Opening up Keynesianism – the implications for economic policy

keynesAt its simplest, Keynesian economics makes the case for the role of aggregate demand in determining output and employment in the economy as a whole. Government policies should therefore attempt to achieve low levels of unemployment through the management of aggregate demand, or the growth of expenditure. A crude form of this emphasises fiscal policy, the balance between tax revenues and public spending. A weak economy with rising unemployment may need an expansionary fiscal policy, with public spending increases or tax cuts to boost demand, while an overheating economy may need the opposite, to reduce demand and lower inflation.

This is a crude characterisation of a major school, or truthfully what has given rise to many schools, of economic thought. It is unfortunate since, in the wake of economic crises in recent decades, particularly that of 2008-09, commentators proclaimed the return of Keynesian ideas as governments across the world responded to recession with degrees of expansionary fiscal policy, as the use of monetary policy alone was deemed to be inadequate. But it didn’t last, and the turn to austerity and ‘tighter’ fiscal policy quickly followed. Alongside a return to reliance on monetary policy and the adoption of Quantitative Easing (QE), this played a role in the weakness of the recovery.

Following the global pandemic and the advent of war in Ukraine, many countries now face the prospect of stagflation, the combination of weak growth and rising unemployment alongside high inflation. Policymakers are now tightening monetary policy by raising interest rates, even as recent fiscal expansions come to an end. Crude Keynesianism appears to have little to offer, echoing its abandonment during the stagflation of the 1970s.

But genuine Keynesianism does have far more to offer public policy than expansionary fiscal policy during a deep recession. It may start with a focus on aggregate demand, but can be used to illustrate the importance of industrial policy, the reduction of inequality and the reform of the global monetary and trade system. This post intends to explain how. Continue reading

Quote of the week: the entrepreneurial versus the cooperative economy

“I don’t have any doubt that, at least in my mind, there is one difference, a central difference between the orthodoxy and the non-orthodoxy. When you think of Keynesian categories, during the preparation of The General Theory, Keynes relied on the distinction between two concepts of modern economies to distinguish orthodoxy from non-orthodoxy: one he called the “cooperative economy”, where factors of production combine in ways described by production functions, and everybody gets their rewards in baskets of goods equivalent to their marginal productivity. The other type of economy is what he called the “entrepreneurial economy” (some people would prefer to call it a “capitalist economy”): there, production is organised by firms. Firms are not consumers; firms are firms. They exist to generate a money surplus, and the production and generation of this surplus – and of course the distribution that follows it – is what this type of economy is about, and this is where aggregate demand can be deficient. An entrepreneurial economy exhibits the characteristics of a modern economy, including how money is organised, the role of contracts, the role of markets, and so on. For me, “non-orthodox economics” is the “non-cooperative economy”.

A. Mearman, S. Berger and D. Guizzo (2019), ‘Fernando Cardim de Carvalho’ in What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.40.

Quote of the week: Keynes, capitalism and public purpose

“In their own way – and in the social, political, economic and institutional context of the early decades of the twentieth century – globalisation, free markets and light-touch regulation contributed to the devastating events that produced two world wars, with the Great Depression in between. Keynes recognised this, and he sought to reform capitalism so as to make it work both more efficiently and more fairly, such that people could live the good life, eventually free from the economic problem of material need.

Indeed, after World War II, the managed capitalism of the so-called ‘Keynesian’ revolution – in which domestic and international financial markets were tightly regulated – delivered three decades of unprecedented improvements in economic equality and living standards. However, since the 1970s and 1980s, across the industrial world, the return to laissez-faire and the unleashing of international corporations, markets and finance set into motion similar forces to those of Keynes’s time, and he would not have been surprised by the events that followed. From the arrival of the Great Depression, Keynes became a critic of both free trade and unrestricted international capital flows, and he ‘would not have been an enthusiastic globalizer’ (sic). But, as he did throughout his lifetime, were he alive today, Keynes would have developed pragmatic policy proposals appropriate to the social, political, economic and institutional circumstances of our times.”

S. J. Konzelmann, V. Chick and M. Fovargue-Davies (2021), Keynes, capitalism and public purpose, Cambridge Journal of Economics, vol. 45, no. 3, p.610.

Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’. Continue reading

Quote of the week: why progressive and interventionist policies prospered following World War Two

Here is another extract from the same chapter as last week’s, by Fabio Petri. These weekly quotes are not necessarily meant to be ‘classic’, nor even penned by the greatest economists in the history of the subject, though sometimes this may be the case. Rather, they make a point that I could not put better myself, and are thus worth posting.

Here the author accounts for the rise of forms of Keynesian interventionism, an effective welfare state in Western Europe, and full employment policies in the US following World War Two.

“One must wait for the Great Depression of the 1930s coupled with the danger of communism to see the hold of marginal theory and policy partly shaken: Keynes candidly admitted he wanted to save capitalism from itself in order to save it from communism, and here we have a strong reason for the general acceptance of his theory in spite of the immediate wave of criticisms, not entirely unjustified, moved against it by Henderson, Hicks, Meade and others. And the beautiful book by Armstrong, Glyn and Harrison, Capitalism since 1945, convincingly shows how at the end of WW2 the fear that the working class would turn communist was the reason for the concession of the welfare state in Western Europe and for a general acceptance, in the USA too, of the interventionist Keynesian state with a duty to maintain unemployment low.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.57-8.

Considering Keynes’s ‘Liberal Socialism’

Was Keynes a champion of a reformed capitalism or a liberal socialist? He consistently argued for a middle way between laissez-faire and state socialism as a means of achieving the good society. But although he referred to a form of socialism in some of his work, his possible variant of such a system creates some confusion in the use of language and argument. A modern social democratic liberalism retains the core features of capitalism and can continue to draw on the ideas of Keynes, even if it does ultimately evolve into something different.

keynesThe conventional wisdom on Keynes has it that the great economist and statesman argued for a reformed capitalism, in order to save the system from its flaws, and guard against political extremism of the left and right. But some of today’s thinkers make a rather different case. They hold that he wanted to see reform lead the way to what he called ‘liberal socialism’.

James Crotty has turned this idea into a whole book, which I wrote about in this post. But Rod O’Donnell makes a similar argument, following the evolution of Keynes’ output during the 1920s, 30s and 40s, in a short chapter from an edited volume from 1999 honouring the work of the late post-Keynesian Geoff Harcourt. The chapter is titled “Keynes’s Socialism: conception, strategy and espousal”. In it, O’Donnell argues that Keynes consistently made the case for a middle way between (and in the process rejecting) laissez-faire capitalism and state socialism. This was his liberal socialism. Politics and economics were to be the means to achieve an ethical goodness in society. This system should combine the best elements of liberalism and socialism, and discard the worst. Continue reading

Some recurring themes in Marx versus Keynes: a personal note

Economist John Maynard KeynesToday’s post summarises some of what are for me the most important and interesting topics in economics, in particular those which draw on Marxist and Keynesian thinking. While the approaches and concerns of the two traditions sometimes overlap, they also give rise to tensions.

I have just finished Stephen Marglin’s new book Raising Keynes, which is the Harvard Professor’s attempt to resurrect and reform in modern guise the key ideas of the great man’s General Theory of 1936. On a personal level, the book is my latest foray into what is broadly known as post-Keynesian economics, whose practitioners claim to be the heirs of Keynes and the developers and propagators of his most important ideas. Through his work, Keynes intended to save capitalism by ridding it of some of its most damaging tendencies, such as periodic mass unemployment. This makes his work appealing to progressives and leftists who are uncomfortable with the idea of revolution and are not convinced that socialism, in the form it has taken historically, is the answer to society’s problems. Continue reading

Quote of the week: Keynesianism and global economic problems

Copland-DouglasFollowing the extracts I have posted in recent weeks, this is the last in the series from the 1947 edited volume The New Economics: Keynes’ Influence on Theory and Public Policy. Once again the piece is from the chapter by Douglas Copland, this time on addressing the problems of the global economy while maintaining a policy of high employment. In particular, Copland discusses the balance of payments and the high demand for imports that will tend to result from such a policy. As before, it is of historical interest, being written while Keynes’ influence was in its ascendency. But it also remains relevant today, in that conflict over international trade is much less likely if the countries concerned are able to achieve full employment. Free trade by itself is not enough and is unlikely to be sustained if it is not associated with high levels of employment and widely-shared prosperity. Continue reading

Quote of the week: public investment and the budget in a full employment policy

Copland-DouglasFollowing on from last week’s extract from the 1947 volume The New Economics: Keynes’ Influence on Theory and Public Policy, here is another from the same chapter by Australian economist and government advisor Douglas Copland. This time, he discusses the role of public investment and the government budget in a policy of high employment. It is, firstly, of historical interest, as this was a time when some aspects of Keynesian thinking were in the ascendance in the realms of both economic theory and public policy. Secondly, it is interesting to reflect on how the ideas propounded below are seen today. In particular, Copland covers the role of budget deficits and surpluses, the importance of substantial public investment in the communities of modern democracies, public ownership of utilities, and the need for a change in the attitude of private business towards the budget and its role in promoting prosperity and high employment. Continue reading

Quote of the week: Paul Samuelson on the essential contribution of Keynes’ General Theory

paul samuelsonPaul Samuelson was the high priest of the post-war “neoclassical synthesis” in economics, which combined a particular interpretation of Keynesian macroeconomics with mainstream microeconomics. He was the author of two influential textbooks which were widely used by students on the US side of the Atlantic and, as time went on, on the UK side as well. Keynes’s disciples at Cambridge University, and many of their students, tended to be politically to the left of their American counterparts, and were critical of Samuelson’s approach to Keynesian economics. But fast forward to today, and the left Keynesians, or post-Keynesians, are sadly confined to a heterodoxy with limited influence on the dominant mainstream of the subject.

This week’s quote, by Samuelson, is another from the 1947 collection of essays The New Economics, published not long after Keynes’ death the previous year. It provides a fascinating snapshot of how some of the influential (mostly American-based at the time) voices in academia assessed Keynes’ contribution to economic theory and public policy. It includes essays by Keynes himself, as well as Joan Robinson, one of the founders of the post-Keynesian school at Cambridge. Continue reading