The Crisis of Keynesian Economics (Routledge Revivals)

Geoffrey Pilling

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9781138779105
• eBook ISBN: 9781317675587
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Geoffrey Pilling's treatment of this complex issue in political economy, first published in 1986, concentrates on a review of Keynes' writings rather than the vast literature that has developed surrounding his work since the Second World War. It does, however, consider the work of the 'Left Keynesians', in particular that of Joan Robinson.

The Crisis of Keynesian Economics has the potential to throw fresh light on some of the issues facing political leaders today, particularly so given that much of the Neo-Capitalist economic orthodoxy established during the 1980s has come under fresh criticism in recent years.

1 Reactions to the Crisis of Keynesianism

DOI: 10.4324/9781315771502-1

There are still echoes of the debate, now well past its centenary, between Marxists and neoclassical economists, but not much of this is heard anywhere in professional circles, and there is certainly very little in it to exercise the general body of economic practitioners. Economics seems, miraculously, to have ceased to be the battleground of conflicting ideologies. As we shall see, there are many and sometimes very profound differences of view on particular issues, especially where specific points of economic policy are concerned. But, while it may be going too far (paraphrasing Sir William Harcourt) to say ‘we are all Keynesians now’, it seems that in our analytical moments most economists are prepared to take the innovations of Keynes and his disciples for granted. (Roll 1968: vi–vii)

Virtually everybody is prepared to agree that a deep malaise now afflicts the once seemingly omnipotent Keynesian political economy. Many are of the opinion that we have already seen the end of the Keynesian era. But there is little agreement amongst orthodox economists about the nature of this illness, its origin and the means to its cure, assuming that it is not in fact terminal. This book attempts, from a Marxist standpoint, to examine various facets of the crisis pervading Keynesianism and thereby provide a critique of Keynesian economics. This it does because, however severe their predicament, Keynesian ideas still retain an important influence, not least in the British labour movement. Thus in the so-called Alternative Economic Strategy — proposed by the Trades Union Congress and others in opposition to the economic policies pursued by the Thatcher governments since 1979 — a large element of Keynesianism is clearly visible. This opening chapter surveys this crisis, outlines several reactions to it from economists and others, and in so doing sketches out the major themes of the book.

It is almost universally accepted that the capitalist economic system is currently experiencing its most acute crisis since the 1930s. Following the end of the Second World War in 1945, a quarter century of boom, interrupted by relatively shallow and localised recessions in the major capitalist countries, suddenly erupted into the violent inflation of the early 1970s, subsequently to collapse into a global slump which, judged by the standards of the post-war years, remains unprecedented in its severity and duration. An important casualty of this crisis has been Keynesian political economy, the severe illness or even death of which has been either celebrated or lamented at various points of the political compass.

According to the conventional view of the history of economic theory, until the 1930s it had been confidently held by the majority of economists that the smooth expansion of capitalism’s productive forces would, on the whole, assure conditions of economic stability, growth and full employment. Unemployment was usually considered to be the responsibility of market ‘imperfections’, especially those connected with wage rigidities. Any persistent unemployment was held to be due to the unwillingness of workers to accept a wage level that would ‘clear the market’. It was the slump of the 1920s and 1930s which threw this economic theory (designated by Keynes as ‘classical’ economics) into a severe crisis. Keynes emerged as the principal figure who attempted to explain this economic crisis and tried to chart a course out of it. The result was Keynesian economics which emerged as the standard economic theory of the postwar world, exercising a powerful intellectual dominance until the very recent past. Thanks to this new economics, it was widely accepted that given an appropriate manipulation of the budgetary aggregates and suitable monetary policies, what Keynes was to term the level of effective demand could be raised to a point where all involuntary unemployment was more or less eliminated.

Writing of the decade following the end of the war, J.K. Galbraith said, ‘Within a decade [after 1945] the belief that the modern economy was subject to a deficiency in demand — and that offsetting government action would be required — was close to becoming the new orthodoxy’ (Galbraith 1973: 189).

Keynes and Radicalism

Now whether this Keynesian-type policy was ever in fact practised after 1945, and whether, if practised, it was responsible for the sustained period of expansion from the end of the war onwards are moot points. Many commentators are doubtful about both these propositions. But one fact is beyond dispute: if not as an economic policy certainly as an ideology, Keynesianism exercised a powerful influence after 1945. On the left especially it was generally assumed that, thanks to Keynes’ discoveries in economic theory, a social-political crisis of the sort which had broken out with such catastrophic consequences in the 1930s was now largely a thing of the past. In particular, Keynesianism had provided the answer to a Marxism which had made such ground amongst the younger intelligentsia in the ‘red decade’ of the 1930s. Calling The General Theory ‘the most influential book on economic and social policy this century’, Galbraith was certainly not out on a limb when he declared that ‘By common, if not yet quite universal agreement, the Keynesian revolution was one of the great modern accomplishments in social design. It brought Marxism in the advanced countries to a total halt’ (Galbraith 1971: 43–4).

So confident was Galbraith in the victory of Keynesianism that he could bemoan the fact that the ‘old’ microeconomic problem in economics — the allocation of scarce resources amongst competing ends — had been forced largely off the agenda with the consequence that key problems, notably the contradiction between public wants and private needs, was now seriously neglected.

Such ideas exercised a considerable influence in Britain in the 1950s and 1960s, not least in Labour Party circles where a wing of the party emerged declaring that Marxism was now discredited and out-of-date, and demanding that an even nominal commitment to socialist aims, embodied in clause 4 of the party constitution, be ditched. The impact of the prevailing Keynesian orthodoxy could be measured in a series of influential books by writers such as Anthony Crosland, by the former Marxist, John Strachey, and others extolling the virtues of the new post-war capitalism which, thanks to Keynes, had overcome its proneness to crises and thereby rendered Marxism obsolete. As Stuart Holland declared:

Keynes was not a socialist, and was almost wholly ignorant of the work of the founding-father of modern socialism — Marx. Yet he had more influence on post-war British socialists than any other theorist of our time. It is also arguable that, almost single-handed, he buried Marxism for a generation of the mainstream British left. (Skidelsky (ed.) 1977: 67)

It is easy to see what attracted radical thought towards Keynesianism. Keynes was in favour of limited measures of social reform. He doubted the efficacy of unaided monetary control. A trenchant defender of private property, he none the less held that the ‘socialisation of investment’ would serve to make capital abundant and thus force down the interest rate eventually to zero, perhaps within the space of 25 years. While private capital would continue, the claims of rentier capital would be destroyed. The resulting scene was a Fabian-type world in which the grosser inequalities of wealth were to be removed by fiscal means (Keynes supported a ‘moderately conservative’ degree of income redistribution as one way of boosting consumption) where no reward is extracted by ‘unproductive’ capital and where employment is preserved at or near its maximum by the manipulation of state investment. It is little wonder that with some justice Keynes could be hailed as the new post-war apostle of social democracy.

On the basis of this type of conception a general consensus emerged. Capital left unregulated might still prove crisis-prone, but given suitable social and economic state policies any instabilities could be kept within politically acceptable limits. Keynes, it seemed, had assured capitalism’s future, albeit a somewhat different capitalism from the laissez-faire type which had existed for much of the nineteenth century. Politics could now occupy the middle ground, concerning itself with the balance of measures to be followed to achieve generally accepted aims within the framework of a beneficent welfare capitalism.

Some, of course, went further, denying that in the age of Keynes any meaningful use could be made of the term capitalism. We now lived in the era of post-industrial society, to use the term favoured by the American sociologist, Daniel Bell. Others preferred the notion of industrial society, still others that of technocratic society. Whatever differences existed between such conceptions, they were united in declaring Marxism to be outmoded, a doctrine at best a reflection of those nineteenth-century conditions which had now thankfully disappeared.

While a minority of radical economists such as Galbraith resented the fact that economics appeared to have little room for judgements about economic choice — he pointed to the increasing public squalor which the growth of private wealth appeared to entail — others positively welcomed the fact that social problems, or rather problems which had hitherto been considered social, were now taking on a purely technical form, concerning, in essence, the matter of the most efficient (‘economic’) allocation of human and material resources to satisfy social and personal needs. Economics had at last come of age. Invested with considerable prestige because of its seeming ability after Keynes to resolve hitherto intractable problems, its procedures were becoming more and more rigorous, employing mathematical techniques, and aspiring to the precision and methods which were assumed to guide the physical sciences. Economics could look down with a certain disdain at the still-infant social sciences. Eric Roll summed up this comparatively new and happy state of affairs:

For some thirty years after the appearance of Keynes’ General Theory the status of economics, largely associated with his general approach, increased steadily until it reached a position of authority, both as a branch of social science and as a tool for the better solving of human affairs, unparalleled in its history and unequalled by any of the non-physical sciences. (Roll 1973: 548)

The leading, almost unchallenged, position occupied by Keynesianism undoubtedly left its imprint on Marxism. There were those Marxists who accepted the new economics of Keynes and believing that capitalism had indeed resolved its fundamental problems — at least in the economic sphere — turned their main attention elsewhere: to the residual cultural problems which were still held to afflict capitalism. Here was an international trend, finding a variety of expressions: the work of the Frankfurt school; in America that of Herbert Marcuse and in Britain in the New Left. One result of such tendencies was a turn away from a study of Marx’s work in economics as found in Capital in favour of Marx the ‘humanist’ and ‘philosopher’ as exemplified in the Paris Manuscripts of 1844, with their theme of alienation. Not only did this artificially divide Marx’s work along quite unwarranted lines but it also meant that Marxists tended in their work to reflect the increasing fragmentation of the social sciences, each engaged in their hermetically-sealed compartments.

On a narrower plane, those Marxists who did continue work in the sphere of political economy were also often influenced by the prevailing Keynesian conventional wisdom in that they were now inclined to believe that certain forms of state action could iron out the cyclical tendencies within capitalism. This in turn led some of them to read Marx’s Capital through the prism of one variant or other of underconsumptionism. By underconsumptionism is meant the view, shared by a variety of writers in the history of economics including Malthus and J.A. Hobson, that a state of stagnation is not simply a passing phase of the capitalist economic cycle, nor the result of a momentary and fortuitous conjuncture of forces, but is a condition towards which the economy spontaneously tends in the absence of counteracting forces, including (for some at any rate) appropriate state action. We leave aside for the moment the question whether Keynes’ General Theory can legitimately be considered to lie within the tradition of underconsumptionism. There is no doubt, however, that underconsumptionism was the basis for the stagnationist thesis popular immediately after the end of the war and advanced by a number of economists who, particularly in America, emerged as Keynes’ leading advocates and interpreters. (In Joseph Schumpeter’s opinion, ‘Keynes may be credited or debited, as the case may be, with the fatherhood of modern stagnationism’ (Schumpeter 1963: 1172).) Alvin Hansen was one of the leading proponents of the view that the major problem likely to face capitalism after 1945 was that of stagnation. But it was a view about the essential problem fecing capitalism by no means confined to these Keynesian circles. To take but one example. A work such as Baran and Sweezy’s Monopoly Capital which appeared in the mid-1960s saw capitalism’s central problem as being associated not with its inability to extract surplus value but with the generation of a surfeit of surplus value. Thanks to the ability of the monopolists to manipulate their prices, more surplus value was created than could possibly be accumulated and this required ever greater and irrational expenditures on the part of the state which would ‘waste’ this excess surplus. A variant on this essentially underconsumptionist theme was the view which held that capitalism’s post-war stability rested on a rising arms budget which had provided an effective leak for a growing volume of surplus value and had allowed capitalism to escape the consequences of the law which Marx had regarded as the most fundamental of all: the law of the tendency of the rate of profit to fall. This position was the basis of those theories which went under the name of the ‘permanent arms economy’.

As is now obvious, the theory of a crisis-free ‘transformed’ capitalism proved, to say the least, to be somewhat optimistic. The once virtual unanimity amongst economists and politicians about the benign results to be obtained from the employment of Keynesian-type policies has now been shattered, many would hold irrevocably so. Near-rampant inflation in the early 1970s combined with a collapse of industrial production and employment in many ways surpassing the decline seen in the period after 1929 defy the central logic of Keynesianism where such things are not supposed to happen simultaneously.¹ In a recent lecture, Sir Charles Carter asked somewhat plaintively ‘What is Wrong with Keynes?’ (Carter 1981). He pointed out that in the 1960s, according to the precepts of Keynesianism, in a situation of slump the government would — within the constraints imposed by the balance of payments situation — have raised spending and cut taxes. Now precisely the opposite was happening. And Carter rightly drew attention to the fact that this was not a policy confined to the Thatcher government, the result of some abberant ideology as it were, for in the face of rising unemployment and inflation similar policies were pursued by the Wilson-Callaghan governments of 1974–79. Indeed it was James Callaghan, then prime minister, who warned the Labour Party Conference of 1976 that it was no longer possible to spend one’s way out of a slump as far as he was concerned, pronouncing the death sentence on traditional Keynesianism_

We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government expenditure. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of employment as a next step.

Because of its chronic weakness, the British economy of the 1960s had already anticipated a crisis which was to assume international proportions in the following decade. The mid-1960s saw a series of savage deflationary measures carried out by a Labour government at the behest of the International Monetary Fund which had singularly failed to correct a long-standing balance of payments problem. The failure of these measures eventually forced the 1967 sterling devaluation, which in turn resulted in a series of severe disturbances in the world gold and currency markets. The end result was the decision taken by the American administration in August 1971 to remove gold backing from the dollar, a measure which had sustained the post-war Bretton Woods monetary arrangements for the previous 25 years or so. It is this economic crisis, with its attendant political and social implications, which has plunged both economic theory and the formulation of economic policy into a crisis. In its scope and depth, this crisis certainly promises to eclipse that of the 1930s. John Hicks, a leading interpreter of Keynes from the time of The General Theory (1936) onwards, holds that the current problems of Keynesianism present one of the gravest questions with which the world is now confronted (Hicks 1974).

Certainly not all share Hicks’ sombre attitude. Some hope that a new Keynes will somehow emerge to resolve our current theoretical and practical problems; meanwhile Micawber-like we should muddle along with whatever tools are to hand. Others have suggested that there is little fundamentally wrong with orthodox economic theory. Our malaise stems from the fact that there is a widespread over-concern with theory as such. What is required is not more theory but better, more reliable, data on which to base rational economic policies. Viewed from this angle, the problems we face turn on a faulty division of labour amongst economists between theoretical and applied work.

But for those who still attach central importance to matters of economic theory, and who are concerned with the Keynesian crisis, there is little agreement about (a) the real signific...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Title Original Page
• Copyright Original Page
• Table of Contents
• Preface
• Abbreviations
• 1 Reactions to the Crisis of Keynesianism
• 2 The Significance of the Keynesian Revolution
• 3 The Foundation of Keynes’ Economics
• 4 Keynesianism, State Spending and the ‘Arms Economy’
• 5 The Collapse of International Keynesianism
• Conclusion
• Bibliography
• Index