By Forbes Elworthy
Published: February 14, 2010

A thought provoking line in Keynes’ General Theory is the question, why the Egyptians were able to maintain a stable civilisation for 2,000 years.

Keynes believed the answer lay in two activities: the construction of the pyramids and the search for precious metals. Unlike most goods, the pursuit of these activities does not “stale with abundance”. You cannot get too much state religion (the pyramids) or gold.

Keynes was referring to ancient Egypt’s solution to the problem of surplus capacity in the productive Nile River economy. He emphasises that economies are not like households and firms. Individuals and organisations suffer from resource scarcity.

Rich, highly productive societies as a whole have a very different problem: of excess production rather than of scarcity. These societies attain such high levels of production that they become unstably rich. When a shock occurs, we all panic. We conclude we are living beyond our means.

As Jeremy Grantham points out, the world was not less wealthy in terms of goods and services on offer (potential GDP) when 2008 struck. We just felt less wealthy since we all decided to retrench, thereby lowering aggregate demand.

Keynes’ only partly ironic point is that, with goods like state religions (pyramids), the less useful they are, the more likely they will keep being demanded and produced.

What then are our pyramids today? Clearly the fashion industry. Also holiday travel. Definitely housing. Our prestigious houses are suitable high income elasticity expressions of ourselves. Our society’s totems. Our pyramids.

How does society organise the building of today’s pyramids? I argue that finance and banking have become, in the west, our great pyramid builder; the industry that absorbs capitalism’s surplus.

The endless moving around of money is in itself a largely pointless activity. Why do our governments allow it to be so lucrative? The answer, and we partly have Keynes himself to thank for this, is that the banking sector, and especially the credit markets, are used by the authorities (our modern Pharaonic court) to pump up the economy whenever needed (the equivalent, after seeing unemployed Egyptians on the street, of ordering the building of a pyramid or two).

Crazy though it may appear, Keynesian monetarism seems to work. Nouveaux riche traders, pumped with cheap money, fan out to fill their pre-destined roles, creating employment on mansions in the Cotswolds and the Hamptons.

Right from the time of publication of the General Theory, Keynes’ critics have complained about his subversion of markets’ natural tendencies. This can work for a while but, longer term, are we not storing up an even bigger crash? Some truly frightening excesses have built up (of consumption, leverage and inequality).

Whether or not modern macroeconomic management would have eventually proved sustainable on its own terms, there is now a new factor challenging Keynesian doctrine. A terrifying external constraint of which Keynes was almost certainly unaware: climate change.

Only in the past 20 years have we discovered that man-made climate change is likely to either disastrously raise the temperature of the planet, or, alternatively, force us to massively scale down our use of fossil fuels, ie change the energy basis of our economy. Climate scientists such as James Hansen (Storms of My Grandchildren, 2009) and the Keynesians are now urging opposite pathways. The climate whistle blowers are advocating a strict carbon cartel, or in other words, an energy shock. The Keynesians are conducting a massive fiscal and monetary expansion and certainly do not want to see an energy shock. Those were the undoing of previous Keynesian reflations (in 1973, 1979 and, arguably, 2007).

What to do? I think we need to take Keynes’ insights about the pyramids and modify them so that our pyramids are no longer houses and cars. Instead, we should shift our pyramids (our surplus) onto the environment. We need to devote the amazingly creative and productive capacity of capitalism to correctly solving the biggest problem it has ever faced – environmental destruction. This is a high elasticity destination for our productive surplus. It is also a most worthy destination.

Forbes Elworthy is founder of Craigmore Sustainables, a green investment fund