The Crisis of Keynesian Economics by Geoffrey Pilling (1986)

2 The Significance of the Keynesian Revolution

... the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slave of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas ... sooner or later, it is ideas, not vested interests, which are dangerous for good or evil. (GT: 383-4)

I believe myself to be writing a book on economic theory which will largely revolutionise ... the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the final upshot will be in its effect on actions and affairs. But there will be a great change, and in particular the Ricardian foundations of Marxism will be knocked away. (Keynes to George Bernard Shaw, 1 January 1935)

The conventional view about the Keynesian revolution and its implications for economic policy held, until recently at least, by most economists ran something like this. An entrenched orthodoxy (‘the Treasury view’ or ‘sound finance’) dominated the formulation of economic policy until the outbreak of the Second World War. Only then did Keynes’ revolution triumph when it won over a tier of influential politicians and those in the upper echelons of the state bureaucracy. Thanks to their conversion to Keynes’ teachings, economic policy took a new turn, with post-war governments committed to full employment and for the first time in possession of the tools to meet that commitment. And as a result of these policies, full employment was secured for more than three decades. Only recently, for reasons which are not immediately clear, have Keynesian Policies been dropped, producing once again conditions of high unemployment and industrial slump. This scenario, we shall argue, is highly questionable on at least three important counts:

1. It accepts Keynes’ own belief in the primacy of ideas in the shaping of state economic policy. An examination of the development of the role of the state indicates that there is an organic trend towards ever greater state involvement in the attempted regulation of economic and social matters and Keynesianism was merely one, but only one, expression of this tendency which took specific forms in the case of Britain during and after the Second World War.

2. It takes prima facie the proposition that Keynesianism was actually put into operation after 1945; Keynesianism here being taken to mean the manipulation of the state budget in order to secure a level of effective demand sufficient to generate full employment. As many have now pointed out, this is a highly dubious contention, certainly as far as British economic policy is concerned.

3. It concurs with Keynes’ own judgement about the significance of his work: namely that it did in fact constitute a revolution in economics. We have already noted that there is little if any agreement amongst those who would wish to be labelled Keynesians about the nature of this revolution. Some see it as an adaptation of the old liberal economics, some as a decisively new way of conceiving economic problems. In looking at each of these questions in some detail we shall be concerned with a series of interrelated matters.

1. We shall explore the nature of state intervention in the economy as this is understood by Marxism. Then we shall examine the reflection of the tendency towards the acceptance of state intervention in English economic thought prior to Keynes. We shall discover that the tenets of the old liberal neoclassical economics, and the corollary of these tenets, laissez-faire as an economic doctrine, were under considerable challenge before The General Theory appeared and that in this respect Keynes was giving expression, albeit a somewhat extreme one, to a definite trend in economic thought. We shall also examine the extent to which the neoclassical economists whom Keynes attacked with such relish in The General Theory did actually carry their theory into practice when it came to the big question which they faced in the 1930s, namely unemployment.

2. The greater involvement of the state in twentieth-century capitalism is an international phenomenon which was actually taken much further in other countries than in Britain, traditional home of free trade and the doctrine of the minimal state. There is no doubt that state regulation reached its zenith in the case of Fascist theory and practice, and we shall therefore examine Keynesian doctrine in the light of this fact.

3. There is now widespread doubt about the operation of Keynesian policies in Britain after 1945. The inflationary boom, it is suggested, had little if anything to do with the conscious application of Keynesian policies.

We shall review critically the recent controversies on this question but also extend the discussion to include two further matters. Many have argued that Keynesianism was quite unsuited for the purposes to which it was put in the post-war period – as an instrument for securing economic growth or for fine tuning the economy; it was, however, an economic theory designed for and suited to attacking the problem which dominated the period in which it was born – the problem was mass unemployment. We shall therefore examine the extent to which, had it been applied in the 1930s, it could have hoped to have solved this problem.

4. The nature of Keynes’ criticisms of neoclassical theory will be examined in the light of the history of economic thought. As is well known, Keynes drew upon the work of a number of previous thinkers, some well known, such as Malthus, others less so, such as Gessel and Major Douglas. (That he did so in such an eclectic manner is perhaps one reason why there is little agreement about the substance of the ‘real Keynes’.) An examination of this earlier work will allow a judgement about the nature of the Keynesian revolution and the relationship of its initiator to previous trends in economic thought.

5. Marxism, historical materialism, insists that ideas are, in the final analysis, a reflection of the social relations of production. Keynes was not critical of the capitalist economic system as such, but he did call into question certain features of the system as they presented themselves in the twentieth century. In the course of this chapter we shall examine Keynes’ objections to certain features of capitalism and assess their historical significance.

Marxism on the Increasing Role of the State

For Marxism the inexorable tendency towards state intervention in the functioning and attempted regulation of the capitalist economy has as little to do with abstractly arrived at policy options as has the onset of war in the present century. Here its view differs radically from that of Keynes and the Keynesians generally. Thus while it can be argued that of all those attempting to explain and justify (often, it must be said, to a sceptical audience) the necessity for greater state involvement in economic and social matters Keynes occupies the most important position, at least as far as the Anglo-Saxon world goes, it would be quite wrong to believe that such state intervention actually flowed from the theoretical work of Keynes and others. To take such a stance would be to confuse cause with effect. In general it can be said that it was the sharpening contradictions engendered by the growth of the productive forces, and in particular the accelerating trend towards monopoly (reaching a nodal point with the onset of the twentieth century) which provide the real material foundation making inescapable a greatly increased activity on the state’s part. The emergence of joint stock companies in the period after ISM, said Marx, ‘establishes a monopoly in certain spheres and thereby requires state interference’ (HI: 438), a point reiterated by Engels in Socialism Utopian and Scientific when he says, ‘In any case, with trusts or without, the official representatives of capitalist society – the state – will ultimately have to undertake the direction of production’ (Marx and Engels 19177 vol. 3: 144).

Here we provide only the briefest sketch of the general conception which Marxism holds about the nature of state intervention in capitalist economy. It is necessary to make two broad points. First, and without entering into the considerable recent controversy on this issue, Marxism rejects unambiguously the notion (one which is implicit in Keynes) to the effect that the state is a neutral instrument, standing above classes, an arbitrator representing the ‘general will’ or whatever. Marxism understands the state as arising only with the appearance of classes in history and thus views it as an instrument of class rule. The nature of the state’s operations, within the sphere of the economy and without, and the limits to that operation are in the last resort determined by this decisive fact, one quite independent of the particular form taken by the capitalist state (whether parliamentary democracy, military dictatorship, etc.). Second – and this once more has been the subject of a considerable literature which cannot be dealt with here – it is a travesty of Marxism to suggest that the state is a mere reflex of economic conditions, only a mechanical reflection of the social relations of production. The state, even though it arises on definite historically formed economic conditions, is an active element always, one of the forces helping shape those economic conditions. Thus Lenin: ‘The state can on no account be something inert, it always acts and acts very energetically, it is always active and never passive’ (LCW 1: 355). And this same point was made earlier by Engels in some of his last letters when he attempted to overcome a tendency towards mechanical materialism amongst certain Marxists at the time. Writing to Conrad Schmidt he points out that under capitalism there exists an

interaction of two unequal forces: on the one hand, the economic movement, on the other hand, the new political power, which strives for as much independence as possible and which, having once been established is endowed with relative independence. (Marx and Engels 1956: 421)

In looking at the nature of the growing intrusion of the state into economic matters it will be convenient to outline the way in which Engels presents the question in his Anti-Dühring. In listing the developing contradictions of capitalist economy, Engels sees them all as reflections of what is in the last resort the fundamental contradiction of this mode of production: an historical tendency for the productive forces to come into ever sharper conflict with the existing property relations. Thus Engels outlines the following points: First, the ever growing tendency towards the socialisation of production under capitalism. Production is never carried out by individuals; Adam Smith’s Robinson Crusoe is an historical myth precisely because production is always a social process involving, amongst other things, a division of labour, and this fact is true of all social systems but more than ever true of capitalism. Under capitalism this growing socialisation takes a number of forms, chief amongst them being in the first place an ever more intricate division of labour, not merely within enterprises (for Adam Smith the main point) nor between enterprises only but between whole branches of the economy. Second, the growth in the scale of production which brings with it the emergence of monopoly as a dominant economic form from the end of the nineteenth century onwards. Both of these trends – the increasingly socialised character of production and the development towards monopoly – make imperative a growing degree of state interference, principally designed to regulate relations between branches of an economy which exhibits a growing tendency towards an unevenness of development.

One consequence of the increasing scale of operation within capitalist economy is the fact that the capital necessary for production tends in many branches to be beyond the reach of even the largest capitals and only the state is able to mobilise resources on the scale required. Thus says Marx:

Any country, for instance the United States, might feel the need in production relations for railways, in spite of this, the benefit . . . derived by production from the existence of railways might be so negligible that the advance of capital for this purpose would be nothing but a loss of money. Then capital transfers these outlays onto the shoulders of the state. (Quoted in Pevsner 1982: 15)

And further:

[capital] always strives only to achieve particular conditions for increasing its value, while the conditions that are common for everything it foists onto the whole community as national requirements. Capital only undertakes operations that are profitable from its own point of view. (ibid.)

Engels points to a related contradiction: that between the growth of ‘planning’ within the individual enterprise on the one hand (a feature which in contemporary capitalism takes the form of the use of operations research, cybernetics, etc.), and the growing anarchy prevalent between such highly organised enterprises. (The term ‘anarchy’ is employed here in its literal sense to mean the absence of any a priori regulation, the lack of any purposeful plan.) Here again the state was driven to abandon the precepts of laissez-faire in order that it might try to deal with the resultant problems.

Finally, Engels draws attention to one decisive contradiction which the development of capitalism entails: that between the world economy and a world division of labour on the one hand, and the existence of the nation state on the other. Here again the state is obliged to assume the role of the defender of the national capital and the instrument through which such capital seeks to secure its economic, commercial, military etc. interests, in competition with its rivals.

One potent factor driving towards state intervention, even in the period prior to that designated by Marxists as the imperialist epoch, is the fact that the increasing socialisation of production brings with it not a lessening of the contradictions between various capitals (as revisionism from the time of Bernstein onwards proclaimed to be the case) but on the very contrary their rapid sharpening. As far as the present century is concerned these contradictions reach the peak of development in war when tendencies inherent in a previously peaceful phase manifest themselves. It is thus inevitable that the functions of the state – price-fixing, direction of labour, military conscription, etc. – should be raised to new heights in such periods.

Keynes: Laissez-Faire and the Role of the State

Whatever conclusions are arrived at concerning the questions raised at the start of this chapter and the others which they entail, it is undoubtedly true that Keynes has to be considered one of the central forces of modern (that is, twentieth-century) theories of the state regulation of the capitalist economy. Whatever the quality of his conceptions, there can be no doubting the ideological import of this aspect of his work. For it is on the basis of the growing role of the state that theories about the alleged transformation of post-war capitalism were mainly if not exclusively founded. (There were several theories in the 1930s about the negation of capitalism which arms then supposedly taking place, amongst them being James Burnham’s thesis concerning the managerial revolution, but they owed little if anything to the ideas of Keynes.) In this respect, because he gave a central place to the state in the functioning of the economy, Keynes may truly be looked upon as one of the initiators of the dominant trend in the political economics of the present century.

The principal complaint Keynes lodged against the old (neoclassical) economics was that he saw its basic assumptions as being increasingly out of line with the new conditions emerging in the present century. At one point in The General Theory, commenting on this increasing lack of correspondence between the old neoclassical theory and the observed developments of the capitalist system, Keynes says:

For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation. It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away. (G7)

Here Keynes is pursuing his well-known theme: that the only measure that could be employed to pass judgement on what he termed classical economics was the question of whether it was capable of serving as a theoretical support to solve the immediate problems of the real world. He is not, we repeat, primarily concerned with the logical deficiencies of neoclassical economics but with the irrelevance of its basic postulates. And because he found those postulates increasingly at odds with reality it could not be concluded that there was an automatic coincidence of the striving by the individual for maximum gain and the social good. Thus ‘The world is not so governed from above that private and social interests always coincide. ... It is not a correct deduction from the Principles Of Economics that enlightened self-interest always operates in the public interest’ (JMK CW 9).

Despite the many efforts to present Keynes as some sort of radical opponent of capitalism, it must be emphasised at the outset that whatever partial objections he may have held about what he called the classical economic tradition, and whatever his particular criticisms of the capitalism extant in his lifetime, Keynes none the less remained a staunch defender of the capitalist order. Thus in The End of Laissez-Faire he hopes that ‘capitalism wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight.’ Here the key words are, of course, ‘wisely managed’. Keynes believed in ‘the transition from economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interests of social justice and social stability’.

The nub of his objection to the ‘old’ unregulated capitalism lay in the fact that he feared it was quite unable in practice to attain this social stability. It was this anxiety which led him to a pragmatic-utilitarian justification of ad hoc state intervention. This is a position by no means unique to Keynes. It was one which, broadly speaking, had been advocated from the 1880s onwards by the Fabians for instance who, incidentally, like Keynes believed in a society run by a mandarin. Thus in Fabian Essays, first published in 1889, we find Sydney Webb, Shaw and co. proposing in a manner strikingly prefiguring Keynes that receivers of rent and interest are to be gradually abolished – in their case by means of a progressive taxation. In his contribution to the Essays William Clarke drew attention to the rapid advance of monopoly and with it the separation of the functions of management from ownership (a favourite theme for post-1945 social democratic theorists). He went on,

the capitalist is fast becoming absolutely useless. Finding it easier and more rational to combine with others of his class in a large undertaking, he has now abdicated his position of overseer, has put in a salaried manager to perform his work for him, and has become a mere rent or interest receiver. The rent or interest he receives is paid for the use of a monopoly which not he but a whole multitude of people created by their joint efforts. (Briggs 1962: 117)

Behind Fabian thinking was the idea that the end of laissez-faire was tantamount to the end of capitalism, at least a capitalism prone to crisis and breakdown. It is always possible to take one relative form of capitalism – in this case laissez-faire capitalism – and suggest that in some way it is the essential form, but one which is now passing away, if indeed it has not already disappeared. Sir Karl Popper, for instance, declared that ‘what Marx called “capitalism” i.e. laissez-faire capitalism, has completely “withered away” in the twentieth century’ (Popper 1947, vol. 2: 318). In other words, Popper, quite illegitimately, takes one passing form of capital, its competitive phase, and raises it to the rank of essential form. Naturally any historical judgement on capital, the relationship between its various forms and the necessity for the passage of one into the other, is avoided by this sort of metaphysical approach. It is just this historical conception of capitalism which is absent in Keynes.[1] His disavowal of laissez-faire is a pragmatic-utilitarian one. It is the only way to save the system. Thus in The General Theory he says:

Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative. (GT: 380)

In short, further state intervention was necessary to rescue the capitalist system, a point reiterated in different form when Keynes says ‘Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live’ (Gr: 247). Rendered into concrete terms this meant that any variables might be selected within the economic system: the choice of the appropriate ones would be judged from the point of view of their effectiveness and applicability in preserving existing economic forms. Naturally disputes could, and in point of fact did, arise about the efficacy of the control of any one particular variable. The monetarists would point to the crucial role played by the regulation of the money supply, the orthodox Keynesians to the control of government spending and the level of investment. Despite the great heat generated amongst the participants in these controversies they are in reality of relatively minor significance.[2] But in any event, for Keynes such operations by the state (his ‘central authority’) would be based on one crucial condition: that the foundations of capitalist economy (‘the kind of system in which we actually live’) would be preserved intact.

According to neoclassical theory, the economy is regulated by the market, through which the consumer makes his demands on it; according to this conception the state does not deal with the consumer but only with the will of the citizens (the electors) who, through the market, make their needs felt in connection with the fulfilling of social requirements. For this purpose a share of income is set aside in the form of taxes. In contrast to this theory, Keynes held that the state’s responsibility was considerably more extensive, for he believed that not only must it regulate the economy in order to ensure full employment, but it would be obliged to carry through measures to generate sufficient investments to compensate for what he considered to be a chronic shortfall of private investments. In the view of Keynes, the state should employ the national income, or at any rate a proportion of it, in order to alleviate unemployment, a fact which made the state a central component of the economic system rather than an external force, as it had on the whole been in the case of the old neoclassical concept. It was principally on the strength of this aspect of Keynes’ theory that apologists for capitalism were at a later stage (after 1945) to propose that the spontaneous operation of the market system – which it was widely accepted had broken down irrevocably in the 1930s – was yielding to state regulation, or statism, as it was widely known. It was from this idea that the notion of ‘welfare capitalism’ was derived, with its view of the state as a supra-class force looking after all members of society regardless of their social position. This in turn provided the justification for the policies of those who dominated social democracy in Britain after 1945, and we shall have more to say of this issue presently.

As is well known, Keynes combined his belief that capitalism suffered from an inadequate number of outlets for profitable investment with proposals for a modest degree of income redistribution as one way in which effective demand might be raised. These prescriptions were in turn derived from Keynes’ view of consumption: a more equitable distribution of income was one way of raising consumption. Here again, in advocating state measures to regulate the distribution of income, Keynes found himself at odds with the old neoclassical tradition where such things were supposedly arrived at spontaneously by the play of market forces.

Another aspect worthy of note is Keynes’ view about the determination of wages. It is widely held that Keynes was opposed to certain aspects of the wages theory to which neoclassical economics subscribed. But in this case, as in many others, the differences with his predecessors were ones of a secondary rather than a substantive character. As recent writers (Meltzer 1981; Hutchison 1981) have noted, Keynes never challenged fundamentally the marginal productivity theory of wages, nor therefore in the last resort did he deny that a reduction in wages was the quid pro quo for an increase in the level of employment. What he did argue was that the seeming geometric decline in employment which capitalism experience as The General Theory was being prepared was due not so much to microeconomic as to macroeconomic factors, notably a shortage of investment and a deficiency of aggregate demand. (This point would of course be disputed by the monetarists: for them, once a sound money policy is instituted, the functioning of the economy depends essentially upon microeconomic factors.) This apart, Keynes believed that direct wage cuts were socially dangerous, for they would almost inevitably meet with fierce resistance on the part of the working class. Keynes proposed that wages be reduced covertly, through the medium of a state-regulated process of inflation: ‘A movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices’ (GT: 264). Such a controlled inflation would allow for an increase in nominal wages while affecting a simultaneous reduction in real wages through a price inflation, which would also help to boost profits. Thus on the question of the level of wages and their determination, Keynes placed the state at the centre of his concerns. At one point in The General Theory he says:

It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that it is necessary. (W: 378)

Keynes here proposes that the state be responsible for the determination of the rate of reward to capital which, by implication, is no longer to be left for market forces to determine. It was from his lead that arguments for state-controlled ‘incomes policies’ were taken, arguments which have been advocated principally by the post-Keynesians and justified as the best instrument for ensuring price stability. (The theoretical issue is as follows: according to the post-Keynesians, one result of the misreading of Keynes has been the wrong diagnosis of inflation. During the postwar years inflation had been understood as being caused by excess demand rather than as a consequence of the pressure on costs. As a result the response by governments to inflationary pressures was invariably to cut demand which, while it certainly reduced output and thereby raised unemployment, made little or no impact on prices.)

Keynes’ ideas are by no means of purely academic interest, for they have quite profound political implications, not least for the nature and role of trade unionism within the capitalist system. One of the principal features of nineteenth-century British capitalism in its liberal phase of development was the granting of certain concessions to the organised trade union movement which was allowed to bargain collectively with employers on questions of wages and working conditions. The present century has brought a steady movement away from such arrangements, a development which has speeded up in the last two decades. All British governments, whether Conservative or Labour, have tended towards some form of corporatism, in which the rights of the unions as independent bargainers on behalf of their members have been eroded. Here this aspect of Keynes’ work was entirely consonant with some of the basic social and political trends of the century.

It should be noted that although Keynes did undoubtedly rely upon the theoretical work of certain of his predecessors, albeit in a highly eclectic manner, his views were also founded upon a considerable practical experience, stretching from his proposals for the reform of the Indian currency system to his work at the end of his life for a new world monetary order. Keynes was an adviser to the government in the First World War, through the period of the Versailles Treaty negotiations as well as during the subsequent attempted restoration and final abandonment of the old Gold Standard in 1931. Although we leave aside until the next chapter a detailed consideration of the nature of Keynes’ theoretical innovations, it can provisionally be asserted that it was largely on the basis of this practical and theoretical work, culminating in The General Theory, that the path was prepared for the notion that the twentieth century marked the nemesis of the age of free competition; for the idea that the economy was no longer able to function and regulate itself without the intervention of a third force (the state) to restore the now inherent imbalance of production (represented by Keynes as a flow of incomes) and consumption.

Nor were Keynes’ ideas merely an immediate response to the slump which engulfed the capitalist world in the period after 1929. His views on economic policy and economic theory alike had deeper roots: they were the outcome of reflections on the problems of economic management under the new conditions of the twentieth century which stretch back until at least the end of the First World War. In his The End of Laissez-Faire, given first as a lecture in Oxford in 1924, Keynes says:

We must aim at separating those services which are technically social from those which are technically individual. The most important items on the Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those activities which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse, but to do those things which at present are not done at all. (JMK CW 9)

Thus was the imperative of state intervention justified.

Here Keynes is expressing the fact that his life spanned that period which witnessed the break-up of the old liberalism: the ideology which had justified British social and economic policy to the rest of the world throughout much of the nineteenth century. The beginning of Britain’s secular decline, which had its roots in the last decades of the nineteenth century, was the phenomenon undoubtedly dominating Keynes’ thought and action throughout his life. In the political sphere it was a loss of world hegemony which found expression in the decline and eventual disintegration of the Liberal Party as the principal political instrument of the ruling class in favour of the Conservative Party. In the field of economics it was a decline which brought about an increasing challenge to and eventual demise of the old ‘Manchester economics’ which proclaimed free trade and economic liberalism as the twin virtues which would guide Britain and the world to uninterrupted prosperity and peace. (Not that the rest of the world necessarily subscribed to these propositions!) By the 1930s both these props of nineteenth-century bourgeois ideology were under frontal attack, and from many standpoints. The doctrine of laissez-faire was being replaced by various notions of ‘statism’, the most intense expression of this trend coming in Germany, a country where Manchester economics had never in any case cut much ice. That free competition had broken down in favour of monopoly, and this being so the state had to assume responsibility for the regulation of the monopolies, was one of the central motifs of Fascist economic ‘theory’.[3] Precisely because Keynes was no academic recluse but was throughout his life intimately concerned with the economic and social problems of twentieth-century capitalism, he was obliged to deal with these central matters of economic theory and policy. Keynes held that overproduction arises from what he regarded as an inherent psychological law, to the effect that as incomes rise so also does consumption, but not as rapidly. As a result, the increase in incomes is accompanied by a greater tendency to save. Investment however fails to increase with sufficient speed to match this rising volume of savings so an unused residual is created, manifesting itself in a less than full use of resources, both human and material. The Victorian view that thrift was amongst the greatest of virtues was no longer appropriate for the twentieth century; indeed, too great a level of savings was one of the causes of our present malaise, said Keynes. He took this discrepancy between saving and investment to be so chronic that its elimination was impossible without systematic state intervention, including a government policy of low interest rates, together with the creation of money and credit in excess of the requirements of immediate circulation, with the concentration in the hands of the state of a part of total income and investment. (Keynes spoke somewhat vaguely about the ‘socialisation of investment’, and it was from such statements that the idea was quite falsely derived that he was somehow an advocate of socialism, an ill-founded view widespread in American big business circles after 1945.)

Keynes’ theory has usually been regarded as an underinvestment theory, in that he saw the problem of capitalism as essentially one associated with the deficiency of investment expenditure. At the same time, however, Keynes was a great admirer of the underconsumptionist Malthus, bitterly regretting the fact that Ricardo’s ideas, rather than those of Malthus, had triumphed in the history of English economic thought. And in one respect there are certainly striking similarities in the work of Malthus and Keynes, not least in the fact that both saw the need for a ‘third person’ outside the relations of capital as a means of correcting the tendency towards unemployment; in the former case such a ‘third person’ comprised the various non-productive classes; in the case of Keynes the role was to be filled by the state. Others with similar views included Sismondi who saw the petty bourgeois as a necessary third person and the radical economist J.A. Hobson who believed that the colonies provided an outlet for surplus goods generated by capitalism.[4]

Now, in their own particular way, each of these writers was a ‘critic’ of the capitalist system – but the criticism was in each case of a severely limited character. Even in the case of Hobson, whose social and political views were markedly to the left of Keynes’, he believed that the contradictions of capitalism could be surmounted through a radical redistribution of income. The point here is as follows. A mere recognition by a particular writer of certain contradictions associated with capitalism does not thereby necessarily render that work scientific, and Malthus is a case which testifies to the truth of that proposition. For while Malthus did see a certain contradiction between production and consumption, he never probed to the real inner source of this contradiction and Marx was able to declare his work both vulgar (concerned merely with the appearance of the contradictions of the capitalist system but not their essence) and thoroughly apologetic (Malthus ‘that shameless sycophant, ‘that Parson’).[5] John Stuart Mill is another example of a thinker who opposed certain of capitalism’s features and made a series of proposals to rectify these ‘faults’, including, in his case, a call for a somewhat more equitable distribution of income and a limited extension of the state’s functions. And so with Keynes: he accepted that certain problems were associated with capitalism (a denial of such a palpable fact was in any case virtually impossible in the conditions under which The General Theory was written) but in effect assumed that, in essence, capital was harmonious. The disharmonious world of appearances arises from factors which contradict this notion and cannot be explained on its basis; in short, they stem from forces outside the economic system – ‘wrong policies’; the obduracy or stupidity of those in power; the harmful effect of monopoly, and so on. Hence, in the final resort, Keynes, as do the monetarists, is obliged to explain the collapse of capitalism in the 1930s by means of non-economic factors.

Keynes directed much of his criticisms of the existing economic and social order not against capitalism as such but against one of its forms, namely interest-bearing capital. Thus in a well-known passage he says:

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of this rentier aspect much else within it will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. (GT: 376)

This opposition to the rentier was clearly one of the reasons why Keynes opposed the deflationary policies pursued in the 1920s, for deflation ‘involves a transference of wealth from the rest of the community to the rentier class . . . from the active to the inactive’ (JMK CW 4).

Keynes was certainly not original in taking this stance: others before him had adopted a similar position, just as some of his contemporaries also denounced non-industrial capital, often in far more strident terms. Proudhon was a case of an earlier thinker who attacked the function of the rentier: according to Proudhon it is the entrepreneur who stimulates production and if enterprise is carried on with borrowed capital, the payment of interest to the rentier-capitalist will check the progress of economic development. For him the power of private property consists of its ability to extract income without labour and the most important way of so doing is through the charging of interest on loans; a view which led Proudhon to advocate the establishment of an ‘exchange bank’ which would lead to the abolition of interest and end the exploitative power of property. Of course, Proudhon and Keynes differed sharply, even fundamentally, on many issues, for whereas the former as a representative of petty bourgeois socialism wanted everybody to become a small owner-worker, Keynes stood firmly for the interests of large-scale industrial capital, as witnessed by his stand at the time of the restoration of the Gold Standard in 1925. Like Keynes, however, Proudhon also saw economic instability as associated with the speculative tendencies of financial capital; like Keynes was to at a later date, Proudhon deemed such tendencies to be unnecessary blemishes which could be got rid of by suitable financial reform. (On the relationship of the economics of Keynes and Proudhon, see Dillard 1942.)

In the present century it was Fascism which, while exempting ‘productive’ (that is, industrial capital) from its attacks, reserved its most vitriolic remarks for the ‘parasitic’ element within capital, namely banking capital. It should, of course, be stressed that this ‘attack’ was entirely sham and was for instance dropped immediately the Nazis seized power.

English Economics and the Growth of State Intervention

Keynes undoubtedly occupies centre-stage as the one thinker who attempted to justify the need for state intervention to regulate and try to save twentieth-century capitalism. It is far from being the case however that this century saw the first major intrusion of the state into economic and social matters. Nor was it the case that this intervention flowed from or was initiated by Keynes’ theoretical work from the 1930s onwards; it was more the fact that Keynes reflected rather than inspired such a trend. Although Marx sadly never managed to complete his projected work for Capital – which was to have included a systematic treatment of the state as the ‘epitome of bourgeois society’ (I, Preface) – he was by no means oblivious of the crucial, not to say violent, role played by the state in the period of the very emergence of capital as a socioeconomic system, the period which he designated as that of ‘primitive capital accumulation’. Not least of the state’s activities in this turbulent period was to act as an instrument in the violent ruination of petty commodity production, a process written ‘in letters of fire and blood’, to recall Marx’s graphic phrase.

It is however true that when, in the first quarter of the last century, capital eventually took a firm grip on economic relations and the bourgeoisie, after a long and often bitter struggle with the remnants of the feudal aristocracy, finally emerged as undisputed leaders in the development of the productive forces, the state began to interfere less overtly in economic and social matters; this to such an extent that Engels in his celebrated work line Condition of the Working Class in England could say: ‘Free competition will suffer no limitations, no state supervision; the whole state is but a burden to it. It would reach its highest perfection in a wholly ungoverned anarchic society’ (MECW 4: 564).

The fact that capitalism in the nineteenth century felt little or no need for systematic state support was an indication of its strength, a reflection of the undoubtedly true fact that at this stage it was still a progressive social system, which, however acute its contradictions, was still able to develop the productive forces in a manner enabling it to conquer the world in a relatively short space of time. But the point made by Engels must not be exaggerated, or, to be more precise, it must not be misconstrued. He is referring here to a tendency but one which, as in the case of all such tendencies, was never realised, at least to its ‘highest perfection’, just as the undoubted trend towards monopoly is never realised completely. Even in its classical phase in England, the country where capitalism reached its most intensive development and the one taken by Marx as the ‘model’ for his theoretical research, the state always retained certain minimal but quite critical functions. These included, amongst others, the provision of an adequate army, police force, civil service, etc. as well as a range of more narrowly economic needs, such as those in the credit sphere where the government acted as guarantor of the banknote issue, as well as itself assuming the role of principal banker.

It is well known that Keynes himself always tried to point up the revolutionary elements in his theoretical work: it was largely of such attempts that the notion of the ‘Keynesian revolution’ was born. It is understandable that, for pedagogic, expository or whatever purposes, Keynes’ leading supporters should also wish to emphasise the gulf separating Keynes’ work and its policy implications from that of his predecessors. But Robinson is overstating the case more than a little when she claims,

For fifty years before 1914 the established economists of the various schools had all been preaching one doctrine, with great self-confidence and pomposity – the doctrine of laissez-faire, the beneficial effects of the free play of market forces. In the English-speaking world, in particular, free trade and balanced budgets were all that was required of government policy. Economic equilibrium would always establish itself. The doctrines were still dominant in the 1920s. (Robinson 1972)

Joan Robinson is exaggerating because not only did the nineteenth-century state always undertake certain functions on behalf of capital but there was always present in neoclassical orthodoxy elements of doubt about the beneficence of the results to be obtained from the operation of an unalloyed policy of laissez-faire. Exceptions to such a policy were allowed for by otherwise impeccable neoclassical thinkers. As the nineteenth century progressed, capitalist reality revealed in an increasingly sharp form that the approach outlined by Robinson did not correspond to the actual state of affairs. As far as microeconomics was concerned, this was expressed in the palpable fact that free or ‘pure’ competition, always regarded as a necessary condition for fair imputation, was being steadily eroded by the inexorable growth of monopoly. This was true even in Britain where for a series of historical reasons the ‘ideal type’ of perfect competition was most nearly met, certainly when compared with the example of Germany where neither perfect competition nor its theoretical expression, neoclassicism, ever established the same degree of preeminence as in the case of Britain. Thus although the thesis of a spontaneously equilibrating capitalism on the basis of the free play of supply and demand had taken firm root in orthodox Anglo-Saxon economics, very few economists were unprepared to acknowledge that there were factors at work upsetting such equilibrating tendencies, even though these disturbances were on the whole regarded as an extraneous evil to be exposed and overcome by appropriate action.

In his classic history of economic theory, Joseph Schumpeter – reminding us that Alfred Marshall, although a staunch defender of free trade declared himself opposed to the ‘evils of inequality’ and favoured a high level of taxation, which was certainly a departure from a pure economic liberalism – sums up the trends at work in economics over the last quarter of the nineteenth century:

On the whole, the business class still had its way throughout the period, at least up to the beginning of this century, though much more so in the United States than Europe. But its severe confidence in the virtues of laissez-faire was gone and its good conscience was going. Hostile forces were growing with which it had to compromise. Still more significant, it grew increasingly willing to compromise and adopt its enemies’ views. Economic liberalism thus became riddled with qualifications that sometimes implied surrender of its principles. (Schumpeter 1963: 761)

And what was true of England, the home of economic liberalism, was much more the case in Germany where the majority of economists were subscribers to the doctrine of Sozialpolitik. But this trend away from pure laissez-faire, towards the advocacy of a greater degree of state intervention did certainly find its reflection in English economics also. Thus at the end of the last century the British economist, Henry Sidgwick, admitting that there was a potential gap between individual and social interests, could declare, in a manner strikingly anticipating the position of Keynes,

Given the proper circumstances, it might be well to allow industry to function without interference. Yet with economic advancement, the propositions of laissez-faire would have to be qualified. Numerous exceptions stemmed from the disparities accruing to the individual and those accruing to society. Indeed it could not be demonstrated that the spontaneous efforts of individuals, motivated by self-interest would maximise material welfare. Often a private enterprise occasioned social costs which it shifted to others . . . and frequently increased social costs were exacerbated by such developments as monopoly. (Quoted in Seligman 1963: 446)

Here on Sidgwick’s part (similar instances could be cited from Marshall, Pigou and others) was a clear breach of that utilitarianism which, since Bentham onwards, had provided the philosophical basis (such as it was) for conventional economics, with its assertion that there was a complete identity and harmony of interest between the self-seeking individual on the one hand and society on the other. Likewise – although from a different angle – with the Swedish school of political economy for whom perfect competition and the automatic adjustment of markets became in effect legends. The real ‘distortions’ and ‘errors’ of the market could be overcome by state action, including action to determine the level of purchasing power. In fact orthodox economics, whatever its theoretical precepts or its underlying philosophical stance might suggest, had never been able entirely to ignore the reality of periodic commodity overproduction which manifested itself even before the first generalised economic crisis – in the case of Britain, in 1825. Even J.-B. Say, for Keynes the doyen of the old discredited classicism, was prepared to allow for the impact of random or subjective factors in bringing about disturbances to an otherwise smoothly operating economic system, such as the defaulting of debtors, the impatience of creditors, or the errors in estimates of the state of the market for goods, etc.

And this same tendency to question the continuing wisdom or relevance of a doctrine which declared state intervention to be in principle a bad thing found its expression in the sphere not merely of economics but also political theory. Thus A.V. Dicey, amongst the leading figures in jurisprudence, writing at the opening of the present century could declare:

The current of opinion [has] for between thirty and forty years been running with more and more force in the direction of collectivism, with the natural consequence that by 1900 the doctrine of laissez-faire, in spite of the large element of truth which it contained, has more or less lost its hold on the English people. (Quoted in McLennan et al. 1984: 14)

The point here is that in any economy based on the division of labour and exchange it goes without saying that there must be a market. Amongst the orthodox economists the need for such a market was not, of course, challenged; it turned out however that in practice its nature could vary greatly. In the twentieth century especially the dominant motif of orthodox economics to the effect that there existed a ‘fair’ distribution of wealth on the basis of a free market came under sustained attack from various quarters, not least from the working class, which from the late 1880s onwards was becoming more extensively organised and was turning increasingly to socialist ideas; orthodoxy was obliged to retreat with its theories of imperfect competition and the ‘mixed economy’ in which the state was accorded a central role. Keynes’ work was an integral part of this accommodation amongst orthodox economics as a whole to the changing reality of capitalist development. The point to be stressed was that it was a reaction to that changing reality and by no means the initiator of such a change, and this must be emphasised in face of the grossly exaggerated role which Keynes assigned to ideas in changing the world.

Did Keynesianism Cause the Post-War Boom?

It goes without saying that Keynesianism has latterly become a dirty word. Not only is the supposed mismanagement of the post-war British economy, about which many now complain, laid at Keynes’ door, but he is further held responsible for the ruinous idea of budget deficits which, it is popularly believed, have done much to land us in our current crisis. And, as though this list of charges was not sufficient, Keynes led us not merely to the spurious idea that the economy could be fine tuned but he also opened the door to a baleful state regulation of the economy. These might be considered grave charges; very few of them, if any, can be substantiated. For instance, we have already noted that Keynes explicitly rejected the notion that a series of tiny adjustments in the budgetary aggregates could regulate the economy within any desired limits. The best that might be said here for Keynes’ detractors is that certain of his followers may have misinterpreted his work along these lines; this is indeed the complaint of Robinson, Hutchison and others (although Hutchison and Robinson disagree markedly on the nature of these misinterpretations).

But this notwithstanding, two things are beyond dispute. In the first place until the mid-1970s unemployment in the United Kingdom rarely reached 2 per cent, an extremely low figure in the light of William Beveridge’s proposal that 3 per cent was a realistic post-war level to be aimed at – a target which Keynes in turn considered improbable of realisation. Second, it was certainly one of the most persistent elements of the conventional wisdom of the 1950s and 1960s that these low unemployment figures and the relative prosperity they entailed were due to the revolution in economic policy for which Keynes had laid the theoretical foundation.

The widely accepted view is that Keynes’ long struggle was to convince the strategically placed policy-makers about the wisdom of his proposals together with the theory that underlay them; once this was achieved (after about 1940) the way was clear for a greater degree of state intervention. And, thanks to the final triumph of Keynes’ ideas, prosperity after 1945 was maintained, with the implication that it was only from the mid-1970s onwards, when such Keynesian policies were rejected, that the economy plunged into an otherwise avoidable slump. Here clearly the dominance is given to the role of ideas in shaping socioeconomic policy. A recent writer has summed up the way in which the issue has usually been regarded:

our perspective on the ‘Keynesian revolution’ was delightfully simple; recent economic history tended to be written by economists or historians of economic thought, and both tended to see economic theory as the main force behind economic policy. Economic policy was presented as a clash between entrenched orthodoxy and an intellectually and morally superior force, Keynesianism, which eventually triumphed with the commitment to maintain high stable levels of employment in the 1944 White Paper. (Booth 1983)

Donald Winch would seem to be adopting a similar stance: ‘In the light of this experience one might conclude that the Keynesian revolution in policy has either been supremely successful or that, for other unexplained reasons, it has proved unnecessary’ (Winch 1972: 293)

It is, of course, the case that post-war governments publicly committed themselves to the establishment of a high and stable level of employment. The White Paper on Employment Policy (1944) to which Booth refers was quite explicit on the matter:

The Government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war. ... Total expenditure on goods and services must be prevented from falling to a level where general unemployment appears.

Not only did post-war governments in this and other declarations publicly pledge themselves to a policy of full employment, but they now had available a state budget which was much larger than before the war. But these changed circumstances notwithstanding, many writers have cast considerable doubt about whether any government in the post-war period did in fact ever attempt to regulate the economy according to the conventional Keynesian ideas of budgetary management.[6] Sir Alec Cairncross, with a minor qualification, appears to support this view:

The answer is that although Keynesian ideas, by prolonging the postwar period of cheap money, undoubtedly contributed to the early establishment of full employment, they were rarely put to the test in the 1950s and 1960s. Demand was usually tugging at the leash of fiscal restraint and the efforts of governments were as concentrated on keeping inflation in check as in trying to ensure full employment . . . throughout the period the central government ran a substantial surplus on current account that until 1973 met most of the borrowing requirements of the nationalised industries. . . . The techniques of demand management were shot through with Keynesian ideas but demand management itself operated on buoyant market forces and even then only within narrow limits. (Cairncross, in Floud and McCloskey (eds) 1981, vol. 2: 374)

In an earlier and well-known article, R.C.O. Mathews was even more forthright in repudiating the still widely-held view that it was the operation of Keynesian policies which explain the expansion of capitalism in the 1950s and 1960s for ‘throughout the postwar period the Government, so far from injecting demand into the system has persistently had a large current account surplus. . . . Government saving has averaged 3 per cent of national income’ (Mathews 1968).

Mathews proceeds to emphasise the role of private investment as the key to an explanation of the expansion of the economy after 1945: ‘the rise of investment must be at the heart of any explanation of the rise in the level of economic activity’ (ibid.). But Mathews rejects the idea that it was public investment which was here the key factor (Keynes’ ‘socialised investment’). On the contrary, he suggests that ‘investment in those industries that fall within the public sector now has been a smaller proportion of total investment, than investment in those industries was before the war.’ Here Mathews takes a similar position to Cairncross, who also points to the favourable conditions for private investment as constituting a vital factor in the economy of the post-war world. But Cairncross finds little evidence that such investment derived from Keynesian policies of demand management: he stresses the fact that the period after 1945 followed the severest slump in the history of capitalism as well as a war which entailed the widespread physical destruction of capital. Here the situation was quite different from the conditions emerging from the First World War: during that war not only was the destruction of the productive forces, apart from human labour, relatively modest but the war had been preceded by an intensive boom.

Keynesianism and the Inter-War Slump

A persistent complaint from a series of commentators who have considered the current crisis of Keynesianism has proceeded along the following lines: Keynesianism was applied in a post-war world which was quite inappropriate for the sort of economic policy measures which Keynes had advocated. Keynesianism was a policy suitable for conditions of mass unemployment when the running of a budget deficit would have made a considerable contribution to alleviating such a situation. But, it is argued, when it came to fine tuning the economy, along lines proposed by many of Keynes’ followers in the post-war years, the matter was of a quite different order, and here Keynesianism proved to be a somewhat blunt and unsuitable instrument.

In the light of this proposition, let us consider the inter-war crisis, especially as it was reflected in the case of British capitalism. To put the issue in the form of a question: Would a Keynesian policy, if attempted, have been successful? Or posing the matter somewhat differently: Was Keynes correct in his oft-repeated contention that the persistence of conditions of slump in the period between the wars in Britain was due to the failure of economic policy? The answer to both these questions must be emphatically in the negative. Given the long-term nature of Britain’s industrial malaise in the 1920s – the widely accepted fact that it was a legacy of a past industrial structure and a deeply entrenched relationship with a world economy currently undergoing a major transformation, not least the result of the First World War – it is inconceivable that an organic crisis of the scope and depth which existed throughout the inter-war period could have been even seriously arrested, let alone reversed, by means of either easier monetary conditions or a lower exchange rate (a policy which Keynes, of course, supported). The truth of this proposition is expressed in the fact that when both these conditions were in fact realised after 1931-32 the staple industries (coal, cotton, shipbuilding, etc.) on which the economy as a whole depended for its revival showed little sign of recovery.

Given the evident inadequacy of a purely monetary policy as a means to economic recovery, the only alternative would have been one centred on a considerable increase in government expenditure – the Keynesian solution. Leaving aside the barriers to the implementation of such a policy provided by the conventional wisdom of the time (‘sound finance’) against which Keynes complained so bitterly and consistently, it is apparent that an increase in government spending of anything remotely approaching the magnitudes needed would in fact have been impossible. It has been calculated (Glynn and Howells 1980) that to restore full employment and generate the near 3 million increase in employment required at the nadir of the Depression would have involved increased government outlays of some £500 million, a figure roughly equivalent to 14 per cent of the 1932 gross domestic product, or nearly half the total public authority spending of that year. It would have implied a rise in spending by the government of some 70 per cent or a reduction in taxation of roughly the same order. ‘Even before one asks where the funds to meet the deficit might have come from, the required amount can already be seen to be in the realms of political and economic fantasy’ (ibid.).

Not least of the consequences of an attempt to put into action any Keynesian-style policy in the concrete conditions of the early 1930s slump would have been a massive flight of capital from London, the prospect of which haunted the MacDonald government as it agonised over a much smaller budget deficit in the course of 1931. This aside, the financing of a government borrowing requirement on the scale needed could not but have involved a steep rise in interest rates to facilitate a sale of government paper of the proportions required. (Far from suffering euthanasia, the rentier would thus have gained greatly from the operation of a Keynesian-style policy.) Such increased interest rates must have impeded those modest forces towards recovery, not least in the house-building sector of the economy which has often been pointed to as that area which derived benefit from the cheap money policy operating after 1932. Further, the effect of a sharp rise in imports which the vast boost in government spending would have entailed must have brought insuperable balance of payment constraints to the operation of the policy.

Even ignoring these in practice insurmountable problems, it is also highly dubious whether a generalised reflation of the economy along conventional Keynesian lines could have mopped up the unemployment. As we have already noted, Keynes himself realised that blanket measures to reflate the economy were not appropriate as a condition of relative full employment began to be realised in the run-up to the Second World War. But the inadequacy of such measures is by no means confined to conditions where comparatively high levels of employment prevail. This is so, given the fact that one inherent feature of the capitalist economy, to which Marxism has traditionally pointed, is its tendency to develop in an uneven manner, and this is true as much on a national scale as internationally. British capital in the 1920s and 1930s was suffering not merely the effects of a deep cyclical downturn in world economy but as much from a series of severe structural problems. A deep imbalance in the economy accumulated from the last quarter of the nineteenth century had created a situation where the north of the country was suffering acute depression whilst the south, and especially the London conurbation, was, by comparison at least, relatively prosperous. Such a chronic imbalance (one incidentally which persisted throughout the post-war boom and has now reappeared in acute form) required for its solution not a generalised boost to demand which a large government deficit would have created but a fundamental shift in the pattern of investment. An overall consumer-led fiscal expansion would undoubtedly have resulted in serious overheating in certain areas of the economy – principally in the southeast – but could have contributed but marginally to the severely hit regions in other parts of the country.

Only a highly centralised state-directed economy, along the lines operating in Germany after the victory of Fascism in 1933, and of the sort advocated in Britain by Mosley and others, could have engineered such a shift. As the German experience demonstrated, such a system was possible only on the basis of a profound social and political counter-revolution. And it must also be added that even a Fascist policy could not eliminate the contradictions of capitalism: it merely raised them to a new pitch of intensity which amongst other things made world war inevitable.

Keynes and the Break-up of Economic Liberalism

It has been widely noted by historians of economics that several works appeared in the 1930s, each in their own particular way trying to formulate ideas similar in spirit to those of Keynes – a sure manifestation that The General Theory marked a definite response to ideas which had already gained a certain resonance amongst economists and politicians in a number of countries. The example of the Swedish school (Myrdal, Ohlin, et al.) has often been pointed to in this regard. It was in Sweden that ideas of a broadly Keynesian nature developed in the 1930s; but it is clear that they were not directly inspired by Keynes, for as Myrdal recalls: ‘In Sweden, where we grew up in the tradition of Knut Wicksell, Keynes’ works were read as interesting and important contributions along the familiar line of thought, but not in any sense as a revolutionary breakthrough’ (Myrdal, Against the Stream: Critical Essays in Economics (1973), quoted in Garvy 1975). Michal Kalecki, the Polish economist (who, according to Robinson (1962: 93), discovered the General Theory simultaneously with Keynes) is another case of an economist working along the same lines as Keynes, but quite independently of him. Such pervasive theoretical developments, appearing in several countries in the same period, were undoubtedly the reflection of a concrete need: that for a ‘new economics’ to provide a policy to tackle an apparently intractable world slump. And independently of these theoretical efforts on the part of Keynes, Myrdal, Kalecki and others, such a policy was being groped towards in practice – pragmatically so in the case of the American New Deal. Here again the Keynesian revolution cannot be said to have inspired Roosevelt’s programme. As M.S. Eccles, one of Roosevelt’s advisers, said of the meetings which hammered out the New Deal:

With the exception of Ezekiel and Tugwell I doubt whether any of the men in the room had ever heard of John Maynard Keynes, the English economist who has frequently been referred to as the economic philosopher of the New Deal. At least none of them cited his writing to support his own case, and the concepts I formulated, which have been called ‘Keynesian’ were not abstracted from his books, which I had never read. (Eccles, Beckoning Frontiers (1951), Garry (1975).)

Such examples are not only indicative of the world character of the crisis which capitalism faced in the 1930s but provide striking disproof of Keynes’ fond belief in the autonomy of ideas as the prime determinant of economic and political programmes. For it must be emphasised that the trend towards Keynesian-type policies was by no means limited to the United States and Britain. We have noted in the case of England that by the close of the nineteenth century dents of a serious nature had already been made in the doctrine of laissez-faire, with its prohibition of state interference in economic matters beyond a highly limited sphere (the ‘minimum state’). It was however in Nazi Germany after 1933 and before The General Theory appeared that a Keynesian-style policy involving a considerable state (military) spending programme was put into operation.[7] Because of its delayed economic and social development and its therefore equally tardy entry into the world capitalist market, economic liberalism never exercised the influence in Germany that it did in Britain. The German historical school, for instance, always assigned to the state a central role in securing a future for German capital against its internal and external enemies alike. Hence its repudiation of the doctrine of free trade and its advocacy of tariffs as a necessary instrument in the protection of a still-infant and relatively weak German industry. In this respect it is interesting to remember that Keynes moved sharply towards support for protectionist measures in the 1930s, although he lacked the conviction to advocate outright autarchy, as did the more extreme proponents of protectionism. But the direction of his thought is unmistakable. As Keynes himself records, he was 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’ (JMK CW 21: 236). But by the 1930s he was able to say, ‘I sympathise with those who would minimise, rather than maximise, economic entanglement between nations’ (ibid.). This point is even more sharply put elsewhere:

I am not persuaded that the economic advantages of the international division of labour to-day are at all comparable with what they were. ... Over an increasingly wide range of industrial, and perhaps of agricultural products also, I become doubtful whether the economic cost of national self-sufficiency is great enough to outweigh the other advantages of gradually bringing the producer and consumer within the ambit of the same national, economic and financial organisation. Experience accumulates to prove that most modern mass-production processes can be performed in most countries and climates with almost equal efficiency (ibid.).

In the view expressed here Keynes was merely reflecting a deep crisis engulfing bourgeois thought. In the nineteenth century, economics had taught that the greatest factor in the production of wealth was the international division of labour; by the 1930s it had discovered that this self-same world division of labour was one of the most potent sources of economic breakdown and crisis. Similarly with the rejection of the Gold Standard which took place in the same decade. In the nineteenth century, gold, as a universal measure of value, became the foundation of all the major monetary systems and as such was supported by all the leading figures in the school of liberal economics. Keynes’ well-known denunciation of it as a ‘barbarous relic’ was again part of a universal trend towards the attempt at ‘national’ monetary systems, the analogue of the increasingly strident demands for protectionism.

Keynesianism formed one of the main ideological components of post-1945 social democracy, particularly in Britain. But there is nothing intrinsic to Keynesianism that links it of necessity to a reformist-liberal trend, such as social democracy. This, it should be stressed, does not concern Keynes’ own explicit politics which, in so far as he identified himself with the ‘educated bourgeoisie’, were of a generally liberal character. We are dealing rather with the implications (the ‘logic’ so to speak) of Keynes’ economic thought and its relationship to the organic requirements of modern capitalism. In the light of what has been noted above both about Keynes’ attitude to previously hallowed ideas such as free trade and the Gold Standard, as well as the rejection of these doctrines in Germany, it is noteworthy that amongst those who advocated Keynesian-type policies in the 1920s, before they were given a degree of respectability by the publication of The General Theory, was Sir Oswald Mosley. In a chequered political career, Mosley was, amongst other things, a junior minister in the 1929 MacDonald government and later leader of the British Fascist movement. Mosley’s plan to deal with the mounting unemployment crisis, presented to the MacDonald government in 1930, was based on a combination of Keynesian-style state spending programmes and protectionist measures to shelter British capitalism from the gale of world competition. (Mosley saw in the empire a potential trading bloc to which British exports would have privileged access.) Robert Skidelsky, biographer of both Keynes and Mosley, puts the relationship between their thinking as follows:

Mosley was a disciple of Keynes in the 1920s and in one important respect ... Mosley’s Fascism was distinctively English. It is a paradox, but not perhaps a surprising one, that out of the heart of economic liberalism should have come its most sustained and brilliant critic: that body of economic doctrine associated with the name of Keynes. Mosley was a disciple of Keynes in the 1920s; and Keynesianism was his great contribution to Fascism. It was Keynesianism which in the last resort made Mosley’s Fascism distinctively English, though it was not an Englishness which most English pundits were then prepared to recognise, being as remote from the Keynesian thinking as they were from the problems which gave birth to it. (Skidelsky 1975: 302)

Like Keynes, Mosley also argued that production was suffering at the hands of the financiers and bankers, a view which in the case of the Fascist Mosley had the effect of putting industrial capital and the working class on the same side against the ‘parasitic’ financiers. And, as Skidelsky points out, this same idea is present in Keynes:

... curiously enough Keynes did not include the class struggle [between capitalists and workers] in his account of interest conflicts. He tended to assume an identity of interest between workers and manufacturers against their common enemy – the rentier and banker. This notion of the conflict of interest within the capitalist community and the identity of interest between the workers and one section of that community – the manufacturers – was to have a profound influence on Mosley’s thought. It was to give him both a strategy and a philosophy quite different from the standard socialist conception of a struggle in which the workers were all on one side, and the wicked capitalists all on the other. Henceforth the producers’ state would be the goal; and finance the enemy. (ibid.: 141)

Keynes made the point that under conditions of free trade and capital movements the desired fall in interest rates would be impossible to achieve. Indeed, according to Keynes himself, the economic policies implicit in The General Theory, far from being inimical to the needs of a Fascist economy were, if anything, easier to operate than in a regime based on parliamentary democracy of the sort Keynes assumed in existence while the book had been prepared. In the preface to the German edition of The General Theory we find Keynes making the following observation:

I confess that much of the following book is illustrated and expounded mainly with reference to the conditions existing in the Anglo-Saxon countries. Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state [totaler staat, Keynes’ euphemism for the Fascism which had then installed itself in Germany] than is the production and distribution of a given output produced under conditions of perfect competition and a large measure of laissez-faire. This is one of the reasons that justifies my calling my theory a general theory. Since it is based on less narrow assumptions than the orthodox theory, it is also more easily adapted to a large order of different circumstances. Although I have thus worked it out having the conditions in the Anglo-Saxon countries in view – where a great deal of laissez-faire still prevails – it yet remains applicable in situations where national leadership is more pronounced. (see Schefold 1980)

This chapter has been concerned with certain aspects of the Keynesian revolution. We have tried to place this revolution in its historical and social context, to see it as a reflection of the development of the economy itself in a period when capitalism had long since ceased to be a progressive force, and as such could no longer rely upon its inherent strength but had increasingly to depend upon the bourgeois state as it grappled with a series of economic, political and social crises on a national and international level. From this viewpoint there was nothing ‘progressive’ about Keynes’ ideas, despite the efforts of his more radical followers in the postwar years to present them as such. In the field of economic theory Keynes, by explicit choice, was a follower of the principal initiator of the school of vulgar political economy, the reactionary Malthus, as against Ricardo, whose work constitutes one of the enduring achievements of early nineteenth-century bourgeois thought and in the case of economics its single most enduring achievement. As far as economic policy goes, Keynes came to base himself on a narrow and reactionary economic nationalism which repudiated the greatest single achievement of capitalism: the establishment of a world market and an international division of labour.

That the state must be responsible for ‘planning’ the economy; that is must assure an abundance of ‘cheap money’ (low interest rates); that free trade is a prejudice which if necessary must be abandoned – all these ideas contain more than an echo of mercantilist doctrines. That Keynes, widely regarded by friend and foe alike as the outstanding economist of the century, was not only unable to make a single advance over the work of the great classical economists (Smith and Ricardo) but was driven to revert to several of the key ideas of an economic theory, mercantilism, which appeared finally to have faded out by the end of the eighteenth century, is but an expression of the historical character of the crisis gripping economics as a whole in the present century. As to Keynes’ not immodest claim that he had effected a revolution in economic theory which in particular would destroy ‘the Ricardian foundations of Marxism’, this will be the subject of the next chapter.


1. One cannot, therefore, accept Joan Robinson’s confident assertion (1962: 74) about Keynes: ‘First of all, Keynes brought back something of the hard-headedness of the Classics. He saw the capitalist system as a system, a going concern, a phase in historical development.’ It was precisely a view of capitalism as a definite mode of production, arising under definite historical conditions, which was missing in Keynes.

2. This does not mean that the polemic between the advocates of monetary and fiscal policy is entirely devoid of importance. In practice, fiscal policy is concerned with the redistribution of the national income, the forcible taking by the state of part of the social value from its original owners and its use for ends which the government itself decides upon. As against this, monetary policy is essentially state credit policy. On the theoretical level, in relation to their theory of money, the Keynesians and the monetarists have much in common. Both start from the point of view of the individual as the basic unit of the economy: when such individuals are aggregated we arrive at the demand for money. Amongst other things this involves a central confusion between money acting as a means of exchange and money functioning as capital (money capital). We shall return to this point in the next chapter.

3. In reviewing ne General Theory, Roll made the following point: ‘it is significant that many of the advances in the theory of imperfect competition are due to Italian and German economists who uphold the doctrines of Fascism. The examination of limited competition made by one of these leads its author to the conclusion that the achievement of equilibrium in the increasingly unstable conditions of to-day is the function of the state. Like the Italian economist Amoroso, he regards the corporative state as the ideal machinery for this purpose. Mr Keynes’ doctrine on money, interest and government control of investment also have their counterparts, if not in Fascist theory, at any rate in Fascist practice. However much the economic policy of Germany and Italy may vary from the detailed in which Mr Keynes would like the policy to be cast, a good case can be made out for saying that Fascist policy is based on some of his principles’ (Roll 1938). Keynes’ Ow were certainly well received in Nazi economic journals such as Der deutsche Volkswirt and Die deutsche Volkwirtschaft.

4. Underconsumptionists, such as Hobson, saw the remedy to slump as lying in savings which would transfer income from accumulation (the capitalists) to the consumers (the workers). Keynes took the problem facing capitalism to be a lack of credit which was itself the result of a restrictive financial policy. In times of slump this created a deficiency of investment: the remedy was to raise the level of investment by means of a ‘cheap money’ policy and, should this prove inadequate, by means of state enterprise.

5. ‘Malthus is interested not in concealing the contradictions of bourgeois production, but on the contrary, in emphasising them, on the one hand in order to prove that the poverty of the working classes is necessary (as it is, indeed, for this mode of production) and, on the other hand, to demonstrate to the capitalists the necessity for a well-fed Church and State hierarchy in order to create an adequate demand for the commodities they produce’ (Th III: 57). But while Malthus drew attention to certain of capitalism’s contradictions he shied away from probing to their essence in the conflict of labour and capital.

6. Joan Robinson says somewhat casually of post-war Keynesian policy: ‘As we know, for twenty-five years serious recessions were avoided by following this policy’ (Robinson 1972). Such a simple judgement would now fail to find anything near unanimous support.

7. In an interesting article, George Garvy (1975) draws attention to the abortive efforts of prominent figures in pre-Hitler Germany, including W. S. Woytinsky, statistician for the German Trade Union Federation, to enlist Keynes’ support for a reflationary policy which they hoped would stave off Fascist dictatorship. But as Robinson (1973) plaintively remarks, ‘Hitler had already found out how to cure unemployment before Keynes had finished explaining why it occurred.’ As Garvy notes, ‘No more than Roosevelt did Hitler have to await the publication of The General Theory to embark on expansionary policies, even though the German edition followed the original by only a few months. G. Strasser [leader of the so-called ‘left-wing’ of the Nazi Party who had urged the policy of credit-creation for ‘productive’ purposes in the period prior to 1933], G. Feder and others in Hitler’s party had already offered the prescriptions.’ And he adds, ‘It was [Hitler] who put into effect, by means of a massive rearmament programme, the basic ideas of those of his opponents who saw in an active job-creating counter-cyclical policy the only way for preserving German democracy.’