Keynes and Globalization by Robert Skidelsky

What would Keynes have thought about globalization? First, let me provide an economist’s definition of the phenomenon (there are of course many others). It is the ‘integration of
economic activities, across borders, through markets’. [1] It is both descriptive
and prescriptive: a process and a project. 
In the latter aspect it is partly a growth project. One writer has
summed: ‘By conforming to comparative advantage an economy also follows its
optimal growth path’.[2] That is, free markets
maximise aggregate   welfare over
time.

For most of the 20th century
most economists did not believe in such a close connection between markets and
economic well-being. Pessimism about, and hostility to, markets was prevalent.
These  pulled in an anti-globalist
direction. The main shift in thinking in our own day has been towards a renewal
of the market optimism of the 19th century. This is the necessary intellectual
condition for the emergence of globalization as a policy
project.

In Keynes’s day,
anti-marketeers  came in two shapes.  Socialists aimed to substitute central
planning for markets, with the state plan allocating production  according to comparative advantages. In
theory this could be done on a global scale, either through a world planning
authority, or, more modestly, through ‘planned trade’. In practice planned
national economies became closed economies, with a small foreign sector to
provide essential  inputs  for the national plan. In the capitalist
world anti-market sentiment typically 
took the form of  Protectionism.
Protectionism and ‘autarky’.[3]  reached their height in the 1930s –the decade
in which Keynes produced his magnum opus, The General Theory of Employment,
Interest, and Money (1936).

The General Theory
is a ‘closed economy’ model. This term is somewhat ambiguous. Technically a
closed economy is  simply an economy
without trasactions  with the rest of the
world: no foreign trade, no foreign capital, no foreign labour. Primarily it is
a simplifying  device to remove the
influence of foreign trade in analysing changes in aggregate demand.  However, it was a device particularly
resonant for a ‘world in depression’, in which no relief was to be had from
altering the terms of trade in one’s favour. As Keynes put it in 1932:’The
course of exchange...moves round in a closed circle. When we transmit the
tension, which is beyond our endurance, to our neighbour, it is only a question
of a little time before it reaches ourselves again travelling round the circle’.
[4] By ‘closing’ the economy Keynes was
in effects saying  that there was no
solution to a global depression within the ‘circle of exchange’. The solution
had to come from the government. Governments were national, so ‘closed economy’
formulations pulled towards protectionism and autarky.