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][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][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][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][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.