National self-sufficiency: 1933

In April 1933, Keynes delivered a lecture entitled "National Self­Sufficiency" to a packed hall at University College Dublin. The lecture was published a few months later both in England and in the USA.

The essential thing to understand about this article is that it contained not one belief or opinion that Keynes had not held for many years and had not publicly expressed many times before.¹ And it contained no important belief or opinion that Keynes did not continue to hold and to publicly propagate for the rest of his life. Far from being an aberrant and temporary response to his disappointment over the inability of the major powers to agree on international cooperation as Roy Harrod claimed, "National Self­Sufficiency" is Keynes's carefully considered views as they had evolved over the previous decade.

The article is devoted in the main to an exploration of Keynes's positions on international economics. It takes his long-held and well- known support for state planning built around an extensive program of public capital accumulation more or less for granted. It also assumed that

National self-sufficiency: 1933 153 the listener and reader were aware that there were ambitious experiments in national economic planning and in national control of international economic activity ongoing in many countries, including in Ireland, where the lecture was delivered. (Mussolini came to power in 1922 and Hitler in March 1933.) It opened with a moving description of Keynes's early and almost religious belief in "free trade" and open capital markets.

I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt but almost as part of the moral law. I regarded departures from it as being at the same time an imbecility and an outrage. I thought England's unshakable free-trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before heaven of her economic supremacy.

(CW 21, p. 234)

It went on to explain that nineteenth-century free-traders believed their position to be consistent with economic efficiency (through comparative advantage), individual liberty, and international peace; he did not argue that they were wrong in that specific historical context.

But time and circumstance have changed; Britain was, as Keynes had been insisting since 1919, in a qualitatively new era. Under modern conditions, he argued, the ancient verities no longer held. The first concern he expressed was about the relation of free trade and, especially, inter­national capital mobility to world peace. Note the strong support for cap­ital controls.

[I]t does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country's economic structure by the resources and the influence of for­eign capitalists, that a close dependence of our own economic life on the fluctuating economic policies of foreign countries, are safeguards and assurances of international peace.

(CW 21, p. 236, emphasis added)

These ideas led Keynes to the following conclusions:

I sympathize, therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel - these are the things which should of their nature be international. But let goods be home­spun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national... For these strong reasons, there­fore, I am inclined to the belief that. a greater measure of national self-sufficiency than existed in 1914 may tend to serve the cause of peace, rather than otherwise.

(CW 21, pp. 236-237, emphasis added)

No one who had followed Keynes's public discourse over the decade would be at all surprised by these conclusions. He had been leery of the implications for world peace of international financial entanglements since the negotiations over the Treaty of Versailles.

the gradual disappearance, in a world of mass-production and of the universal adoption of modern techniques, of the special advantages in manufacturing which used to be ours, and to the high real wages (including in this the value of social services) to which our workers are accustomed as compared with our European competitors.

(CW 6, p. 169)

And in mid-1930, Keynes had written in an internal government memorandum:

I am no longer a free trader. in the old sense of the term to the extent of believing in a very high degree of national specialisation and in abandoning any industry which is unable for the time being to hold its own.

(CW 20, p. 379, emphasis added)

Of course, while Keynes's positions on these questions had not changed, the recent world trend toward higher protectionist tariffs and

National self-sufficiency: 1933 155 toward increased economic autonomy in many nations had hardened or solidified or reinforced his views. It is important to understand that Keynes was not arguing in favor of autarky.

I must not be understood to carry my argument beyond a certain point. A considerable degree of international specialisation is necessary in a rational world in all cases where it is dictated by wide differences in climate, natural resources, native aptitudes, level of culture and density of population. But over an increasingly wide range of indus­trial products, and perhaps of agricultural products also, I become doubtful whether the cost of national self-sufficiency is great enough to outweigh the other advantages of gradually bringing the producer and the consumer within the ambit of the same national, economic and financial organisation.

(CW 20, p. 238)

This gets us to the crux of the paper.

Keynes stressed the fact that while many countries were currently experimenting with national economic planning of one sort or another, there was no satisfactory model of democratic and efficient national planning in existence for the British to copy. Thus, the transition toward a planned economy had to be accomplished through bold but thoughtful experimentation, taking care at every point to ensure that no irreparable damage was done in the process to democracy, individual liberty, or eco­nomic efficiency. His discussion of the need to experiment opens with a statement that very few economists today would recognize as Keynes's. Here, he condemns modern capitalism in the harshest terms - not just the capitalism of the Great Depression, but the capitalism of the 1920s as well.

The decadent international but individualistic 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. Each year it becomes more obvious that the world is embarking on a variety of politico-economic experiments...

(CW 20, p. 239, emphasis added)

His main point is that these experiments in national planning will not succeed if each country remains tightly tied into an orthodox international financial and trading system. Keynes believed that very low long-term interest rates were a necessary condition for the large-scale public invest­ment program he supported. Yet under the traditional open system of international finance, they would be impossible to maintain because higher interest rates in other countries would trigger the flight of capital from Britain. And in the absence of managed trade, a substantial increase in economic growth in Britain while the rest of the world continued to deflate would cause unsustainable British trade deficits.

The whole point of national self-sufficiency was to untie the economy from its existing restraints; to free it up for experimentation with an eco­nomically more powerful state. Keynes was simply making the argu­ment - which he never recanted - that the government would have to manage trade and capital flows as part of an overall state planning pro­cess, and that England should continue to produce domestically whatever goods or services were thought to be essential to the quality of Britain's economic or social life, even if such commodities could be purchased else­where somewhat more cheaply.

We wish - for the time being at least and so long as the present transi­tional, experimental phase endures - to be our own masters, and to be as free as we can make ourselves from the interferences of the outside world. Thus,. the policy of an increased national self-sufficiency is to be considered not as an ideal in itself but as directed to the creation of an environment in which other ideals can be safely and conveni­ently pursued.

I have become convinced that the retention of the structure of pri­vate enterprise is incompatible with the degree of material well-being to which our technical advancement entitles us, unless the rate of interest falls to a much lower figure than is likely to come about by

National self-sufficiency: 1933 157 natural forces operating on the old lines. Indeed, the transformation of society, which I preferably envisage, may require a reduction in the rate of interest towards the vanishing point within the next thirty years.² But under a system by which the rate of interest finds... a uniform level throughout the world, after allowing for risk and the like, this is most unlikely to occur. Thus,. economic internationalism embracing the free movement of capital and loanable funds as well as of traded goods may condemn this country for a generation to come to a much lower degree of material prosperity than could be attained under a different system. But this is merely an illustration. The point is that there is no prospect for the next generation of a uniformity of economic systems throughout the world, such as existed, broadly speaking, during the nineteenth century; that we all need to be as free as possible of interference from economic changes elsewhere, in order to make our own favorite experiments towards the ideal social republic of the future; and that a deliberate movement towards greater national self-sufficiency and economic isolation will make our task easier, in so far as it can be accomplished without excessive cost.

(CW 21, pp. 240-241)

Keynes ended this essay with a warning. Looking to the experience of Russia and Germany with national autonomy and central planning, he saw much waste and inefficiency as well as many things that were polit­ically and socially frightening. "I must not be supposed to be endorsing all those things which are being done in the political world today in the name of economic nationalism" (CW 21, p. 244). He listed three particular dangers. "The first is Silliness - the silliness of the doctrinaire." Here, he stressed the importance of economic efficiency and the tendency of social movements to let ideology dominate good sense. "An experimental society has need to be far more efficient than an old-established one if it is to survive safely" (CW 21, p. 244).

The second danger was "Haste." This was a theme he had stressed over and over again - careful evolutionary change offers much greater prospects of eventual success than hasty revolutionary change.

We have a fearful example in Russia today of the evils of insane and unnecessary haste. The sacrifices and losses will be vastly greater if the pace is forced. This is above all true of a transition towards greater national self-sufficiency and a planned domestic economy.

(CW 21, p. 245)

The third danger is "Intolerance." Referring to Russia again, Keynes warned against the practice of forcing one's views on society through vio­lence rather than persuasion. It may be a natural tendency, he suggested, for revolutionary movements to continue to practice the same methods

in power that they were forced to use in the struggle to acquire power. But only a deeply rooted commitment to foster criticism can create the atmosphere of tolerance of criticism that is essential for successful experi­mentation. Keynes made it clear that he would personally prefer laissez- faire - with all its inefficiency, waste, injustice, and propensity for war - to a Stalinist mode of economic development.

Yet 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 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. We need the collaboration of all the bright spirits of the age. Stalin has eliminated every independent, critical mind, even when it is sympathetic in gen­eral outlook... Let Stalin be a terrifying example to all who seek to make experiments. If not, I, at any rate, will soon be back again in my old nineteenth-century ideals.

(CW 21, p. 246)

The central themes of this essay, especially the necessity for managed trade and capital controls to facilitate domestic planning, were to find explicit embodiment in the 1940s. In the war years, Keynes's proposals for a new international financial system included the obligation of all member nations to institute tight capital controls.³ And he continued his campaign for domestic full-employment policy based on state control of investment.

Notes

1 His rejection of free trade was of recent vintage. As noted, he had rejected this doctrine at least three years before in the Addendum to the Macmillan Committee Report, and two years earlier in his public writings.

2 Keynes had for some time been gravitating toward the view that if state planning could sustain full employment for, say, one generation or so, the rate of profit on capital would fall toward zero. To maintain capital investment at a full-employment level would therefore require that the risk-adjusted long-term interest rate fall toward zero as well. Keynes will present and defend this argu­ment in The General Theory, where he looks forward to "the euthanasia of the rentier" (CW 7, p. 376).

3 Crotty (1983) provides a defense of the claim that Keynes was determined to incorporate tight capital controls on the post-WWII international financial order.