Keynes and the problems of planning

Robert Lekach man

For forty years three versions of Keynesian doctrine have lurked within the covers of The General Theory of Employment, interest and Money, economic gospels of conservative, liberal, and radical temper. According to the initial version, nothing much was wrong with contemporary capitalism that a bit of intelligent tinkering could not cure. Those timid beasts, the businessmen, would expand their investments and set off euphoric multiplier effects upon national income and employment if, but only if, politicians took pains to speak kindly to them, shove Interest rates lower, and run the economy at gently inflationary rates. In this mood, KeYnes was likely to criticise Franklin Roosevelt for scaring sensitive American corporate types with his loose talk of driving the moneychangers out of the temple and Punishing malefactors of great wealth. When Keynes in Chapter 18 got around to summarising his own analysis, he commenced with this notorious paragraph: We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour, and of the activities of supervision and organisation, as well as the social structure including the forces . . . which determine the distribution of the national Income.'

• Although in the very next sentence Keynes insisted that 'This does not mean that we assume these factors to be constant,' the context made it plain that 'the degree of competition' which Keynes took for granted aPProximated Marshall Ian assumptions of sufficient competition in most markets to guarantee quick responses by sellers to shifts in the demand for their products. Certainly there were few suggestions at any 13°Int in The General Theory that private Monopoly was a force to be reckoned with. . For the most part, however, Keynes's Judgment of the efficacy of monetary policy ‘t!as strongly coloured by his glum percepfl°n of the investment outlook, for he eared that in the long run the marginal efficiency of capital, his term for expected _13r13fitS, must decline. Here, of course, he wrote in the tradition of nineteenth-century Liassical economics, both Ricardian and m tarxian, which forecast, though for conrd sting reasons, declining profits. This second gospel was popularised in the United 11941es38 in the late Alvin Hansen's famous Presidential speech to the American co.nomic Association as the secular stagwcIti°n hypothesis. Investment possibilities ere fated to narrow because population

growth was slowing, the western frontier remained obstinately closed, and less was to be anticipated from technical innovation in the future than in the past.

Within The General Theory Keynes was only an occasional secular stagnationist. Many of his °biter dicta held open the possibility that a combination of tax and financial incentives to private business and direct deficit outlays by government might fill the gap between underemployment and full employment. Here and there this advocacy of what came to be called fiscal policy took bravura form as in Keynes's splendid discourses on the economic virtues of Egyptian pyramids, mediaeval cathedrals, buried bottles full of cash and other wasteful expenditures which possessed the merit, all the same, of promoting more sensible spending on the goods and services which filled human needs.

Textbook versions of Keynesian aggregative equilibrium, such as all ten editions of Samuelson and the many volumes which imitate him, now combine monetary and fiscal policy as equally desirable implements of economic management. Although texts published within the last two or three years are influenced by the unsettling experience of stagflation, Samuelson's coinage for an unpleasing simultaneous appearance of inflation and unemployment, respectable expositions of Keynes still preach the optimistic message that reasonably steady economic growth accompanied by acceptable price and employment behaviour is possible if public policy is astute and unions and corporations restrain their avarice.

Here, of course, is the occasion of this essay. Although Keynes did casually admit in The General Theory that inflation might be troublesome even before full employment was reached, he ascribed the possibility to the emergence of supply bottlenecks which pushed wages or prices higher and, on occasion, spread to portions of the economy in which unused capacity still persisted. Keynes, at least in The General Theory, failed to examine possible concentrations of market power which allowed suppliers of either goods or labour to extract higher prices or wages even at the cost of lost sales or fewer jobs. One of the more striking American phenomena of current experience was the pricing policy of General Motors and its friendly rivals during the 1973-1975 mini-depression. During this period, the auto companies sharply marked up their prices even though the customers were fleeing showrooms in hordes and sales plummeted to their lowest levels in two decades.

This is to say that wherever one, two,. or three huge corporations dominate an im

portant industry, that industry can choose between alternative combinations of high prices and small sales, and low prices and larger sales. When the unions are the stronger party, they enjoy similar discretion in the choice of either higher wages and fewer jobs, or lower wages and more jobs. The market for services is by no means exempt from seller dominion over both sides of the supply-demand equation. In the United States once more lawyers, at least until the Supreme Court recently rebuked the practice, circulated minimum fee schedules to protect their members from price competition. Tidy coalitions of physicians, hospitals, health insurers and amiable federal regulators have pushed the cost of American medical care upwards at a pace double that of inflation in general.

Ever since A. W. Phillips published his famous article, it has been fashionable to assert the presence of a trade-off between inflation and unemployment. As the tale is often told, during spells of high employment labour discipline falters, absenteeism and other varieties of bloody-mindedness flourish, unions press wage claims far beyond the frontiers of imaginable productivity improvement, employers, kicking and groaning, pass their higher costs onward to customers (usually with a profit sweetener to ease the pain), higher prices become the sufficient reason for still larger wage claims, and so on, until in self-defence some Iron Chancellor slams on the fiscal and monetary brakes.

The Phillips hypothesis assumes stability of profit and wage shares and a sturdy tendency of employers and unions to react against any erosion of their shares. It implies also as did Keynes that both prices and wages are flexible enough to respond quickly to increases or decreases in the demand for products or workers. But, as British and Americans can ruefully testify, theory runs counter to current history. In England, where many unions are more powerful and more bellicose than their American counterparts, wages until recently rose at dangerously high speed even though unemployment also rose far beyond the symbolic million mark. Because American managers are stronger and their unions weaker, prices until the middle of 1975 rose more rapidly than wages, even though economic activity and employment subsided to figures unprecedented since 1940. The moderate expansion which began early in 1975 and picked up speed in 1976 (apresidential election year), has left unemployment hanging at well over 7 per cent, itself a figure plausibly attacked by trade union economists as an underestimate by at least 2 or 3 percentage points. Among American economists of conservative or even moderate views, the new fashion is to argue that 6 or 7 per cent unemployment is tolerable because so many of the unemployed are mere women, untrained and under-educated blacks, and restless teenagers, groups, it is implied, which suffer less because of their jobless condition than do male, white heads of households. Certainly by the criteria of such influential Keynesians of the KennedyJohnson era as Walter Heller, Gardner Ackley and Arthur Okun, the three chairmen of Democratic Councils of Economic Advisers, such unemployment targets mark a substantial retreat from the 'interim' goal of 4 per cent unemployment enunciated a mere fifteen years ago.

Not particularly aided by their economic advisers, parliamentary governments swing uneasily between spells of monetary and fiscal austerity which operate only indifferently to curb inflation but certainly do succeed in enlarging unemployment, and, in good time for the next election, renewal of fiscal and monetary stimulation which customarily speeds up inflation but manages only moderately to reduce unemployment. Such stop-go episodes, as notorious in the United States as in England, are especially damaging to economies whose growth is slow as it has been in both countries since 1945 by comparison with the international league leaders—West Germany and Japan.

Thus it appears that Keynes Mark 1 and Keynes Mark II are equally irrelevant to this decade's central economic issue, reconciliation with in the framework of political democracy and private ownership of much or most of the productive apparatus, of group claims for more of the national product than can be made available. The problem is all the more acute because OPEC has taught the industrialised nations a lesson which other raw material producers are all too eager to emulate: resources are both finite and susceptible to political manipulation.

When growth slows or stops entirely, one group can gain only at the expense of another. As Rudolf Klein has put the point, 'Immediately the competition for resources become a zero-sum game. One man's prize is another man's loss. If the blacks want to improve their share of desirable goods, it can only be at the expense of whites. If the over-sixty-fives are to be given higher pensions, or improved services, it can only be at the expense of the working population or the young.' In such communities, fears Klein, it would seem only too likely that the haves would man the barricades to defend their share of resources against the have-nots. The politics of compromise would be replaced by the politics of revolution, because the have-nots would be forced to challenge the whole basis of society, and its distribution of wealth and power.'

Whether or not shifts in income distribution justify such extreme pessimism, whether, as Robert Heilbroner fears, democracy is itself doomed in the longer run because quarrels over resources within nations and between nations will tear societies apart is, perhaps fortunately, the sort of question to which no firm answer can be given. There is, as might be expected, a more cheerful vision of the future in Keynes, the last of his three perspectives. This is the picture sequestered in The General Theory's final chapter. 'Concluding Notes on the Social Philosophy Towards which the General Theory Might Lead.' Economists, no more than other readers, pay much attention to the last pages of difficult books, particularly when they are able to extract delightful mathematical models from the analysis which preceded the mere words of social reflection with which Keynes ended his great intellectual enterprise.

It is interesting and rewarding to reread the fourteen pages of Chapter 24. Keynes began by noting that 'The outstanding faults of the economic society in which we live are its failure to provide full employment and its arbitrary and inequitable distribution of income and wealth.' No considerations of growth and efficiency justified this maldistribution. 'There is,' he allowed, 'social and psychological justification for significant inequalities of incomes and wealth, but not such large disparities as exist today.' Inequality was ethically outrageous and dangerous to the hope of full employment, for it limited consumer demand and diminished the incentive to invest.

Thus if the marginal efficiency of capital was in any case fated to decline, Keynes's preferred policies included income redistribution which enlarged the propensity to consume, and public policy 'directed to increasing and supplementing the inducement to invest.' Keynes, an intense individualist, hoped that much .scope would remain for personal choices of all varieties, but his programme specifically contemplated the 'euthanasia of the rentier,' the 'vital importance of establishing certain central controls in matters which are now left in the main to individual initiative,' and the exercise by the state of a 'guiding influence on the propensity to consume.' Since banking policy by itself was unlikely to 'determine an optimum rate of investment,' Keynes was prepared for stronger measures: `I conceive, therefore, that 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 cooperate with private initiative.'

Keynes knew perfectly well what he was saying: 'The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional

functions of government.' The curious irrelevance to public debate of standard Keynesian analysis is the result of stubborn resistance on the part of conventional economists to the structural features of economies in which the free markets of their models are less and less important and allocation of resources is dominated by the interplay between private market power and government authorities who sometimes resist that power and more often serve the will of those who wield it.

The societies of the west are engaged in inchoate debate over the goals and techniques of planning. Planning of the French and Japanese variety occurs under the influence and control of major industrial and financial interests. The socialisation of investment which is achieved under such auspices naturally protects property interests and preserves existing disparities of income and wealth. Nevertheless, when such planning is intelligently handled, attention is paid to job protection and adequate levels of social services. On the record, French and Japanese planners have done far less well in the control of inflation. Struggles over income shares continue.

The recent upsurge of interest in economic planning in the United States centres upon a mild measure sponsored by Senators Hubert Humphrey and Jacob Javits, The notion of some sort of planning has attracted the approval of alert business tyPes like Henry Ford II, Felix Rohatyn Lazard Freres, and W. Michael Blumenthal of Bendix. Ideological confusion on the subject is underscored by the vehement opposition to any variety of planning by Walter Wriston of Citicorp, Thomas Murphy °I. General Motors, and most of the business press. The rhetoric echoes The Road 10 Serfdom. It is still another symbol of intellectual confusion that a timid step toward an alternative planning model, closer to the spirit of Keynes, has been sponsored by the sante Hubert Humphrey. The Humphrey-Hawk' ins Full Employment Bill defines 3 per cent unemployment as a goal of national polla to be reached in three years or less, imposes upon the White House and Congress joint responsibility to enact appropriate full etw ployment programmes, and embodie5. despite the pervasive free enterprise rhetoric, a commitment to direct job creation by the federal government. Full em1)10Y,, ment is by itself mildly redistributionist afl the tax and other policies needed ,td achieve it are also likely to diminish ity equality. Keynes implies in Chapter 24 that thie hopes of democrats are likeliest to be fu; filled by planning for full employmerl and redistribution, for it is only within tile. social context of diminished inequality that social envy diminishes and group claims are tempered. Only in such circumstances are, incomes policies at all likely to win general assent and thus attain effective influence upon the rate of inflation. When Powe.,ri determines income shares, the weak

struggle to become stronger and the strong Will as Rudolf Klein said, defend their Privileges on the barricades.

It would be reassuring to think that economists will play a part in the movement toward enlightening debate and satisfactory Planning. With or without their help, imPortant choices will be made, much as Adolf Hitler and Franklin Roosevelt pursued KeYnesian measures several years before Keynes couched them in suitably theoretical form. Those who live by the sword tend to Perish by the same sharp implement. Economists who now live by econometric models of vanishing market conomies may well die Professionally if not personally because of 1 end on a note of tempered optimism. It is unlikely that any advanced economy will successfully yoke together full employment, price stability and steady growth without substantial alterations of existing institutional arrangements and distributions of income, wealth and market power. It is possible, though not highly probable. that the inevitable drift toward planning will be in the wholesome direction of full employment and economic equity. Should the future be this pleasant, Chapter 24 will become a sacred text and Keynes's hope that economists will become citizens as useful as dentists will at length become reality.