John 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. Continue reading →
“The reasons for which Keynes’s arguments fail to translate into the orthodox paradigm are not because they are vague, confused or poorly formulated. They fail to translate, instead, because they identify and address crucial flaws in the structure and logic of the dominant paradigm. As Keynes himself put it, what he hoped to do is ‘convince [us] that Walras’ theory, and all others along those lines are little better than nonsense’. He was able to see, like Kornai, that the Walrasian ideal is ultimately ‘a special branch of mathematics’, which employs ‘logical reasoning [but] from arbitrary assumptions’, making it more an ‘intellectual experiment’ than a theory in the mould of the sciences.
The real problem which far too many economists have had with understanding Keynes’s arguments exactly as he expressed them is an intransigent desire to believe that, as once said by Debreu in an interview, ‘the superiority of the liberal economy is incontestable and can be mathematically demonstrated’. The problem with this conviction is that the economy that Debreu had in mind has little connection with reality. It is time, if we want in the future to avoid the terrible waste, not just of the past ten years, but of the many other times that liberal economies have so clearly failed to provide for full employment, that we turn our attention to understanding more accurately not the economic society in which we might wish to live but the one in which we actually live. It is in this regard that Keynes, read without the desire to adhere to the conventional wisdom of the Walrasian General Equilibrium paradigm, provides a truly valuable starting point.”
Thomas Palley, a post-Keynesian economist, here provides a critique of recent policy proposals by US Democratic politicians employing some ideas from Modern Monetary Theory. They variously want to fund programmes such as universal healthcare and a ‘Green New Deal’, financed to a large degree by increased government borrowing.
MMT, as a set of ideas, is an offshoot of post-Keynesianism, but is perhaps more straightforward to grasp when it comes to budget deficits and its opposition to austerity; hence its current popular appeal. Continue reading →
Another in this occasional series from Michael Hudson’s excellent J is for Junk Economics:
“John Maynard Keynes (1883-1946): In the 1920s, Keynes became the major critic of World War I’s legacy of German reparations and Inter-Ally debts. Against the monetarist ideology that prices and incomes in debtor countries would fall by enough to enable them to pay virtually any level of debt, Keynes explained that there were structural limits to the ability to pay. Accusing Europe’s reparations and arms debts of exceeding these limits, Keynes provided the logic for writing down debts. His logic controverted the “hard money” austerity of Jacques Rueff and Bertil Ohlin, who claimed that all debts could be paid by squeezing a tax surplus out of the economy (mainly from labor).
Modern Germany has embraced this right-wing monetarist doctrine. Even in the 1920s, all its major political parties strived to pay the unpayably high foreign debt, bringing about economic and political collapse. The power of “sanctity of debt” morality proved stronger than the logic of Keynes and other economic realists.
In 1936, as the Great Depression spread throughout the world, Keynes’s General Theory of Employment, Interest and Money pointed out that Say’s Law had ceased to operate. Wages and profits were not being spent on new capital formation or employing labor, but were hoarded as savings. Keynes viewed saving simply as non-spending on goods and services, not as being used to pay down debts or lent out to increase the economy’s debt overhead. (Banks had stopped lending in the 1930s.) He also did not address the tendency for debts to grow exponentially in excess of the economy’s ability to carry the debt overhead.
It was left to Irving Fisher to address debt deflation, pointing to how debtors “saved” by paying down debts they had earlier run up. And it was mainly fringe groups such as Technocracy Inc. that emphasized the tendency for debts to grow exponentially in chronic excess of the economy’s ability to carry its financial overhead. Emphasis on debt has been left mainly to post-Keynesians, headed by Hyman Minsky and his successors such as Steve Keen and Modern Monetary Theory (MMT), grounded in Keynes’s explanation of money and credit as debt in his Treatise on Money (1930).”
I recently re-read John Maynard Keynes’ magnum opus, The General Theory of Employment, Interest and Money (hereafter GT). First published in 1936, this was the great man’s attempt to persuade his fellow economists that changes to their understanding of economic theory and policy were necessary to remedy the mass unemployment which seemed to be a recurring feature of capitalist economies, particularly during the Great Depression of the 1930s.
It is now a decade since the onset of the Great Recession, when governments across the world ‘rediscovered’ Keynes, or what they thought were Keynesian ideas, for fighting the economic slump. There was a brief revival of activist fiscal policy: taxes were cut, public spending increased and government deficits rose. But once the threat of collapse had been averted, there was a turn to austerity in many countries, amid renewed worries about ‘credibility’ and business confidence. Continue reading →
Here is a nice video introduction to the life and work of John Maynard Keynes, whom many regard as the greatest economist of the 20th century. Keynes’ goal was to save the capitalist system from its worst defects, particularly mass unemployment, through intelligent government interventions, at both the national and international level. For Keynes, it was more about economic reform than revolution.
As an economics student I was strongly influenced by leftist Keynesian ideas, which I later found out are broadly termed post-Keynesian. I often tried to make that come across in my essays. Some of my teachers didn’t like that, as such ideas tend to be outside the mainstream.
Since then, I have explored political economy more widely, including the work of Marx and modern-day Marxists. I have become a little disillusioned with Keynesian policies, or at least the prospect of our political masters coming together to put them into practice. I now see industrial and social welfare policies as equally important at the national level, both for the developed and developing nations.
As a result, I have become less of a post-Keynesian, and more aware of the limits to successful interventions under capitalism. I try to be more flexible ideologically, but I still find Keynesian ideas useful and they remain important to progressive thinking.
The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.
Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading →