Keynes' obsession: the worry over global imbalances.

• Author: Goodspeed, Tyler Beck
• Position: John Maynard Keynes

There is a whiff of necrophilia in the air where old theories are exhumed for use in waging contemporary policy wars, with the economics of John Maynard Keynes seeming often to comprise the weapon of choice. It is a weapon which should be wielded more knowledgeably. Keynes was notorious for relentless revision during his "long struggle to escape" from a classical paradigm to which even he, in his "unregenerate days," once subscribed. According to one close friend and colleague, no sooner had The General Theory of Employment, Interest, and Money hit the printing press than Keynes was already planning an edition of "footnotes" to modify and amend his magnum opus. Indeed, shortly before his death in 1946, Keynes lamented the state of "Keynesian" economics, "gone wrong and turned sour and silly." The scrupulous student of Keynes is left pleading: "Would the real Mr. Keynes please stand up?"

But we can be certain of one thing: Keynes was nothing if not a monetary economist. The lone theme coursing through all his work, surviving that "immense lot of muddling and many drafts" which accompanied the journey from his first article, on the Indian exchange rate, to his last, "The Balance of Payments of the United States," is a long-abiding apprehension toward global trade imbalances, coupled with an exhausting, at times pedantic, quest for an international monetary system to restrain them. As global imbalances increasingly assume center stage in the debate over the Financial Crisis of 2007-10, Keynes' protracted attention to what he termed the "secular international problem" is a topic about which pedantry is again well worth the while.

Keynes' obsession with this problem began early. His 1919 bombshell, The Economic Consequences of the Peace, strenuously protested German indemnification on the grounds that it would inevitably inflict massive and sustained current account deficits upon the Allied economies. An entire chapter of his 1923 Tract on Monetary Reform is dedicated to the "balance of payments" question, while his 1930 Treatise on Money features lengthy discussions on squaring "internal" asset price stability with "external" exchange rate stability. Even The General Theory concludes, tellingly, not with some paean to deficit spending, but rather with a provocative reflection on how domestic economic policy can and must be reconciled with international monetary stability, lest international trade devolve into no more than a futile mercantilist...