Keynes, effective demand and the future of capitalism


The economist John Maynard Keynes

John Maynard Keynes, writing in his General Theory, claims that his theory was

“adequate to explain the outstanding feature of our actual experience; namely, that we oscillate, avoiding the gravest extremes of fluctuation in employment and prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life …[and that] we must not conclude that the mean position thus determined by ‘natural’ tendencies, namely by those tendencies which are likely to persist, failing measures expressly designed to correct them, is, therefore, established by laws of necessity. The unimpeded rule of the above conditions is a fact of observation concerning the world as it is or has been, and not a necessary principle which cannot be changed (1936, p254).”

Thus he outlined the potential for his theory of effective demand to lead to policies which could improve the operation of capitalism and lead to persistently higher levels of employment. I read his General Theory twenty years ago as a student, and was for a while inspired by his writing to believe that capitalism could be managed to achieve a more harmonious society.

However, the history of the capitalist world since the 1930s leads me to be somewhat pessimistic about the ability of either state intervention or laissez-faire to achieve and maintain full employment, however that is defined.

The ‘Golden Age of Capitalism’ in the 1950s and 60s saw full employment and rising, widely shared prosperity across many countries, and seemed to lend support to Keynes’ general thesis. However, since the 1970s, while prosperity has risen for many, it has stagnated or fallen for many others, amidst increased instability and uneven development across the world. It seems that Keynes’ vision has not been fulfilled. I continue to believe that we can do better, but accept that there will tend to be good and bad periods for the majority living through the ongoing social transformation of a capitalist society.

4 thoughts on “Keynes, effective demand and the future of capitalism

  1. What I admire in Keynes, to the smallish extent that I am acquainted with his own writings, rather than secondary representations of it, is his knack for unprepossessed realism.

    He was not anti-capitalist but highly critical of capitalism; he was a confessing bourgeois but sceptical of bourgeois culture. As a citizen and public servant, he was committed to his country, in large part by questioning it with constructive intent.

    In looking at economics, what I find most frustrating above all is the apparent inability of its various proponents to escape ideological commitment and groupthink. On this count, the left is no better than the right. The “ideologicity” of its practitioners seems to be another sign of the discipline’s immaturity.

    I wish economists were more like Keynes, who focussed, like all great scientists, not on a hidden agenda of conceit, but on a problem. He would go where he could find solutions to the problem rather than where his conceit would send or leave him.

    • Thanks for your recent comments on my blog. Like you, I admire Keynes and his approach to economic problems. For some time I subscribed to the ‘left Keynesian’ or maybe post Keynesian vision of economic theory and policy and it still influences my thinking. Having read more widely since I was a student, I have become more pessimistic about the prospects of their vision being achieved in practice. Reading Marx and Marxist political economy makes me think that inter-disciplinarity is important in economics, so I prefer the term political economy. Given that it is politicians who are putting particular policy ideas into practice, I suppose we can’t escape from ideology and power relations. The real world can be quite messy I think!

      Keynes did indeed seem to take the practical approach and wasn’t afraid to change his mind according to evolving real world problems. He had his own flaws, but remains influential in that governments of all stripes seem driven to intervene in all sorts of areas of the economy and society. Some of this may not be for the better.

      Returning to Anwar Shaikh’s new book, and having viewed many of the youtube lectures, he really does seem to stand out in his recourse to empirical evidence and linking it with his own theoretical vision of what he calls ‘real competition’ in a broadly classical economic approach. He is definitely critical of capitalism, although he admits that it is rather good at making profits over the long term, with ‘turbulent equalization’ going on all the time rather than the mythical equilibrium beloved of orthodox theory. Throughout much of the book, he compares his own approach with neoclassical, Keynesian, post Keynesian and occasionally Austrian theories, which makes for interesting discussion and thorough analysis.

      I would also recommend the work of Michael Pettis, if you haven’t come across him already, who writes on China and global trade and financial imbalances. He takes a reasonably non-ideological approach and is able to incorporate different theoretical ideas into his own framework. He has a blog which is interesting reading.

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