Britain’s economy lurched about uncertainly after the war, and Keynes was called in frequently to minister to the nation’s needs—though ultimately the men in charge never followed his advice. Still, the postwar decade was a crucial moment in Keynes’s intellectual and emotional development. Throughout the 1920s, his skepticism toward statistics as a source of truth intensified. So did his appreciation for animal spirits, in economics and in everyday life.
By 1920, Keynes was a rich man, partly from the sales of Economic Consequences of the Peace and partly from successful investing in stocks. He acknowledged the “fun and mild excitement” to be had from either playing the ponies at the track or betting on stock prices, both of which he compared with the consumption of alcohol. All were pleasant pastimes that only occasionally led to ruinous outcomes. “It is agreeable to be habitually in the state of imagining all sorts of things are possible,” he said. This sanguine point of view was underwritten by his new wealth and celebrity, which allowed him to take up foxhunting with the “kid gloves and tiara set”—a sport that lured him into awkward adventures as his horse wandered off from the pack.
After Economic Consequences, he turned to the completion of A Treatise on Probability, a book he had been writing and rewriting for over a decade. It was an argument against the reigning view that probability was an objective fact in the world, which could be statistically calculated with reference to frequency of occurrence: if one smoker in ten dies of cancer, according to this view, the probability of smoking causing cancer is 10 percent. But to identify probability with frequency, Keynes wrote, “excludes a great number of judgements which are generally believed to deal with probability.” Probability judgments may depend in part on statistical data, but they are not reducible to the data—in fact they might have nothing to do with data at all.
Comparative judgments of probability are not numerical, Keynes observed; they are approximations, not precise calculations. And sometimes they are arbitrary. Consider the question of whether it is more or less likely to rain. There are times, he wrote, when “it will be an arbitrary matter to decide for or against the umbrella. If the barometer is high, but the clouds are black, it is not always rational that one should prevail over the other in our minds, or even that we should balance them—though it will be rational to allow caprice to determine us and to waste no time on the debate.” Few devotees of reason were as willing as Keynes to grant so much space to caprice, even in trivial matters.
Keynes was groping toward his own version of a distinction between risk and uncertainty—one the Chicago economist Franklin Knight was already making in Risk, Uncertainty and Profit (1921) when he wrote: “A measurable uncertainty, or ‘risk’ proper…is [so] far different from an unmeasurable one that it is not in effect an uncertainty at all.” But Keynes was more doubtful than Knight that the probability of most events could ever be precisely measured.
Instead of a description of events in the world, Keynes argued, probability was a belief about those events, based on logical inference. This was a subjective process, but one that all rational beings shared. To make rational choices under conditions of uncertainty, one had to take into account what Keynes called “the weight of argument”—the amount and relevancy of evidence that an event is likely to occur—and the “moral risk”—the phrase that summarized his preference for choosing a smaller good with a higher possibility of attainment over a greater good with a lower possibility. The principle of moral risk underlay his choice of gradualist reform over socialist revolution. More broadly, the Treatise suggested the future direction of his economic thought—away from statistically based prediction and the spurious reduction of uncertainty to certainty, toward arguments that depended on persuasion rather than proof.
While Keynes’s professional life prospered, his personal life swerved in a new direction. In December 1921, Sergei Diaghilev’s Ballets Russes came to London, and Keynes saw an accomplished Russian ballerina called Lydia Lopokova dance a dual role as Aurora and the Lilac Fairy in Tchaikovsky’s Sleeping Beauty. She was already a celebrity; the London papers waxed rhapsodic over her “exquisite plebeian beauty,” and “Lydia dolls” were flying off the shelves. Keynes found her performances hypnotic; he returned night after night, embracing the unfamiliar role of stage-door Johnnie. She was stirred by his cornucopian intelligence; he by her energy, vivacity, and talent. She invited him to tea on December 26; they were both already smitten.
By April, they were exchanging erotic notes. Hers were in the idiom Keynes and his friends later fondly dubbed Lydiaspeak: “I gobble you my dear Maynard”—“I place melodious strokes all over you”—“With caresses large as sea I stretch out to you.” Keynes reciprocated: “I want to be…gobbled abundantly,” he wrote. They kept this up well after they were married in 1925, though Keynes sometimes resorted to scholarly indirection. Researching Babylonian coins in 1926, he wrote to Lydia that he had found the earliest recorded “love poem”—“Come to me my Ishtavar and show your virile strength / Push out your member and touch with it my little place.” Keynes’s growing awareness of animal spirits in the 1920s was as much a matter of physical and emotional as of intellectual experience. Sex was at the heart of it.
Lydia was Maynard’s first and only female lover. After twenty years in enthusiastic pursuit of gay sex, Keynes’s heterosexual turn shocked his Bloomsbury friends, who gradually came to appreciate Lydia but for a long time viewed her with dismissive bemusement. Lydia did not cultivate the exquisite self-consciousness of the hyper-civilized Bloomsbury set—indeed, that lack of self-consciousness was one source of her charm: Lydia and Duncan Grant, Keynes’s other great love, were both “uneducated; their reactions were spontaneous, fresh, unexpected,” as Skidelsky remarks, noting that despite Keynes’s devotion to reasonableness, his “fancy could leap and soar over all rational obstacles. He was a gambler, and Lydia was his greatest gamble.” It paid off. Keynes was already in high gear intellectually, but after taking up with Lydia, his engagement with public affairs was relieved at least occasionally by the peace and contentment he craved.
The British government continued to invite his advice, and Keynes continued to supply fresh ideas, which had little or no effect on policy. In his Tract on Monetary Reform (1924), he argued that the government had a responsibility to protect the population from the worst lurches of the business cycle—to stabilize prices rather than letting inflation or deflation burn itself out. Classical economists’ resort to “the long run” was misplaced; we live our lives in the short run; while “in the long run, we are all dead.” It was his most famous utterance, and it perfectly captured his preoccupation with lived experience over theoretical formula. He would find occasion to return to it.
Meanwhile, Europe seemed to be falling apart. The young Weimar Republic was in a state of constant upheaval. In January 1923, when Germany failed to meet a reparations payment to France, the French army occupied the Ruhr Valley, home to much of German industry. The Versailles order crumbled, only to be restored by the American intervention of the Dawes Plan, a weaker version of what Keynes had suggested at the Peace Conference. The French withdrew in 1925.
Amid the intermittent chaos, Keynes began to write the lecture that would become The End of Laissez-Faire. Like almost everything else Keynes wrote in the 1920s, this pamphlet signaled an important new direction in his thought, as he urged that economists acknowledge the primacy of ethical concerns over technical economic efficiency. The mature Keynesian vision was coming into focus.
By the mid-1920s, Britain’s stagnant economy was poised on the brink of prolonged depression. Winston Churchill’s decision to stick to the gold standard at an overvalued exchange rate tipped it over the edge. Keynes was appalled by any contraction of the money supply in a depressed economy. “The proper object of dear money is to check an incipient boom,” he wrote. “Woe to those whose faith leads them to use it to aggravate a depression!” Dear money was exacerbated by falling incomes. An overvalued pound sterling meant that British mine owners had to sell their coal abroad at reduced prices in order to compete in the world market; to make up the difference, mine owners imposed steep wage cuts. The miners struck to protect their wages, and soon the General Strike followed.
Amid spreading class war, Keynes wrote Can Lloyd George Do It? This proposed a preview of what Franklin Roosevelt would try during the New Deal—an ambitious public-works program to counteract the looming depression, to combat collective gloom and to banish visions of a bleak, limited future. “There is no reason why we should not feel ourselves free to be bold, to be open, to experiment, to take action, to try the possibilities of things,” Keynes wrote—the only obstacle was “a few old gentlemen in their frock coats, who need only to be treated with a little friendly disrespect and bowled over like ninepins.” All of this was a valiant effort to rally the population. But the public was already convinced that laissez-faire was dead; class conflict was regnant. And Britain was not the United States, where a raging bull market provided a textbook example of animal spirits on the loose—and of the futility of attempting to quantify them.
But by Labor Day 1929, signs of a market slowdown on Wall Street were unmistakable. Throughout the early fall, fitful sell-offs would course through the market, until they were stopped by a wave of buying. But the general tendency was down, and on Friday, October 24, the market opened with a broad sell-off that simply would not stop. After a noon meeting with other New York bankers, Thomas Lamont of J. P. Morgan admitted there was “a little distress” that morning on the floor of the exchange. After lunch, the bankers launched a classic rescue operation, much like the one J. P. Morgan had staged in 1907. As they bought millions of dollars’ worth of shares, fear on the floor vanished. Prices boomed upward. Black Friday ended happily. But the following Tuesday, October 29, did not have so cheerful a denouement. That Black Tuesday marked the end of organized support by the bankers. Panic selling began at the bell and persisted all day. Outside the exchange a crowd gathered, emitting an “eerie roar.” Said one eyewitness: “It wasn’t an angry or hysterical sound. That was the most ominous thing about it. It was a kind of hopeless drone, a Greek dirge kind of thing. It was damned distracting, I must say.”
Not everyone was dismayed. Edmund Wilson admitted that “the stock market crash was to count for us almost like a rending of the earth in preparation for the Day of Judgment.” Yet, he added: “One couldn’t help being exhilarated at the sudden and unexpected collapse of that stupid gigantic fraud.” Keynes was far more engaged than Wilson with policy matters, but his first reaction to the crash was upbeat too, though for different reasons. There was, he announced in the New York Post, “an epoch of cheap money ahead.” Britain had been struggling economically for years; there was no sense of sudden collapse there as there was in the United States, no sense that the bottom had fallen out. For Keynes as for most Europeans, the sound of the Wall Street crash was muffled. He continued to produce work that laid the groundwork for the General Theory—arguing (for example) in his Treatise on Money (1930) that money and markets were the creation of the state, and not the other way around—and that the largest aim of public policy, the creation of a vibrant culture, was the consequence of lending and spending, and not the “voluntary abstinence of individuals from the immediate enjoyment of consumption which we call thrift.” “Were the Seven Wonders of the World built by Thrift?” Keynes asked. “I deem it doubtful.”
Keynes’s buoyant sense of possibility contrasted sharply with the atmosphere of doom enveloping American society from boardrooms to breadlines. But when he visited the United States in spring 1931, he was reminded of what would become a key theme in the General Theory: the emotional basis of economic policy. He admitted what he had not earlier realized: “the anxiety of many banks and depositors throughout the country is a dominating factor.” Economic recovery would not occur as long as the people were paralyzed by fear. On that key insight, Keynes and Franklin Roosevelt were united.