Volume 43, Issue 4: July/August 2009

Keynes and the crisis

A Case of Mistaken Identity

A spectre has returned to haunt the left—the spectre of Keynes. The Left kept it at bay in the 1950s and 1960s by pretending that “reformist” and “ineffectual” “Keynesianism” was Keynes. But it was so far removed from Keynes’ profound critique of the doctrine and reality of capitalism that one eminent economist called it “bastard Keynesianism.” After neoliberalism dispatched Keynesianism in the 1970s, the left was relieved of the need to confront Keynes. But as neoliberalism self-destructs in capitalism’s greatest crisis since the Great Depression, neoliberals and “third way” economists conjure up Keynesianism anew in their attempts to salvage it. Yet their new doctrine also misconstrues Keynes, seeing crises—which he held to be systemic—as minor aberrations, exonerating rentiers and speculators he would have indicted, and promoting a “bankers’ recovery” he would have opposed. It is a fatal mistake for the Left, in opposing this “contingent” Keynesianism, to fall once again into the Right’s trap by equating it with Keynes. We therefore take issue with Gonick and Wolff’s recent contributions in Canadian Dimension to try and promote a long-overdue reckoning with the true, hidden, Keynes.

Keynes’ own thinking was too radical to be of much use to capitalism. The “Keynesianism” of postwar policy and textbooks was already de-clawed and de-fanged by self-professed Keynesians. They reconstructed Keynes’ disequilibrium analysis as an equilibrium model. In it crises became temporary disequilibria—to be resolved by fiscal and monetary fiddling with aggregate demand. This reconstruction, popularized in Paul Samuelson’s phenomenally successful textbooks, was so influential that even the left came to regard it as “the” definitive presentation of Keynes’ ideas. Gonick’s article would be better entitled “The Return of Professor Samuelson.” This Samuelsonian discourse obscures deep affinities between Keynes and Marx. Neither took a narrowly “economic” view; both were moral, political and historical thinkers. Their respective critiques of economics were also similar in key resects. Most importantly, both trenchantly criticised the doctrine economists know as “Say’s Law.” This Panglossian outlook debilitates economics even today, incorporating in its purest form the neoliberal, equilibrium assumption that markets are inherently perfect. For Keynes and Marx, who were temporalists, economic processes took place in real time. Outcomes were uncertain and expectations could fail to be realized, resulting in disequilibria and crises. They were endogenous to capitalism, contrary to classical and neo-classical economics in which they could only result from external shocks.

Finally, while most theories of money focused on the market, seeing money merely a means of circulation, for both Marx and Keynes money reflected the reality of capitalism. It could be hoarded and accumulated and therefore also acted as a store of value and a means of settling debts. These roles lay at the root of crises, disequilibria, and unemployment. Criticism comes from within.

If, unlike Marx’s, Keynes’ critique emerged from within, not outside, the establishment, this merely showed how low capitalism’s stock had sunk during the Age of Catastrophe (1914­45). Even those perceive elements of radicalism in Keynes thinking don’t always reckon with how systematically it escaped the liberalism of his stated convictions in anti-capitalist directions. Keynes claimed to be reforming capitalism to save it. However, would it remain capitalism if his reforms were implemented? While Marx’s critique was more profound, Keynes, born three months after Marx’s death, witnessed capitalism’s metamorphosis in its worst economic and geopolitical catastrophe to date. Along with many Marxist and social-democratic writers, Keynes not only traced the dynamics of competing imperialisms to the new (nation-) statist forms capitalism was taking, he also saw that the domestic legitimacy of the new capitalism was henceforth inextricably intertwined with emerging mass national politics. This has consequences for economics.

Keynes pioneered the study of national economic aggregates—macroeconomics—and national income accounting. Their impact was profound. During the Great Depression of the 1930s, for instance, no useful figures for unemployment existed. It was simply not considered a problem. Regular compilation and publication of national accounts made Keynes “inescapable,” as the progressive American-Canadian economist John Kenneth Galbraith pointed out. No one could henceforth deny that national income needed to be enough to buy the national product, that savings “might not be absorbed by the spending for investment goods” and that “an increment of income, as from government expenditure, would make up any shortfall in investment spending or consumer borrowing and add to the purchase and production of goods.” While the more radical implications of Keynes’ thinking were successfully sidelined, in this minimal form Keynes’ ideas became the basis of the modicum of national economic management mass democratic politics and the politicization of the working class made necessary after the Second World War. Even neoliberalism could not avoid it, as Alan Greenspan’s “credit Keynesianism” and Ronald Reagan’s “military Keynesianism” showed.

Keynes’ national economic management aimed at full employment, the heart of his intellectual enterprise. Witness to the mass unemployment non-Marxist economists had hitherto declared impossible, he was politically savvy about the new reality of an organized working class and morally disgusted at the misery and waste of human effort, talent and potential that unemployment entailed. This ethical individualist, founder of the Arts Council and member of the bohemian Bloomsbury set aimed to create a decent society. Conscious and frank about his bourgeois origin and inclinations he was, as Marx said of Ricardo, enough of a scientist not to shrink from conclusions his social peers found hard to face. Keynesianism paid lip service to full employment but discarded Keynes’ vital insight that the origin of the disparity between aggregate demand and supply lay not in just in consumer but also in investment behaviour. Class, like disequilibrium, was a constant presence in Keynes’ writing because it accounted for the gap between savings and investment. “Bastard” and “contingent” Keynesians alike have excised the most critical part of his account: crises are rooted in capitalists’ behaviour.

Keynes’ macroeconomics did, it is true, require ensuring that enough income went to the working class and (it is rarely remembered) that it should be relatively equally distributed, to ensure high levels of consumption demand. But it also required displacing capitalists’ supreme right to determine levels of investment based on heir expectations of the future and the “liquidity preferences” they yielded, in favour of government initiative. Thus, he felt, a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. Keynes was not making a case for State Socialism “beyond this” (though, presumably, “up to this”). But could capitalism tolerate what he had in mind? The extent of the socialization of investment needed to achieve full employment is revealed by the fact that even Roosevelt’s New Deal did not turn the U.S. economy around. The war did—with wartime state controls and intervention reaching heights undreamed of, and never since seen, in the USA. No wonder some insightful economists pronounced full employment incompatible with capitalism. Odd, however, that this counted against Keynes’ radicalism!

For Keynes entrepreneurs were little more than skilled workers. They played a useful role, “forecasting the prospective yield of assets over their whole life.” Rentiers—speculators or “functionless investors”—who merely “forecast[ed] the psychology of the market,” did not. They restricted investment and economic activity and stood between society and “that degree of material well-being to which our technical advancement entitles us.” Keynes proposed to make interest rates so low that return on capital would “just cover [capital goods’] costs of production plus an allowance for risk and the costs of skill and supervision.” This meant nothing less than “the euthanasia of the rentier and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital… [For i]nterest today rewards no genuine sacrifice, any more than does the rent of land.”

Really remembering Keynes, his radical heritage

Unremitting commitment to full employment, egalitarian income distribution, socialisation of investment, euthanasia of the rentier ­ this is the Keynes we forget. Useful as this wilful amnesia is to the Right, the Left cannot afford it. Socialism will need to implement every one of these economic measures, and there is no call to dissent from them. In what sense are these policies “reformist?” The onus is on those who claim to hold out for more “revolutionary” goals to explain their reasoning.

Cy Gonick calls for “bold proposals.” But Keynes’ own bold proposals add up to a pretty tall political order. Reform and revolution can have complex interrelations depending on historical context. “Peace, Bread and Land” were the most minimal conceivable demands. The Bolsheviks did not advance “more revolutionary” demands in case capitalism might manage to end the war, feed people and given them livelihoods. What made them revolutionary was that the revolutionaries brooked no compromise, insisting on them implacably. If the ruling classes could not fulfil them, the people would have to in “revolutionary” ways.

The Left should expose the fakery of Keynesians who ignore Keynes’ real ideas and the Right’s politically motivated identity fraud. Like any socialism worth having, Keynes’ ideas also require a determined struggle against capitalist interests. That is why the Keynes that entered the portals of economic policy in the postwar years was a de-radicalized and distorted Keynes. That is why the Left should defend his radical heritage.

Further Reading: