China’s Immunity Gap
The Zero-COVID Strategy Leaves the Country Vulnerable to an Omicron Tsunami
Economists must leave to Adam Smith the glory of the Quarto, must pluck the day, fling pamphlets into the wind, write always sub-specie temporis, and achieve immortality by accident, if at all.
--John Maynard Keynes, in his essay on Alfred Marshall
AT THE whisper of an economic issue Keynes leaps among us with brightening opinion and advice. He will continue to do so. That is immortality.
The publication of Roy Harrod's "Life"[i] stirs the impulse to inspect his title to remembrance. That is not easy. For his mind and spirit both were always on the move. Those who travel with them will appreciate, even if they do not approve, the wry comment of Sir Eyre Crowe: ". . . he, Keynes, only sees for the time being, the point he sets himself to prove, and regardless of the fact he has proved something very different yesterday, and is very likely to prove something different still tomorrow. . . . He can bring a converging series of arguments to bear upon a single point so that he succeeds in making everything else seem to have a minor interest to other persons, and it is doubtful if it even has a subordinate interest for Keynes himself. His opinions are in a perpetual state of progress, and therefore of apparent flux. . . ."
In this flux there were many themes. Of these I shall pursue but three: his assault upon the Peace Treaty with Germany (1919); his examination of international monetary matters; and his inquiries into our economic system.
"The Economic Consequences of the Peace" appeared in the late autumn of 1919. It cried woe. The book transported its readers to Bedlam (a spot of which Keynes was often reminded when visiting the realm of statesmanship).
His censure touched all features of the Treaty. But it centered on economic terms, particularly the reparation demands imposed on Germany. These, he argued in an analytical brief that impressed the world, were hugely beyond Germany's capacity to pay. The refusal of the Allies to fix a terminal time for the obligation would, moreover, kill any impulse to try to pay. Such a reparation policy, Keynes predicted, would condemn Germany to misery, reduce her to servitude, and must fail. It would work havoc everywhere, destroy forever the interests which sustained and held Western Europe together, and rob the newly created states of a chance to live. As summarized in a letter to Austen Chamberlain in May: "The Prime Minister is leading us all into a morass of destruction. The settlement which he is proposing for Europe disrupts it economically and must depopulate it by millions of persons. The New States we are setting up cannot survive in such surroundings. Nor can the peace be kept or the League of Nations live."
These verdicts more deeply shocked because of his interpretation of the making of the Treaty. A most sensitive and disturbed artist had been in the conference room along with the Treasury expert; and around the grim statistics he wrote a tale of scorn and horror. Such excusing historic reasons as there were for the Treaty were, in his telling, subdued. The tensions and hatred that had forced the creation of new states and inspired the wish that Germany be made to pay appeared in a wanton light. Passion, fear, hurt, the wish for independence--none of these is granted right to satisfaction. Ruin was being prepared because nations were acting like rabble and ignoring the compulsive facts of economics. And this was so because the leaders of the victorious allied countries--Lloyd George, Clemenceau and Woodrow Wilson--were, each in his own way, so failing in purpose or character. The decisions are dramas of personal traits and responsibility. One might think almost that the Treaty was distilled out of Lloyd George's waywardness, Wilson's stubbornness and Clemenceau's grey gloves.
Of the three, it was Wilson's standing among men that suffered most, and the cause for which Wilson fought. Keynes struck him hardest--from his own disappointment and hurt, probably. For he had hoped for little wise or fair of the other two, but of Wilson he had. In his eyes the American President forsook the good which he had avowed. He who had once spoken of a "peace without victory" had consented to a harsh victor's peace; and then, self-deceiving, denied the fact. Thus Keynes found him wholly wanting: a rigid, nebulous, ill-informed fraud. Also irritating to Keynes was the "Wilsonian dogma which exalts and dignifies the divisions of race and nationality above the bonds of trade and culture."
Around the mistakes and injustice his denunciation whirled. Keynes' analysis soon proved itself. It became quickly evident that the reparations were, as he had argued, destructive and unenforceable. But the economic consequences were not as calamitous or lasting as those Keynes foresaw. For after the troubles and defaults of the kind that he predicted, the burden was reduced and payment made easier. Keynes' assault hastened the failure and prepared opinion for the needed revisions. In that way he himself revoked the sentence of doom which he had pronounced. By 1929 Germany had recovered. Her production, exports and imports were as great as before the war. Unemployment was less than half of that in Britain. Had the great depression not begun, reparations would soon have become a secondary feature of international economic life. Those who thought Keynes' excitement extreme may thus maintain that they were right. But they were not, because the erosion by which the settlement was dissolved did great harm. It left a miasmic pond of misery which awaited Hitler's image.
The mark left by Keynes' polemic spread far beyond the particulars of the reparations settlement. It sharpened perception over a wide area of experience; and it refreshed lessons that had been forgotten or ignored. First, that the victors in war are not usually able to make the losers pay for or repair their losses; and that sustained attempts to make them do so will increase rather than lessen the damage. Only slavery and sack--as practised by the Romans and Russians--can qualify this conclusion greatly. Second, that statesmen must give heed to economic consequences when settling frontiers, transfers of territory, issues of statehood. Third, that regard for the economic fortunes of other countries is not merely an act of kindness, but an essential condition of good relations, and perhaps of peace. Fourth, that peacemaking is not apt to be a consistent exercise in the application of some general principle, or moral idea. It is apt rather to be a savage struggle, swayed by prejudice among conflicting desires for advantage, safety and power, until and unless we have a strong international system of order permeated by morality.
As against these points of instruction--commonplaces now--a heavy bill of consequences lies against Keynes. Proof of this opinion cannot be given here. Such as there may be is diffused through the millions of pages and in one's memories and those of friends. Many came to think, under the influence of his words, that the war of 1914-18 was a struggle without meaning; that the Allies were as responsible for it as Germany; that the whole Treaty imposed upon Germany was cruelly unjust; that Germany would be well justified in destroying it as soon as she could; that the small new states had no future. Nor in his view did Europe have much future. Did not he write that we were hearing "the fearful convulsions of a dying civilization?"
These versions of events and prospects, toward which he persuaded many, had, as I have said, consequences. Of these, two surged with enough force against the structure of peace built at Versailles to be reckoned among the causes of its crumbling. Germans (and many others) could, on this authority, trace the source of the misery that beset them to the Treaty, not only in the early twenties, but in the depression years. It became easier to forget that the war itself did more permanent damage to Germany's economic condition than the Treaty, and to suppress the fact that Bruening's policy of drastic deflation in the midst of world-wide depression contributed much to the mass unemployment of the early thirties. Keynes, so far as I know, made no effort to prevent such deductions from his work. Hitler's screams about the Diktat of Versailles could travel down an authorized road.
Those Americans who wanted to keep clear of Europe and its conflicts were also given sanction for their views. Wilson had been a solemn innocent abroad; France and Britain--sterile and grasping--had made it almost inevitable that war in Europe would soon come again; we could not clear up this mess; the League of Nations was a trap. Toward judgments of this sort many Americans were drawn on reading Keynes. Harrod points out that the American Senate had rejected the Treaty, as presented, before the "Economic Consequences" appeared in print. Therefore, he concludes, "Keynes can be entirely exempted from any shadow of responsibility for the great American decision, which was to have such vast effect on the working of the European settlement." That is so. But that was not the last of the issues of our relationship with Europe and the League. Keynes made it seem futile, if not fatal, to engage American fortune with theirs.
Judgments and phrases such as his are remembered long after they are read. Taunts survive long after their objects are dead. This was no masque, no ballet that ended of an evening. The wind in which he tossed his pamphlet had course and currents with which he, in his despair, did not wisely reckon. His theme was sound. His revolt against the Treaty justified. But now, looking back, it seems that his reasoning proved too much, his scorn was too corrosive, and his compassion was badly shared as between Germany and the countries that had to live next her. His gift for exposing error was greater than his power to guide the world toward balanced harmony. In judging treaties, tolerance is to be prized more than wit; for most of them are but mauled children of forced consent.
Keynes' attention gradually turned away from the turmoil of adjusting economic realities and political actions in the countries of Europe. For a while he followed these subjects as observer and reporter. But his comment became less declamatory, more hopeful. His soaring, sterilizing mind reverted to matters on which it had been engaged before.
His effort was purposeful. The world possessed the means and knowledge to live decently and securely; why did it not manage to do so? It had need of the labor of all, but many were idle, decayingly idle. It endured poverty while in sight of plenty, anxious misery next to great riches. What interests, attitudes or forms were responsible? Or what faults of understanding, or errors of policy? He went in search of the explanation; and, when he thought he had located the trouble, in search of the remedies. His answers qualify him for place among the greatest physicians of our public affairs.
His concern struck first against the prevailing international monetary system. Conditions spurred his pen. There was then--in the twenties--persistent unemployment in Britain and stiffness in the joints of her economy. No longer could it with ease make the adjustments required of a faithful adherent to the international gold standard, with a fixed gold value for sterling. It was essential, his traveling mind concluded, that Britain (and other countries) withdraw from these bonds, in order to do what must be done to invigorate economic life.
His scrutiny of the gold standard system broke its authority. A despot king gold had been. Keynes, at the start, thought it could be tolerated as a constitutional monarch. But at the end it was deposed: the currency rulers regarded it merely as their treasure, to be managed like any other asset.
The charges he pressed against the gold standard were several. Each was a shock to most of the world of finance. He showed the irrationality of allowing the trend of money incomes and prices throughout the world to be influenced by changes in the total supply of gold, and the still greater irrationality of allowing the rate of economic activity in any individual country to vary with the quantity of that metal in its possession. And most irrational of all was the toleration of unemployment and misery because the supply of gold in any country ran short, or the toleration of unhealthy expansion because the supply grew greatly. None of this, he urged, was a necessary feature of a sound and serviceable currency system, either national or international. All of it was wasteful and socially unjust.
Events were moving with his opinions, but not as rapidly. He anticipated rather than recorded fact when in 1923 he wrote that passage which teased his antagonists: "In truth, the gold standard is already a barbarous relic. . . . A regulated non-metallic standard has slipped in unnoticed. It exists. While economists dozed, the academic dream of a hundred years, doffing its cap and gown, clad in paper, has crept into the world by means of the bad fairies, always so much more potent than the good--the wicked Ministers of Finance."
Keynes recognized, except when the imp of controversy tickled his hand, that there was need for some form of order and restraint in the monetary relations among nations. He was aware that unless there were some kind of commonly endorsed international rules all countries might be the worse off. There was a danger, he appreciated, that the freedom gained by discarding the gold standard might turn into a riot of loose national financing, debased currencies, unhealthy surges of capital across frontiers, and unsettling trade reversals--as the supporters of the gold standard said it must. And there was danger too that this abuse of freedom might in the end bring clamping controls upon all trade and enterprise. In answer he urged regulatory management. "We should," it was his reiterated plea, "rid ourselves of deep distrust of regulation of the standard of value by deliberate decision."
But how? By what means and principles? On these questions he wavered. Anyone who now rereads the proposals he made during 20 years will find them a lexicon of many variations. His views were supple--and subject to abrupt change--particularly as regards the question whether management should be national or international. Should each country do its own managing, or was there need for a system conducted internationally? His views on this revolved with his judgment as to which of the two methods was, at the moment, more likely to stimulate economic expansion.
Thus in 1923 he opposed the idea of joint management with the United States, since it would make Britain too dependent on the policy of the Federal Reserve Board. He was sure that Britain at that time needed a policy that would increase money values as an alternative to poverty and collapse; the United States was not then subject to the same necessity. Hence his conclusion: "I see grave objections to reinstating gold in the pious hope that international coöperation would keep it in order." This also dictated the judgment he passed upon Britain's decision in 1925 to return to gold at the old parity; "a triumph of unreasoning prejudice," he called it. In short, international management could be beneficial only if there were assurances that it would not, in effect, restrict in the way that gold does. This is the consistency, I think, behind his inconsistency. It was the conditioning factor in his quest.
But by 1930 all countries were in the same plight. Here was the time to strike, he thought, and strike he did (in a "Treatise on Money"). At the end of that most stimulating and comprehensive analysis of monetary matters, he proposed the creation of an International Monetary Authority to manage the value of gold. It was to be the center of a cluster of national systems which would try to regulate the price level. This meant an active, coördinated effort to raise the level of prices, and to stimulate investment till all had work. Each government was to make borrowing easy and cheap, and each, if necessary, was to subsidize or direct domestic schemes of capital investment.
No government was ready for a program such as this. Each country, as the slump grew worse, thought and fought for itself alone. Keynes swung with the tide: if such individual effort, then, was the only way managed expansion could be attained, he was ready to acclaim that method. Thus when Britain left the gold standard in 1931 he wrote: "There are few Englishmen who do not rejoice at the breaking of our gold fetters." And when Roosevelt in 1933 rejected the flexible stabilization accord prepared in London, he hailed the decision as "magnificently right." Others will disagree with this opinion, as I do, even though they share Keynes' belief that it was essential at that time that money values should keep on the rise. But the difference of judgment about this decision cannot be argued here.
Ten years later (1943) his thought came to logical fullness. In a plan for an International Clearing Union his mind flung itself into most brilliant exposition of a plan of universal expansion. This time his ideas were approved by the British Government. His design was to harmonize monetary intentions by underwriting a simultaneous effort by all countries to engage in fullest economic activity.
Each country was to allow all others to draw upon it for such amounts of its currency--up to a high limit--as they might need. This would enable each and all, he reckoned, to expand investment, production and employment without quick or close regard for its balance of payments. Debits and credits between members of the Union were to be adjusted in good time by the responsible effort of each and all. Relative values of currencies were to be left fluid, but subject to international scrutiny.
The proposal smashed against two main objections. Keynes proposed that as much as 25 or 30 billions (dollar equivalent) should be available as needed. All knew it would be dollars that would be most wanted. Such a sum was then deemed by the American Government outside of reason. There was another objection, also tough. Would not this scheme--providing credit for the asking, almost--be misused and abused? Would it not support the lazy, the corrupt and selfish among nations at the expense of the industrious and honest? That it would have seems beyond dispute.
The Bretton Woods Agreements were the compromise. These acknowledged lesser purposes and provided strictly limited funds. Keynes seemed to reconcile himself to the stingy substitute. Some reasons why he did may be surmised. These agreements made some extra dollars available to Britain and others in a time of great need. They subordinated gold, though to the superficial observer they did not seem to do so. They contemplated easy adjustment of exchange rates. They admitted, in the scarce-currencies provision, that creditors had joint responsibilities with debtors for disequilibrium in the international accounts. And they endorsed the reasonableness of the goal of full employment. Keynes' conceptions had been recognized, though the means of satisfying them had not, then and there, been provided.
These features were enough to turn Keynes, for the first time (and only for a short time), into an almost uncritical friend of the American financial authorities. But his satisfaction was brief. At the inaugural meeting of the International Fund at Savannah, it became clear that the sponsors had not, at Bretton Woods, really agreed as to how it should operate. Keynes ran squarely into the question of who would do the managing. The American Government, speaking through Mr. Vinson, made it plain that it intended to assert its power as provider. American wishes would be most influential if not dominant. Further, the task was not to be left to sheltered experts and officials. It might be taken over by untutored politicians. To make the issue still graver, Keynes perceived that the Americans thought that the Fund should exert severe censorship over the monetary policies of its members. This was contrary to his previous understanding and wish. Keynes recoiled, and on his return trip to Washington, his heart failed.
But his work in this field was transforming. He had scented events and emerging pressures clearly, and his arguments had changed prevailing thought and practice. Stability at a high level of activity was raised to first place among the aims of national and international monetary policy. Free convertibility of currencies remained a desirable objective but was no longer regarded as essential. The obligation to maintain fixed gold values of currencies took a subordinate place in prevailing economic thought. The idea of deliberate management of international monetary relations displaced the belief that economic tides should be allowed to run their course. Whether governments know enough to manage well, whether they will act decently enough, time will tell. Keynes did more than any man of his time to instruct us as to how they may act wisely.
In his studies of monetary policy, Keynes was seeking freedom to use monetary measures to correct economic deformities. But unless the causes of the trouble were more certainly identified, and more thoroughly known, even the best prescription could be only an inspired guess.
Classical economic theory, as taught at Cambridge, proffered explanations. But these Keynes found unsatisfactory. They seemed to him in some respects in conflict with experience, in others indifferent to it. The logic of these theories, he concluded, needed rearrangement, its equilibriums needed reëxamination, and its application needed correction. His writings on these matters were more crucial than all else he did. For here he was dissecting the heart of the system of free private enterprise. At the end of his work he had created a system of economic analysis which much improved our understanding. But it is doubtful whether he managed fully to solve (or dissolve) the main problem which he exposed.
The older doctrine concluded that, under the conditions assumed, the system of private enterprise could and would take care of itself well, and tended toward equilibrium with employment for all. If all participants in production bowed to the decisions of the market (thus allowing flexible money wage rates, prices and interest rates) there could be no persisting flaw: payments for production would provide the purchasing power needed to buy the product and keep all productive elements well employed. After examining the propensities and institutions which governed the flow and use of purchasing power, Keynes reached quite contrary conclusions. First, that our economy might arrive at, or come to rest in, many other situations besides full employment; "equilibrium" (for he clung to that abstraction) could be reached in any situation. Second, that marked fluctuations were probable, and the period of slump not necessarily transient. The reasoning which led to these conclusions was conducted with cold, technical logic. But he spelled out their meaning boldly; posted it in plain and large letters for the world to read as it ran--downhill.
As a portrayal of the characteristics of our economy, his analysis has won acceptance. Not as the whole and invariable truth; but as a more discerning and profound report on the pattern and behavior of the forces at work than any other. Our economic system may fail badly and stubbornly to yield full measure for our resources and effort. It does so at times; and much of the time it comes close to doing so. It must--and this was Keynes' plea--be made to do so all of the time.
Many, myself among them, who accept the main course of his reasoning, find his exposition murky or inconclusive in two important ways. First: the analysis of the cause of the failure of purchasing power does not seem complete. Second: he seems to have no answer to the question of proportionality over the long run between accumulated investment and the size of national income. This--if it be so--means that his prescriptions may bring only transient cures, need larger and larger doses, and in the end necessitate complete control of the patient.
Vast as it is, the interpretative literature on his theories does not seem to clear up these perplexing points. That should not cause surprise. For Keynes shared the revolving course of his cogitations too soon with his readers. He changed his formulations in successive works, correcting himself without remorse and with only curt apology.
Loosely it may be said that in all versions of his work he located the main cause of malfunctioning of the system to failure of "effective demand." This he traced to faulty use of income--as between spent income, saved income and invested income. But on what a turntable of logic and definition his analysis went round! In 1929 he wrote with blunt finality, "When investment runs ahead of saving, we have a boom, intense employment, and a tendency to inflation. When investment lags behind we have a slump and abnormal unemployment." His concepts seemed ordinary, his definitions usual, his meaning simple. In his next work, "Treatise on Money" (1930), he seemed to leave his basic dictum unaltered: ". . . disequilibrium between savings and investment is the mainspring of change." But in this book different and novel meanings were assigned to the terms "savings" and "investment." They were used by Keynes from then on not as names of familiar acts, but as symbols for deduced abstractions. He came to regard them as determinates within the economic system, not determinants.
This was a novel form of statement rather than a revolutionary conclusion. But it seemed to be so. For by his rearranged treatment of economic behavior he lifted attention away from the acts of saving and investment in their evident and familiar sense; he fixed attention instead upon the propensities which, over a period of time, determined how much saving and how much investment were actually realized. By this turn of exposition he brought into startling prominence certain ideas previously left in the background. For example, that the amount a country could save was not governed by the part of its income its people tried to put aside, but by the flow of effective demand, as sustained by investment.
These ideas remained in his next and greatest book, "The General Theory of Employment, Interest and Money." But as a result of the further changes in the cage of definition within which his reasoning was conducted, Keynes now insisted that savings and investment must come out equal and even. It is no wonder that ever since his thought has had to make its way through confusion. To the searcher for his meaning a quotation used in the "Treatise" may well recur: "The wild duck has dived down to the bottom--as deep as she can get--and bitten fast hold of the weed and tangle and all the rubbish that is down there, and it would need an extraordinary clever dog to dive and fish her up again."
Keynes stated the practical inferences of his analysis in propellant phrases, to the following effect:
1. Unless necessary measures are taken, the capitalist system may destroy itself.
2. Since consumption lags behind income, employment cannot increase unless new investment increases; hence there can be prolonged unemployment. And ". . . moreover the richer the community, the wider will tend to be the gap between actual and potential production; and therefore the more obvious and outrageous the defects of the economic system. For its propensity to consume will be weaker and the opportunities for investment less --unless the interest rate falls enough." Here is the frightening ghost of "stagnation" which during the thirties roamed through American economic texts.
3. A too vigorous attempt on the part of too many to save was apt to have bad results, and be self-defeating.
4. A redistribution of income will favor economic progress.
5. Governments must see to it that "effective demand" is sufficient to keep the productive system fully employed. To this end interest rates should usually be kept low. But since this and related measures might not serve, a comprehensive socialization of investment might prove to be the only means of securing an approximation to full employment.
What can be said of these in the light of past wisdom and recent experience? Five brief and inadequate comments may be ventured. One: this counsel is surely in the right direction and its prospect of progress is invigorating. Two: any general theory of economic behavior is of necessity abstract. Even though the type of economic system is the same in, say, two countries, the operative tendencies will be in degree different in each. Hence even though the same general prescription may be sound for all, the proper dose for each, and the proper mode of administering it, will be different for each. Keynes' prescription fitted Britain best. Three: its bent against deliberate saving--that is to say, thrift--is excessive. Such severe disparagement could be justified only on the supposition that much or most saving is hoarded. Four: the thesis may not give due place to the stimulus of invention. Five: the intense emphasis on investment as a cure may easily be taken for a cure-all. That certainly it can never be.
Unless social relations within a community are good, and there is enough flexibility (of all kinds) within the economic system, investment, no matter how well subsidized or sustained, will not bring stable and full activity. Inflation will be cumulative, and the effort will end either in collapse or thorough control or both.
Keynesian ideas have had great subsurface effect in the international field--first of shock, then of reassurance. For they were infused with certainty that if the Western capitalist or semi-Socialist democracies are alert and flexible, they can perform well and can assure a better and more secure economic life than ever before. Keynes tells us that if necessary measures are taken, their best time lies before them, not behind.
This was the emerging answer to the Marxian prophecies of inanition and collapse. Keynes summarily rejected the Marxian exposition of our economic system. Marx argued that the extension of the private capitalist system, by which it accumulates and uses more and more capital, condemns it to collapse. Keynes, in contrast, conceived capital accumulation (investment) as the means by which the whole society can improve its condition without end--provided (and the provisos were all-important) it took the proper means and measures. Thus he carefully distinguished his analysis from the theories of "over-saving" or "under-consumption." These, he pointed out, argue that the distribution of wealth leads to over-investment--"an entirely different terrain than my theory; inasmuch as on my theory it is a large volume of saving which does not lead to a corresponding large volume of investment (not one which does) which is at the root of the trouble." Again, and later, he emphasized the focal point of difference; that the troubling factor in our economy is not excessive saving, causing excessive accumulation of capital, but the propensity to save more income than is attracted into investment. In the Marxian analysis the course of capital growth itself creates an impasse; in the Keynesian, capital growth can bring mounting advantage.
Keynes' ideas stimulated a revision of international economic attitudes and expectations. The poorer, capital-lacking countries took them up eagerly. They were soon translated into requests for foreign aid, and into proposals for the international maintenance of investment. Capital has been made not only the key to prosperity, but also a test of international friendship. Formerly power to repay (to transfer) seemed an accepted limit to the advisable flow of capital across frontiers. Now the prevalent attitude justifies the investment in face of obscure transfer prospects, on the theory that the resultant full use of resources will provide the solution. It is ironic that Keynes, whose first great work centered on the difficulties of transfer payments across frontiers, in the end sowed the belief in the expansibility of transfer capacity.
It is to the United States above all that other nations look for the realization of the promise of a better economic life that Keynes' work holds out. The responsibility is a proper consequence of American economic strength. It will be, as we are learning, neither cheap nor easy. But it may be greatly rewarding.
To his last days the remark Keynes made in 1926 to the Manchester Reform Club remained true: "The Republic of my imagination lies on the extreme left of celestial space." The world has been fascinated by his flight over the vast regions between here and there. Since he is gone, we must do for ourselves the job of correcting, as we coldly test, those trails which his genius found.
[i] "The Life of John Maynard Keynes," by R. F. Harrod. New York: Harcourt, Brace, 1951.