Keynes against capitalism

Crotty Keynes Against CapitalismJohn Maynard Keynes did not wish to merely save capitalism ‘from itself’ but to replace it with ‘Liberal Socialism’. That is the controversial claim made in a new book by the distinguished radical economist James Crotty, whose work ‘attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions’.

The book, Keynes Against Capitalism, subtitled His Economic Case for Liberal Socialism, draws heavily on textual evidence found in the collected works of Keynes himself, from the 1920s through to the end of his life in 1946. This is both its strength and its weakness.

Without wishing to get into debate over semantics, one could find oneself agreeing with much of the argument ie that Keynes did in fact wish to replace capitalism with a radically different system called Liberal Socialism, but to say, in some ways, so what? The book is a fine scholarly read, but I found myself questioning whether Keynes’ (Crotty’s?) Liberal Socialism, for all its admirable socially transformative aims, would be both feasible and sustainable.

According to the argument of the book, and for Keynes, the world economy of the 1920s and 1930s was prone to what has in today’s world been called by Lawrence Summers ‘secular stagnation’. For Keynes, the prosperity of 19th century Britain had been driven by free trade, imperialism, high savings resulting from a high inequality of income and wealth and channeled into investment at home and abroad, and rapid population growth and technological change. This era had come to an end and been replaced by one of secular stagnation, or a tendency towards sluggish economic growth and high unemployment, which required a radical change in policy to escape it.

Keynes’ Liberal Socialism would need a commitment from the state to ensure that a high percentage of large-scale capital investment should be in the hands of public or semi-public corporations, rather than be left mostly to the private sector. It also needed managed international trade, controls on international capital flows, industrial and regional policies, and a larger role for state planning and investment as the key to achieving and sustaining full employment over the long term.

There was also a need, according to Keynes, to drive the rate of interest towards zero in order to achieve the ‘euthanasia of the rentier’. Together with sustained full employment, this would result in a dramatic shift of the distribution of income, wealth and power away from the financial sector and other elites and towards the working class. It would also help to overcome what Keynes saw as the problem of a declining general rate of profit in the economy, which was dampening the spirits of enterprise.

Keynes was highly critical of the ‘insane’ operation of financial markets, particularly in the US stock market of his day, but also those in the UK. When speculation dominated enterprise, rather than the other way around, investment, economic growth and employment would suffer. He proposed that the financial system be predominantly national, aided by the aforementioned capital controls. This would allow the monetary authorities to keep the rate of interest at a low enough level to help achieve full employment.

Crotty maintains that the key to Keynes’ arguments was that the state needed to guide, implement and drive investment, since, left predominantly to private initiative, its unstable and unreliable nature over the business cycle would be inevitable, producing a tendency towards sluggish growth and insufficient levels of employment.

Once full employment had been achieved, policies to raise the marginal propensity to consume and lower the propensity to save, such as the progressive redistribution of income and wealth, would also be needed.

Interestingly, Keynes criticised not only laissez-faire capitalism, as the system of a bygone age, but also the state socialism favoured by the Labour Party of his time, which called for widespread collective ownership in order to implement state planning. While state planning was part of Keynes’ Liberal Socialism, he did not see state ownership as key, instead favouring a more experimental approach to discover what degree of public, semi-public or private control would prove most effective in achieving a sufficient level of investment.

Another important part of Keynes’ argument that Crotty highlights is his opposition to wage cuts as a solution to unemployment. He admitted that increasing trade union power in Britain had made wages more ‘rigid’, but that undoing this would be ineffective, would violate the norms of social justice, and could increase uncertainty due to the resulting instability of prices which could well reduce business incentives to invest.

Wage cuts and a generalised deflation would also tend to weaken the economy, increasing the debt burden and potentially the level of unemployment, while fueling social unrest. Wage cuts were missing the point: it was insufficient aggregate demand and investment which was the cause of unemployment.

This Liberal Socialism was certainly more all-encompassing than the mainstream Keynesian adherence to ‘fine-tuning’ using fiscal and monetary policies. In addition to this, the post-war period prior to the rise of neoliberalism, termed by many the Golden Age of capitalism, did see widespread capital controls, fixed but adjustable international exchange rates, and varying degrees of industrial and incomes policies. But the rapid growth with generally low unemployment, rising wages and relatively low inequality could only be sustained for 25 years or so, before the Bretton Woods system broke down amidst rising inflation and unemployment (stagflation) and falling productivity growth across the capitalist world.

History therefore tells us that full employment is achievable, but probably unsustainable over long periods, especially when accompanied by rising wages for the majority and declining inequality. The Golden Age lasted for 25 years, and was followed by long periods of significantly higher unemployment in most capitalist countries. When the latter subsequently fell, this was in many cases in countries whose governments had acted to weaken trade union power and workers’ rights and protections more generally so that falling unemployment was associated with rising inequality and job insecurity, and stagnant wages, particularly at the lower end of the distribution.

Another question which Crotty’s book begs is whether the rentier class would accept, in the words of Keynes, their euthanasia. Once more, history tells us that, having achieved heightened power and status in society, they would not, at least not for long. A huge increase in the role of the state in society and in the strength of labour vis-à-vis capital would also prove unpalatable to many. Major economic and financial crises or conflict might produce a dramatic shift to the left politically, and greater support for much more progressive policies. But even this is not guaranteed with regard to those actually wielding political power, as the decade since the Great Recession has so far proved.

Thus I applaud Crotty for a work of significant scholarship, interest and even inspiration, but suggest that Keynes’ Liberal Socialism, as he sees it, may remain a little idealistic.

5 thoughts on “Keynes against capitalism

  1. “Economic progress, social justice, individual liberty” seem to be your explicit values from your blog. It would superficially appear that there is a close match between those ethics and those being highlighted in the text you have reviewed. Your argument is that the work in question is “a little idealistic.” I’m unsure how society can ever get to reflect your ethics without a modicum of idealism. Hence I wonder if it is not the idealism of the text that has attracted your criticism. Is there something specific about the proposals which is unworkable? Or are some of the policies unattractive to you?

    • Thanks for your comment. I think overall, such policies, whether applied in toto or not, could be workable for a limited period, but that even if successful in achieving economic progress, social justice, and individual liberty (ethical outcomes which may not be fully compatible with each other, due to particular tradeoffs, and their contested nature), changes in the structure of the economy and the balance of power in society could well undermine them, or at least bring to political power those who would do so in order to shift the balance of power and wealth in a different direction. This certainly happened in the UK in the 1970s, with the rise of Thatcher etc.

      This does not mean that I dislike Crotty’s version of Keynes’ proposals. I enjoyed his book, but I was trying to make the point (perhaps not very well) that he does not really address empirically or otherwise their feasibility or sustainability, which history suggests is difficult. We could always fall back on Keynes’ ‘in the long run we are all dead’ dictum and push for them politically even if we have this difficulty in mind, so maybe I was letting some pessimism colour my argument.

      Having said that, plenty of Marxists might no doubt argue that all this is still a reformed capitalism rather than true socialism and is therefore infeasible and unsustainable and we should reject Keynesianism.

      I think we should try to be mindful of our own and others’ ideals, as well as theories, models and vision of history, and where they come from, and accept that there will be periods of prosperity and as well as more difficult times, despite our best efforts, both individually and socially. Historical processes will keep on going in some sense and I guess we have to try and use them to our advantage. Maybe this is a rather bland conclusion!

  2. The criteria which Crotty uses to specify Liberal Socialism (according to Nick, I haven’t read the book) are fulfilled by economic and political systems as far apart as the Third Reich, a socialist regime, and postwar West Germany, which one cannot possibly call a socialist country.

    Ironically, both the Third Reich and postwar West Germany are cases of successful Keynesian policies, the former using demand management to ensure highly short-term objectives necessarily leading to the physical destruction of Germany, while the latter (and Japan still more so) emphasised a balance of the interest of capital and labour, thereby supporting high, growing and usefully coordinated levels of aggregate demand, productivity, profitability and wage income.

    You can’t make Keynes responsible for the uses other people put his economics to (the USA have become a country perpetually at war owing to Keynesian policies). Keynes’ economics does not come with a general criterion by which to decide what is a morally satisfactory application of Keynesian policies.

    Keynes has shown that general equilibrium economics is nonsense and that by filling the gap thus left behind by the false promise of neoliberalism, i. e. by guiding capitalism in certain ways, a modern economy can be kept economically powerful and free from catastrophic downturns.

    It is a different issue whether we avail us of this possibility or not and, if we do, what goals we choose to pursue in making Keynesianism work.

    It does not seem to me that Mr. Crotty has helped us at all in coming to grips with this all-important choice.

  3. I rank the capability of critical and circumspect perception (as evident in Nick’s writing) higher than idealism. As for Crotty, I can’t even see what he really means by socialism. Should it include the only form of socialism that is clearly defined (the nationalisation of all productive means under the authoritarian guidance of a totalitarian state) I would consider his idealism (if he has any) a dangerous aberration and a sign of being unable to learn from history.

    I agree with Nick, that a Keynesian policy regime that we might concur with is never guaranteed to persist in perpetuity. In pointing out this very important aspect, to me, Nick is neither bland nor lacking in desirable idealism but “running the tests” that we ought to apply rather than giving free rein to our emotions.

    I tend to agree with Nick and cheepcheepcopy (see his blog post: “The Burial of Class War) that the balance between capital and labour has become notably precarious in disfavour of the latter, who nowadays appear to be lacking political awareness, resolve and the means to bring change about.

    Refer to this relationship as class war, if you must, but (clearly defined) socialism has never been able to redress such imbalances, inflicting instead still greater hardship on the working population.

    Marx and socialists (of the clearly defined denomination) have no workable alternative but only an even worse regime to offer, as their credo refuses to acknowledge that work and human interaction are based on relationships of differential power at any historical stage. For them socialism, is simply a shortcut to claiming that “there will no longer be adversarial social and power relationships”. Idealism at its worst!

    Whatever mix and dosage of Keynesian policy elements one might care to refer to as “socialism” (any socialism not fulfilling the criteria clearly defined socialism in the above sense), it is likely to work and satisfy our moral standards only if careful attention is paid to the presence and operative readiness of social institutions (rule of law, effective political competition, sufficient protection of individual freedom etc.) that have proven able to achieve what clearly defined socialism is in principle unable to attain: peaceful, rational and economically effective management of the power relationships permeating every economy and every society.

    Paying careful attention to these absolutely vital considerations may appear a bland exercise to “clearly defined socialists” or “wishy-washy socialists” whose creed uncritically implies possession of the ultimate solution. But to those who seriously assume responsibility for these difficult aims (a non-totalitarian open society with a reasonable balance of interest between labour and capital) and remain first and foremost realists (of controlled political passion rather than unadulterated idealists), the issue is a lively and stirring concern.

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