Why Keynes was a socialist
In an important new book Keynes Against Capitalism: His Economic Case for Liberal Socialism (Routledge, 2019) James Crotty argues that Keynes was a socialist who advocated a much more radical economic agenda than most mainstream economists and political analysts realize. Based on a very close reading of Keynes’ work, Crotty argues that core Keynesian economic ideas should inform democratic socialism today.
The conventional wisdom assimilated into mainstream perspectives is that Keynes remedied some serious deficiencies in neo classical liberal economics, most importantly the view that capitalist economies tend towards a full employment equilibrium. The mainstream adopted his insight that full employment required occasional policy intervention by the state to fine tune aggregate demand through macro-economic (fiscal and monetary policy) but rejected the view that capitalism based on predominantly private ownership of the means of production had to be fundamentally transformed. As such, Keynes is widely held to have “saved” capitalism. By the same token, many social democrats came to the view that their goal of greater equality can be achieved through the combination of “Keynesian” macro-economic policy and the re distributive welfare state.
But, Crotty argues, Keynes himself was much more radical than the bastard Keynesianism of many of his followers. He thought that there was no natural tendency at all to full employment, which was highly dependent upon the animal spirits of private capital, the state of technological progress, and the absence of financial crises caused by an unregulated and highly speculative financial sector. Following a long period of capitalist expansion in the Victorian age, he thought that the underlying tendency after World War One was to “secular stagnation,” as seen in the high unemployment British economy of the 1920s and the global slump of the 1930s.
In this context, Keynes came to believe that public investment, that is, investment by the state and quasi public enterprises, had to be the driving source of growth given the chronic deficiency of private capital investment. He was calling not for the occasional injection or withdrawal of macro economic stimulus through state spending but for greatly increased and sustained public investment to vary according to the level of unused capacity. He also thought that there was a need for the state to play a major role in the re-restructuring or private industry.
Keynes did not believe in monetary policy as an important tool for growth, favouring fiscal policy and public investment in periods of slump. Sustained low interest rates were needed to underpin high levels of public investment. Indeed Keynes looked forward to a day when interest rates would fall to zero leading to “the euthanasia of the rentier” living off capital while performing no necessary function. Inflation, in his view, should be fought not through higher interest rates or attacks on wages bur rather, if necessary, by higher taxes to curb consumption and a slower pace of public investment.
The key point is that Keynes was an advocate of a planned economy based on a very large public sector and many public enterprises with a much smaller private sector, albeit an economy still based on markets and liberal civil and democratic rights. He was also a strong proponent of a radical re-distribution of income and wealth, for moral reasons and since inequality undercuts aggregate demand by boosting the savings of the rich and restricting the consumption of the working-class. (In Keynes view, savings are not needed to drive investment.)
As Crotty summarizes the position of Keynes, “The major policy tool required to accomplish the transition from laissez-faire capitalism to Liberal Capitalism was societal control over two-thirds to three-quarters of all large scale capital investment. Private capitalists operating in private markets would no longer determine the basic trajectory and character of the economy and society over the long run. This would be done primarily by state economic planners and executives in public corporations.” (p,368.)
Keynes believed that the liberal international economy which led to the collapse of the 1920s and 1930s had to be replaced by a system of planned national economies allowing societies to make their own political choices free from the fear of capital withdrawal and balance of payments crises. Accordingly he supported capital controls and managed trade. This view was more radical than the post War Bretton Woods system, and totally at odds with today’s globalized neo liberal economy.
As to the relevance of Keynes today, Crotty argues that “control of the economy is passing from democratic processes thatat least had the potential to help society control the economy through the political process to economic policy regimes that serve the interests of giant corporations and the rich.” (p.375.) He calls for major increases to public investment, re-regulation of the financial system, policies to reverse huge increases in inequality, and a move back towards national capital controls and managed trade.
Full Employment: The Road Not Taken
“It is more appropriate to think of Keynes’s full employment policy as one of “on-the-spot” or direct employment of the unemployed at any stage of the business cycle (Tcherneva 2012a). In boom times, Keynes argued we are “more in need . . . of a rightly distributed demand than of greater aggregate demand” (Keynes 1982: 395). His blueprint for full employment over the long run was “to take the contract to the worker and distressed areas and regions.”