Keynes Against Capitalism

His Economic Case for Liberal Socialism

James Crotty

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781138612839
• eBook ISBN:
  9780429877056
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Keynes is one of the most important and influential economists who ever lived. It is almost universally believed that Keynes wrote his magnum opus, The General Theory of Employment, Interest and Money, to save capitalism from the socialist, communist, and fascist forces that were rising up during the Great Depression era. This book argues that this was not the case with respect to socialism.

Tracing the evolution of Keynes's views on policy from WWI until his death in 1946, Crotty argues that virtually all post-WWII "Keynesian" economists misinterpreted crucial parts of Keynes's economic theory, misunderstood many of his policy views, and failed to realize that his overarching political objective was not to save British capitalism, but rather to replace it with Liberal Socialism. This book shows how Keynes's Liberal Socialism began to take shape in his mind in the mid-1920s, evolved into a more concrete institutional form over the next decade or so, and was laid out in detail in his work on postwar economic planning at Britain's Treasury during WWII. Finally, it explains how The General Theory provided the rigorous economic theoretical foundation needed to support his case against capitalism in support of Liberal Socialism.

Offering an original and highly informative exposition of Keynes's work, this book should be of great interest to teachers and students of economics. It should also appeal to a general audience interested in the role the most important economist of the 20th century played in developing the case against capitalism and in support of Liberal Socialism. Keynes Against Capitalism is especially relevant in the context of today's global economic and political crises.

1Introduction

Was Keynes trying to save capitalism or create “Liberal Socialism?”

Everyone knows that Keynes is one of the most important and influential economists who ever lived. His magnum opus, The General Theory of Employment, Interest and Money (hereafter The General Theory), was published in 1936 when much of the world was in acute economic distress and intense political turmoil in the midst of the global Great Depression. Right-wing and left-wing revolutionary forces had become powerful in many countries in Europe in the interwar years. Mussolini and Hitler were already in power, as, of course, was Stalin. Capitalism was even under assault in the USA, which experienced significant economic and political unrest in the 1930s.

The General Theory was an intervention in theory intended by Keynes to support a radical transformation of the institutions and practices of British political economy from those traditionally supported by the reigning classical economic theory and captured by the phrase “laissez-faire” to a system he called “Liberal Socialism.” (To support my arguments about Keynes, I rely primarily on Keynes’s own words as they appear in relevant volumes of The Collected Writings of John Maynard Keynes (hereafter CW), which were published for the Royal Economic Society by Cambridge University Press.) He believed that if Britain did not drastically reorganize its economic system, its militant working class might become a revolutionary working class. In the last chapter in the book, he summed up the situation as follows:

It is certain that the world [i.e. the working class] will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated – and, in my opinion, inevitably associated – with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.

(CW 7, p. 381, emphasis added)

It is almost universally believed that Keynes wrote The General Theory to save capitalism from the socialist, communist, and fascist forces that were rising up against it in this era. I argue in this book that this was not the case with respect to socialism. The historical record shows that Keynes wanted to replace then-current capitalism in Britain with what he referred to as “Liberal Socialism.” In an interview in The New Statesman and Nation in January 1939, he said:

The question is whether we are prepared to move out of the nineteen-century laissez-faire state into an era of liberal socialism, by which I mean a system where we can act as an organised community for common purposes and to promote economic and social justice, whilst respecting and protecting the individual – his freedom of choice, his faith, his mind and its expression, his enterprise and his property.

(CW 21, p. 500, emphasis added)

I shall use Keynes’s term “Liberal Socialism” throughout this book to refer to the system of political economy he wanted to replace laissez-faire capitalism with.

In 1983, I published a brief article in the Journal of Economic Literature that could be seen as a precursor of this book. I made the case that in the interwar period Keynes was not trying to save capitalism as the conventional wisdom would have it, but to replace Britain’s capitalist economy with a planned or state-guided socialist economic system built around public and semi-public control of the lion’s share of large-scale capital investment. The state was to use its control over capital investment (augmented by capital controls) as the main policy tool to achieve and sustain full employment. My article opened with an outline of Keynes’s 1933 article titled “National Self-Sufficiency.”

Keynes analyzed the combined domestic and international requirements for the creation of an efficient and humane economic system to replace the laissez-faire, free-trade capitalism which, he argued, had been largely responsible for the political and economic chaos of the previous twenty years. Distilled to its essentials, his program had three major aspects: first, the state would undertake primary responsibility for guiding and planning the domestic economy; second, economic intercourse with the rest of the world would be politically controlled as well as reduced in size and scope. As for capital flight, the free movement of capital across Britain’s borders would be eliminated.

In this essay … Keynes argued that the two major threats facing the contemporary world – depression and the possibility of world war – were in part derivatives of existing capitalist institutions … He pulled no punches in his indictment: “The decadent international but individualistic capitalism, in the hands of which we found ourselves after the war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it doesn’t deliver the goods. In short, we dislike and are beginning to despise it” (CW 20, p. 239) … The pursuit of peace and prosperity required the creation of additional or alternative economic institutions. Keynes proposed that Britain begin an evolutionary, trial and error, process of creating a more planned and controlled economic system at home, simultaneously instituting a system of controls over the movement of goods and especially money.

(Crotty 1983, pp. 59–60)

I went on to outline Keynes’s radical policy program designed to achieve sustained full employment and domestic prosperity.

Keynes believed that the state would have to take responsibility for basic economic decisions concerning the level of investment and saving, the allocation of investment among competing uses (broadly defined), and the general distribution of income. State control of the investment process through public works, public or semi-public corporations, investment planning boards, credit allocation schemes and so forth – not monetary and fiscal policy as conventionally defined – was the cornerstone of Keynes’s domestic economic policy proposals.

(Crotty 1983, p. 60)

I noted that in The General Theory Keynes called for a “somewhat comprehensive socialization of investment” and proposed that the state take “an ever responsibility for directly organizing investment” (CW 7, p. 378, emphasis added). I also argued that Keynes never changed his position on this crucial issue.

Keynes’s emphasis of the use of state control of investment to stabilize the economy at full employment continued undiminished in the 1940s … In 1943, for example, he argued that if “something like two-third to three-quarters of total investment will be under public or semi-public auspices, the amount of capital expenditures contemplated by the authorities will be the essential balancing factor … It has nothing to do with deficit financing.”

(Crotty 1983, p. 60)

This book deals with the same broad issues as my 1983 article, but it does so in rich historical detail.

When I submitted a completed draft of this book to Routledge Press for possible publication, one of the reviewers referred me to a book of essays on Keynes published in 1999 that contained a short essay by Rod O’Donnell titled “Keynes’s Socialism: Conception, Strategy and Espousal.” O’Donnell argued that, from 1924 through WWII, Keynes wanted to replace British capitalism with what he called Liberal Socialism. “My primary thesis is that Keynes, in his writings, advocated a kind of socialism which, to use his own term, may be called liberal socialism” (O’Donnell 1999, p. 149). He said that Keynes’s commitment to socialism was “steady, durable and unwavering; he advanced his views in one form or another in virtually every year from 1924 to his death”; and it was “public and not merely private, appearing in a variety of journal articles, The Times newspaper, and a BBC radio broadcast” (O’Donnell 1999, pp. 163–164). O’Donnell was right about this, as this book will demonstrate in rich historical detail. Yet in spite of the historical record, O’Donnell observed:

The suggestion that Keynes’s political thought may be characterised as socialist is usually met with total skepticism. The long-standing majority view in the literature is that whatever kind of political being Keynes was, he was certainly never a socialist or even a quasi-socialist. Usually his position is depicted as either centrist liberal, right-wing liberal or even humane conservative. As the traditional account has it, his goal was to save capitalism from itself to ensure its long-term survival, not to lay the foundations for an alternative type of society.

(O’Donnell 1999, p. 150)

As I will demonstrate in this book, virtually all post-WWII “Keynesian” economists misinterpreted crucial parts of Keynes’s economic theory, misunderstood many of his most important policy views, and had no idea that his overarching political objective from 1924 until his death was not to save British capitalism, but rather to replace it with Liberal Socialism.

Keynes’s Liberal Socialism began to take shape in his mind in the mid-1920s (see Chapters 4 and 6), took a more detailed institutional form with the publication of the Liberal Party’s manifesto Britain’s Industrial Future in 1928 (see Chapter 8), is argued for in the most urgent terms in 1933 in National Self Sufficiency (see Chapter 11), is described in outline form in The General Theory (see Chapter 20 of this book), and is laid out in detail in his work on postwar economic planning at Britain’s Treasury during WWII (see Chapter 22).

Keynes’s plans for the postwar economy were not just of academic interest. He had more influence on Britain’s postwar economic planning during the war than anyone else. Most economists are aware that Keynes designed Britain’s plans for financing WWII and creating a post-WWII international financial system. They also know that Keynes was Britain’s chief negotiator with the USA on the latter issue. “In his narrower, and subordinate sphere, Keynes rivaled Churchill. He was, in fact, the Churchill of war finance and post-war financial planning” (Skidelsky 2002, p. xvi). It is less widely known, I think, that Keynes was also the primary architect of Britain’s plans for the creation of a new political–economic system after the war (see Chapter 22). Schumpeter put the matter concisely in his 1946 survey of Keynes’s contributions to economic theory and policy in the American Economic Review: “Everyone knows that during the war he entered the Treasury again (1940) and that his influence grew, along with Churchill, until nobody thought of challenging it” (Schumpeter 1946, p. 518). This makes his views on postwar planning of the utmost importance in understanding whether he was trying to save or to replace capitalism in Britain. And what Keynes said he was planning for over this entire period, including during WWII, was not an improved capitalism, but rather a form of socialism.

In this book, I trace the evolution of his views on policy from WWI until his death in 1946 and argue that they are qualitatively different from the policy perspective associated with what I will refer to as “Mainstream Keynesianism,” the semiofficial interpretation of Keynes’s theory and policy in the post-WWII era in the USA and elsewhere. I also discuss the evolution of his thinking about economic theory over this period and show how it relates to the development of his socialist policy views, with a special emphasis on The General Theory.

This introduction has four main parts. First, I explain why Keynes’s evolving policy vision for a radically new economic system for Britain in the post-WWI era is appropriately described by him as “Liberal Socialism” rather than as “reformed capitalism.” This is the main thesis of this book. Second, I present a brief overview of Keynes’s critique of classical theory, the dominant theory in Britain and in the USA prior to the Keynesian “revolution” that was used to justify a laissez-faire policy regime. This is important because Keynes developed his own theory of capitalist economies partly in response to his increasing dissatisfaction with classical theory as an appropriate foundation for economic policy formation. Third, I argue that important aspects of Keynes’s critique of classical theory apply with equal force to post-WWII Mainstream Keynesian theory. Mainstream Keynesian theory is not only in serious conflict with Keynes’s own theory in matters of great moment; more important for our purpose, it has also inadvertently hidden his support of Liberal Socialism from several generations of economists. Fourth, I compare and contrast Keynes’s preferred economic policies with those of Mainstream Keynesianism. The arguments in all four parts rely heavily on my understanding of the theory and policy presented in The General Theory. The discussion of the stark differences between Keynes’s views on theory and policy as expressed in The General Theory and the theory and policy incorporated in Mainstream Keynesianism occupies about a third of this book.

The reader should be aware that, unfortunately, I am neither an economic historian nor a historian of economic thought. I would have loved to have coauthored this book with the great British economic historian, Eric Hobsbawm. Unfortunately, he died in 2012 and, to the best of my knowledge, he had never heard of me. The reader should also be aware that since this is a book about Keynes, I rely heavily on his interpretation of classical theory, an interpretation not universally shared by historians of economic thought.

Keynes’s Liberal Socialist economic policy agenda

Keynes’s economic policy agenda was designed to create a liberal and democratic variant of a government-guided socialist economy. This government planning system did not incorporate most manufacturing and service-sector corporations; those firms that were in industries that were not oligopolistic would be left to operate in the market economy as before. The system did not involve state ownership of all productive assets as in the Soviet Union or in Labour Party manifestos. It relied instead on large publicly owned and state-influenced enterprises (such as residential construction) that together controlled the lion’s share of the large-scale capital stock of the country. It also included state guidance of firms with excessive market power. The centerpiece of Keynes’s new policy regime was control over major capital investment projects by “public and semi-public” institutions through a “Board of National Investment.” Keynes frequently referred to the importance of “semi-public” investment projects. Investment in both residential and non-residential buildings, public transport, and public utilities are examples of semi-public investment. Some investment is semi-public because it is under the control of Britain’s large number of important “public corporations.” The Board would be empowered to select and prioritize the investment projects to be undertaken. To fund its projects, the Board was to receive a major share of government tax revenue and could borrow under central-government guarantee at relatively low interest rates. This is described in great detail in Chapter 8.

The primary objective of policy was to increase “public and...

Table of contents

• Cover
• Half Title
• Series Information
• Endorsements
• Title Page
• Copyright Page
• Dedication
• Contents
• Acknowledgments
• 1 Introduction: Was Keynes trying to save capitalism or create “Liberal Socialism?”
• Part I From The Economic Consequences of the Peace to The General Theory
• Part II The General Theory: The ultimate defense in theory of Keynes’s radical policy agenda
• Part III State planning, public investment, and Liberal Socialism after The General Theory
• References
• Index