of Britain, but of the eighteenth-century Enlightenment. At a benefit performance at the Cambridge Arts Theatre to raise money for refugees in December 1940, Keynes told the audience that there were a t
housand Germans in Cambridge. There were, he said, now “two Germanys”:
The presence here of Germany in exile is . . . a sign that this is a war not between nationalities and imperialism, but between two opposed ways of life . . . Our object in this mad, unavoidable struggle is not to conquer Germany, but to convert her, to bring her back within the historic fold of Western civilization of which the institutional foundations are . . . the Christian Ethic, the Scientific Spirit and the Rule of Law. It is only on these foundations that the personal life can be lived.3
By the time the blitz began in the summer of 1940, Keynes and Hayek had been exchanging notes for months about the evacuation of the London School of Economics to Cambridge, help for Jewish academics fleeing Nazi-controlled Europe, and efforts to win the release of foreign colleagues as “enemy aliens” in the panicky weeks after the fall of France in June 1940. In October Keynes had arranged rooms and high table privileges at King’s College for Hayek. On the long weekends that Keynes continued to spend in Cambridge, they frequented G. David, the antiquarian book dealer around the corner from the Cambridge Arts Theatre, and exchanged historical tidbits.
More surprisingly, the war put Hayek and Keynes on the same side of the economic policy debate. For most of the 1930s, Hayek had dismissed Keynes’s proposals to fight the Great Depression with easier money and deficit spending as “inflation propaganda” and once referred to his rival privately as a “public enemy.”4 But by 1939, Hayek was praising Keynes in newspaper articles. Much to the chagrin of some of his left-wing friends and disciples, the war had turned Keynes into an inflation hawk.
What happened? Circumstances had changed. Britain had practically dissolved its army and air force after World War I, so playing catch-up with Hitler’s Germany required massive increases in government spending starting in 1937. Partly out of fear that raising taxes would aggravate unemployment, which still hovered at around 9 percent, and partly because rearmament was unpopular, the government of Prime Minister Neville Chamberlain opted not to raise taxes, instead issuing IOUs to the public in the form of bonds. Thus, even before war was declared, Britain’s national debt had climbed to dizzying heights. The first war budget, published in September 1939, projected a deficit of £1 billion, or a stunning 25 percent of Britain’s annual national income.
Massive deficit spending had a dramatic effect. The economy boomed, especially in the south of England, where ports and bases were being expanded and arms factories were being built. This was, belatedly, the cure that Keynes had advocated in 1933, and it seemed to vindicate the General Theory.
One might have expected Keynes to be pleased that the Treasury, having stubbornly resisted his advice in the late 1920s and early 1930s, had finally turned “Keynesian.” Instead, writes Skidelsky, he was increasingly worried and disapproving. By running up a huge debt and then printing money to hold down interest rates, the government was sowing the seeds of future inflation. Now that war was certain, things could only get worse. Keynes denied that he was having a change of heart. It was circumstances that had changed. In 1933, the unemployment rate was 15 percent; in 1939 it was below 4 percent and falling, and industrialists were complaining of shortages of skilled mechanics and engineers. Keynes invented the economics of plenty to address a massive shortfall of demand in a depression. Now he was applying the same logic to the opposite condition: namely, an excess of demand during a war.
After World War I, the consequence of inflationary war finance and huge debt burdens had been economic and political chaos. He unveiled the “Keynes Plan” in two articles in the Times of London in mid-November 1939.5 To plug the gap of £400 million to £500 million between spending and tax receipts, he proposed a wartime levy on income. The twist was that the money was to be refunded after the war, enabling Keynes, like Schumpeter in 1919, to call his tax “forced savings.” Skidelsky points out that the articles, published a few months later as How to Pay for the War, illustrated “Keynes’s conception of the budget as instrument of economic policy.”6 One of the warmest endorsements came from Hayek, who seconded Keynes’s proposals in a column in the Spectator and followed up with a note: “It is reassuring to know that we agree so completely on the economics of scarcity, even if we differ on when it applies.”7
• • •
As Keynes well knew, he was living on borrowed time. A massive heart attack in 1937 had forced him into premature retirement at Tilton. Two years of being cared for by Lydia, a German miracle drug, and Germany’s mad dreams of world conquest gave him the opportunity for a third and final act.
On the eve of the Battle of Britain, Hitler’s attempt to destroy the RAF on the ground, Keynes was back at the Treasury with “no routine duties and no office hours” but with “a sort of roving commission plus membership of various high up committees.”8 The prime minister, Winston Churchill, Britain’s last lion, paid scant attention to how the war against Hitler would be financed, and even less to postwar economic arrangements. These became the bailiwick of Keynes, who took on the role of Churchill’s de facto Chancellor of the Exchequer during World War II. When Keynes wrote his impassioned outburst against the Versailles Treaty in 1919, he had warned that “vengeance, I dare predict, will not limp” if the victors insisted on impoverishing the vanquished. After he was proved tragically right, Skidelsky writes, Keynes’s “one overriding aim” was for the Allies “to do better than last time.”9
After the stunning collapse of France left Britain to face the German juggernaut alone, the Treasury’s, and therefore Keynes’s, obsession became to raise money to keep fighting. While Hitler’s tactic of serial conquest did not require Germany to place her economy on a total war footing, Britain did not have the luxury of waging a limited war. As the aggressor, Hitler could decide when to attack, and his strategy of Blitzkrieg was self-financing insofar as despoiling its victims paid the military bill. Britain’s choices boiled down to two: One was accepting Hitler’s offer of “peace,” which meant sharing France’s ignoble fate. While Keynes’s old political mentor, Lloyd George, was prepared to become King George’s Marshal Pétain and the Left was holding peace vigils, that option was a nonstarter with the British electorate. The other choice was to throw fiscal prudence to the wind and wage total war regardless of the postwar consequences. Although Keynes had no doubt that the latter was the correct choice, he never stopped racking his brains for clever ways to soften any negative consequences. Once again he was “interested, geared up, and happy.”10 As he wrote to a friend, “Well here am I, like a recurring decimal, doing very similar work in the same place for a similar emergency.”11
From August 1940, Keynes spent as many as eighteen hours a day at his desk and, quite often, in the Treasury’s deep cellar. Like Hayek, who had insisted on staying in London and commuting to Cambridge during the first phase of the bombing, he ignored the danger, dismissed the possibility of a German invasion, and hoped that his books and pictures would survive. Now that he was an insider with access to “all the innermost secrets” as well as to the chancellor, whose office was next to his own, he had a far bigger hand in shaping British financial policy than during World War I. Insider, yes, but still an iconoclast. Neither middle age, celebrity status, nor bad heart had dimmed his impatience with the inefficiency of the King’s College freshmen or the fury expressed in The Economic Consequences of the Peace. “To the carpenter with a hammer, everything looks like a nail,” goes the old saw. To Keynes, everything looked like a problem that he was better qualified to solve than those who were assigned the responsibility. He meddled in matters from tariffs to beer taxes, often getting the facts wrong and ruffling feathers. He once sent Richard Kahn, now posted in Egypt, a plan for reorganizing Cairo’s entire transportation system.
As in the previous war, Keynes’s job became to loosen American purse strings. In early May 1941, before America’s entrance into the war and at the height of a bitter controversy with the United States over providing navy destroyer escorts for arms shipments to Britain,
Keynes spent eleven weeks in Washington, D.C., as Britain’s envoy. It was his third visit to the United States—such visits being “considered in the nature of a serious illness to be followed by convalescence”12—but this time he eschewed his favorite mode of transatlantic conveyance, the Queen Mary, and flew on Pan American’s Atlantic Clipper. With German U-boats roaming the North Atlantic sinking British ships at the rate of sixty a month, flying was safer, although not necessarily much faster due to erratic schedules. Stepping onto the tarmac at La Guardia airport, where reporters waited, Keynes first fantasized aloud about a daily shuttle between London and New York, then took aim at American isolationists.
A German victory would mean that America’s ties to the Old World would be severed permanently, he pointed out. “The American economy could not function at all on its present basis. It doesn’t bear thinking about.” Not everyone appreciated his lecture. The arch-isolationist Senator Burton Wheeler of Montana sneered, “The American people resent the fact that these foreigners are trying to involve us in the war by giving us free advice on how to run our country when they’ve made such a miserable failure with their own.”13 By “miserable failure,” the senator meant that Britain couldn’t pay her bills. Having converted her economy for total war, Britain was forced to pay for imported matériel with hard currencies, even as her ability to earn hard currencies by exporting evaporated. When Lord Lothian, Britain’s ambassador, came right out and said, “Well, boys, Britain’s broke. It’s your money we want,” the US Treasury refused to believe that the British Empire could possibly be short of gold.14