Keynesian Economics-A Critique
Selignan, Ben B.
There are few occasions when so abstruse a discipline as theoretical economics enters into general currency. Adam Smith's unseen hand and Marx's surplus value are the two main examples up to...
...The precautionary motive was merely a matter of saving for the proverbial rainy day...
...For example, the concept of the declining rate of profit may be visualized as the objective manifestation of the declining marginal efficiency of capital...
...And the major concern, as with the Classicists, was always with economic equilibrium...
...But this was a mechanical simplicity in which talk about the kind of "built-in stabilizers" that would absolve all of us of ultimate responsibility replaced the need to comprehend and grasp the complex, vibrant and all too often turbulent realities of economic activity...
...and the trouble with Keynesian economic thought, concluded Burns, was that it employed a mechanical approach that failed utterly to comprehend the real turbulence of the business world...
...Keynes then went on to analyze that aspect of effective demand which he described as the propensity to consume.* He started with a simple proposition: consumption bore a certain relationship to income, changing in clearly defined ways as income itself changed...
...This was his "declining marginal efficiency of capital" and he was referring to nothing less than the familiar falling rate of profit, a proposition that economists from Adam Smith to Marx acknowledged as quite valid...
...See Beveridge's Full Employment in a Free Society and Wootton's Plan or No Plan...
...The anticipated beneficent price rise was attained largely through the needs of a growing military elite...
...Their attitude is that it is better to make money through price changes rather than earn one's keep by anxious sweat...
...Supply was basically a technical matter dependent on available resources, machines and manpower skills...
...However, for a strictly orthodox Marxian treatment ofKeynes (in a quasi-Stalinoid fashion) see Science and Society, Spring 1955...
...windfall profits, he insisted, would upset the Keynesian equilibrium...
...Despite its seemingly static character, the Keynesian system lends itself to all sorts of dynamical modification...
...War preparation, so far from requiring a sacrifice, will be the stimulus, which neither victory nor defeat of the New Deal could give you to greater individual consumption and a higher standard of life...
...For both, productive techniques were quite significant: to Keynes long run investment decisions depended on productivity, a notion not entirely alien to Marx...
...This occurs whenever anticipated receipts are insufficient to call forth a large enough output...
...Keynes focused his sights on the demand side of this relationship, since he felt that it required greater attention...
...The argument was made, and not without some justification, that a net concept does not tell the entire story of total income flows, since it reveals only the final outcome without telling what has happened in the meantime...
...As Schumpeter once remarked, this had happened before only to the Physiocrats and to Marx...
...To understand the situation, he argued, we must begin with an over-all view of the entire economy...
...Keynes was also charged with having arbitrarily selected his variables and constants which are the really critical elements in any theory...
...True, the description of psychological motives here brought to economic thinking a freshness that was long overdue...
...From this was derived the schedule of the propensity to consume, a purely mental construct which tabulated the quantities that persons would buy at certain prices...
...He attacked the cardinal capitalist appeal to unremitting thrift by demonstrating that husbanding resources during a depression was harmful...
...These effects were especially noticeable in the United States during the early Thirties...
...But in the early work, Indian Currency and Finance (1913) , Keynes was still a classically oriented economist, despite its plea for a managed currency...
...Otherwise, it is quite possible to omit it...
...lend themselves easily to empirical verification...
...There was a certain amount of doubt in some quarters that free enterprise per se could establish the necessary requirements for maximum utilization of economic resources without resorting to the stimulus of war...
...If the capitalist must go to the money market for funds, then it is clear that earnings on new capital cannot fall below the going interest rate on loans...
...and our society has developed money institutions in which the art of making more money becomes basic...
...Keynes, however, countered traditional long-run equilibrium theory with a rather incisive short-run analysis that led him directly to the theory of employment...
...An additional countervailing element that both writers would have surely acknowledged is the permanent war economy.* But Marx wanted to go beyond the technical economic variables to what he conceived to be underlying social relations...
...It was the actions of people, it seemed to say, rather than brutish, impersonal market drives that create the "stocks and flows" of economic analysis...
...It assumed that the level of activity which set the amount of the national income was already fixed, and moreover at full employment levels...
...In the years after the first World War, Keynes concerned himself mainly with the problem of price, "stability...
...In the same New Republic article mentioned above Keynes wondered why politics in peacetime impeded the attainment of the kind of prosperous conditions that could be established through wartime production...
...Unfortunately, society does not function that way, for political economy in the proper sense must account for rationality and human judgment...
...The pertinent data are instructive: in 1941 there were 17.8 million families with an extra wage earner and another 10.9 million families with two or more...
...Normally, the monetary factor has no effect on economic situations since the modern economy is nothing more than an extension of a barter system...
...He drew the implication that accumulation and thrift could lead to impoverishment...
...However, it does have an outer limit set by several leakages in the system, such as debt cancellation, hoarding, taxes and imports (since the latter do not provide domestic employment) . There is also a relationship between the multiplier and consumption, or more precisely, the "marginal propensity to consume" (defined as that part of added income which is consumed rather than saved) which assumes a certain stability in consumer behavior, a notion that some economists have denied...
...Since interest was a "price," the critical determinants were supply and demand, as in the case of all pricse...
...When in Rome .. The methods you have pursued, my dear Pliny, in sifting the cases of those denounced to you as Christians is extremely proper...
...Both Barbara Wootton and Sir William Beveridge quickly discovered that economic planning for investment necessitated control from a center...
...All this appears old-fashioned now for, it is argued, all the indices of industrial production and economic activity make these propositions invalid...
...Keynes was exercised by the problem of how much people intend to spend, since it was this that determined the level of consumption and investment...
...The explanation of income and its movement could be framed in terms of persons and with such an approach it was even suggested that it might be possible to exercise • K. K. Kurihara, ibid...
...The latter are supposedly in the $4,000-$10,000 bulge...
...This was aggregate demand...
...Change could best be attained by careful study and a program of gradualism...
...In Marx it is the rate of saving out of surplus value that governs investment: the pace is set by the competitive urge to beat down all rivals...
...Ricardo had placed income distribution at the center of economic theory, and as a result, said Keynes, classical theory became overly concerned with the way the national income was divided and insufficiently with its size...
...This was particularly the case in times of crisis, when the demand for getting something done was persistent...
...Keynes showed that it was possible to discuss economic problems with labor as the major or even sole factor of production...
...the classicists called them rewards for astuteness and abstinence...
...This means simply enough that economic life under capitalism is a matter of making and spending money and that it is possible to derive from this proposition all that need be said about economics as a means of increasing the national welfare...
...Keynes made much of the argument that there was a tendency for profitability to decline as the market for any given capital good filled up...
...Keynes converted this into an income multiplier designed to show the relationship of a small increase of investment to increases in income...
...If the United States takes seriously the material and economic side of the defense of civilization and steels itself to a vast dissipation of resources in the preparation of arms, it will learn its strength— and learn it as it can never learn it otherwise...
...Effective demand as a consideration in determining investment patterns does not enter the Marxian system at all, so that basically unemployment and crises are due to an insufficiency of capital...
...To his critics this was outrageous...
...were meaningful...
...In other words, it was the national income which when seen from Keynes' view was the determining factor in the creation of employment...
...Keynesian theory, continues the argument, is but a special instance of the more general Marshallian version: the new economics has no particular relevance for current prosperity conditions...
...behavior of individuals and firms to such aggregates through a number of recondite concepts: these were the now famous "marginal propensity to consume," "liquidity preference" and "the marginal efficiency of capital...
...This lent to the General Theory an irresistible attraction...
...During the 1930s, for example, monetary supply increased, yet no one would suggest that inflation existed at that time...
...In fact, should interest rates fall to zero, a point may be reached where capital would continue to be created until it is no longer "scarce...
...Despite these strictures, the multiplier concept successfully called attention to investment as the major dynamic element in the economy, for not only did it indicate the direct creation of employment but it revealed that income was generated throughout the system like a stone causing ripples in a lake...
...ity preference) and supply to the amount of money in circulation...
...While family income is a useful market research tool, it fails to reveal the entire story...
...No search should be made for these people...
...The need to do things in a depression pointed to questions of policy: this was the direction in which Keynes moved and he was able to give intellectual expression to both despair and hopefulness, while his use of aggregates and global figures seemed to make everything disarmingly simple...
...tax structure, low interest rates and big government deficits...
...This was a most comfortable procedure and many of his co-workers were very grateful...
...Marx said that interest and profits were merely divisions of exploitative spoils...
...Rutgers, 1954...
...Should aggregate demand, said Keynes, fall below what business men expected and thereby fail to cover costs of production, there would be cutbacks resulting in unemployment...
...According to this thesis, capitalism would continue to suffer a depressed economy because of the decline of the rate of population growth, the passing of thei frontier, the exhaustion of natural resources and the drop in the rate of profit...
...That this suggested wage cutting and less income did not occur to the theorists...
...This was the pleasant fate of John Maynard Keynes, whose impact on popular thinking has been the greatest since Smith, Ricardo and Marx...
...This revealed a lack of understanding of demand as a flow of income which might have breaks and leakages so that some part of output would conceivably fail to be taken up...
...On these grounds, Keynesian theory, even as later developed, could be made to support utilitarianism: if unequal distribution of income, for example, is the cause of economic imbalance, then measures to attain a better distribution increases social happiness (or as the economist would prefer, economic welfare) . Keynes came to feel that "effective demand" was the prime mover in the attainment of this balance and if government actions were needed to make the economy operate properly, he was willing to go along...
...All this is to be accomplished by economic gadgetry...
...It would be quite wrong, however, to call Keynes the father of the New Deal, as seems to be the fashion in some quarters...
...During the first five decades of the 20th century, geographic expansion and population growth slowed down, while technology emphasized capital saving devices...
...Marx employed the categories of producers and consumers goods with a three-fold division of value into constant, variable and surplus cutting across both groups...
...These objective factors were suffused by numerous subjective ones...
...These became homogeneous concepts, easy to handle in an analytical scheme, as was evident in the doctrinal system constructed by Keynes wherein he tried to relate the * A further advantage accrues from this approach in that it enables one to bring together sociological and psychological criteria as well as economic in analyzing agiven situation...
...But since money is the only credential required to obtain consumer goods, there is no guarantee that people will be rewarded according to the time-honored theory of marginal productivity...
...He analyzed only those...
...But they all failed to recognize, including the master himself, that the mores of our society have created a dichotomy between peacetime full employment and the system of free enterprise...
...The social group, in other words, might be the proper vehicle for the operation of all the Keynesian "propensities...
...He thought that capitalism, unless revived, would founder entirely and when a neoKeynesian remarks that the tragedy of investment is that it leads to crises that are themselves useful he comes dangerously close to the Marxian conception...
...In the former, economic propositions are derived solely from decisions based on the relations between men and goods...
...He urged that partisanship be replaced by moderation...
...Keynes never surrendered his belief in the idea of progress...
...But where ordinary theory spoke of the balance of capital productivity and capital supply, Keynes related the demand element to the desire for cash (liquid...
...Increased demand for money in relation to available goods does force prices upward...
...Improving the lot of the poor was simply something that all Englishmen should advocate because they were English...
...1 * For example, the portion of surplus value used to purchase additional producers goods can be equated to Keynes' entrepreneurial transactions...
...But all such statistics are based on family income...
...Furthermore, the reasoning at this point seems somewhat dubious, since relating the rate of interest to liquidity preference overlooked the fact that the latter itself depended in large measure on income...
...It was only in inflationary conditions, as in wartime, that interest centered on the supply side, for then balance could be maintained only by breaking through bottlenecks...
...From a letter of the Emperor Trajan to Pliny...
...Keynes' rejection of Say's theory of markets and his underscoring of the lack of automatism in economics may also be found in Marx...
...With money so institutionalized, manipulation to compensate for disturbances was quite possible, said Keynes...
...Furthermore, such a condition would weaken the rentiers who were an inactive class anyway: their desire for high interest rates was a serious impediment to Keynesian aims...
...Money, it is argued, enters into a system of economic equations only as an accounting device or as a means of facilitating transactions...
...His thinking here, though, seems somewhat woolly...
...There are few occasions when so abstruse a discipline as theoretical economics enters into general currency...
...Formulating the General Theory along the lines that he did allowed him to adapt his thinking to contemporary political and social changes...
...The relationships between men and goods that are expressed in monetary form acquire a life and importance of their own which cannot be obscured by the veil that classical economists draped over it.* One of the important results of the monetary approach was the growth of the so-called macroeconomic technique in economic thinking...
...It was this attitude that led some persons to call him a congenital inflationist...
...2. •• See Arthur F. Burns, The Frontiers of Economic Knowledge, 1954...
...11 To place Keynesian economics in the main stream of economic thought requires some explanation of the so-called "real" versus monetary analysis...
...Thus, monetary manipulation seemed to him at this time the most effective way of solving economic ills...
...With this new vision, Keynes believed that he was leaving the classical system behind...
...The most fruitful answer to the question of how capitalism functions seemed to lie in this disparity...
...See Post Keynesian Economics, edited by K. K. Kurihara...
...National income ought to be distributed it a way that would provide for the unfortunate, but absolute equality was completely undesirable...
...However, it seems especially germane to inquire whether the permanent war economy through which we are currently living is not an embodiment in a refined form of "socialized investment," for wherein but a garrisoned society does the state organize investment so thoroughly...
...As he continued to observe the economic scene, he felt more and more that satisfactory price levels and full employment would have to be created by tinkering, by deliberate policy...
...However, the implication that over-all spending patterns are the same for all income groups must be rejected...
...These were basic to the idea of liquidity preference, an important component in his system...
...would be ordinarily supposed, since a snow-balling effect would ensue.* The multiplier mechanism suggested that heavy spending—by government, business or consumers—would have a salutary effect on the national income...
...capitalists...
...Here he was no different from Marshall or Mill or Say...
...must believe that it is worthwhile to concede a great deal to preserve that decentralization of decision and of power which is the prime virtue of the old individualism...
...Full employment was possible only where government spending reached astronomic magnitudes...
...The drawback in the original version as presented in the General Theory was his failure to take after-effects into account, so that it was possible for him to offer, half in jest, pyramid building as a prescription for depression...
...The Board would merely specify the total amount of investment without directly allocating resources...
...The conclusion then is that the economy does not necessarily stumble over its own feet: causes external to the system must be sought for explanations of cyclical change...
...There i little doubt that when we get down to the root of the matter Keynes firmly sustained the principle of private enterprise...
...At this point it might be well to clarify what is meant by inflation, since it does not simply mean an increase in the amount of money in circulation...
...Income is defined as the flow of goods and services in exchange for labor, while saving is the actual accumulation of produc tive factors and their conversion into physical equipment...
...A school, in the true sociological sense was formed: there was an inner core of expert exegetes surrounded by an outer layer of popularizers...
...That is to say, in neither system were automatic adjustments a reality...
...Moreover, if the theory of prices adumbrated by Marx in Vol...
...By employing aggregate thinking it ran the risk of creating a merely mechanical theory which would suggest that some kind of socialized gadgetry would be sufficient to attain economic change, whether in depression or prosperity...
...Yet the modifications that Keynes introduced into received economics revealed the common roots of both doctrines...
...His major work, The General Theory of Employment, Interest and Money, the influence of which has been matched only by Capital and the Wealth of Nations, showed that governmental action was just what was necessary to meet the psychological and economic needs of the day.* It was his ability to frame a set of popular ideas within a resplendent border of principles that made Keynes so well received an economist...
...The result was a number of short, sudden spurts of capital formation which failed to take into account long-run social needs...
...They insist also that a secular rise in prices can be a pleasant and respectable experience...
...there is a loss of real income, maladjustments between creditor and debtor ensue, and distortions in the use of resources upset accustomed economic equilibrium...
...As was suggested above, there was simply too much gadgetry embodied in it, too much "engineering" and inadequate concern for the underlying social realities of economic tension...
...the consumption function does not assume the shape ascribed to it in the General Theory...
...The New Deal itself evolved in a purely ad hoc fashion and by men who eschewed economic theory...
...The total increase in income, he said, resulting from an initial expenditure would be far greater than * It is frequently contended today that the pattern of income distribution assumes a diamond shape...
...Here Marx's objective definition of capital appears at odds with Keynes' monetary motivation...
...This makes money an opaque veil which must be with drawn if we are to learn the actual ratios of exchange that Iie behind money prices...
...And the mere matter of choice which is involved in such a schedule suggests the problem of measuring comparability, something that most psychologists doubt is possible...
...Dillard points to the similarities in their social reform program, the monetary approach, attitudes toward the "rentiers" and their general optimism concerning the effectiveness of their respective theories...
...It insists rather that it is the central feature of economic behavior...
...The gap between standard theory and Marx has always seemed unbridgeable...
...Perhaps that is why he became a social tinkerer and a man of principled expediency...
...Should the situation get out of hand, then a mere reversal of policy will impose down-draft dampers...
...All contemporary economic discourse, even that of Keynes' critics, is cast in its terms...
...This made it possible for a table of value to be distributed among producer and consumer industries...
...Each value portion thus represented not only a certain type of good but a cost and demand item as well...
...A laborer works for money wages...
...The first arises from the fact that income receipts are discontinuous, while expenditures are continuous, thus creating a need for holding some cash in order to meet obligations...
...Should such families revert to single wage earner status, they would drop into the below-$4,000 class...
...That is, he was always advocating some practical course of action...
...Keynes' conception, which attributed this tendency to an excessive supply of capital, is in many respects fairly close to the Marxian idea...
...it is sometimes admitted, as Fortune recently did, that most of the families in the lower range of this bulge have more than one wage earner...
...Marx, who viewed capitalism as a passing phase in history, sought to expose its failings...
...2. Dudley Dillard, a noted Keynes expert, asserts that there is a greater intellectual kinship between Keynes and Proudhon than between Keynes and Marx...
...It can be made quite complex without damaging its inherent logic...
...There is no denying the fact that the influence of the General Theory has been enormous...
...a capitalist seeks money profits...
...he insisted that there would still be a place in such a setup for private capitalists to seek unexplored avenues...
...This resulted in some circularity: interest affected investment which in turn determined income...
...Now, it should be clear that total expected proceeds must cover costs, if production is to occur...
...Yet, curiously enough, elimination of the rate of interest as a significant factor in no way seemed to upset the Keynesian system...
...Difficulties arise when Marx analyzes the total supply of capital and its rate of profit...
...This implied, among other things, that spending habits are fairly stable while saving is done by upper income groups, a not unreasonable surmise...
...The chief characteristic of Keynes' major idea, the national income, is the fact that its basic analytical techniques are applicable to all sorts of economic systems...
...A speculative psychology comes to the forefront and people are more concerned with rising values per se rather than with more basic productive processes...
...Like the aggregates, they mean something only in the mass...
...Reformers, he said...
...Here he began as an avowed Marshallian for whom basic principles were well established...
...it is an interesting question how such "socialized" investment policies could operate without a certain amount of central direction.* Keynes' original conception of the dynamics of capitalist motion placed a good deal of emphasis on the rate of interest...
...classical doctrine insisted that capitalism was solid and permanent...
...The use of money becomes complex and irrational: it may even be used as an instrument of coercion...
...This, in the final analysis, reveals Keynes as essentially a conservative thinker.* His social philosophy was grounded in a belief in unremitting economic endeavor, while leadership was for him a function of the chosen few...
...Rapid adjustment to market change was the desired goal, since this was the way in which unemployment could be eliminated...
...Thisarticle demonstrates to the author's satisfaction that neither Keynes nor Marx wouldhave known what the other was talking about...
...Furthermore, some economists have questioned the statement that the proportion of consumption declines as income increases, contending that a constant share of income is consumed at all levels...
...the kind of control that would dispose of the disheartening cyclical variations to which capitalism so often gave rise...
...Soon holders of such assets acquire a vested interest in inflation...
...What he wanted above all else was to make capitalism work...
...When prices begin to surge upward certain goods become more desirable...
...Yet, as his biographer Roy Harrod says,* he appears even this early as a man of expediency...
...The realization that money is significant enabled economists to reduce a complex image of the economic system to a few social aggregates— income, saving, investment, consumption...
...The prospective net yield resulting from this relationship was called the marginal efficiency of capital...
...For this, an analysis was necessary that would not avoid making money a significant factor in the economic system...
...But such investment is undertaken under capitalism only if it yields a profit equal to at least the next best alternative...
...In fact, with but a few shifts in definition and some alteration in variables, it is possible to bring Marxian theory quite close to Keynes...
...In 1953 the numbers were 21.5 million and 17.1 million respectively...
...Keynes observed that these reac * However, this was not an especially new idea: it could be found in the writings of the famous Russian economist, Tugan-Baranovsky, as well as in Knut Wicksell, the Swedish economist...
...The implication that society could afford to allow private expectations to determine the required investment level was drawn by Keynes as well as by his chief American disciple, Alvin Hansen...
...Keynes argued that this was a gratuitous assumption...
...rising prices were fine, for that would stimulate investment and business activity...
...Monetary analysis denies that money is an illusion...
...Real analysis emphasizes the non-monetary aspects of economic behavior...
...Furthermore, Marx made his schema so involved and abstract that all too often his most trenchant insights were lost...
...People want to hedge against unknown contingencies and they begin to purchase durable commodities, real estate, even old postage stamps...
...with the restriction, however, that when the party denies himself to be a Christian, and shall give proof that he is not (by adoring our Gods) he shall be pardoned...
...This restricts profitability and investment...
...This ultimately focused attention on the level of economic values and their flows rather than on origins and consequently lead to an overweening interest in the mere mechanics of the economy...
...This implies that if the main purpose of economic policy is to attain full employment through "balanced" government spending, then the accompanying cost of a price rise ought not be too disturbing...
...Inflation becomes respectable, for it maintains purchasing power...
...If this belief were correct then economic relationships could be defined as the outcome of interpersonal and group relationships...
...Since marginal productivity theory presupposes single units of capital and labor, it would not be remiss for economists to consider the suggestion that a better picture of income distribution might be secured with the individual as a basis...
...not depend on saving alone but was an active, sometimes creative, sometimes disturbing, process penetrating all aspects of the economy...
...In this way the marginal efficiency of capital brings psychology to the forefront of economic theory...
...The strength of business men's convictions about the future becomes crucial...
...Others have said that savings habits are independent of income...
...when they are denounced and found guilty they must be punished...
...psychological characteristics of human nature and those social practices and institutions which though not unalterable are unlikely to undergo a material change over a short period of time...
...It was, he intimated, more a mode of ancestral worship than economic analysis...
...Yet what has happened is that a vast government intervention has altered the situation without in the least undermining the older notions...
...Objection has been voiced to Keynes' use of net national income as the fundamental idea in economic analysis...
...Alvin Hansen and Arthur Pigou, Keynes' teacher, had greeted the general theory with anger and disdain, but it was not long before Hansen became the first apostle, while Pigou would later concede that his star pupil after all had been right...
...The corollary that some writers have drawn seems not unreasonable: Keynesian theory could work as well in a totalitarian society as in a democratic one, for this system of economics is by itself entirely neutral...
...While in England, knowledge of the sources of Keynes' ideas seemed to dull their brilliance, in this country the extraordinary unemployment in the midst of an astounding natural resource potential made almost everyone ready to accept Keynesian theory as the last word in economics, for it pointed to the behavior of people as the motivating force in the economic process...
...All that Keynes did, said one economist, was to establish diplomatic relations between standard theory and the business cycle...
...The most striking parallel is that breakdown results from internal insufficiencies.* At this point, Keynes and Marx differed only in their use of aggregates...
...The entire system was so "neutral" that it could easily serve as a convenient theoretical justification (particularly as it related to the social control of investment) for a totalitarian movement seeking to extend the status quo by state action...
...While it combined policy with economics, Keynesianism failed to create a true political economy...
...Both also recognized that the contradiction, to employ the Marxian term, between consumption and production lay at the root of economic crises...
...They are, in a sense, pure concepts and like the Ricardian categories from which they derived much of their form, they are not measurable...
...This gave to economic study a condition of serenity that was never to be recaptured...
...a low • The Life of John Maynard Keynes: A Personal Biography, by Roy E. Harrod, 1951...
...The relationship between the marginal efficiency of capital and interest underscored that idea...
...They must zealously protect the variously woven fabric of society, even when this means that some abuses must be spared...
...Consumption is limited by the kind of income distribution a society develops...
...The Rooseveltian program had both reform and recovery aspects, but Keynes was interested primarily in the latter...
...At first Keynes ignored much contemporary theorizing, which was perhaps an advantage, since he could later devise a system of his own without too much concern for its relationship to other doctrines...
...His argument that cutting money wages was no cure for economic imbalance upset traditional habits of thought, although he did says that a reduction in real wages might turn the trick...
...It has been demonstrated that the latter's picture of a pleasant economic equilibrium is applicable only to periods of full employment, and now that such a condition has been more or less attained, classical analysis becomes just as useful as any other...
...This introduces a broad range of questions raised by the theory of expectations and anticipations...
...This may seem to contradict the general understanding of Keynesian analysis, which in the thirties had set forth a theory of capitalist stagnation...
...But he did not want government domination...
...The relation of consumption to income was described as follows: consumption increases as income increases, but not as rapidly...
...Such a use of this theory could only happen because the human and the political did not penetrate the economic in Keynes' thinking...
...Factors of time and place were introduced in order to ascertain which income patterns " Much has been written of this concept: a considerable technical literature now exists with which we cannot concern ourselves here...
...It was understandable that Keynes' ideas should have a striking influence on opinion regarding inherent tendencies in capitalism...
...Keynes himself had a rather happy facility for recognizing history as it moved, and he was not averse to suggesting that its motion was essentially Keynesian...
...Beyond these there grew up a large body of sympathizers who spoke the language of the master with wonderful glibness...
...His most intransigent opponents began to think as he did...
...Burns objected also to the aggregate approach on the ground that not all firms act alike...
...But, asked his opponents, would this not result in continuously rising prices or worse, wildcat inflation...
...Yet it is extraordinary that, despite an antipathetic outlook, Keynes was able to develop a vision of capitalism the mechanics of which approximated Marx's...
...Keynes' interest theory, however, failed to account for investment made by corporations out of accumulated reserves, a situation in which the rate of interest is at best but a fictional yardstick...
...Adam Smith's unseen hand and Marx's surplus value are the two main examples up to the present in which recondite notions were absorbed into popular ideology...
...This, however, is what economists today describe as structural unemployment, a quite different kind from that which occurs when there is merely a failure in demand...
...In this way an economic theory has been frequently employed as an elaborate rationalization of what was thought to be desirable social action...
...For all his consideration of cash balances, liquidity references, multiplier effects and consumption functions, one does not always have the feeling that these are categories of human behavior...
...See Journal of Economic History, May 1942...
...Keynes was not perturbed...
...Burns would have quarrelled as much with Ricardo or Marshall as he does with Keynes...
...The main drift of the argument here is that prospective yield becomes the decisive factor in influencing the rate of investment...
...Such a schedule, of course, would have to exhibit multidimensional features, for consumption habits are determined not by income alone...
...Estimations of profitability, however, may be related not to the actual embodied historical cost of assets but to their replacement cost, a notion which is largely of an "iffy" character...
...Business gyrations arose too from the fact, previously stated in an explicit way only by Marx, that the largest part of investment is made by a small group which does not absorb the bulk of consumer goods...
...Marxians insist that the variables employed in their economic theorizing are implicit in the system itself, whereas Keynes' basic elements are derived from non-economic psychological factors...
...Yet he did not reject reform: social evils were an abomination not to be tolerated in his England...
...Keynes rejected the whole approach out of hand...
...Keynesian economics thus represented an attempt to create an acceptable political economy at a time when people wanted action as well as analysis...
...It has been argued that while resistance to cutting consumption is often evinced in an economic downturn, the upswing phase of the business cycle has generally shown an evenly proportionate variation between income and consumption...
...Classical theory had described wages as the price paid for labor and like all prices it was subject to ordinary market influences...
...It is quite possible to study the capitalist economy along the lines suggested by Keynes without paying much attention to the rate of interest, just as it is possible to follow Marx's analysis of circulation without recourse to the labor theory of value.* IV The Keynesian system did not, of course, go unchallenged...
...learn a lesson that can be turned to account afterward to reconstruct a world which will understand the first principles governing the production of wealth...
...III The basic element in the Keynesian system was the concern with effective demand...
...Born in 1883 of a Cambridge family (his father, J. N. Keynes, who outlived him, was a noted logician and economist in his own right) , Keynes' background was traditionally unexciting...
...The failure to recognize this made the Marxian model essentially a classical one with an unexpected moral twist, one that was rejected by later economists...
...In this context, investment could only mean newly constructed physical assets, not the mere purchase of securities...
...In Marx, the depression must await further accumulation before renewed activity can take place...
...Say admitted that specific commodities might be overproduced, but a general glut in the sense of a general depression was unthinkable, for the very process of production created the required effective demand necessary to absorb total output...
...Since the latter depends on profits, the actual limit to investment ultimately becomes the saving-consumption relation...
...Interestingly enough, a fantastic amount of empirical research was stimulated in an effort to discover in just what ways consumption did depend upon income...
...To this apparatus Keynes added the notion of the multiplier, an idea borrowed from R. F. Kahn who had traced the effect of an increase in investment on employment...
...The Marxian aggregates, on the other hand, lack operational character and consequently do not • In an article on war finance, written in July 1940 especially for the New Republic Keynes said: "It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiment which would prove my case—except in war conditions...
...Keynes accepted the proposition that the interests of the various groups in society were harmoniously balanced...
...When unforeseen rises in the price level permit demand to exceed supply, true inflation develops with troublesome social impact...
...New Dealers grasped at his theories to justify what it was they were doing...
...However, if this is anticipated, it is possible to make adjustments that would circumvent "inflationary" effects...
...This, too, might be done through monetary stimulation...
...Had Keynes acknowledged the appropriateness of the political and social he might, for example, have been less hasty to suggest that a constant rise in prices would achieve the millennium and he would not have fostered the view that social engineering could dispense with the need for a truly rigorous reevaluation of capitalist society...
...This was to be his major goal and it did not trouble him that it would mean the destruction of the gold standard...
...Increases in investment bring forth new capital goods which compete with old equipment, while expanded output forces prices down, thus reducing anticipated yields...
...tions had been quite unstable in the past, inducing rather violent fluctuations in the demand for investment goods...
...III of Capital were modified in the fashion of von Bortkiewicz* it would not take much adjustment to incorporate it into the main body of economic theory...
...governmental action could be effectively utilized to modify and influence the behavior of the important economic groups—certain business men, trade unions and even consumers...
...Neo-Keynesians today openly concede that what they want is to achieve "stability" through a steadily rising price system.** They suggest that inflation in the ordinary sense is no longer the heinous affair that the conservative mood has always made it out to be...
...When Keynes pointed out that investment implied payments to the factors of production without necessarily bringing goods to market he was offering an operational as well as an empirical concept...
...But by the time Keynes went to work on his Treatise on Money (1930) there was some suggestion of a developing theoretical synthesis which was to flower later into the structure of the General Theory...
...it is as patently improper to accuse them of inconsistency as it is improper to charge a man with inconsistency when he wears an overcoat in winter and Bermuda shorts in summer...
...This approach accounted for Say's famous Law of Markets, in which every supply was supposed to create its own demand, making general overproduction a logical impossibility...
...This conception of inflation, however, reveals a basic bias in the Keynesian approach...
...Keynes then went on to analyze the motives for holding money...
...The simple fact of the matter was that Keynes' economics failed to achieve the status of a true political economy...
...Although the profit motive might have sordid implications, state enterprise was most impractical...
...The English utilitarians, who had accepted some forms of government intervention, found the theory of harmony not incompatible with their scruples, for it was possible to justify at least a minimum of government action as a means of preserving the balanced state...
...In 1938 Keynes thought that there should be a Board of Public Investment which would influence the course of the business cycle by its decisions...
...Searching for the forces that led to the creation of value, he was compelled to conclude that the crucial relationships could be expressed quantitatively through commodity exchange...
...This can continue so long as the rate of interest remains below the marginal efficiency of capital...
...Furthermore, it is possible that the character of the multiplier is itself a variable the values of which shift with the cycle...
...In reality, say the Keynesians in implicit fashion, there is no conflict between capitalist stagnation and the theory of gently rising prices...
...Money, he said, was held to facilitate transactions, to engage in speculation or for precautionary reasons...
...The experts—Harrod, Lerner, Hansen, Robinson—kept themselves busy filling in gaps and "dynamizing" the system like engineers tinkering with a strange new motor...
...Arthur F. Burns, chief economic advisor to the Eisenhower administration, has in one of his rare theoretical moments leveled severe attacks on it.** He has questioned whether Keynes really provided enough information to enable governments to deal with cyclical situations...
...All his early writings emphasized the practical...
...However, increases in population, expansion of territory and technological improvements prevent such contingencies...
...All this represented some fairly rough shoals for Keynesian theory to traverse, yet it came through without too much damage...
...But Keynes did emphasize the fact that accumulation did • See L. von Bortkiewicz in International 'Economic Papers, Vol...
...See S. Tsuru in Post Keynesian Economics...
...From this construction it was possible to work out a circular flow which could then be converted without much logical hazard into Keynesian categories.** It can be argued that this procedure would demonstrate only formal similarities...
...Money is not only the measure of economic activity but the very force that gives rise to the phenomenon that it purports to measure, and as both Wesley Mitchell and Joseph Schumpeter acknowledged, it is a rationalizing device which establishes behavior patterns in a specific and historically conditioned manner...
...The cost of producing total output was called aggregate supply...
...Nor can such a situation be described as merely an increase in income and spending...
...While he ignored "monetary" analysis, Marx did concede that the amount of money in circulation was affected by business habits as well as prices...
...One is merely the cure of the other...
...Keynes consequently could be charged with looking upon the economic process as just a process and nothing more: his followers have taken these strictures to heart and have made valiant efforts to achieve a more vital approach.* Marx's study of the relationships among constant capital, variable capital and surplus value was meant to answer just this question: it sought to determine how income was distributed amongst the various classes as a gross rather than a net flow, and in this respect Marx was analytically superior to Keynes...
...when world war and a depression undermined his original illusions, he sought new ones in order to sustain the notion that man can always move closer to the angels...
...All too often, the social groups that are implied by Keynesian economics merely comprise a number of individuals who react in the economy as a result of certain none-too-well defined expectations or because of speculative moods or as a result of some action undertaken by the central bank...
...In fact, the economic system develops a set of countinghouse attitudes which are extremely important elements in the drives that dominate contemporary behavior...
...It reduces strain between groups and softens social conflict...
...Yet most of these studies continued to show the ageold lop-sided distribution.* The connection of income to employment was inescapable...
...As for interest rates, Marx attached much less importance to them than did Keynes: interest was nothing more than that part of surplus value subject to bargaining between • See Joan Robinson, ibid...
...While Keynes' interest in the use of public works to counteract unemployment goes back to 1924, when Lloyd George began to advocate this device, the final shape of his theories came after the New Deal was initiated...
...But above all he was concerned with the flow of income and here he began to see more clearly than most that money was no mere veil for transactions but the source from which was derived the energy that made the capitalist economy tick...
...For an understanding of the underlying character of a society it appeared necessary to go beyond this brand of contemporary economics...
...This suggested that economic equilibrium was entirely possible even under conditions of mass unemployment...
...Such an analysis emphasizes that money is the compass by which individuals must today steer...
...there is no guarantee that spending would always revive dormant economic life...
...What this relationship would be depended not only on the amount of money earned but also on price levels, consumer tastes, tax policies, corporate depreciation plans, and the like...
...The intellectual climate was characterized by a calm Victorian utilitarianism in which reform was conceived to be the instrumentality of progress and intelligent discussion the primary basis for attaining the ultimate goal of social perfectability...
...If this were so it would no longer be possible to consider it a causal factor...
...The transactions motive itself was divided into demand created by consumers, which in turn depended on the average interval between pay periods and the size of the national income, and business requirements for the payment of wages and purchase of raw materials...
...This had two facets: it represented actual consumer expenditure and it was also income to the factors of production...
...Above all, it is never the neutral phenomenon that so-called real analysis says it is...
...Informations without the accuser's name subscribed must not be admitted in evidence against anyone, as it is introducing a very dangerous precedent, and by no means agreeable to the spirit of the age...
...But Keynes, unfortunately, concerned himself only with shortrun situations...
...See bibliography and references in The New Economics edited by Seymour E. Harris, 1947...
...Ultimately, it becomes the economic ideology of a mindless mass society...
...Total employment is created by expected total proceeds from forthcoming production...
...Yet, in this search, one of the most exciting in the history of economic thought, he overlooked the patent fact that such commodity transactions acquire an independent reality...
...In the Keynesian system, interest is important where borrowing is involved...
...Such a feeling might be ascribed to Burns' inordinate passion for facts and his sharp rejection of theory...
...only the discovery of practical rules of application remained...
...His formula permitted economists to hold on to their old notions while taking a new look at the way capitalism really functioned...
...Intentions to spend were trans lated into aggregate demand, a psychological rather than a technological factor...
...What he urged in this book was a gold exchange standard with a central bank that would conserve gold reserves and avoid the unusual drains on Indian gold...
...When such a price failed to move with the freedom assured it by Smith's unseen hand, then it must be due, it was thought, to frictions, immobility, or even trade unions...
...As mathematical economists are wont to say, it is a parameter or a fixed variable that provides the matrix in which specific economic forms take shape...
...Since Keynes was so preoccupied with speculation, his emphasis was understandable...
...A more serious criticism is the contention that Keynes did not really advance much beyond classical theory...
...When employment does increase, costs can conceivably match receipts at levels below full employment...
...The Keynesian version sees breakdown caused by variations in the inducement to invest...
...Counterbalancing factors are the growth of new industries and the compulsion to expand outwardly...
...It is rather the unexpected, unanticipated events that are important...
...When Marx spoke of the excess of surplus value over capitalists' consumption as being limited by the expenditure for new producers goods and foreign investment, he comes close to the Keynesian view, for here investment is seen as a purchase without a sale and saving as a sale without a purchase...
...Whatever suggestions there were in Ricardo of dire social conflict were dismissed by the Classicists to a fiery subterranean existence in the pages of Marx's Capital...
...The third motive was described by Keynes at great length and was considered by him to be very important in an advanced capitalist economy...
...A more cogent criticism is that Keynes' consumption-income relation fails to account for corporate income, the earning and spending of which bear no visible relationship to the psychological habits of consumers...
...Long run alterations he left to others...
...See Joan Robinson, An Essay on Marxian Economics and Ladislaus von Bortkiewicz, Value and Price in the Marxian System, the latter reprinted in International Economic Papers, Vol...
...thus proving that there are fewer rich, fewer poor and many more middle class persons...
...But all this merely revealed a thoroughgoing misunderstanding of the aim of theoretical discourse...
...A short stay in the British India Office in 1906 drove Keynes to take a post at Cambridge where Alfred Marshall's Principles ruled the realm of economics...
...There was an implied faith that the total amount of the national income would always be predetermined at full employment levels...
...It was Marx, of course, who contended that capitalism could not possibly function without periodically grinding its gears...
...He suggested further that "socialized" investment might be the vehicle for attaining a high level of employment...
...On the other hand, should aggregate demand exceed expectations, production would be stimulated...
...That level of aggregate demand which led to an equilibrium was the effective balance...
...Perhaps the closest affinity in the two systems is to be found in the theory of capitalist circulation which Marx discussed so profoundly in his second volume of Capital...
...Stagnation has been replaced by a permanent war economy...
...The latter is what happened in the Thirties and it is the likeliest type of unemployment in modern capitalism...
...And the theorist who was able to supply the answers was often accorded the role of hero...
...The Keynesian aggregate analysis, on the other hand, exhibits a simple neutrality that successfully evades the charge of moralizing...
...Moreover, none of these groups ever seems to exhibit any identifiable social interest beyond the course of action prescribed for them by the theory...
...Had he chosen, for example, to cast his analysis in terms of the propensity to save rather than consumption, he might not have acquired so many followers...
...Since employment is derived from output, each supply price will give rise to a particular level of employment...
Vol. 3 • January 1956 • No. 1
