Grand Pursuit

by Sylvia Nasar

  Robbins resented the dominance of Cambridge and Keynes in English economics and regarded Keynes, with whom he clashed bitterly on protectionism while serving on Ramsey MacDonald’s Economic Advisory Board, as a political opportunist and intellectual bully. Ironically, Robbins’s ambition was to turn the London School of Economics, founded and patronized by Fabians, into the liberal counterweight to Cambridge collectivism. In search of potential political allies, Robbins had spotted Hayek, the thirty-one-year-old Austrian protégé of von Mises, and invited him to come to LSE to give a series of lectures in January 1931. Hayek, who was running his business cycle research institute in Vienna and working on a massive history of monetary policy, had impressed Robbins by correctly predicting the collapse of the American boom back in the spring of 1929, when other pundits were issuing sunny forecasts: “The boom will collapse within the next few months.”74 Hayek later recalled that he had said that there was “no hope of a recovery in Europe until interest rates fell, and interest rates would not fall until the American boom collapses, which I said was likely to happen within the next few months.”75

  Mises and Hayek had developed a theory blaming depressions on excessive money creation and overly low interest rates in the preceding boom that led to a massive misallocation of capital—or, as Robbins put it, “inappropriate investments fostered by wrong expectations.”76 Hayek thought the theory explained the Great Depression, which he argued was “due to monetary mismanagement and State intervention operating in a milieu in which the essential strength of capitalism had already been sapped by war and by policy.”77

  If it was true that overinvestment during the boom—not underinvestment in the recession, as Keynes contended—was to blame for the slump, then what was needed was simply “time to effect a permanent cure by the slow process of adapting the structure of production”—in other words, waiting until excess capacity was absorbed or written down and new investment was once again called for. “The creation of artificial demand,” Hayek argued, would do nothing to undo the misallocation of capital and therefore would only lead to another burst of inflation and another downturn, as it had in 1921, when Austria suffered a hyperinflation.

  Hayek’s LSE lectures were “a sensation,” according to Robbins. “At once difficult and exciting . . . they conveyed such an impression of learning and analytical invention.” William Beveridge, the director of the LSE and the acknowledged father of the English welfare state, was so impressed by the “tall, powerful, reserved” Austrian that he promptly offered him a vacant professorial chair. Hayek had written a stinging review of Keynes’s Treatise on Money and had engaged in a high-profile debate with Keynes and his disciples. Hayek’s grave expression, courtly manners, and reserve that hinted at some private sorrow appealed to his English audience. His enigmatic expression, fearlessness, and ascetic refusal to prescribe easy cures reminded them of his cousin Ludwig Wittgenstein. Hayek had found credible new arguments for the traditional liberal policies of sound money, free trade, and respect for property rights and the view that recessions heal themselves.

  Lionel Robbins’s 1934 book The Great Depression was a skillful application of Hayekian theory to the boom and bust of the interwar period. (Decades later, in his 1971 Autobiography of an Economist, Robbins recanted, confessing that he would “willingly see it forgotten.”78) Hayek supported Robbins’s public campaign to counter Keynes’s proposals. He was one of the cosigners, with Robbins and other LSE professors, supporting a balanced budget policy in 1932.79

  Hayek’s star did not glitter for long. By 1935, Beatrice Webb said of “Robbins and Co”—the “Co.” being Hayek—that “they and their credo are side-tracked, without influence or even relevance to the present state of the world.”80 She was right. By the time Keynes’s General Theory appeared the following year, the debate was over, and the economics profession had swung solidly to the Keynesian view, which, according to one of Hayek’s friends, “fitted the times of deflation and mass unemployment better than Hayek’s monetary temperance.”81

  At the time, Hayek was left less embattled than entirely eclipsed. Speculating about Hayek’s failure to attack the General Theory in print, Bruce Caldwell, editor of Hayek’s collected works, hazards a guess that Hayek was simply not invited to review it. Harsh criticisms of the early Hayek—from his adversaries, his erstwhile defenders, and his political allies—are prevalent in the literature. Keynes referred to his 1931 work Prices and Production as a “frightful muddle,”82 and Milton Friedman described himself as “an enormous admirer of Hayek, but not for his economics.”83 Before long, Hayek’s exchanges with Keynes were confined to their common passion for antiquarian books.

  • • •

  After three stints as a visiting professor, Schumpeter moved to Harvard for good in 1932. His reasons for leaving Germany had less to do with the rise of left- and right-wing political extremism (the Nazis fared poorly in the 1932 election) than with his failure to obtain a chair in Berlin and his desire to avoid marrying his longtime mistress, Mia Stöckel. Germany had been for him a place of exile, irrevocably associated with the greatest disappointments and tragedies of his life, including the deaths of his beloved second wife, Annie, and his mother.

  A severe blow was the publication of Keynes’s Treatise on Money, which convinced Schumpeter, who had been working on his own book on monetary origins of the business cycle, that his project was “useless.” He told one of his students, “The only thing left for me to do now is to throw the money manuscript away.”84 His reaction suggests that his own ideas coincided with those of Keynes and Fisher and that he realized he had little to add. Otherwise, Schumpeter surely would have welcomed a chance to criticize Keynes’s theory and contrast his own.

  Schumpeter’s depression was deepened by the stunning collapse of the German economy after Black Thursday. As American investors rushed to liquidate their foreign holdings and American merchants slashed their imports of German grain, German industrial production fell by 40 percent and unemployment shot to more than 30 percent.85 The depression in Germany was even deeper than in the United States—deeper, in fact, than in any other major economy.

  Twenty years before in the midst of another global economic crisis, Schumpeter and Keynes had advocated similar responses. Now Schumpeter defined his position in opposition to that of Keynes. At the annual meeting of the American Economic Association in December 1930, Schumpeter had attracted a spurt of media attention when he suggested that no politically palatable cure for the depression existed.86 Joseph Dorfman, the historian of economics, attributed that response to Schumpeter’s “somber outlook,” which struck many in the United States as “a useful counterbalance to the characteristic optimism of the Anglo-American tradition.”87

  Schumpeter’s insistence that monetary expansion was bound to fail intensified over time. It is a bit of a puzzle, especially in light of his praise of Japan’s decision to abandon the gold standard in 1931. To be sure, Schumpeter’s theory of the business cycle emphasized causes other than monetary ones far more than Keynes’s or Fisher’s, particularly the consequences of new technologies, chemical and mechanical, that were revolutionizing farming. Schumpeter also believed that “creative destruction” of obsolete firms or industries was a precondition for long-term growth of productivity and living standards. But had he believed these things any less in 1919? His extreme fatalism struck at least some of his students and colleagues as new.

  Schumpeter took part in efforts to find jobs for Jewish economists who were being persecuted by the new Hitler administration. He formed “a Committee [with the American economist Wesley Clair Mitchell] to take care of some of those German scientists who are now being removed from their chairs by the present government on account of their Hebrew race or faith.” In a letter written shortly after Hitler became chancellor in Germany’s coalition government in March 1933—but before the creation of the Nazi dictatorship—Schumpeter expressed his growing sense of isolation and unhappiness:

 
; In order to avoid what would be a very natural misunderstanding allow me to state that I am a German citizen but not a Jew or of Jewish descent. Nor am I a thorough exponent of the present German government, the actions of which look somewhat differently to one who has had the experience of the regime which preceded it. My conservative convictions make it impossible for me to share the well-nigh unanimous condemnation the Hitler Ministry meets with in the world at large. It is merely from a sense of duty towards men who have been my colleagues that I am trying to organize some help for them which would enable them to carry on quiet scientific work in this country should the necessity arise.88

  Schumpeter must have imbibed some of the new attitudes that Hayek brought to the LSE when he gave a series of lectures there on the depression. By the time he arrived at Harvard for good a year later, he was asserting that economists had no business giving advice, although, as his student Paul Samuelson remarked sardonically, “He was always giving advice.” He organized an informal seminar with like-minded colleagues, the “Seven Wise Men,” who met once a week. The group, which included Wassily Leontief, the Russian-born mathematical economist, eventually published a laissez-faire manifesto attacking the New Deal.

  Recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested element of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead. Particularly, our story provides a presumption against remedial measures which work through money and credit. For the trouble is fundamentally not with money and credit, and policies of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future.89

  When Keynes’s General Theory appeared, Schumpeter, who had earlier been on the most cordial terms with Keynes and sympathetic to his views, wrote a singularly splenetic review: “The advice (everybody knows what it is Mr. Keynes advises) may be good. For the England of today it possibly is. That vision may be entitled to the compliment that it expresses forcefully the attitude of a decaying civilization.”90

  Chapter XI

  Experiments: Webb and Robinson in the 1930s

  The Soviet Union presents a blazing contrast to the rest of Europe.

  —Walter Duranty, New York Times, July 20, 19311

  Two experiments on a large scale are actually going on in the world of today—American Capitalism and Russian Communism.

  —Beatrice Webb, April 19322

  The apparent helplessness of Western governments in the face of a global economic calamity seemed to confirm the thesis of the Webbs’ 1923 book The Decay of Capitalist Civilization. Interpreting Labour’s stunning electoral defeat as more of “a victory for the American and British financiers” than a repudiation of the government’s shaky response to the slump, Beatrice Webb lost what little remained of her faith in the Fabians’ “inevitability of gradualism.”3 Initially hostile to the Bolshevik regime, she now saw the Soviet Union as the only nation that was “increasing the material resources and improving the health and education of its people.” Somewhat impulsively, she decided to make this “new social order” the subject of her and Sidney’s next magnum opus.4

  One week after the general election that evicted Sidney from his cabinet post on October 27, 1931, the seventy-eight-year-old Beatrice was asking herself, “How shall we spend our old age?”5 She wondered if she was strong enough to travel to Russia to collect material, even though her reason for wanting to go was merely to lend “vividness” to her account.6 She had already made up her mind that the Soviet experiment was working just as surely as the Western one was not, declaring that “without doubt we are on the side of Russia.”7 Before their departure aboard the Russian steamer Smolny, she had “summarized the immense book that she and Sidney were to write on their return.”8

  Stalin had not foreseen the worldwide depression any more than Keynes or Fisher had, but he seized the opportunity to recruit Western sympathizers and allies. Prominent fellow travelers were even more prized than more ordinary party members, and extraordinary efforts were expended to cultivate them. A phalanx of official guides, interpreters, and drivers met the Webbs in Leningrad and whisked them off on a strenuous two-month tour of factories, farms, schools, and clinics to inspect what Webb now referred to as a “new civilization.”9

  In London, the dinner invitations, political consultations, and newspaper interviews had dried up after Labour was ousted. In Russia, “We seem to be a new type of royalty,” Beatrice observed with pleasure.10 We now know that while the Webbs were being ferried about in limousines and special trains, Stalin was transforming the Ukraine into a giant concentration camp. Moscow had been selling grain to the West in return for machinery, but the collapse of world grain prices meant having to double the tonnage for export. The Soviet dictator, who was so economically illiterate that he once, after a shortage of small coins developed, had several dozen bank cashiers shot, demanded one-half of the harvest for export. The inevitable famine ultimately claimed at least six million lives, one-quarter of a rural population that was already decimated by forced collectivization.

  Once back in England, Webb added her voice to the denials issuing forth from Moscow. She was relying on the testimony of Western correspondents in Moscow like the New York Times’s Walter Duranty, who insisted, “There is no famine or starvation, nor is there likely to be.”11 But Duranty had not strayed from the capital and was merely echoing the government’s disavowals. After Malcolm Muggeridge, a Manchester Guardian correspondent who was married to her niece, went to the Ukraine to see for himself, Webb refused to believe his shattering description of starving peasants and official abuse. She dismissed her nephew’s reports as “hysterical” and suggested that Soviet Communism had become the innocent target of “poor Malcolm’s complexes” and “a well of hatred in [his] nature.” Beatrice invited Ivan Maisky, the new Soviet ambassador, and his wife over for the weekend and was “comforted” by their assurances that there was no famine.12 In Soviet Communism: A New Civilization, which was published in 1935, she insisted that “what the Soviet Union was faced with, from 1929 onward, was not a famine but a widespread general strike of the peasantry, in resistance to the policy of collectivization.”13

  Bertrand Russell, who was critical of the Webbs for their “worship of the state” and “undue tolerance of Mussolini and Hitler,” was even more appalled by their “rather absurd adulation” of the Soviet government.14 The historian Robert Conquest faults their naïve faith in official statistics, inclination to depreciate anecdote, and ignorance of history: “They had no background of knowledge, let alone ‘feel’ for the great slave empires of antiquity, the millenarian sects of the 16th century, the conquerors of medieval Asia.”15 But Keynes probably put his finger on the real source of Webb’s infatuation with the Soviet Union when he called Communism a religion “with an appeal to the ascetic in us.”16 In her eighth decade, Webb had found a new faith. As Muggeridge complained, “You couldn’t change her mind with facts.”17

  • • •

  Although Keynes had an “unmitigated contempt for the official Labour Party,”18 he was an old-fashioned liberal like Russell. He bracketed the Soviet Union with Fascist Germany and loathed Stalin, predicting in 1937 that “an eventual agreement between him and Germany [is] by no means out of the question, if it should happen to suit him.”19 On being asked to contribute to a Festschrift for Webb’s eightieth birthday, he replied that “the only sentence which came to my mind spontaneously was that ‘Mrs. Webb, not being a Soviet politician, has managed to survive to the age of eighty.’ ”20

  Keynes was inclined to see young Communists and fellow travelers in his circle at Cambridge as amateurs whose fanaticism was a harmless eccentricity or a passing phase. He didn’t see why ideology should get in the way of friendship or research and, if anything, he admired their idealism and courage. In 1939, h
e ventured that “there is no one in politics today worth six pence outside the ranks of Liberals except the post war generation of intellectual communists under thirty five.” Though deluded, they were “magnificent material,” too good to waste.21

  Joan Robinson, who would become the most famous of Keynes’s Cambridge disciples, was almost certainly one of the “intellectual communists” that Keynes had in mind when he wrote that these members of the younger generation were “the nearest thing we now have to the typical nervous non-conformist English gentleman who went to the Crusades, made the Reformation, fought the Great Rebellion, won us our civil and religious liberties and humanized the working classes last century.”22 Robinson’s commanding manner, zeal, and combative instincts were bred in the bone. Born Joan Violet Maurice, she came from a long line of military officers, university dons, civil servants, and dissenters. Her mother, the indomitable and perpetually youthful Lady Helen Marsh, was the beneficiary of a trust created by Parliament in 1812 after the assassination of her ancestor the British prime minister Spencer Perceval. Her great-grandfather F. D. Maurice, a famous university radical whom Alfred Marshall had known in the Grote Club, gave up his Cambridge chair rather than agreeing “to believe in eternal damnation.”23 Her father, Major General Frederick Maurice, sacrificed his military career when he publicly accused Prime Minister Lloyd George of lying in World War I, then went on to become a war correspondent, a military historian, the head of two London colleges, and the author of nineteen books. Robinson’s maternal uncle, Eddie Marsh, was Winston Churchill’s longtime private secretary. He devoted his free time to writing bad poetry and promoting the work of comely young writers and artists, among them Rupert Brooke, Siegfried Sassoon, and Duncan Grant. Robinson’s family, her husband, Austin, said, was “a trifle frightening.”24