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A thinker for our times

Global leaders are once again reminding themselves of the insights of the Cambridge academic who hel

John Maynard Keynes has been restored to life. Rusty Keynesian tools – larger budget deficits, tax cuts, accelerated spending programmes and other “economic stimuli” – have been brought back into use the world over to cut off the slide into depression. And they will do the job, if not next year, the year after. But the first Keynesian revolution was not about a rescue operation. Its purpose was to explain how shipwreck might occur; in short, to provide a theoretical basis for better navigation and for steering in seas that were bound to be choppy. Yet, even while the rescue operation is going on, we need to look critically at the economic theory that takes his name.

In his great work The General Theory of Employment, In terest and Money, written during the Great Depression of the 1930s, Keynes said of his ideas that they were "extremely simple, and should be obvious". Market economies were in herently volatile, owing to un certainty about future events being inescapable. Booms were liable to lead to catastrophic collapses followed by long periods of stagnation. Governments had a vital role to play in stabilising market economies. If they did not, the undoubted benefit of markets would be lost and political space would open up for extremists who would offer to solve economic problems by abolishing both markets and liberty. This, in a nutshell, was the Keynesian "political economy".

These ideas were a challenge to the dominant economic models of the day which held that, in the absence of noxious government interference, market economies were naturally stable at full employment. Trading in all markets would always take place at the "right" prices – prices that would "clear the market". This being so, booms and slumps, and prolonged unemployment, could not be generated by the market system itself. If they did happen, it was due to "external shocks". There were many attempts to explain the Great Depression of the 1930s along these lines – as a result of the dislocations of the First World War, of the growth of trade union power to prevent wages falling, and so on. But Keynes rightly regarded such explanations as self-serving. The Great Depression started in the United States, not in war-torn Europe, and in the most lightly regulated, most self-contained, and least unionised, market economy of the world. What were the "external shocks" that caused the Dow Jones Index to fall from 1,000 to 40 between 1929 and 1932, American output to drop by 20 per cent and unemployment to rise to 25 million?

He set out to save capitalism, a system he did not much admire, because he thought it the best hope for the future of civilisation

We can ask exactly the same question today as the world economy slides downwards. The present economic crisis has been generated by a banking system that had been extensively deregulated and in a flexible, largely non-unionised, economy. Indeed, the American capitalism of the past 15 years strongly resembles the capitalism of the 1920s in general character. To Keynes, it seemed obvious that large instabilities were inherent in market processes themselves.

 

John Maynard Keynes was a product of Cambridge civilisation at its most fertile. He was born in 1883 into an academic family, and his circle included not just the most famous philosophers of the day – G E Moore, Bertrand Russell and Ludwig Wittgenstein – but also that exotic offshoot of Cambridge, the Bloomsbury Group, a commune of writers and painters with whom he formed his closest friendships. Keynes was caught up in the intellectual ferment and sexual awakening that marked the passage from Victorian to Edwardian England. At the same time, he had a highly practical bent: he was a supreme example of what Alasdair MacIntyre calls “the aesthete manager”, who partitions his life between the pleasures of the mind and the senses and the management of public affairs. After the First World War, Keynes set out to save a capitalist system he did not particularly admire. He did so because he thought it was the best guarantor of the possibility of civilisation. But he was always quite clear that the pursuit of wealth was a means, not an end. He did not much admire economics, either, hoping that some day economists would become as useful as dentists.

All of this made him, as his wife put it, "more than an economist". In fact, he was the most brilliant non-economist who ever applied himself to the study of economics. In this lay both his greatness and his vulnerability. He imposed himself on his profession by a series of profound insights into human behaviour which fitted the turbulence of his times. But these were never – could never be – properly integrated into the core of his discipline, which spewed them out as soon as it conveniently could. He died of heart failure in 1946, having worked himself to death in the service of his country.

The economic theory of Keynes's day, which precluded boom-bust sequences, seemed patently contrary to experience, yet its foundations were so deep-dug, its defences so secure, its reasoning so compelling, that it took Keynes three big books – including a two-volume Treatise on Money – to see how it might be cracked. His attempt to do so was the most heroic intellectual enterprise of the 20th century. It was nothing less than the attempt to overturn the dominant economic paradigm dating from Adam Smith and David Ricardo.

He finally said what he wanted to say in the preface to The General Theory: "A monetary economy, we shall find, is one in which changing views about the future are capable of in fluencing the quantity of employment and not merely its direction." In that pregnant sentence is the whole of the Keynesian revolution.

Keynes's understanding about how economies work was rooted in his theory of knowledge. The future was unknowable: so disaster was always possible. Keynes did not believe that the future was wholly unknowable. Not only can we calculate the probability of winning the Lottery, but we can forecast with tolerable accuracy the price movements of consumer goods over a short period. Yet we "simply do not know" what the price of oil will be in ten, or even five, years' time. Investments which promised returns "at a comparatively distant, and sometimes an indefinitely distant, date" were acts of faith, gambles on the unknown. And in that fact lay the possibility of huge mistakes.

Classical economists could not deny the possibility of unpredictable events. Inventions are by their nature unpredictable, especially as to timing, and many business cycle theorists saw them as generating boom-bust cycles. But mainstream economics, nevertheless, "abstracted" from such disturbances. The technique by which it did so is fascinatingly brought out in an argument about economic method between two 19th-century economists, which Keynes cited as a fork in the road. In 1817, Ricardo wrote to his friend Thomas Malthus: "It appears to me that one great cause of our differences . . . is that you have always in your mind the immediate and temporary effects of particular changes, whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them."

To this, Malthus replied: "I certainly am disposed to refer frequently to things as they are, as the only way of making one's writing practically useful to society . . . Besides I really do think that the progress of society consists of irregular movements, and that to omit the consideration of causes which for eight or ten years will give a great stimulus to production and population or a great check to them is to omit the causes of the wealth and poverty of nations . . ."

Keynes sided with Malthus. He regarded the timeless equilibrium method pioneered by Ricardo as the great wrong turning in economics. It was surely the Ricardo-Malthus exchange he had in mind when writing his best-known aphorism: "But this long run is a misleading guide to affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

Ricardo may have thought of the "long run" as the length of time it took storms to disperse. But under the influence of mathematics, economists abandoned the notion of time itself, and therefore of the distinction between the long run and the short run. By Keynes's time, "risks", as he put it, "were supposed to be capable of an exact actuarial computation". If all risks could be measured they could be known in advance. So the future could be reduced to the same epistemological status as the present. Prices would always reflect objective probabilities. This amounted to saying that unregulated market economies would generally be extremely stable. Only very clever people, equipped with adequate mathematics, could believe in anything quite so absurd. Under the influence of this theory, governments withdrew from active management and regulation of economic life: it was the age of laissez-faire.

Keynes commented: "The extraordinary achievement of the classical theory was to overcome the beliefs of the 'natural man' and, at the same time, to be wrong." It was wrong because it "attempts to apply highly precise and mathematical methods to material which is itself much too vague to support such treatment".

Keynes did not believe that "natural man" was irrational. The question he asked was: how do we, as rational investors, behave when we – unlike economists – know that the future is uncertain, or, in economist-speak, know that we are "informationally deprived"? His answer was that we adopt certain "conventions": we assume that the future will be more like the past than experience would justify, that existing opinion as expressed in current prices correctly sums up future prospects, and we copy what everyone else is doing. (As he once put it: "Bankers prefer to be ruined in a conventional way.") But any view of the future based on "so flimsy a foundation" is liable to "sudden and violent changes" when the news changes. "The practice of calmness and immobility, of certainty and security suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct . . . the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning yet in a sense legitimate where no solid basis exists for a reasonable calculation."

 

But what is rational for individuals is catastrophic for the economy. Subnormal activity is possible because, in times of crisis, money carries a liquidity premium. This increased "propensity to hoard" is decisive in preventing a quick enough fall in interest rates. The mainstream economics of Keynes's day viewed the interest rate (more accurately, the structure of interest rates) as the price that balances the overall supply of saving with the demand for investment. If the desire to save more went up, interest rates would automatically fall; if the desire to save fell, they would rise. This continual balancing act was what made the market economy self-adjusting. Keynes, on the other hand, saw the interest rate as the "premium" for parting with money. Pessimistic views of the future would raise the price for parting with money, even though the supply of saving was increasing and the demand for investment was falling. Keynes's "liquidity preference theory of the rate of interest" was the main reason he gave for his claim that market economies were not automatically self-correcting. Uncertainty was what ruined the classical scheme.

The same uncertainty made monetary policy a dubious agent of recovery. Even a "cheap money" policy by the central bank might not be enough to halt the slide into depression if the public's desire to hoard money was going up at the same time. Even if you provide the water, you can't force a horse to drink. This was Keynes's main argument for the use of fiscal policy to fight a depression. There is only one sure way to get an increase in spending in the face of falling confidence and that is for the government to spend the money itself.

This, in essence, was the Keynesian revolution. Keynesian economics dominated policymaking in the 25 years or so after the Second World War. The free-market ideologists gave this period such a bad press, that we forget how successful it was. Even slow-growing Britain chugged along at between 2 and 3 per cent per capita income growth from 1950-73 without serious interruptions, and the rest of the world, developed and developing, grew quite a bit faster. But an intellectual/ideological rebellion against Keynesian economics was gathering force. It finally got its chance to restore economics to its old tramlines with the rise of inflation from the late 1960s onwards – something which had less to do with Keynesian policy than with the Vietnam War. The truth was that "scientific" economics could not live with the idea of an unpredictable world. So, rather than admit that it could not be a "hard" science like physics, it set out to abolish uncertainty.

The "new" classical economists hit on a weak spot in Keynesian theory. The view that a large part of the future was unknowable seemed to leave out learning from experience or making efficient use of available information. Rational agents went on making the same mistakes. It seemed more reasonable to assume that recurrent events would initiate a learning process, causing agents to be less often surprised by events. This would make economies more stable.

The attack on Keynes's "uncertain" expectations developed from the 1960s onwards, from the "adaptive" expectations of Milton Friedman to the "rational" expectations of Robert Lucas and others. The development of Bayesian statistics and Bayesian decision-theory suggested that agents can always be modelled as having prior probability distributions over events – distributions that are updated by evidence.

 

Today, the idea of radical uncertainty, though ardently championed by “post-Keynesians” such as Paul Davidson, has little currency in mainstream economics; however, it is supported by financiers of an intellectual bent such as George Soros. As a result, uncertainty once more became “risk”, and risk can always be managed, measured, hedged and spread. This underlies the “efficient market hypothesis” – the idea that all share options can be correctly priced. Its acceptance explains the explosion of leveraged finance since the 1980s. The efficient market hypothesis has a further implication. If the market always prices financial assets correctly, the “real” economy – the one involved in the production of goods and non-financial services – will be as stable as the financial sector. Keynes’s idea that “changing views about the future are capable of influencing the quantity of employment” became a discarded heresy.

And yet the questions remain. Is the present crisis a once-in-a-lifetime event, against which it would be as absurd to guard as an earthquake, or is it an ever-present possibility? Do large "surprises" get instantly diffused through the price system or do their effects linger on like toxic waste, preventing full recovery? There are also questions about the present system that Keynes hardly considered. For instance: are some structures of the economy more conducive to macroeconomic stability than others?

This is the terrain of Karl Marx and the underconsump tionist theorists. There is a long tradition, recently revived, which argues that the more unequal the distribution of income, the more unstable an economy will be. Certainly globalisation has shifted GDP shares from wages to profits. In the underconsumptionist tradition, this leads to overinvestment. The explosion of debt finance can be interpreted as a way of postponing the "crisis of realisation".

Keynes did not have a complete answer to the problems we are facing once again. But, like all great thinkers, he leaves us with ideas which compel us to rethink our situation. In the long run, he deserves to ride again.

Lord Skidelsky is the author of "John Maynard Keynes" (three volumes), published in hardback by Macmillan

This article first appeared in the 22 December 2008 issue of the New Statesman, Christmas and New Year special

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The love affairs of Stan Laurel: "If I had to do it over again things would be different"

A romantic who craved stability, the English comedian Stan Laurel led a Hollywood love life as chaotic as his films’ plots

The comedian Stan Laurel was, even by the standards of his time, a prodigious correspondent. The Stan Laurel Correspondence Archive Project contains more than 1,500 artefacts, and these are only the documents that have so far been traced, as many of his early missives appear to have been lost. He was, quite literally, a man of letters.

His punctiliousness about correspondence can be ascribed, at least in part, to his natural good manners, but letters were also a means of filling his long retirement. He outlived his screen partner Oliver Hardy – “Babe” to his friends – by almost eight years but refused all offers of work during that time. Instead, heartbreakingly, he wrote sketches and routines for the duo that would never be performed. It was, perhaps, a way for Laurel to speak with Babe again, if only in his head, until he followed him into the dark on 23 February 1965.

Though Laurel and Hardy have never been forgotten, they are currently undergoing an energetic revival. Stan and Ollie, a film dramatisation of their later years, starring Steve Coogan as Stan Laurel and John C Reilly as Oliver Hardy, is scheduled for release in 2018. Talking Pictures TV is to start showing the duo’s long features from September. Sixty years since Oliver Hardy’s death on 7 August 1957, the duo will soon be rediscovered by a new generation.

They were such different men and such unlikely partners. Laurel was born Arthur Stanley Jefferson in 1890, in Ulverston, then part of Lancashire, the son of AJ, a theatre manager, and Margaret, an actress. He made his stage debut at the age of 16 and never again considered an alternative profession, eventually leaving for the United States to act on the vaudeville circuit before finally ending up in the nascent Hollywood. Norvell Hardy, meanwhile, came from Harlem, Georgia, the son of a slave overseer who died in the year of his son’s birth, 1892, and whose first name, Oliver, Norvell took as his own.

Hardy, who had worked as a singer and as a projectionist, became a jobbing actor, often being cast as the “heavy”because of his bulk. Laurel, by contrast, was groomed for stardom, but it repeatedly slipped through his fingers. Unlike Chaplin’s Tramp, or the boater-and-glasses-wearing Harold Lloyd, he had no persona. Only when Hal Roach paired him with Hardy did he finally find a mask that fitted, and thus a professional marriage slowly grew into a friendship that would endure until Babe’s death.

Laurel was the creative engine of the partnership, creating storylines and gags, intimately involving himself in the directing and editing of each film, but Hardy was the better, subtler actor. Laurel was a creature of the stage, trained to act for the back rows; Hardy, by contrast, had watched countless films from his projectionist’s perch and knew that the smallest of gestures – the raising of an eyebrow, a glance flicked in the audience’s direction – would be writ large on the screen. Laurel recognised this and tailored his scripts to his partner’s strengths.

Thus – and unusually for such partnerships – they never argued with each other about either screen time or money, despite the notorious parsimony of their producer Hal Roach, who paid them what he could get away with and would not let them negotiate their contracts together in order to weaken their bargaining position. Indeed, apart from one contretemps about the degree of dishevelment permitted to Babe’s hair, it seems that Laurel and Hardy never argued very much at all.

And then Babe died, leaving his partner bereft. What was a man to do but remember and write? So Laurel, always a prodigious correspondent, spent much of his retirement communicating with friends and fans by post. It helped that he had a curious and abiding affection for stationery. During one of the many interviews he conducted with John McCabe, his first serious biographer, Laurel revealed a wish to own a stationery store. Even he didn’t seem sure exactly why, but he admitted that he was quite content to while away entire afternoons in examining grades of paper.

Since letters were Laurel’s primary source of contact with the world, much of his writing is quite mundane. He deals with repeated inquiries about the state of his health – “I’m now feeling pretty good,” he informs a Scottish fan called Peter Elrick on 8 June 1960. “I suffered a slight stroke in ’55, fortunately I made a good recovery & am able to get around quite well again, of course I shall never be in a condition to work any more.” He notes the passing of actors he has known (to Jimmy Wiseman on 29 January 1959: “That was a terrible thing about [Carl] ‘Alfalfa’ Switzer wasn’t it? All over a few dollars’ debt he had to lose his life. I knew him very well as a kid in Our Gang films…”), answers queries about his films and his late partner (to Richard Handova on 21 March 1964: “Regarding the tattoo on Mr Hardy’s right arm – yes, that was an actual marking made when he was a kid – he always regretted having this done”) and often writes simply for the pleasure of having written, thus using up some stationery and enabling him to shop for more (“Just a few more stamps – hope you’re feeling well – nothing much to tell you, everything is as usual here,” represents the entirety of a letter to Irene Heffernan on 10 March 1964).

In researching my novel about Stan Laurel, I read a lot of his correspondence. I had to stop after a while, because the archive can overwhelm one with detail. For example, I might have found a way to include Oliver Hardy’s tattoo, which I didn’t know about until I read the letter just now. But of all the Laurel letters that I have read, one in particular stands out. It was written to his second wife, Ruth, on 1 July 1937, as their relationship was disintegrating. It is so striking that I quote it here in its entirety:

Dear Ruth,

When Lois divorced me it unbalanced me mentally & I made up my mind that I couldn’t be happy any more. I met & married you in that frame of mind, & the longer it went on, the stronger it became. That’s why I left you with the insane idea Lois would take me back.

After I left you, I found out definitely that she wouldn’t. I then realised the terrible mistake I had made & was too proud to admit it, so then I tried to find a new interest to forget it all, & truthfully Ruth I never have. I have drank just to keep up my spirits & I know I can’t last doing that, & am straining every effort to get back to normal.

You’ve been swell through it all, except the few rash things you did. I don’t blame you for not being in love with me, but my state of mind overrules my true feeling. If I had to do it over again things would be a lot different, but not in this town or this business. My marital happiness means more than all the millions.

Why has this letter stayed with me? I think it’s because of the penultimate sentence: “If I had to do it over again things would be a lot different, but not in this town or this business.” Hollywood brought Laurel a career, acclaim and a personal and professional relationship by which he came to be defined, but all at a price.

Stan Laurel was a complicated man, and complicated men lead complicated lives. In Laurel’s case, many of these complexities related to women. His comic performances and lack of vanity on screen often disguise his handsomeness, and monochrome film cannot communicate the blueness of his eyes. Women fell for him, and fell hard. He amassed more ex-wives than is wise for any gentleman (three in total, one of whom, Ruth, he married twice), to which number may be added a common-law wife and at least one long-standing mistress.

Had Laurel remained in Britain, serving an apprenticeship to his father before assuming control of one of the family’s theatres, women might not have been such a temptation for him. At the very least, he would have been constrained by a combination of finances and anonymity. Instead, he left for the United States and changed his name. In 1917, he met Mae Dahlberg, an older Australian actress who claimed to be a widow, despite the existence elsewhere of a husband who was very much alive and well. Laurel and Mae worked the vaudeville circuit together and shared a bed, but Mae – who lacked the talent to match her ambition – was eventually paid to disappear, as much to facilitate Laurel’s wedding to a younger, prettier actress named Lois Neilson as to ensure the furtherance of his career.

Yet it wasn’t long into this marriage before Laurel commenced an affair with the French actress Alyce Ardell, one that would persist for two decades, spanning three further nuptials. Ardell was Laurel’s pressure valve: as marriage after marriage fell apart, he would turn to her, although he seemed unwilling, or unable, to connect this adultery with the disintegration of his formal relationships.

The end of his first marriage was not the result of Laurel’s unfaithfulness alone. His second child with Lois, whom they named Stanley, died in May 1930 after just nine days of life. For a relationship that was already in trouble, it may have represented the final, fatal blow. Nevertheless, he always regretted leaving Lois. “I don’t think I could ever love again like I loved Lois,” he writes to Ruth on Christmas Eve in 1936. “I tried to get over it, but I can’t. I’m unhappy even after all you’ve done to try to make me happy, so why chase rainbows?”

But chasing rainbows was Stan Laurel’s default mode. He admitted advertising his intention to marry Ruth in the hope that Lois might take him back. Even after he and Ruth wed for the first time, he wrote letters to Lois seeking reconciliation. It set a pattern for the years to come: dissatisfaction in marriage; a retreat to Alyce Ardell’s bed; divorce; another marriage, including a year-long involvement with a notorious Russian gold-digger named Vera Ivanova Shuvalova, known by her stage name of Illiana (in the course of which Laurel, under the influence of alcohol, dug a hole in his garden with the stated intention of burying her in it), and finally contentment with another Russian, a widow named Ida Kitaeva Raphael, that lasted until his death.

These marital tribulations unfolded in full view of the media, with humiliating details laid bare. In 1946, he was forced to reveal in open court that alimony and child support payments left him with just $200 at the end of every month, and he had only $2,000 left in his bank account. In the course of divorce proceedings involving Illiana, his two previous wives were also briefly in attendance, leading the press to dub Lois, Ruth and Illiana “triple-threat husband hazards”. It might have been more accurate to term Stan Laurel a wife hazard, but despite all his failings, Lois and Ruth, at least, remained hugely fond of him.

“When he has something, he doesn’t want it,” Ruth told a Californian court in 1946, during their second set of divorce proceedings, “but when he hasn’t got it, he wants it. But he’s still a swell fellow.”

Laurel’s weakness was women, but he was not promiscuous. I think it is possible that he was always looking for a structure to his existence and believed that contentment in marriage might provide it, but his comedy was predicated on a conviction that all things tended towards chaos, in art as in life.

Thanks to the perfect complement of Oliver Hardy, Laurel was perhaps the greatest screen comedian of his generation – greater even than Chaplin, I would argue, because there is a purity to Laurel’s work that is lacking in Chaplin’s. Chaplin – to whom Laurel once acted as an understudy and with whom he stayed in contact over the years – wanted to be recognised as a great artist and succeeded, but at the cost of becoming less and less funny, of leaving the comedian behind. Stan Laurel sought only to make his audience laugh, and out of that ambition he created his art.

“he: A Novel” by John Connolly is published by Hodder & Stoughton on 24 August

This article first appeared in the 22 December 2008 issue of the New Statesman, Christmas and New Year special