Phil Murphy questions the 'Keynesian revolution', and
its relevance in today's slump
John Messiah Keynes?
This is what a biography should be like. It is informative, substantial
and entertaining. In this 700-page second of three volumes on John Maynard
Keynes, Robert Skidelsky takes us through the 1920s to the 1936 publication
of Keynes' most famous book, The General Theory of Employment, Interest
and Money. Skidelsky provides a succinct summary of the idea behind
the General Theory, in which Keynes focused 'on the level of demand,
or spending, as the determinant of the level of activity in an economy.
His book is an attempt to show how consumption and investment demand in
any period can fall short of potential supply, or capacity to produce, resulting
in mass unemployment' (p545).
- John Maynard Keynes: The Economist as Saviour 1920-37,
Robert Skidelsky, Macmillan, £20 hbk
Keynes was a man with many interests - from mathematics to philosophy, from
Cambridge high table to the Bloomsbury group and many more. Key aspects
of Keynes' life and outlook are here confirmed with new colour: his intellect
and application certainly, and also his elitism, his arrogance, his anti-Semitic
leanings and, emphatically, his anti-socialism.
The contemporary discussion of Keynes' work reflects the interest in the
policies drawn from it. During the postwar period economic policy in the
West was dominated by Keynesianism, as associated with state intervention
in the economy. This policy was widely credited with the return of prosperity
after the slump of the 1930s. Keynesianism became the basis for the postwar
economic consensus, while free market thinkers like Friedrich Hayek were
marginalised, their laissez-faire policies damned by association
with the Depression.
However, with the return of recessionary trends in the seventies, it was
Keynes' followers who became discredited. State intervention was blamed
for choking the entrepreneurial spirit and the free marketeers were rehabilitated.
Hayek became a respected fount of wisdom, Keynes a has-been. More recently,
however, the failure of the free market policies advocated by Margaret Thatcher
and Ronald Reagan, and the onset of slump in the capitalist world, have
led to renewed interest in Keynes' work and the possibilities of managed
Despite the idea that Keynesian economics are socialistic, his own motives
were to preserve capitalism. But he disagreed with free marketeers like
Hayek, who saw any state economic intervention as a form of socialism, paving
the 'road to serfdom'. In the words of one of his students from the 1920s,
AF W Plumptre, Keynes 'saw clearly that in England and the United States
in the 1930s the road to serfdom lay, not down the path of too much government
control, but down the path of too little, and too late':
'Continued unemployment meant socialism, complete government control, unlimited
government intervention. He tried to devise the minimum government controls
which would allow free enterprise to work. The end of laissez-faire was
not necessarily the beginning of communism.'(Quoted in John Maynard Keynes,
Skidelsky has his own agenda. He seeks to distinguish the greatness of Keynes
from the misunderstandings and mistakes of postwar Keynesians. They
inherited his machinery, but without, Skidelsky claims, his balanced views
on its limitations. Skidelsky's glee is barely disguised as he describes
the decline and fall of the great man's policy-making 'disciples' of the
1960s and 1970s: 'Their hubris was inevitably succeeded by nemesis.' (p410)
Contrary to orthodox opinion, Skidelsky regards the 1930 Treatise on
Money, not the General Theory, as Keynes' 'classic achievement'
(p337). For Skidelsky, the counter-crisis proposals for deficit-financing
which Keynes theorised in the General Theory were only appropriate
in the exceptional circumstances of the 1930s. The Treatise, however,
he sees as having wider relevance. Although published during the great Depression,
it is pre-Depression in atmosphere and deals with fluctuations in output
rather than persistent mass unemployment.
The Treatise reflected the experience of the 1920s, not the 1930s.
It analysed the problems of an arthritic economy, not of a world in deep
depression. As such, says Skidelsky, the neglected Treatise would
have provided a more relevant guide to dealing with the arthritic British
economy post-1945 than did the General Theory's emphasis on public
spending: 'That Keynesian policy after the Second World War came to be identified
so exclusively with "fiscalism" was a misreading of the times
fostered by a "single book" approach to Keynes.'(p319)
Skidelsky concludes that there should be a more balanced approach to government
intervention. He is sympathetic, for example, to making more use of monetary
policy to influence investment, rather than the exclusive focus on fiscal
policy contained in the General Theory. Skidelsky blames the reversal
of the 'Keynesian revolution' upon the absence of such 'balance' among Keynes'
Skidelsky's exposition is useful in dispelling the more narrow and mechanical
interpretations of Keynesian economics. As an economist Keynes certainly
was much more than a deficit-financer. But Skidelsky is less successful
in defending the two principal claims about Keynes' legacy: that his policies
made him the 'saviour of capitalism' in the thirties, and that his impact
upon economic thinking amounted to a 'Keynesian revolution'.
Despite the book's title, Skidelsky fails to provide convincing evidence
that Keynes saved capitalism. That was certainly how Keynes saw himself,
but the condition of capitalism half a century on is not evidence of his
Keynesian economic policies did not end the slump of the 1930s. Few governments
sought to adopt the Keynesian prescription during the Depression. And where
they did - in Japan, for example - it was not done in the name of Keynes.
In both Britain and America balanced budgets remained the policy objective,
though it became increasingly difficult to achieve them. In practice capitalism
increasingly needed state intervention just to survive.
The pragmatic moves towards creating what became known as the 'mixed economy'
were not taken on the basis of Keynesian theories. And, in any case, they
were not what ended the slump. Deficit-financing failed to re-establish
the conditions for sustained profitable investment. In America, for example,
mass unemployment was still around the 10m mark in 1939. Profits did not
regain their 1929 level until 1940. Nowhere in the West - outside of Nazi
Germany - was a new dynamic of expansion created. It was only the exceptional
circumstances of rearmament and war preparation at the end of the thirties
which finally brought an end to mass unemployment.
In places, Skidelsky comes close to admitting that public spending cannot
be credited for the end of the slump: 'The verdict on the 1930s remains
open....It is at least open to question whether Keynesian policies in Britain
could have achieved much more....The American recovery under the New Deal
was rather less successful than Britain's. Hitler's Germany alone provided
triumphant vindication of Keynesian economics, but only through semi-war
conditions, backed by terror' (p467). But elsewhere he seems to go along
with the conventional view that government jump-starting worked in the 1930s
Such ambiguity is unhelpful, particularly when people are today proposing
extra state spending as a possible solution to the slump. It did not work
last time and it would not work this time either. It was only the consequences
of the Second World War which allowed capitalism to escape from the Depression
and paved the way for the postwar boom. And the decisive impact of the war
was not a Keynesian boosting of demand, but the forced restructuring of
capital and an increase in the rate of exploitation. It was this which restored
the conditions for profitable production and steady expansion after 1945.
If the application of Keynesian-style policies was ineffective in curing
the Depression, how is it that Keynes became so influential as to be credited
with a 'revolution'? Skidelsky declares that 'the revolutionary thought
was that people could be unemployed due to a "lack of effective demand",
and not because they had "priced themselves out of jobs"'(p545).
This is a fair summary of what Keynes said, but did it amount to a revolution?
Skidelsky himself admits that the General Theory's message about
the need for government intervention in the economy was 'intuitively acceptable
and also wanted by the late 1930s'. It was 'common sense' (p545).
It was so commonsensical that Keynes was not unique in arguing for state
intervention. Lots of other economists including Gunnar Myrdal in Sweden
and Michael Kalecki in Poland were arguing along similar lines. Nor was
the theory of effective demand so novel: Thomas Malthus - Keynes' 'favourite
economist' - JA Hobson and the less well-known Nicholas Johannsen were all
Since the General Theory's publication there has been a debate as
to whether Keynes' ideas were a 'revolutionary' break with classical economics,
or just an amendment to classical theory. This often becomes a debate about
what classical theory is, and how Keynes defined it, but such academic discussions
miss the important point. Keynes shared with others the insight that free
market self-equilibrating theory was simply outdated.
As he says right at the start of the General Theory, 'the characteristics
of the special case assumed by the classical theory happen to be not those
of the economic society in which we actually live, with the result that
its teaching is misleading and disastrous if we attempt to apply it to the
facts of experience' (Macmillan edition, 1970, p3). For Keynes classical
theory was simply behind the times. He thought it valid for the 150 years
before 1914, but outmoded in the new age of greater uncertainty.
Towards the end of his major work, even Keynes went so far as to concede
that he remained in some ways within the previous tradition:
'Our criticism of the accepted classical theory of economics has consisted
not so much in finding logical flaws in its analysis as in pointing out
that its tacit assumptions are seldom or never satisfied, with the result
that it cannot solve the economic problems of the actual world. But if our
central controls succeed in establishing an aggregate volume of output corresponding
to full employment as nearly as is practicable, classical theory comes into
its own again from this point onwards.' (General Theory, p378)
The most interesting feature of Keynes' economic thought is his great emphasis
upon exogenous psychological factors, beginning with the propensity to consume,
as determining the level of activity. He gives centre stage to the role
of expectations in an age of uncertainty, to the state of confidence, and
its consequences for the propensity to hoard and the inducement to invest.
Yet even Keynes' promotion of the role of motives, expectations and psychological
uncertainties as the true subject matter of economics is more a development
of what went before than a departure from it. It locates him within the
long tradition of the decline of objective thinking about the economy and
the elevation of subjective factors; a decline which began way back with
the disintegration of classical political economy in the 1830s.
Skidelsky gets closer to the mark on the origins of the 'Keynesian revolution'
when he notes that 'twentieth-century events had plunged economics into
crisis long before Keynes'.
Keynesianism was not the product of any great battle of ideas between the
old guard and the new. What happened was that the waste, the poverty and
stagnation brought on by the Depression contradicted the orthodox theory
of a cosy capitalist society with eternal equilibrium. The old theory became
discredited because, like the views of Flat-Earthers, it was too far removed
from the facts. Within the void created by the discrediting of the old,
a new set of ideas came to the fore which more reflected the way capitalism
was now operating. But why was it Keynes, rather than, say, Kalecki or Myrdal,
who was deemed to have fathered a revolution and credited with shaping postwar
The answer lies in the particular political needs of the time for a new
ideology, especially in the Anglo-Saxon world. Skidelsky sees that 'a new
ideology was required for a capitalism evolving into more organised forms'
(p229). This had become a particularly pressing need by the 1930s. The experience
of the slump ensured that confidence in capitalism was at a new low, while
the alternative of socialism seemed to be making gains in the Soviet Union.
By the late 1930s the widespread intellectual conviction had grown that
the notion of a free market capitalism was not sustainable. The experience
of economic stagnation and decay during the slump had exposed the deep problems
of the market system. More and more businessmen in Britain, in America and
around the world came round to the view that growth could only resume through
Since capitalism seemed to be associated with Depression, unemployment and
fascism it faced a crisis of confidence. Free market policies were simply
not viable options for the capitalist class any longer. This sense of pessimism
about the future for capitalism was especially striking in Britain and America.
The speed of their economic descent was a major factor. On the eve of the
First World War Britain was still the world's foremost economic power. By
the 1930s it was clear that it had lost this position and there was no going
back. In America the roaring twenties had given way to the slump-ridden
Given their past economic successes, free market ideology had survived longest
in these two countries. The acceptance of greater state intervention would
therefore need a more decisive overturning of existing ideas in Britain
and the USA. Elsewhere, in Europe and in Japan, the state's greater role
during the slump was less of a departure. There the state had long played
a part in protecting emergent indigenous economies against stronger rivals.
So enhanced governmental activity in the 1930s was more acceptable in Europe
and Japan than it was in Britain and America.
This contrast underlies the phenomenon which Skidelsky notes, quoting Gunnar
Myrdal, that the Keynesian revolution was mainly an Anglo-American affair
(p581). For these two countries overturning free market policies was a more
iconoclastic act. English-speaking Keynes, with a long record of service
on behalf of the elite British establishment, was the economist of the times
who earned the title of official iconoclast.
Keynesianism grew in influence because it corresponded to the requirements
of the post-Second World War politics of consensus. The experience of the
Depression and war had led to a general loss of faith in capitalism. One
by-product of this was the establishment by the mid-1940s of a new Western
consensus, which accepted the need for planning and the creation of a mixed
economy, as well as a commitment to welfare provision.
Keynes' argument for what Skidelsky appropriately calls the Middle Way,
of limited state intervention to save capitalism, fitted this developing
mood. Keynesianism was the economic ideology appropriate for the consensus
politics of the postwar boom. His theoretical work did not initiate or inspire
the era of state intervention; it just mirrored it. Keynes' work was a reaction
to changing reality, rather than an initiator of change.
From this perspective it becomes clear that the demise of Keynesianism in
the 1970s was not due, as Skidelsky believes, to the deficiencies of its
practitioners. It was rejected because of the loss of faith in the supposed
capacity of state intervention to ward off the crisis. The return of recession
in the early 1970s discredited the fanciful notion that state intervention
could prolong the boom for ever. Keynesianism was the casualty.
Keynesianism was a victim of the new depression, just as it had been the
beneficiary of the last. With the new cycle in politics which began around
this time, the Keynesian ideology of a middle way became one of the frontline
targets in the right-wing offensive against the consensus politics of the
postwar years. Because of this association with the past, Keynesianism will
not be resurrected as an influential school. But whatever form the desperate
demands for more state intervention during this slump take, the lesson from
Keynes and the 1930s is that it will not be able to solve the fundamental
problems facing the capitalist economy.
Patricia Hewitt, former press secretary to Neil Kinnock, has produced a
detailed study of changes in working time practices over the recent past.
Tracing the rise of the flexible worker - working part-time, flexi-time,
job share, term-time only, weekends only, or taking career breaks - Hewitt
goes so far as to say that 'the full-time employee working a standard five-day
week is in the minority' (p25).
- About Time: The Revolution in Work and Family
Life, Patricia Hewitt, Rivers Oram/IPPR, £22 hbk, £9.95
After detailing changes at work, Hewitt describes the role that women continue
to play in the home. Her statistics (although disappointingly based on 1985
figures) give a stark picture of women's oppression. Women continue to do
four times as much routine housework as men; women have continued to take
responsibility for childcare (although childcare takes seven hours' work
a day, seven days a week, the most men contribute is 44 minutes a day).
Hewitt points out, however, that men and women average the same daily working
hours - about 10--indicating that it is primarily men who are responsible
for providing the family's income, while women fit work in around their
Hewitt takes an unashamed standpoint in favour of more work-time flexibility.
Women do not, she claims, aspire to full-time working. She argues that instead
of the right to full-time work, the right to shorter hours with a pro
rata reduction in pay should become the campaigning focus of the trade
unions. In fact her own sources disprove this, her main point. The most
important issue for all workers is pay. Hewitt quotes the 1985 EC employee
survey, which demonstrated that just five per cent of workers would like
fewer hours with pro rata pay cuts. Even among women, just one in
five full-timers wanted shorter hours at the cost of lower pay.
Hewitt's ideas have much more to do with the employers' needs than with
those of employees at the receiving end of workplace reorganisation. Chapter
Four, 'How people feel about working time' was sponsored by DIY store B&Q
(basic rate £3.48 an hour). Hewitt eagerly lists the benefits of flexible
working practices to managers, urging them to take advantage of the opportunities
it offers; reducing unit labour costs, increasing the operating time of
plant and machinery, removing expensive overtime and increasing productivity.
She notes that 'the economic importance of flexible working time is the
part it plays in strategies for restructuring enterprises to make them more
competitive' (p89). In effect, Hewitt is encouraging workers to take pay
cuts, urging employers to implement them.
The latter half of the book consists of recommendations to government, employers
and trade unions on how to bring the law into line with the new patterns
of work. But perhaps it does not matter much how many pro rata rights
you have if you take home around £60 a week (my estimate of what a
30-hour, term-time only worker earns at B&Q). You still can't live on
Lester Thurrow, dean of the prestigious Massachusetts Institute of Technology's
Sloan School of Management, has written a lively telling-off to American
business and government alike. The book is in the form of a comparative
analysis of the main competitors for control of the twenty-first century:
America, Japan and Europe (which for Thurrow's purposes, and with some accuracy,
means a German-dominated Europe).
- Head to Head: The Coming Economic
Battle among Japan, Europe and America, Lester Thurrow, Nicholas
Brealey, £9.99 pbk
Thurrow begins with the observation that the bear in the woods is gone - the
enemy of Soviet communism has turned out to be no enemy at all, however
fierce it once looked. For the next century, rivalry will be economic, not
political or military, and the prize belongs to the power most in tune with
the new circumstances.
Thurrow concludes that the next century probably belongs to Europe, principally
because of its advantageous position with respect to the markets of the
former Soviet bloc. However, it would be a mistake to think that his analysis
is just an observation.
In fact, Thurrow's treatment of Europe and Japan is superficial, where his
investigation of the United States is involved, at least at the empirical
level. Thurrow's purpose is not so much to really find out where America's
competitors have an advantage, but to scare the American authorities into
taking the right steps to defend American competitiveness.
Accordingly, the qualities that Thurrow attributes to the Europeans and
Japanese have little to do with the actual particularities of those economies,
but more reflect what he wants to see happen in American industry.
Thurrow charges American investors and workers with an Anglo-Saxon desire
to reduce effort to a minimum, while striving for maximum rewards. Consequently
Americans have little sense of the long term, with investors demanding inordinately
high returns before they will invest in industry while workers expect high
wages with little sacrifice. By contrast, Thurrow argues that the German
and Japanese economic cultures are 'communitarian' - putting group interests
above those of the individual, and the long term above the immediate. Japanese
investors, for example, will sacrifice high dividends to increase a company's
Thurrow's critique of American industry seems profound, but actually relocates
the problems of American profitability at the level of culture. It is interesting
to reflect that where once the work ethic and thrift were considered protestant
virtues they are now the province of Shinto, and that now it is the Anglo-Saxons,
not the orientals who are supposed to be work-shy. In reality the different
investment cultures are a product of different economic conditions. American
investors cannot get high rates of return from their industry and so seek
easy profits in the speculative financial markets. The long-term stagnation
of industrial productivity is the real reason for American short-termism.
Reproduced from Living Marxism issue 55, May 1993