What Keynes warned about globalization


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WE are all Keynesians now. The hero of the Great Depression has been summoned in our hour of need and has begun to appear everywhere: in the editorials of the financial dailies, the columns of weekly magazines, and even the pages of the American journals of finance and economics where Keynesianism has usually had a lukewarm reception. But the new vogue for Keynes overlooks the fact that Keynes’s economic policies were developed in explicit opposition to what we now call ‘globalization’. Keynes warned that global economic integration generates tensions that cannot be solved by ordinary politics within a single state. As a result, it can endanger international peace. In fact, making Keynes an apologist for deficit spending while ignoring his warnings on economic integration risks replicating the international conflict that spurred his thinking in the first place.

The globalization of the past few decades is not the first such episode the world has experienced, nor, by many measures, the deepest. The period immediately prior to the First World War was one of unprecedented financial and economic ‘globalization’, though of course it was not then called by that name. This was the world in which John Maynard Keynes grew up, got his education and professional start – and which he saw collapse. While we tend to think of Keynes in terms of his academic and institutional work in the 1930s and 1940s, the formative period in his life was earlier: during the First World War and the economic problems that plagued Britain following its return to the strictures of the gold standard in the 1920s. It was witnessing the military conflict and economic turmoil following a period of peace and economic integration that motivated Keynes’s theories.

Throughout his life, Keynes struggled to understand how the world he grew up in – what has been called the first era of globalization – could have come to such a catastrophic end. The first globalization was a British-led movement: it depended on the British commitment to what we now call economic integration, summed up in the slogan of ‘free trade’, meaning the free movement of capital, goods, and (in an important difference from today) people.

Keynes had been originally an ardent advocate of free trade, but, as he explained in a speech on ‘National Self-Sufficiency’ in 1933, his views had undergone a radical change.1 ‘Like most Englishmen,’ he had been ‘brought up…to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law.’ But the experience of the First World War and the economic upheavals of the interwar period had produced a set of circumstances more consequential for policy-making than any of the analytic propositions about free trade that he had formerly believed. New ‘hopes and fears and preoccupations’ had required Keynes to ‘shuffle out of the mental habits of the pre-war nineteenth century world’ – the ideologies of the first globalization he had once reflexively accepted.


The justification for the first globalization had been given by the great classical proponents of free trade, whom Keynes credited with being ‘among the most idealistic and disinterested of men.’ Those advocates of laissez-faire had believed that they alone were ‘clear-sighted’, and that protectionism was ‘always the offspring of ignorance out of self-interest.’ They had been confident that ‘they were solving the problem of poverty, and solving it for the world as a whole,’ and ‘serving, not merely the survival of the economically fittest, but the great cause of liberty.’ Most importantly, these nineteenth-century advocates of free trade had believed that ‘they were the friends and assurers of peace and international concord and economic justice between nations and the diffusers of the benefits of progress.’

Commentators since the eighteenth century had been arguing that free trade would lead to peace by tying the destinies of nations together through economic interdependence – much as we still hear from optimistic commentators on globalization today. It was particularly this idea that Keynes’s generation – looking back from the perspective of the 1920s and 30s – thought so naive and dangerous, having seen precisely the opposite. Rather than forging world peace, the economically interdependent nations of Europe had destroyed one another.


The parallel between these dogmas of the ‘prewar nineteenth century world’ and the rhetoric of post-Cold War neoliberalism is striking, although Keynes would have been the last to suspect that the nineteenth century view of capitalism would return with such a vengeance. ‘There are still those who cling to the old ideas,’ he wrote in 1932, ‘but in no country of the world today can they be reckoned as a serious force.’ Instead, the political demand in the 1930s was to be ‘our own masters’ rather than ‘at the mercy of world forces working out, or trying to work out, some uniform equilibrium according to the ideal principles, if they can be called such, of laissez-faire capitalism.’ Taming these ‘world forces’ required the construction of a new world order, which Keynes worked to see implemented in what were literally his dying days.

The international aspect of Keynes’s agenda was partially if imperfectly instituted in the Bretton Woods system, which combined development and reconstruction aid with a new world financial order of national currencies and ‘embedded liberalism’.2 Under Bretton Woods, all currencies were pegged to the U.S. dollar, and the U.S. dollar was anchored to gold; exchange rates between currencies were fixed, and subject to ongoing international negotiation. The aim was to make economic production congruent with national regulatory oversight while allowing international commerce. This congruence was most apparent in finance, as exhibited in Keynes’s advocacy of a switch from the gold standard to a system of national currencies linked together through international negotiation.

Keynesian monetary policy requires national currencies to enable political regulation of the business cycle, but in order to avoid isolation, there must be some way to link economies together within rather than beyond the regulatory purview of the state. Keynes was not advocating autarky; he was seeking a remedy for the problems that had arisen in a global economy ungoverned by politics. His aim was to align production and politics at the national level, which he understood meant folding international commerce into international diplomacy generally, by instituting forms of international regulation to complement domestic oversight of markets.


As it turned out, the ‘old ideas’ did return in new form, but only after the post-war Keynesian order – an order expressly constructed to manage the fall-out of the first globalization – had been systematically dismantled. The beginning of the current episode of globalization – what we might call the ‘second globalization’ – is usually dated to roughly the middle of the 1970s, precisely when this post-war Keynesian order began to break down. The end of the Bretton Woods system ushered in a new world order, which only came fully into its own after the end of the Cold War. The neoliberal ideal of a ‘world without walls’ (in the words of former Director of the World Trade Organization, Mike Moore3 ) stands in direct contrast to the Bretton Woods regime.

The liquidation of the Keynesian system was the victory of several decades of effort by Wall Street and the City – joined by a host of neoliberal think tanks. It was ultimately ratified in the ‘Washington Consensus’ that pushed governmental and intergovernmental organizations toward privatization, deregulation, and market-mimicry. According to the ideology of this second globalization, politics had to be withdrawn from production. Against post-war Keynesianism, advocates of the Washington Consensus sought to create an economic space purified of political interference, especially in the developing world. Markets, on this account, could be trusted to generate the right outcomes; states ought to defer to the ‘magic of the market’, as financial commentator Martin Wolf called it.4 


The first globalization emerged outside the purview of nation states because there were no international institutions at that time able to extend regulatory control over transnational commercial actors, at least outside the large European empires. By contrast, the emergence of the second globalization required the deliberate dismantling of the system of governmental oversight set up on expressly Keynesian grounds, in the wake of the World Wars. The second globalization did not lead, however, to a disordered world. After the United States switched off the gold standard in 1971, the dollar, crucially, continued to function as the world’s reserve currency – even while other currencies floated freely against it. In this new environment, many Asian countries maintained informal pegs to the dollar for purposes of maintaining a stable exchange environment for the purpose of export-oriented development.


This new regime allowed for the rapid economic growth of East Asia – including, most recently, coastal China, but Japan and the East Asian ‘tigers’ before that – through the sale of consumer items to the United States in exchange for increasing amounts of dollar-denominated debt. It also allowed the United States to deficit-spend through booms and busts alike by relying on foreign purchases of its debt, taking advantage of the dollar’s continued centrality to the world financial system. The U.S. thus became the lender – and spender – of last resort: lending abroad to consume from abroad in a cycle it seems unable to stop.

This new regime represents the distorted evolution of post-war Keynesianism. Under either a gold standard proper or a functionally equivalent ‘gold-pegged’ standard, U.S. debt levels would have been revealed as patently unsustainable several decades ago: the gold to back up the debt would simply not have been in the bank. Likewise, under a system of floating currencies without a reserve currency, the value of the dollar would have been tied directly to reciprocal foreign demand for U.S. goods and services. It is only in the second globalization following the breakdown of Bretton Woods that we find the novel combination of globalized finance and a world reserve currency that can be inflated at will.

U.S. debt issuance has increased dramatically in the current financial crisis, and it is in this context that Keynes has been rehabilitated as a prophet of debt-financed public spending. Critically, however, the money being spent is not money that Americans are borrowing from themselves, and will one day pay back (or fail to pay back) to future generations of Americans. Rather, the deficit-spending now under way – undertaken on ersatz Keynesian grounds – depends disproportionately on money that Americans are borrowing from abroad, and will one day pay back (or fail to pay back) to future generations of foreign citizens, particularly Chinese.

China is now the largest holder of U.S. Treasury bonds: at least $768 billion worth in March 2009, though some estimates put its total dollar-denominated assets at twice that. Together, China and Japan are the major foreign investors in U.S. public debt, half of which is held outside the United States. In the current crisis, America is depending on its creditors not just to maintain their existing dollar-denominated debt, but also to soak up the new Treasury Bills being printed in Washington. In June, United States Treasury Secretary Tim Geithner visited Beijing to reassure the Chinese government that its dollar holdings remain a sound investment despite massive new U.S. borrowing. After his opening speech at Beijing University, Geithner responded to a question about the soundness of the U.S. dollar declaring, ‘Chinese assets are very safe.’ The comment provoked loud laughter from the assembled students: they knew perfectly well that the American IOUs they will inherit are of deeply uncertain value.


From eighteenth century philosophes such as Montesquieu to twentieth-century journalists such as Thomas Friedman or Martin Wolf, the idea that economic interdependence leads to international peace has been a popular one. Alas, the idea is hard to square with the historical facts. Keynes argued the opposite position following his experience of the First World War:

‘It does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country’s economic structure by the resources and the influence of foreign capitalists, and that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace. It is easier, in the light of experience and foresight, to argue quite the contrary.’

A famous commentator at the time, Sir Norman Angell, had argued on the very eve of the First World War that Germany would never attack Britain, given the interconnections between the two economies. (Germany was Britain’s second largest trading partner.) War had become impossible among modern commercial nations, Angell claimed: those who thought it might occur were under a ‘great illusion’ since ‘military and political power give a nation no commercial advantage’ and ‘it is an economic impossibility for one nation to seize or destroy the wealth of another, or for one nation to enrich itself by subjugating another.’5 


In retrospect, Keynes was able to identify what had really been the ‘great illusion’: the fantasy that economic globalization would lead to peace. That fantasy rested on the idea that rival countries necessarily put economic prosperity above other values, such as national honour or complex geopolitical commitments. The First World War revealed otherwise: economically interdependent countries were not immune from violence and, on a different account of why violence happens, might even be particularly prone to it. Indeed, while Keynes cited many reasons for limiting economic globalization, including for the sake of what we now call the ‘policy space’ available to governments to intervene in the economy, it was international peace that was his foremost concern. Because globalization allows economic relations to form above and outside the state, there is no obvious route to a solution if things go awry (as might be expected) in complex chains of production and investment that cross national borders.


Keynes argued that, ‘The divorce between ownership and the real responsibility of management is serious within a country, when, as a result of joint stock enterprise, ownership is broken up among innumerable individuals who buy their interest today and sell it tomorrow and lack altogether both knowledge and responsibility towards what they momentarily own.’ These are the circumstances that led to our current financial crisis: the lack of ‘both knowledge and responsibility’ for investments that are only ‘momentarily’ owned – bad debts securitized, then traded, and used as leverage for the speculative purchase of more assets. It is a scenario that Keynes would have found entirely familiar, leaving aside, of course, the more complex financial instruments that facilitated our recent bubble. But the division between ‘ownership’ and ‘real responsibility’ becomes an even more acute problem when globalization divides ownership and production across multiple countries, leaving no overall political forum in which conflicts can be managed:

‘When the same principle [i.e. the division of ownership and responsibility] is applied internationally, it is, in times of stress, intolerable – I am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.’


Globalization divides up the different parts of the productive process (and the differential gains from it) among citizens of many different countries – and did so in Keynes’s time as well as today. In so doing, it may increase aggregate welfare, and it certainly helps investors and those best positioned to make money in globalized markets. But it also has the consequence of elevating the market above politics by moving decisions about production to a realm where they can only be made according to ‘some financial calculation’ and for which there is no straightforward political remedy should things go sour. Reflecting on this fact led Keynes to be wary about global economic integration: ‘I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations.’

This does not mean that Keynes was anti-cosmopolitan or illiberal. He makes his commitment to a liberal and cosmopolitan order clear: ‘Ideas, knowledge, science, hospitality, travel,’ he explains, ‘these are the things which should of their nature be international.’ Sharing these things, he thought, would not embroil people of different nationalities in intractable conflict. The situation is different, however, with economic production, and, especially, with finance: ‘let goods be homespun whenever it is reasonably and conveniently possible,’ Keynes advised, ‘and, above all, let finance be primarily national.’ National self-sufficiency might or might not be the best economic policy, but it ought nevertheless to be pursued for the sake of peace. As Keynes pointed out in dramatic understatement: ‘the age of economic internationalism was not particularly successful in avoiding war.’


The second globalization today represents a massive failure of ‘national self-sufficiency’, especially the demand that finance should above all be focused nationally. If the U.S. debt driving it were held domestically, as Keynes counselled, there might one day come a reckoning between different generations or different classes of Americans – between those who hold the massive debt and those who owe it. The political procedures of the United States would probably be resilient enough to contain the process: since antiquity, the history of democratic self-government has featured many episodes of debt forgiveness undertaken for the sake of national reconciliation. But the average American is now in debt not just to other, richer Americans – who can be squeezed politically for debt-relief or redistribution – but also to people far away and who are mostly far, far poorer.

The Nobel Prize-winning economist Paul Krugman has jokingly described the U.S. relationship with China in recent decades as a swap of toxic debt for toxic toys: ‘They sold us poison toys and tainted seafood; we sold them fraudulent securities.’6 What this means, joking aside, is that vast numbers of Chinese peasants (turned factory workers) have spent their lives producing goods for consumption in the U.S. in exchange for American IOUs of dubious value. It would be unwise to be too sanguine about this situation, or to assume that the reckoning the parties will choose to pursue will be an exclusively economic one – as Norman Angell, not Keynes, would have supposed. If we wish to summon the ghost of Keynes today, it should not be to provide us with sorry comfort as the U.S. taxpayer makes good the bad bets of Citibank by borrowing yet more money from abroad.


In some quarters, the Nehruvian legacy in India is blamed for what is considered a low rate of economic growth during the several decades following Independence. A conventional narrative holds that India failed to achieve growth commensurate with that of its East Asian neighbours because it pursued too devotedly the ‘national self-sufficiency’ that Keynesians (including Nehru) advocated. On this account, India’s recent economic acceleration can be credited to the liberalization of the early 1990s, beginning with the IMF-led intervention in 1991.

This account remains controversial and is inaccurate in several respects: the growth of the 1990s began earlier – with comparatively minor reforms in the 1980s, when the license raj was still in effect, and if India’s growth from independence up to 1990 was not spectacular, it was still entirely ‘normal’ when compared with similar developing countries.7 Besides, evaluating India’s economic liberalization normatively requires specifying an appropriate benchmark by which to compare the outcomes of different policies – and a clearer sense of how economic growth in the aggregate is related to more pressing concerns about poverty alleviation and inequality. The debate over the economic reforms will go on, but this seems an opportune time to consider a different question: how India’s development has (and has not) depended upon the complex dynamics of the ‘second globalization’.


At the time of writing, India appears enviably sheltered from the current financial crisis. Its large domestic market continues to grow, unchecked by the recession in the rich countries abroad. The comparative insulation of its economy, particularly in finance, and a relative lack of dependence on export-led growth now seem less an unwelcome residue of Nehruvian statism than an important buffer against a broken world economy.

What it means to have a short memory – or, at least, a short-term profit horizon – is to forget that what appears an obstacle in one moment can turn out to be an important advantage under altered circumstances. For India did not throw its doors wide open in the mid-1990s, even though the nature of its planning had changed to allow more market-orientation.8 And on critical questions of international economic integration, such as capital controls and the export-orientation of its development policies, India remained comparatively jealous of its national prerogatives.

This relative insulation from globalization was much lamented, perhaps especially by Indian economists trained in the United States, who were taught that an East-Asian style miracle awaited if only India would devote itself fully to economic integration. It is hard to say that this view was simply wrong – we cannot re-run history to play out the counterfactual – but it now seems much less convincing than it formerly did. The point is not simply that India has enjoyed rapid economic growth without a deep commitment to international integration; the untestable retort will then come that India could have grown even faster – at 12 per cent annually, say, rather than 10 per cent – if only it had let the markets rip. The point must be, rather, that India has enjoyed rapid economic growth without becoming entangled in a web of international finance that appears politically dangerous, leaving aside economic calculations about roads not taken.

India’s holding of U.S. Treasury Bills remains small – only $38 billion as of April 2009, though that is nearly four times what it was only a year earlier – and while it seems a good time to have a deep domestic market rather than American debt, the issue is not really about economics. As Keynes reminds us, the questions about globalization are above all political ones – and India may prefer to remain an ally of the United States rather than its creditor. The world’s two most important democracies may be able to remain better friends by maintaining a prudent economic distance from each other – something that India will need to consider as it continues to grow rapidly alongside an increasingly indebted and anxious United States. For the moment, it is Chinese students alone who must laugh at the assurances of the U.S. Treasury secretary; perhaps their Indian counterparts should be glad they have been spared a similar privilege.



1. See John Maynard Keynes, ‘National Self-Sufficiency’, Yale Review 22(4), 1933, 755-769 (given as the first Finlay Lecture at University College, Dublin, on 19 April 1933).

2. John Gerard Ruggie, ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’, International Organization 36(2), Spring 1982, 379-415.

3. Mike Moore, A World Without Walls: Freedom, Development, Free Trade and Global Governance, Cambridge University Press, New York, 2003.

4. Martin Wolf, Why Globalization Works, Chapter 4, Yale University Press, New Haven, 2004.

5. Norman Angell, The Great Illusion: A Study of the Relation of Military Power in Nations to Their Economic and Social Advantage, G.P. Putnam, New York, 1911, p. vii.

6. Paul Krugman, ‘China’s Dollar Trap’, The New York Times, 3 April 2009, p. A29.

7. See Brad DeLong, ‘India Since Independence’, in Dani Rodrik (ed.), In Search of Prosperity: Analytic Narratives on Economic Growth, Princeton University Press, Princeton, 2003, pp. 184-204.

8. See Montek Singh Ahluwalia, ‘Planning Then and Now’, Seminar 589, September 2008.