The political meaning of the Keynesian revolution

Robert Skidelsky

Did Keynes help save capitalist democracy or did he nudge it towards its doom? A good Marxist answer would be that he did both, and in this case, the Marxists are right. Keynes found a way of keeping capitalist democracy working, but only by further weakening the long-run conditions for its survival. Hence our ambivalent attitude towards Keynes today. Recognising in him the author alike of our economic health and sickness we don't quite know what attitude to take. The Master himself is still largely immune from attack; Keynesians or 'pesudo-Keynesians' ( pace Sir Keith Joseph, Spectator 10 July) are fair game. But this really will not do. We cannot so easily separate Keynes from his consequences, from the style of thought and order of priorities to which his revolution gave rise. To say that had he lived he would have remained more flexible than his disciples is true but trivial. There was no more chance of him becoming 'pre-Keynesian' again than there was of Copernicus once more becoming a flat-earther. One has to take Keynes with the Keynesians.

Undoubtedly Keynes was a good thing. He advanced human knowledge in economics. As a result—and this is where his political significance lies—he gave capitalist democracy a programme on which to fight back against fascism and communism. This programme, however imperfectly applied, has been fantastically successful. Although, as we can now see, it was inadequate, time was gained to tame both demons, so that the chances of a benign order beyond capitalist democracy are much brighter today than they were forty years ago.

This last point is often forgotten by those who harp on the admitted weaknesses of the present economic dispensation. Max Beloff recently wrote in New Society, In my view, there is little doubt but that the individual who (perhaps unwittingly) most seriously damaged the interests of his native country was Lord Keynes'. That 'perhaps' is a characteristic touch; but what really does Professor Beloff mean ? Is he claiming that there was some non-Keynesian way of overcoming the slump of the 1930s, or preventing future slumps arising, which would have served capitalist democracy better? Or that there was some democratic way of tackling Britain's problems which did not involve Keynesian-type intervention? If so, these alternatives should be spelled out. Remember that the inter-war years were the time when liberal systems toppled like ninepins, largely because of uncontrollable economic fluctuations. Under what kind of system would we be living

today had those fluctuations been allowed to continue? It is against this background, rather than against some individualist ideal, that the Keynesian achievement must be measured.

The way Keynes set out to tackle the economic problem reflected his personal and political values—a point which economists sometimes forget. He called himself an 'immoralist', but was never a social or political radical. He refused to join the Labour Party, stating quite frankly that 'the class war will find me on the side of the educated bourgeoisie'. Keynes's ideal was aesthetic, not moral—something misunderstood by A. L. Rowse, who tried to convert him to socialism in the early 1930s. The charge against capitalism, therefore, was not general, but particular; its failure to realise the abundance which modern technology made possible, an abundance that was the necessary condition for experiments in new styles of living. This failure could be remedied by certain limited changes. Keynes insisted on the need to distinguish 'the Agenda of Government from the non-Agenda'. The important thing for government 'is not to d6 things which individuals are doing already... but to do those things which at present are not done at all'. The chief economic fault of individualistic capitalism was its failure to provide full employment. No one was responsible for keeping demand as a whole sufficiently high to provide employment for all those seeking work. This fact suggested the economic agenda for modern government.

Its task should be to secure an 'aggregate volume of output corresponding to full employment', leaving the market to allocate resources and rewards as hitherto. Keynes thought this objective might require a 'somewhat comprehensive socialisation of investment'. What he appears to have meant by this vague and alarming phrase was no more than that the state should be prepared to augment private investment sufficiently to produce full employment. Whether and to what,extent it would have to do so, experience only would show. Beyond this, the state should use the taxation system to redistribute income 'in a way likely to raise the propensity to consume', while allowing for 'significant inequalities of incomes and wealth'.

The precise economic rationale for focusing on aggregate demand, rather than on supply, need not detain us here. Nevertheless, it had such important political implications that it is difficult to believe that the direction of Keynes's inquiry was not influenced by political considerations. First, his

view that if demand was right, supply would look after itself undermined not just Say's Law (which said the opposite), but the socialist case for public ownership, which rested in part on the inefficiency of the allocative mechanism under capitalism. It suggested, in fact, an alternative economic strategy to the one outlined by the Labour Party at that time. Secondly, it avoided having to choose between capital and labour. Keeping demand buoyant would simultaneously underwrite high profits, full employment and rising wages, thus eliminating or at least easing the conflict over the distribution of wealth. Thirdly, the decision for macro-economic, as opposed to micro' economic, intervention, was a decision for indirect and general, as opposed to direct and detailed, economic control by government ; for a 'managed' rather than a 'commanded' economy. Fiscal and monetary leverage by government could be reconciled with economic free will by individuals 'and groups. In this, Keynes was quite consciously seeking an alternative to dictatorship., The authoritarian state systems, he wrote in the General Theory (he must have had Germany, Italy, Russia and Japan in mind), 'seek to solve the problem of unemployment at the expense of efficiencY and freedom. It is certain that the world will not much longer tolerate the unemploYment which... is associated.. . with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease while preserving efficiency and freedom'.

The reference to Germany and Russia, reminds us of the chief alternative 'cures for the economic disease then on offer. Fascism in the specific form it took in the 1930s is today so discredited that it is generally forgotten that it was then 3 rapidly expanding political force. Its attraction was two-fold. It promised an anti: socialist solution to the crisis of capitalism; and it offered a political critique of liberalism's ineffectiveness in face of crisis which seemed to fit the experience of the Depression. Moreover, practice confirmed theorY. It is now increasingly recognised that Hitler's was the only New Deal that actuallY succeeded in eliminating unemployment' America's certainly didn't. There were fifteen million Americans unemployed when Roosevelt took office in March 1933. There were still eleven million four years later, and the economy only properly recovered with rearmament and war. The reason was that budget deficits remained far too small to plug the shortfall in private investment: the stimulating effect of fiscal policy was greater in 1931, when Hoover was president,

than in any of the pre-1940 Roosevelt years. The Swedish New Deal is also a myth. Unemployment dropped from 30 per cent in 1933 to 11 per cent in 1938, but mainly because exports revived. Public works employed only a small fraction of the unemployed; the impact of fiscal measures was negligible. Discussion of whether Sweden's New Deal was most influenced by Keynes, Lloyd George, Wicksell or Marx is now seen as an attempt to explain an event which did not occur. The significance of all this is that capitalist democracy had not found an answer to economic fluctuations by the late 1940s, and was therefore vulnerable to any system which had, or said it had.

The other ideology on offer was socialism. This was not the 'democratic socialism' Which, with the help of Keynes, has been evolved since the war; but one much more Marxist, and also heavily influenced by Stalinist Russia. In Britain, the Labour Party emerged from the Depression with a heavily non-Keynesian analysis of its causes. Rising unemployment was the consequence of substituting machines for men in producing goods (a Marxist argument). Technological unemployment was therefore inevitable. What was needed was a combination of public ownership and socialist planning to translate capitalist unemployment 'into new leisure for the People by shortening the working life' (Arthur Greenwood). Moreover, the Labour Left wanted this programme of industrial reorganisation to be carried out by means of an Enabling Act empowering a Labour government to legislate by Orders in Council to avoid parliamentary obstruction. Underlying such attitudes was a deep belief in the imminent collapse of liberal capitalism which gripped practically the Whole left-wing intelligentsia. In a number of influential books, John Strachey denied that capitalism could save itself either by raising wages or by cutting them. The first Would produce a crisis of profitability; the second a crisis of 'realisation'. Insofar as the Labour movement was not gripped by such ideas, it had little to offer beyond the failing nostrums of capitalism's own spokesmen. It was only in the later 1930s that a number of younger Socialists like Douglas Jay started to work out a social democratic Programme in Keynesian terms. Thus capitalist democracy had no relevant philosophy of government to put up against its critics. Keynes provided it with °tie. It would be too much to say that by doing so he 'saved' our civilisation, even temporarily. That was done by a combination of Keynesian ideas, the Second World ,vvar, and the Allied victory in the war, leading to American 'underwriting' of the free-world economy. The Keynesian Revolution was a necessary, but not sufficient, condition for the libertarian prosperity of the postwar years. The Second World War was doubly important. First, it provided the laboratory for testing out the new theories of economic management. Second

ly, it created the social consensus for which Keynesianism proved the ideal ideology, promising, as I have suggested earlier, benefits to all groups, including government and bureaucracy. (One should perhaps add that the power balance between Capital and Labour was just about right for an ideology neutral between the two.) But without the existence of an appropriate set of ideas, the postwar opportunities could have been destroyed as easily as they had been after 1918; an illustration of the truth that even when the times are ripe for a certain development, an appropriate consciousness is still required to realise it. The Keynesian Revolution in economics provided that consciousness.

What then went wrong? What grounds have we for supposing that the Keynesian Revolution was a transitional stage rather than a stable state ?

There are, I suggest, two main grounds. The first is, quite simply, that Keynes overestimated the possibility of rational economic management by democratic government. Hayek thought Keynesian government would be too strong for democratic health. It has turned out to be too weak— too much penetrated by, dependent on, or at the mercy of outside forces to be able to make its economic will prevail. This 'overloading', to use the current jargon, threatens democracy by saddling democratic governments with a cumulative burden of failure.

Keynes's own political expectations emerge quite clearly in the debate on the gold standard in the 1920s. According to the Cunliffe Report, the great merit of the pre-1914 gold standard was that it was politician-proof. Only when gold reserves went up could the note issue be expanded; when they went down, the quantity of notes went down as well. The system, in other words, imposed an automatic check on any inflationary increase in the money supply. When Keynes advocated, in its place, a `managed' currency, the Treasury asked him pertinently how he would prevent inflation. His answer, in effect, was: by the exercise of responsible intelligence. Sir Roy Harrod rightly remarks that 'Keynes... . deemed England a sufficiently mature country for it to be possible to assume that the authorities... would not indulge in an orgy of feckless note issues'. But an alternative hypothesis was possible and, as it has turned out, more realistic; which is that once economic life became a matter for continuous political decision, economic rationality (however defined) would be subordinated to political demands through the auction for votes of a competitive political system.

The view that Keynesian government has lost control over economic policy seems closer to experience than the monetarist

In our next article in this series. Mr Aubrey Jones will discuss the problem of inflation, and how to cope with it in a post-Keynesian world.

assertion that government could control the money supply if it wanted to. If that is so, why has it not done so? This is a question which Sir Keith Joseph has never, in my view, properly answered; and he will not be able to do so as long as he continues to believe that since the war 'governments in this country have had unprecedented power over economic life'. Responsibility yes; power no.

Secondly, Keynes's division of labour between government and market was never as theoretically, or practically, stable as he supposed. The idea that, if demand was right, supply would look after itself was particularly delusive for an economy like Britain suffering from structural obsolescence: it has fed the natural inclination of `overloaded'post-war British governments to avoid making choices about Britain's future. More generally, given the contemporary combination of rapid change and growing intolerance of economic dislocation (the latter greater in Britain than in some other countries) it is hard to see how planning for change can avoid becoming a permanent part of any modern economic system; the sole question being whether it is done by private interests or public authorities. Keynesian policy has itself accelerated the growing rigidity of the economic system which makes planning necessary. For example, systemic 'cost-push' inflation would be impossible without the public commitment to full-employment output. That commitment thus forces governments to act directly on wages and prices, rather than allowing the power of unions and employers to be checked by unemployment and bankruptcy. In this way. Keynesian governments have been dyawn inexorably into economic planning to compensate for the decay of the 'disciplines of the market' produced in part by their own policies. This has upset the original Keynesian balance between government and market forces; at the same time the relative failure of democratic governments to plan successfully (e.g., the repeated failures of wage-price policies) has further weakened their credibility.

In these.ways, the political economy of Keynes is coming unstuck. His assumptions about what government needed to do were more valid for his day than for ours. With Britain's imperial markets still captive, planning for modernisation was less important. With middle-class hegemony still secure, working-class pressure was inevitably less clamant. With Business and Labour still relatively unorganised, the mandarins of the Treasury and the Bank were freer to make policy as they pleased. Today economic life has become too politicised for the Keynesian balance to work; hence the incipient signs of breakdown. That economic decision-making needs to be `depoliticised', that is, anchored once more in economic reality, is generally accepted. The key question is on what basis. I, for one, feel certain it will be on a post-Keynesian, not pre-Keynesian, one.