BBC economics editor Stephanie Flanders examines how three extraordinary thinkers, Keynes, Hayek and Marx, helped shape the 20th century.
Keynes’s Investment Strategy
Dr David Chambers of Cambridge University’s Judge Business School and Professor Elroy Dimson of the London Business School have studied Keynes’s investment strategy.
Keynes believed that probability and statistics could help you predict the way financial markets were going to move. A theory Keynes put to the test in his role as Bursar of his old College, King’s in Cambridge.
Release date:10 September 2012
https://www.bbc.co.uk/programmes/b01mzqw9
This vast solar power plant being built in the remote Arizona desert is part of the biggest economic rescue effort in history while the cost of action will be greater I can assure you that the cost of inaction will be far greater with the economy still struggling the American government is
Shelling out three4 of a trillion dollars to try to haul the country out of trouble and in Britain billions are being spent to accelerate growth even by a government determined to cut borrowing is this really the right road to take after the crash of 2008 the world seemed
To be running out of cash but rather than cut back governments spent huge amounts of money they didn’t have why on Earth would they do that it all goes back to the extraordinary ideas of of this man the British economist John mayard KES quite simply he changed the world I think it
Is true that he’s one of the great figures of the 20th century and in many ways of the 21st century Kane’s thought capitalism was brilliant but left to its own devices it could also go seriously wrong it was up to governments to step in to get the economy back on
Track he was the archetypal man in whal Westminster or Cambridge who thought he knew best kanes has never been more relevant or controversial than he is today because for the first time since the 1930s the problems he was grappling with then bank failures International crises the possibility of a long economic slump
We’re facing two in this series I’ll tell you about the lives and thoughts of three extraordinary men with radically different views KL Marx Fredick Hayek and tonight canes they all saw that taming the Growing Power of money was The crucial challenge for the modern world all three were intellectual Giants
Whose ideas have been a hidden Force shaping world events changing the lives of every one of us but I think they have something special to tell us right now because they more than anyone taught us the awesome power of money the good that markets and capitalism could do and the
Enormous trouble they could cause I think they’d know exactly what we’ve been going through I want to know can they help us find a way Out the quiet Hills of Northwest England for me a chance to experience economics in action I’m getting to try out rally cars competing in the tour of Cumbria the sponsors pelli are getting a slice of the government’s 2.4 billion pound fund to help Reg growth and
Employment they want to show me what the company’s really all about pelli is one of the world’s biggest tie makers it’s been Manufacturing in Britain for almost a century it wants to develop some of its top ranges and beef up research and development brilliant absolutely brilliant but the sums hav’t been adding up
This Factory is one of carlile’s biggest employers there are about 750 workers here producing 10,000 tires a day not so long ago people worried the company would shift production overseas to cut costs A2 million pound government grant has persuaded plli to invest in Britain instead when we have a major investment
The confidence in people to spend the wages um is increased and the local economy benefits and it’s not only pelli employees we have hundreds of suppliers and contractors who depend on this Factory and they benefit also when Corelli increases its spend and also they recycle that money into the local
Economy it might seem surprising a handout to a private company when the government’s so worried about the mounting national debt now more than a trillion pounds but K’s was quite clear there are times when we need to step in to make capitalism work for us even when that
Means spending money we don’t have what K said was that it was possible for government to come in and make markets work better so uh one way that it’s often put is that Kings save capitalism from the capitalists they for Kane’s critics it’s Mistakes by governments that really cause the
Trouble when we find instances of economies being seriously knocked out of equilibrium it’s generally been as a result of government policy mistakes um but canes didn’t really make a convincing case that even when an economy was knocked out of equilibrium that government action could do better than allowing the economy to essentially mend Itself so KES was either an economic savior or the man who led us all astray but there’s no argument that he changed our world and the way we think about it he was at the center of the debate 80 years ago and he’s back there again
Today a great weight is lifted from us this is the only known film of kan’s speaking there’s no danger of the exchange falling too far there’s no danger of a serious rise in the cost of living it’s a broadcast about economics how to share out the world’s resources British trade but for kanes
This was no dry science it was about changing the world for the better I think if we’re looking at Britain’s who made a real difference in the 20th century the most obvious name would be Winston Churchill John men AR KES is really not far behind Kan spent years in this house in
London developing ideas that helped shape some of the most important events of the past Century helping to save capitalism from the Great Depression funding the war against the Nazis and building a new post-war economic order that helped pave the way for decades of growth and Rising Prosperity what’s really extraordinary
About Kan from a modern perspective was his access despite being so unconventional in his life and especially in his views he had the ear of anyone who mattered presidents and prime ministers all listened to what he had to say though it was only after his death that everyone started taking his
Advice I applied to University in 1965 and the whole intellectual climate of the time not just in terms of economics but politics was driven by the idea that can’s had solved the economic problem by the late 1960s can’s ideas were built into the fabric of pretty much every Western economy but he didn’t
Seem to have an answer to the high inflation of the 1970s after that Keynesian fine tuning was out and free market ideas gradually took over but when the world got into serious bother in 2008 KES was back it’s IDE years that that uh mobilize the
World uh on right and left good and bad and KES was the author of in my judgment the best Suite of ideas about how to think about capitalism that there’s been uh and if you think that counts then he Counts so what are these great ideas that have dominated our economic landscape gap for so long and where exactly did they come from kanes was born at the height of the British Empire in 1883 to middleclass parents who sent him to Eaton and Cambridge so far so conventional but at University he fell
In with a very unconventional crowd the Bloomsbury set as a young man he spent a lot of time here at their country retreat Charon in Sussex was a kind of commune for artists and writers and the one Economist they did see themselves as very different to an extent they were
Tinged by that rather indefinable concept Bohemian they were very ahead of their time they were Pioneers about sexual behavior they were Pioneers on the political front um they were Pioneers in many aesthetic fields in writing and um and in the Arts the bloomberry group allowed him to step outside of the box
And to think the unthinkable and that breadth of uh intellect that he had allowed him to leap off cliffs with the confidence that there was no Bottom K’s immersed himself in the cultural world all his life collecting paintings fine books even founding the Arts Theater here in Cambridge perhaps it’s no coincidence that a man with such wide ranging interests should have the vision to develop a radically new approach to economics keynesianism Shand today for government efforts to control the
Economy KES was born nearly 130 years ago into a confident age science have been marching forward in medicine and Engineering every year extending what was humanly possible but there was one domain where science had barely begun economics the world of money and Market if we could tame capitalism we could really shape
Our destiny K’s fundamentally believed that but he also understood maybe better than some of his followers just how difficult that was going to be Greek Fury at the austerity they feel has been imposed on them by their European neighbors for kanes this might feel a bit familiar he saw at firsthand the
Disaster that can come from stronger countries dictating economic terms to the weak that helped him form his first big idea in an interconnected world when you beggar your neighbor you might well beggar yourself it was an idea forged by the horrors of World War I true to his
Bloomsbury values KES didn’t want to fight in the war but he was willing to use his e economic Brilliance to help Finance it Kane’s job at the treasury was to help Channel loans from America to other countries in the alliance his time here brought home to him how integrated the
Global economy had become isolation just wasn’t an option the economic fate of entire populations might come to depend on events hundreds even thousands of miles away once the war was over KES could see how hatred of the defeated Germans might lead the victors to make a terrible
Mistake at the end of the first world war there was a great deal of obviously public hostility towards Germany I mean it had been a disastrous War um both obviously in terms of lives and casualties but economically too I think there was quite a strong feeling that Germany must be made to
Pay at the Palace of Versailles where the peace treaty was signed British prime minister Lloyd George and his French and American Allies relished their Victory KES was a member of the British delegation here but against his advice Germany was ordered to pay everyone’s bills for the damage and suffering
Caused by the war how could Germany afford to repay that debt you need an economy that is running to produce money to produce wealth and then you can repay uh you cannot repay without of nothing kanes was so outraged that he resigned from the treasury and retreated to his
Room in Charleston to write his first major book The Economic Consequences of the Peace brilliantly written it became a bestseller though some said with his Sympathy for the Germans he should be awarded an iron cross he says if we aim deliberately at the impoverishment of central Europe
Vengeance I dare predict will not limp the key point for me is he didn’t just think it was immoral the treaty or or unfair he thought it was stupid he thought a desperate Germany wasn’t going to keep the peace in Europe and it certainly wasn’t going to contribute to
Prosperity wasn’t going to buy goods from Britain and help Britain recover from the war something he kept coming back to one way or another throughout his life we’re all in it together the Versa treaty brought one of the great powers of Europe to its knees as kanes predicted the German economy descended into
Chaos their debts were so impossibly large they ended up printing the money to pay the bills which quickly led to hyperinflation and a thoroughly worthless currency hyperinflation didn’t just destroy the economy it destroyed the fabric of German Society people’s hopes too there are stories about people taking out all
Of their savings to buy a single postage stamp for a suicide letter when K’s warned that the Versa treaty would bring a catastrophe here even his admirers might have thought he was exaggerating they didn’t think that for long just 14 years after the Treaty of Versa Hitler came to
Power World War II wasn’t far away as canes had predicted the price of getting economic relations wrong was Calamity KES foresaw that the reparations were too onerous would have to be adjusted and that actually you were laying the seeds of the of the next European configration he thought it was
Unbelievably shortsighted he was right so what would canes make of Europe today well once again he might see strong countries dictating economic terms to the weak but this time it’s strong countries like Germany itself insisting that crisis-ridden Nations like Greece sign up to tough budget cuts in exchange for emergency loans
The newspapers show the depth of ill will that’s built up as a result of the crisis you’ve got the Germans talking about the Greeks as no good scers but in Greece well there’s no more taboo anymore about comparing German leaders to Nazis the canes might say they were
Harking back to the wrong War the tough conditions being imposed on Greece might remind him ironically of the deal imposed on Germany at Versa the dominant thinking in Europe at the moment uh is exactly repeating the mistakes I believe certainly as far as Greece is concerned
As was made made at the end of the first world war there comes a point if you visit upon countries things they can never deliver it will end in tears if you look at what’s happening in the Euro Zone today riots on the streets of Greece General strikes in Spain General
Strikes in Portugal you can see well aren’t we just failing to learn the lessons of History here If KES could join me in Berlin today he’d surely appreciate the complexity of the crisis in the Euro Zone and he’d understand why ordinary Germans feel it’s time for Greece to pay its own way but he also understood that imposing too much austerity could be self-defeating
I think he would have said let’s make Greek strong so then they can repay their debt as long as the pays the Creditor is happy but as soon as the deor gets into difficulties and if he’s a very important detor the Creditor has also problems because he won’t get his M
Back faced with the crisis affecting the people of Europe today KES would undoubtedly have come up with some Solutions in fact years after the Treaty of versailes he’d unveil a plan for countries to work better together but but first there was a more basic question how to steer the economy Itself to tame the economy to make it work for us kan’s realized you first had to understand how it worked and the tool for doing that economics was still young in the 1920s but it had Grand Ambitions people hoped you’d be able to predict the movement of economies like you could
Predict the movement of the planet C was drawn to that idea as well but he came to the conclusion economies weren’t like planets they were more like people you never really knew what they were going to do next in fact he noticed the times when economies looked most predictable
Were usually the times when things were about to go disastrously wrong it certainly felt like that in 2008 when the global Financial system imploded after one of the longest booms in history many claim now to have seen it coming but at the time many more behaved
As if the good times would go on and on no return to Tori boom and Bast being too sure about the economic future was another mistake that kanes had warned about 80 years ago because he’d made the same mistake himself After resigning from the treasury after World War I KES retreated to the sanctuary of his old College Kings in Cambridge he was a lecturer and later a burer looking after the college’s finances He had a special interest in probability Theory a branch of mathematics that tries to predict the future from the evidence of the Past when he wasn’t writing or studying kanes was often betting on the financial markets he needed money and he thought speculation was a good way to get it but it was also a great way for him to test his belief that probability Theory and statistics could help you predict the
Way markets were going to move he had very mixed [Laughter] Results in his early years as an investor C sat in bed every morning pouring over reams of statistics about currency shares bonds and commodities when he was sure he’d worked out which way the market would move he’d make the Deals the Cambridge academic David Chambers has spent a lot of time studying Kane’s investment strategies given this economic knowledge that he had this great thirst that he had for numbers and statistics he believed I think that he could Define the delineate the business cycle and uh and as a consequence of
That you will be able to pick when was the right time to be in the stock market to own shares and when was the right time to come out of the stock market into say bonds government bonds in particular or alternatively cash but none of kan’s elaborate calculations pointed out the disaster
Just around the corner Wall Street before the crash in 1929 looked a lot like the tail end of our Market boom investors could see no end to the good times armed with the very latest mathematical models they thought they had everything covered then the bubble burst World Markets collapsed and can’s
Lost money along with millions of others Paving the way for the Great Depression his confidence in predicting the future was gone he have bitterly reproached himself for not foreseeing the Great Depression but he came to the view that the future is not like that that anybody who happens to predict it right is
Likely to be doing so on the basis of luck rather than judgment kan’s speculating days weren’t quite over years later he thought he might have to store hundreds of tons of wheat in King’s college chapel after a commodity trade went wrong but he did change the way he invested and became a wealthy
Man he’ learned lessons about the way economies work that we still struggle with today that you can never get rid of uncertainty and that economies are made up of people not numbers more than anyone K’s wanted economics to be respected as is a modern science but he knew it was never going
To be a science you could reduce to a set of equations iron predictions because economists were always going to have one extra thing to deal with human nature if you don’t know about the future and you’re trying to get a fix on What’s um taking place any moment in
Time uh you you know you would defer to the crowd and the crowd is moving in a certain direction they must be right you know the crowd’s buying what are they buying I must I must buy too the crowd’s selling I’m a cell too and it’s it’s very animal it’s very
Herd this idea of her psychology helped canes make sense of the economic bubble that blew up in the years before the great crash of 1929 it can also do a pretty good job explaining our own great financial crash in 2008 in normal times any economic textbook now or in kan’s time time would
Say if the price of something goes up people buy less of it if the price goes down they buy more that’s how markets work except Kane’s realized when you have bubbles then a different side of human nature takes over it’s the side that says oh house prices are going up
Shares are going up I should buy more because the price is going to go up again which of course it does becomes a self-fulfilling spiral prices go up and up and up and up eventually the bubble will burst it always does in the years before 2008 did we
Forget what KES had taught us about herd psychology Bubbles and the uncertainty of economic life did the bankers investors politicians and the rest of us simply get too confident in thinking the good times would go on forever I think in as much as people actually sat down and
Thought about what were the risks what are the uncertainties uh then quite clearly a large number of people were manifestly found wanting and of course if you don’t know what you’re doing it’s not surprising that you end up being smashed to bits and that’s precisely what Happened Kane’s Big Ideas that countries shouldn’t beggar their neighbors that markets were unpredictable all came out of his own experience but now the Great Depression produced his most important idea yet and added real urgency to his need to tame the economy what he realized was economies might sink and
They’re not automatically float back up looking around the Western economies today that does sound a bit Familiar in the early 30s the outside world world was deep in Gloom with do qes lengthening and factories closing everywhere but kan’s life was Blissful by now he was famous and he’ shocked even his avangard Bloomsbury Friends by marrying a Russian ballerina up till then he’d been Gay art books love affairs for kan’s this is what life was all about about but he understood probably more keenly than his Bloomsbury friends with their inherited wealth that money kept the whole thing afat you couldn’t have a civilized society without a well functioning economy when he was back in
The real world on Monday morning he could see the British economy wasn’t working at all Britain had been in a slump for years classical economists said that if workers would just agree to wage cuts businessmen would invest again create jobs the economy would revive but KES disagreed he thought the way to recovery
Was being blocked by pessimism or low Animal Spirits the big Insight of canes behind all of this was that a market economy is not self-stabilizing and when you get very big changes in Animal Spirits in sentiment where people who are producing to sell in the future suddenly worry
That actually maybe maybe there won’t be the demand in the future so they stop producing to get out of that low output trap can be very difficult Kane’s realization that an economy could stay sunk indefinitely was a radical break with conventional thinking the classical approach said the
Economy would get better we just had to give it time but looking around seemed obvious to Canes that it wasn’t getting any better and it seemed blindingly obvious why it wasn’t every time someone lost their jobs and joined the DOL CQ well they had less money to spend so
That would mean fewer goods were bought probably mean more job losses you could get caught in a downward spiral with no obvious way out now it seems equally obvious to us today but back then it was all very new can’s thought the low animal spirits in the business world were now in infecting
Everyone in a radio broadcast in 1931 he made a dramatic call for Action the slump in trade and employment are as bad as the worst which have ever occurred activity and Enterprise both individually and nationally must be the Cure today Kane’s followers have made similar calls years after the start of the recession the economy is still struggling to get back to where it was you don’t have to be CED to see animal spirits Al low whether his ideas can revive them is another question Kane’s Insight that countries could just
Get stuck was probably his most important contribution to economic thinking but he didn’t just want to understand economies he wanted to make them work better he had plenty of advice for getting out of a slump but the most controversial was that governments should spend money they haven’t got to
My mind the biggest argument in politics today is over whether countries have done too much of that since the crisis hit or not Enough KES might have died almost seven decades ago but out here in the Arizona desert his big idea for getting the economy moving again lives On at heila Bend they’re building the biggest solar power plant of its kind in the World the site covers over 3 and 1/2 square miles nearly a million mirrors will capture enough energy to provide 70,000 Amic American homes with clean power but for the people in this remote region and for John mayard KES probably the most important thing this plant will produce is employment between my wife
And I we probably spent two years out of work thank God not at the same time but but we uh we took some very significant hits company that sources our Manpower tells me they receive 300 resumés per day there’s there’s a lot of people looking for work and the people who have
Jobs out here are very feel very lucky to have their jobs in effect this plant is part of a vast cian experiment in the wake of the crash the US government stumped up 3/4 of a trillion dollars for projects like this one to create jobs and growth
In normal times say the people who run this site they would have raised the billion and a half dollars to get things going from commercial Banks but these aren’t normal times because of that uh downturn we had to uh look for alternative sources of financing and uh
Of course in this context the the fedal long guarantee program here in the US has helped it at a lot in fact without that kind of uh public programs uh this plant could have never been a reality now we’re used to governments using their cash to try to bring the
Economy to life in hostile environments where private money is drying up but back in kain’s day it was a much more controversial idea in the 1930s C spent weekday at his home here in London’s Bloomsbury District he wrote countless articles and pamphlets explaining how something could
And should be done to tackle this Great Depression in normal times K’s thought monetary policy was the best way to help the economy you cut interest rates to encourage people to borrow and spend more and companies to invest but when animal spirits were really low that might not be enough companies might not
See the point of making new Investments people might not want to borrow no matter how cheap it was that’s when C’s thought government did need to make up the Gap with more public Spending Kane suggested the government should hire people to demolish South London and then rebuild it he wasn’t serious but he was making a serious point if the government borrowed to create jobs people would spend more confidence would rise and the economy would recover if you pick the right
Moment moment he insisted the extra spending would pay for itself by producing higher tax revenues well of course he did have enormous trouble trying to persuade the treasury the so-call treasury view that you should borrow at the bottom of a business cycle but in economic terms what you
Need is more demand in the economy and you can do that in the ways that Kan suggested naive K and prescriptions of Simply responding to depressions and recessions by raising the budget deficits as if this had no effect on other economic no adverse effect on other economic variables uh I I really
Think are very dangerous policy prescriptions in the 30s KES found that most British politicians had a similar view High borrowing was dangerous he thought he might have a more receptive audience in America after all he was now a celebrity on both sides of the Atlantic and the economic situation in America was
Desperate girl National product was down to almost 70% you had unemployment nationally at 25% but in places like Chicago and Detroit um unemployment was up to 50 50% over over half the population unemployed president Hoover’s solution to the Great Depression had been spending cuts and tax Rises he’d made an
Argument we’ve heard others make more recently balancing the country’s books would create confidence and encourage investment didn’t happen never has happened when you cut back government spending in a situation such as a recession or depression demand goes down unemployment goes up and it’s a vicious circle confidence isn’t restored when
Unemployment goes up uh and business goes down confidence is eroded Hoover’s successor Franklin Delano Roosevelt had a different approach Again echoing arguments made today he thought the government should spend its way out of trouble this nation is asking for action and action Now when kanes arrived in America in 1934 there’s no evidence that he persuaded the US government to adopt keynesianism they were doing it anyway KES had his one and only meeting with President Roosevelt by all accounts it didn’t go very well KES thought the president was no Economist the president
Thought KES was a bit too clever for his own good but they did agree on the most important thing this was no time for government to sit on its hands was time for a historic experiment the New Deal a vast program of government funded projects to put armies
Of jobless to work ever since it’s been the celebrated example of a Keynesian effort to boost flagging Economies and there’s no more iconic project of that era than this one Hoover Dam built across the Colorado River bordering Nevada and Arizona it was the biggest construction project in the World I would call it a keesan project absolutely the government stepped in with money built a deficit and out of that came Hoover Dam which gave thousands tens of thousands of people a new life money to spend armies of workers from across America tunneled for 5 years through mile upon
Mile of mountain rock to build what was in effect a vast power generator providing electricity for huge sves of the country it primed the economy $165 million investment which produced billions in growth economic growth Just 8 miles away is Boulder City built to house the workers building the Dam all these houses along these Avenues are uh what we now call dingbat houses they were the homes built for the workers they were put up to last through the construction constuction of the dam very quickly built but because people stayed which they didn’t anticipate people would do families still live in
Them Roger cha runs the town’s Hotel he thinks Boulder City shows how in a depression extra government spending can trigger private spending and investment too adding to the economic benefits it’s what kan’s called the multiplier by the end of the second year they lived in a town a full Town fully
Operating town with retail stores and restaurants and medical facilities and recreational facilities it happened in you know less than two years critics of Keynesian spending plans often say the benefits of fleeting and the costs permanent but Boulder City took Route and [Applause] thrived those who still live here say if it hadn’t been for the New Deal this would still will be Desert Hoover Dam might have helped the local area but it’s actually a myth that the New Deal ended the Great Depression it took a World War and all the extra government spending that went with that finally to bring the economy out of the doldrums you might wonder whether a
World war was really the best test of Kane’s arguments but ever since then so-called Keynesian policies have been what governments do when faced with emergencies and the crisis of 2008 was the biggest emergency anyone had seen for a long time when the Global Financial system crashed the world faced the real
Possibility of another Great Depression governments have been preaching the free market for years but faced with this economic disaster they reached again for the old Keynesian levers it was a classic Keynesian response when individuals stopped spending money and when businesses stop spending money if the government also
Stops spending money at the same time then what happens the economy basically crashes the aim was to boost confidence or Animal Spirits by making it easier to borrow invest and spend interest rates were slashed to just half of 1% the lowest on record we’re all now in Uncharted Territory then when interest rates
Couldn’t go much lower the bank of England started pumping billions of pounds directly into the economy it’s literally creating 75 billion in the next few months to get money moving around the economy again even vat was temporarily cut it’ll make goods and services cheaper and by encouraging spending it will help stimulate growth
In 2009 with the global economy still tosing ing leaders gathered in London to endorse a Keynesian rescue plan for the entire world this is the day that the world came together to fight back against the global recession I find it very hard to explain the collapsing
World Trade of over 15% in 6 months between the end of ‘ 08 and beginning in spring’ 09 in terms of anything other than an extraordinary collapse of animal spirits or or confidence now some of that was turned around in 2009 but by no means all even that great rescue plan of 2009
Wasn’t quite what it seemed for all Gordon Brown’s talk Britain’s own stimulus plan was actually one of the smallest because our government was already borrowing more than any other Advanced economy so even a Keynesian prime minister like Gordon Brown didn’t think we could borrow a lot more his
Successor thinks we should borrow much less we now have a prime minister who on one fundamental Point appears to disagree with KES some of the normal things that governments can do to deal with a normal recession like borrowing to cut taxes or increasing spending these things won’t work because they
Lead to more debt which would make the crisis worse the only way out of a debt crisis is to deal with your debts I suspect that kanes probably wouldn’t have used exactly the prime minister’s formulation I think that canes would have accepted at some point that you
Have to head back towards uh a more balanced budget particularly if you don’t want to Stack debts onto future generations to me the remarkable thing is that countries like the UK that have a choice are voluntarily putting themselves through austerity and almost certainly we will know we know what will happen uh the
Economy will will get weaker um unemployment will go up and uh there will be an enormous amount of unnecessary suffering this argument will run and run on both sides of the Atlantic in Arizona the massive spending program that built this solar power plant and let thousands
Clock on for new jobs hasn’t been a miracle cure for the US economy maybe the medicine didn’t work because the dose was too small or maybe the mountain of debt Weighing on most western economies means the Keynesian route to recovery is simply shut off we are in a Stratosphere today that we just
Have not seen before and maybe it’s fine but no other countries very rarely have seen these kind of debt levels public private and other measures they’re risks by the 1940s KES was riding High his theater here in Cambridge was thriving he was back in the treasury helping Finance the second world war and
His books were being Hil as masterpieces but he had one last big idea to pursue with profound implications for the world then and now Kane’s ideas for fixing broken economies had now been tested but towards the end of World War II he got a chance to leave his mark on the entire
Global economy in a more integrated world he was more convinced than ever that countries needed institutions to force them together make them cooperate the catastrophe after World War I could never happen Again the single most important Trip To America that canes ever took was in 1944 to the exclusive Resort of Breton Woods in New Hampshire he was joining delegates from over over 40 different countries all charged with laying the foundations of a new post-war global economy they wanted to rebuild the
System you know not just from the war but from the Great Depression the financial system had just been destroyed the economic chaos of the 20s and 30s was largely responsible for the war canes believed countries had all focused on charting their own path without very much thought for what was going on around
Them the world had paid a terrible price for that failure to cooperate there was a real determination among uh officials both in London and in Washington that we couldn’t do this again that we we had to fix the world’s economy that we had we couldn’t go back to the to the
Kind of uh economic crisis we’d had before because we couldn’t afford another world war as representatives from across the world gathered here at Mount Washington hotel elsewhere there was still ferocious fighting but once the war was over canes knew for the world economy to prosper countries would need to work together much more
Closely only two delegations at the conference really counted kan’s British team and the Americans both agreed that there should be controls to prevent currencies fluctuating too wildly against each other they agreed too that institutions that later became the World Bank and international monetary fund should be there to Foster trade and growth in
Poorer economies well the big gain from it was the recognition that countries need to work together to resolve their macroeconomic problems it’s just not enough to pretend that you can do it as an island you may be an island geographically but you’re not economically but on one crucial issue canes failed
The Americans were adamant that rich exporting countries like them shouldn’t have to spend more and Export less to balance World Trade It was weak countries with big trade deficits that had to shape up if everyone at Breton Woods had accepted kan’s logic that it takes all sides to keep the global economy in
Balance the world today might be in a lot better shape this old East German television Tower is a symbol of reunified Germany but these days feelings of European Unity are in short supply ministers here in Berlin want struggling Eurozone countries to impose tough measures to get their economies into
Shape the stronger countries have been willing to help by offering massive loans but I don’t think think K’s would have thought that was enough kan’s thought for the global economy to work it had to be a two-way street so the weak countries that had
Run up a lot of debt with the rest of the world they did have to become more competitive learn to pay their way but the rich exporters well they had to do their bit as well spending more on other Count’s goods and exporting less becoming a bit less competitive now
That’s a bit of keesing advice that doesn’t go down well here in Germany at all if you say Germany should export less or become less competitive the pop which that’s that’s mad why getting us weak when others are already weak and certainly that’s the wrong conclusion there are signs of movement
On Germany’s side of the street domestic Car Sales have been going up but exports are still a central plank of the country’s economic policies and car exports are up by almost a third in the past 2 years German consumers have been spending more lately but not enough to
Provide much of a selling opportunity for struggling countries like Greece that’s a very popular approach to tell German private hous please more don’t be so greedy with your money uh but I think that’s that’s wrong because people look at their income and they say I can’t afford simply and that’s true I
Mean we have had very weak wage increases during the past years and that’s the point where you have to have higher wages and these higher wages would certainly spend and then German consumption would certainly be much stronger than it was in the past and that will help Us memories of hyperinflation are still Roar in Germany few want to put their hard one economic stability at risk for their weaker European neighbors the divisions between countries at a global level are even clearer leaders pay lip service to C’s dream of a truly coordinated global economy where strong work with the weak
For the benefit of all but there’s little sign of them actually doing it I think KES would look at our world the troubles in the Euro Zone the banking crisis say it was a pretty scary place without many of the checks and balances that he argued for at Breton
Woods but he’d also say he did say that a really global economy was tremendously exciting with huge potential to improve all of our Lives if governments could only work out how to put into practice that basic Insight that he kept coming back to we really are all in it together
Sure it would would be great to have better multinational institutions and KES was a Pioneer in that he was a big believer and I think in order to fix the International Financial system that would be very helpful and maybe somebody with the sort of magnetism and gravitas and stature of kan’s could somehow
Catalyze that but he is a rare person indeed kan’s left an extraordinary Legacy he didn’t just transform economics changed the lives of billions of people around the globe there aren’t many people born in the 1880s whose name you hear as often as can’s in current debates his ideas that countries
Shouldn’t beggar their neighbors that economies would deeply unpredictable could get stuck in slumps have changed the way we think about the world but what can canes actually do for us right Now back in Cumbria it’s clear what kanes has done for them government intervention will help keep Parelli’s Tire Factory open and provide a lot of employment in the political mainstream there aren’t many who challenge C’s basic message that you can’t leave economies to drive themselves KES was a very dominant force
In the 20th century and my guess is he will remain a dominant force in the 21st century which is why I think he will go down as one of the greatest econ the world has produced 80 years ago building this Dam eased the Great Depression with the government
Borrowing more cheaply than ever before you might think the case for New Deal type Investments was equally strong today but given the sheer volume of public debt no one can promise that piling on more borrowing will be a miracle cure what is thought of as a typical
Kian solution to get more debt borrow money spend spend spend and uh cut taxes that needs to be used more judiciously here because at the end of the day you got to get rid of this St this is a very long Hall I don’t think anything just
Boosts your way and zooms your way out of this there there just is no Magic Bullet and what of Kane’s final big idea that countries are all in it together since Bret and woods the world has grudgingly accepted that we have to cooperate to prosper but we’re
Struggling to make it work in practice he’d be worried he’d be very worried he’d been very concerned about the growth of inequality worldwide uh he’d be very concerned that there was a return to begam my neighbor policies I have no doubt that he would be uh warning of regional war and all its
Dangers he’d be he’d be very frightened uh that the circumstances that led to war in 1418 and 3945 were on a slow burn basis unfolding in front of us again maybe the biggest thing KES could do for us now would be to remind us of the traits that guided him all of his
Life imagination and optimism he came along and was willing to examine these profound problems in in ways that no one had done before his great legacy is that fundamental belief in humanity that fundamental belief in the ability of government and of society to to dedicate itself to to helping those that are less
Fortunate and and need our Help in 1946 Cain suffered a fatal heart attack in his beloved Sussex Downs just 62 he left a legacy that changed the world but he also left an enigma he thought we should try to tame the power of money to make it work for us but he also taught us that economies
Were fundamentally unpredictable it’s a contradiction we’re still grappling with today more than anyone K’s pav the way for activist government he said you could and should make the world economy work better and the generation that rebuilt the global economy after the war really were children of Caines but when
You read him today it’s another equally powerful message that comes through about the great unpredictability uncertainty of economic life you should never think you’ve got it covered that you’ve abolished boom and bust that’s the great Paradox the man who did most to make economists arrogant their
Capacity to bend the world to their will also gave gave them or should have given them the best reasons for Self-doubt next time on the power of money Kane’s great adversary friederick hyek who looked at the same facts and Drew exactly the opposite view the market needed to be set free and governments should back off the open University’s produced six one minute animations to explain some of
The key economic ideas that affect all of us so if you want learn how to spot an invisible hand or other secrets of Economics go to bbc.co.uk masters of money and follow the link to the open University can chemicals make us irresistible to the opposite sex James May reveals all you need to know about chemistry next on bbch HD Oh