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The
economics of Keynes and its theoretical and political importance: Or, what would Marx and Keynes have made of
the happenings of the past 30 years and more?*
G. C. Harcourt (Jesus College, Cambridge
University, UK)
© Copyright 2004 G. C.
Harcourt
I
I start with two
propositions: first, that Maynard Keynes and Karl Marx, were they still with
us, would have made far more sense of the happenings of modern capitalism of
the past 30 to 40 years than do the more modern approaches to macroeconomics
of the same period; and, secondly, that Keynes would have sat down and tried
again to save capitalism from itself.
(Marx may have rubbed his hands and hoped that its demise, so often
predicted by him and his followers, was at last on hand – but I could not bet
on either of these.) It may surprise
you that I couple Keynes and Marx together, but I would argue – the evidence
is supplied in a fine book by Claudio Sardoni
(1987) – that, adjectives apart, when Marx and Keynes examined the same
issues in the capitalist process, they came up with much the same
answers. Perhaps, on further
reflection, this should not be surprising, for along with Michal
Kalecki and Joseph Schumpeter (said by Joan
Robinson to have been Marx with the adjectives changed), they have made the
deepest, most insightful analyses of the laws of motion of capitalist society
in our profession. (Marx’s views on
socialism are another matter, see Harcourt and Kerr (2001a).)
II
I shall say more about
their analyses below. First, let me
clear out of the way why I think the modern approaches are less than
satisfactory. They employ either
representative agent models, or Frank Ramsey’s benevolent dictator model,
or an emphasis on certain imperfections in the workings of capitalist
institutions, such as are to be found in New Keynesian models: sticky wages
and prices, imperfectly competitive market structures, asymmetrical
information and the like.
Modelling the
economy as a representative agent rules out by assumption one of the
fundamental insights of Keynes (and Marx), to wit, the fallacy of
composition, that what may be true of the individual taken in isolation is
not necessarily true of all individuals taken together. This implies that when looking at the
macroeconomic processes at work in capitalism, we cannot presume that the
whole is but the sum of the parts.
Indeed it is not. We have,
therefore, to consider the macroeconomic foundations of microeconomics as
James Crotty, citing Marx, told us long ago now,
see Crotty (1980), and on which Frank Hahn,
innocent of all this, is now working, as has been Wynne Godley too for many
years. In fact that great and wise
Keynesian, Lorie Tarshis, regarded the use of the
representative agent as the greatest heresy of modern macroeconomics and
explained why in Tarshis (1980), see also Harcourt
(1995; 2001a).
As for the use of
Ramsey’s benevolent dictator model, a re-read (or a read for the first time)
of his classic 1928 article, “A mathematical theory of saving” together with
his own scathing assessment of it1, ought to show how fanciful it
is to argue that, in a completely different setting, it could illuminate what
has been happening in actual interrelated modern economies in recent decades,
in fact, any decades. As for the New
Keynesians, while it is possible to applaud many of their policy conclusions
and make common cause with them on them (a plea I first made in 1980 though
my paper was not published until 1996-97, see Harcourt (1996-97; 2001a)), I
submit that their policies do not always follow logically from their
theories. By basing their results on
imperfections, they imply that if the latter were not there in the first
place, or were to be removed, all would be well. But as Marx and then Keynes argued, freely
competitive capitalism with power
diffused equally between all individual decision makers and the recipients of
such decisions, especially wage-earners, so that, in effect, no one
individual has any power, still would not work in an optimal manner. In particular, it would not necessarily
provide full employment of labour and capital either in the short or the long
period, so that booms and depressions, inflations and deflations and in
certain circumstances deep crises, could still be the order of the day. An especially astute argument for an aspect
of this set of arguments is to be found in Nina Shapiro’s 1997 paper,
“Imperfect competition and Keynes”.
She argues, plausibly (but fairness demands that I refer the reader to
Robin Marris’s paper, “Yes, Mrs. Robinson! The
General Theory and imperfect competition”, Marris
(1997), that immediately precedes Nina’s paper in Harcourt and Riach, vol. 1 (1997)), that an economy characterised by
freely competitive market structures would have cycles of greater amplitudes
and higher average levels of unemployment over time than one characterised by
imperfectly competitive market structures.
This insight is shared both by her contemporaries, for example, Paul
Davidson and Jan Kregel and by distinguished
predecessors, for example, Austin Robinson who always lamented the relative
lack of interest by Keynesians in the early post-war years in the systemic
effects of market structures, regional experiences and requirements and the
like, Michal Kalecki,
whose review of The General Theory which alas, though published in
Polish in 1936, was not available in full in English until 1982, see Targetti and Kinder-Hass (1982), forcefully makes this
point in his usual lucid and succinct way, and John Kenneth Galbraith in his
greatest classic, The New Industrial
State, Galbraith (1967). All these economists, together with Marx
and Keynes, were analysing how key decisions made in an environment of
inescapable uncertainty impact on systemic behaviour.
The thrust of Robinson’s, Galbraith’s and Shapiro’s argument is that
anything that reduces the impact of uncertainty on the decisions on the
production, employment and, most importantly, accumulation of firms (the most
fundamental unit of analysis in Keynes’s macroeconomics, a point emphasised
repeatedly by Tarshis, one of Keynes’s most devoted
pupils and disciples, see Harcourt (1995; 2001a)), is likely to result in
more satisfactory and stable systemic behaviour. Especially is it likely to beget a higher
rate of accumulation on average and so a greater chance of absorbing
(offsetting) the level of saving associated, if not with full employment
levels of income, at least with high levels, certainly higher levels than
would occur in a system characterised by the Marshallian
freely competitive structures that Keynes used for most of the time in his
models in The General Theory itself.
Though the New Keynesians have mounted vigorous and, to my mind
anyway, telling counter-attacks on the new classical macroeconomics within
the latter’s own framework, see, for example, Hahn and Solow
(1995), they have not themselves completely escaped from the clutches of what
Joan Robinson once aptly dubbed “Pre-Keynesian theory after Keynes”, Joan
Robinson (1964). It is true that they
have routed the extreme idea associated with the beginning of the use of the
hypothesis of rational expectations by the new classical macroeconomists that
the world may be analysed as if perfect competition and perfect presight reigned so that the Arrow-Debreu
model could be used as the base on which to erect theory and policy. And it is also true that the rational
expectations hypothesis when it is uncoupled from the Lucas vertical
aggregate supply curve, is just a hypothesis deserving to be tested. Indeed, if it were found not to be
inconsistent with the facts, and if the world is correctly illuminated by
Keynes’s model, coupling them together would serve to reinforce policies of
intervention for then thinking alone could make it so, as it were. Yet, having cheered all this, there are
still so many remnants of what Keynes dubbed classical economics present in
the New Keynesian approach as to make it logically unacceptable as the appropriate
model or even “vision” for starting an analysis of the modern world: that is
to say, a world in which foreign exchanges have been floated, sometimes
dirtily, often freely, financial markets have been deregulated, credit has
been made “available to all”, capital controls have been removed in many
economies, labour markets have been made flexible (a euphemism for making the
sack effective again by recreating the reserve army of labour after the full
employment years of the long boom as the Marxists have it or Golden Age of
capitalism as the Left Keynesians dubbed it), international trade has been
liberalised at least in some directions, often at the expense of the South
and to the benefit of the North, and technical advances have reduced the
length of the short run in financial and other markets to hours rather than
weeks or months. For it is not obvious
that the equilibrating mechanisms of supply and demand (even if associated
with path dependence) with their underlying theme of harmony, balance and voluntary
choice are universally the appropriate tools to use. So let us reiterate the essential lessons
that Keynes taught us.
III
I briefly sketch what I
have come to believe is the essence of Keynes's new position, as he saw it himself in 1936 and 1937, as he moved from the Tract through A Treatise on Money (1930) to The General Theory (perhaps we should
start from A Treatise on
Probability (1921) and The Economic
Consequences of the Peace (1919).) I do not give chapter and verse for what I
have to say; it is based on my reading over many years of The General Theory and Keynes's other
books, the Collected Writings,
especially volumes XIII, XIV and XXIX, and much secondary literature,
especially in recent years Robert Skidelsky’s
superb three volume biography of Keynes, Skidelsky
(1983, 1992, 2000).
The essential
characteristics of the Marshallian system as Keynes
viewed it was, first, the domination of the long period and secondly, a
strict distinction between the real and the money. In the real system, supposing there to be
free competition, the object of the analysis was to determine long-period
normal equilibrium prices and quantities, using partial equilibrium supply
and demand analysis (but showing in an appendix that the same principles
apply in a general equilibrium system, to wit, that equilibrium prices were,
as we say now, market-clearing). The
analysis was as applicable to the market for commodities as it was for those
for the services of the factors of production. As for the process of accumulation, there
was a supply of real saving, consumption foregone, associated with maximising
expected utility choices between present and future consumption, with the
rate of exchange reflecting time preference at the margin; and a demand for
saving, investment, in which the technical possibilities of transforming
present consumption into future consumption at the margin were the key
concepts. The price which cleared this
market and set the composition of the national income between consumption and
saving/investment was the natural rate of interest, a real concept.
The general equilibrium
version would have as a corollary the Say's Law level of long-period overall
output, itself a 'simple' summation of the individual quantities of
commodities (and employment) associated with the long-period market-clearing
prices of each individual market. So
what determined overall employment (and zero,
non-voluntary, unemployment) was
not an interesting theoretical
question, if it were ever even to be asked: only simple summation was
required.
When we come to the
discussion of the determinants of the general price level – so far only relative prices and quantities have
been discussed, neither money nor money prices played any significant
analytical role – the quantity
theory of money tautology could easily be turned into a theory. For if M
was determined by the monetary authorities, V was given by institutions and historical customs and T was interpreted as the total of
transactions associated with the Say's Law long-period equilibrium position, P remained the only unknown. Moreover, if V and T were given,
changing M would, at least as a
long-period tendency, change P in
the same proportion. (Keynes would
have expressed all this in terms of the Marshallian/Cambridge
version of the quantity theory but the story is essentially the same.) Money, therefore, was only a veil in the
long period.
The object of volume II
of a Principles of Economics was to set out this basic theory, analyse
the causes of fluctuations around the long-period position (the trade or
business cycle) and design institutions which either allowed the economy to
return as quickly as possible to the equilibrium
position after a shock; or to move as painlessly as possible to a new
equilibrium position if the basic real determinants of it – tastes, endowments,
techniques of production – themselves changed. The essential task of the monetary
authorities was to ensure that the money rate of interest was consistent with
the underlying natural rate of interest which like saving ruled the roost in
the process of accumulation. This, in
the crudest, simplest form, was the system on which Keynes was brought up, as
he came to see it.
Because of the
real/monetary dichotomy, and
because he was writing on money, Keynes felt inhibited about spending time on
the intricate happenings to output and employment in the short period and
over the cycle, "the intricate theory of the economics of the short
period". Nevertheless, in the Tract he recognised them and especially the evils of unemployment as
well as falling prices – hence he
cheeked Marshall about our mortality in the long run – but, analytically, he was looking for
institutions and their behaviour which would give price stability and allow
the economy to settle at its long-period Say's Law position. In A Treatise on Money he presented the famous banana plantation
parable but he was unable analytically to stop the downward spiral of
activity and prices until either the inhabitants had starved to death or
there was an ad hoc change in their
accumulation behaviour (Keynes 1930; 1971, C.W.,
vol. V, 158-60). The endogenous
process and its end had to wait for the publication of Kahn's multiplier
article in 1931 which also contained “Mr. Meade's relation” – the derivation
of the value of the multiplier by concentrating on the leakage into saving.
Keynes replaced the old
system by a radically new, indeed revolutionary, system. As a Marshallian
his basic tools were demand and supply functions, now aggregate ones. His emphasis was on the short period in its
own right, suitably adapted for analysis of the economy overall. (This had been the emphasis, too, in Kahn's
dissertation, The Economics of the
Short Period (1929; 1989) though Kahn's analysis was microeconomic.) The dichotomy between the real and the
money disappeared in both the short period and the long period (which Keynes
ultimately ceased to believe to be a coherent concept in
macroeconomics). Money and other
financial assts and monetary institutions entered the analysis from the
start (institutions were only sketched
relatively to the rich analysis in A Treatise on Money, a deliberate choice by Keynes). Aggregate planned expenditures basically
drove the system which operated in an environment of inescapable
uncertainty. The latter had inescapable
consequences for vital decisions, especially regarding investment
expenditures and the holding of money and other financial assets and the form
that they took. Investment dominated
and saving responded through the consumption function, the relationship
between aggregate disposable income and the distribution of income between
the classes on the one hand, and planned consumption expenditure, on the
other, intimately related to the (income) multiplier through the marginal
propensity to consume. The amount
saved (but not the form in which it was held) was treated as a residual. Investment was determined by expected
profitability, on the one hand, and the money rate of interest, representing
the alternative ways of holding funds (and their availability and cost), on
the other. Subsequently, in 1937,
finance, especially through the banking system and the stock exchange, was
also to play a vital role as, cet. par., the
ultimate constraint on investment expenditure. The money rate of interest therefore ruled
the roost and the expected rate of profit (the mei, the counterpart to the
natural rate of interest in the old system) had to measure up to it. The money rate of interest was depicted as
the price which cleared the money market by equating the demand for money with
its supply, not as the (real) price which equalised desired saving and
investment.
The rest state in both
the short period and the long period (the latter was ultimately to become for
Keynes and his closest followers but economics for economists) could be
associated with involuntary unemployment – people willing to work in existing
conditions but with the level of aggregate demand such as there not to be
sufficient demand for their services.
Nor was there any effective way for them to signal that it would be
profitable to employ them; indeed, there would not be unless there were to be
a rise (or an expected rise) in real expenditures. Up to full employment, the outcome in the
labour market depended on what happened in the commodity market. The quantity theory was replaced as an
explanation of the general price level by old-fashioned Marshallian
short-period competitive pricing, suitably (or perhaps not) adapted to the
economy as a whole. There were
therefore at least three 180º turns between the old and the new: investment
dominated saving, the commodity market dominated the labour market and the
money rate of interest dominated the expected rate of profit. The forces which would make planned
accumulation even on average absorb full employment saving were unreliable
and weak, not to be relied on even as tendencies. Moreover, the general price level was
determined by factors other than the quantity of money.
IV
The new system was the
base on which Keynes would build his theory of inflation in How to pay for
the War (1940; 1980) and his policy proposals for the international world
order in the postwar period. In his superb review article, Vines (2003),
of Robert Skidelsky’s third volume of his biography
of Keynes, Skidelsky (2000), David Vines makes a convincing
case for the proposition that Keynes provided the conceptual basis for modern
international macroeconomic theory. Of
course this is not to be found explicitly in The General Theory
itself. That book was mainly concerned
with a closed economy model in order to highlight the central theoretical
propositions and insights of the new theory.
Nor did Keynes analyse the trade cycle or long-term growth issues
systematically in The General Theory and some of his obita dicta asides look rather strange now.
For most of The
General Theory Keynes was content to discuss existence and stability
propositions in the short period, focussing especially on the factors that
were responsible for the point of effective demand at which aggregate demand
and aggregate supply, and planned investment and planned saving (more
generally, injections into and leakages from the
expenditure-production-income circuit) were equalised. (He said later that if he were to write the
book again he would have been more careful to separate out the fundamental
factors responsible for the existence of the point of effective demand from
the other set responsible for stability and reaching the point through a
groping process by business people. He
thought that Ralph Hawtrey had confused the two,
see Keynes, C.W., XIV, 27, 181-82.)
In his most stark
model, one designed not so much to describe the world as is, as to bring out
most simply what was at stake, he assumed, as Jan Kregel
(1976) has told us, that short-term expectations concerning immediate prices,
sales, costs et al., were always realised and were independent of
long-term expectations concerning their future courses, the ingredients most
relevant for investment decisions, so that planned investment could
provisionally be taken as a given and the point of effective demand
established immediately. In his most
sophisticated model of (the same) reality, the independence of the two sets
of expectations was scrapped, the point of effective demand was not realised
immediately and indeed it changed over “time” as the model of shifting
equilibrium came into play. This last
apparatus is in rudimentary form the starting point for the development of
growth theory by Richard Kahn and Joan Robinson, Nicky Kaldor
and Luigi Pasinetti and the models of cyclical
growth by Kalecki (independently) and Richard
Goodwin.
V
Both Marx and Keynes
recognised that when financial capital was not moving in tandem with
industrial and commercial capital (Marx would and Keynes would not have put
it this way), malfunctioning and sometimes crises were likely to occur. Keynes set out his ideas on this in, for
example, the key chapter 12 of The General Theory on the operation and
non-operation of the stock exchange and its relationship to real accumulation
and activity generally. Another key
step was in his 1937 paper on the finance motive, see Keynes, C.W., vol. XIV, 201-23, on how the banking
system in particular holds the key to the realisation of investment plans,
taking as given the state of long-term expectations. The stock exchange also has a key role
because the repayment of the bank loans used to finance the setting up of
investment projects, the start of the process of accumulation, depends upon
the firms concerned being able subsequently to place new issues of shares and
debentures at satisfactory prices.
(The demand for the new issues comes, in part at least, from the
placement of the new saving created by the new investment.) The point is that finance and saving are
sharply separated by their roles and place – timing – in the process of
accumulation.
These ideas were
subsequently developed by Hyman Minsky in
particular, writing under the rubric of his financial instability
hypothesis. Minsky
spelt out ideas, perhaps more implicit in Keynes’s and Dennis Robertson’s
writings, that the natural, probably inescapable, cyclical movements on the
real side of the economy can be enhanced both upwards and downwards by events
in the financial aspects of the economic process, resulting in the greater
amplitudes of the actual cycles experienced by economies. Minsky stressed
the feedbacks associated with the disparities between expected cash flows and
actual or realised cash flows in the accumulation/production process, on how
non-realisation acts on confidence and expectations, enlargening
the boom, at least in its early stages, accelerating the downturn and
deepening and prolonging the subsequent recession or depression.2
VI
As well as pointing out
the implications of disparities in the progress of finance capital in relation
to commercial and industrial capital, Marx’s analysis of the inherent
contradictions in capitalism are of immediate relevance for our purposes in
this paper. Unlike Keynes and, to a
lesser extent, Kalecki, Marx made a clear
distinction between happenings in the sphere of production, on the one hand,
and happenings in the sphere of distribution and exchange, on the other. As far as the possibility of and limits to
accumulation are concerned, it is conditions in the sphere of production –
the length and intensity of the working day, the state of the class war
between capital and labour, employer and employee – that ultimately determine
the size of the potential surplus created for the realisation of profits and
for future accumulation. Whether this
potential is realised or not, though, depends upon happenings in the other
sphere of distribution and exchange.
It is here that Keynes, Kalecki and
developments based on their contributions come into play: the combination of
the theories of investment and of the distribution of income determined by
the expanded version of the theory of effective demand decides how much of
the potential surplus is realised in actual profits and accumulation, see,
for example, Harris (1975; 1978).
These ideas help to
explain one of the paradoxes of recent decades. Monetarism has rightly been called by the
late Thomas Balogh (1982) “the incomes policy of
Karl Marx”. Ostensibly, the theory was
meant to justify policies designed to rid the system of inflationary
tendencies. In fact, it was associated
with the attempt to swing the balance of economic, social and political power
back from labour to capital. (The
reverse swing had occurred cumulatively in many advanced capitalist economies
during the years of the long boom.) The
means to this end was the recreation of the reserve army of labour, so making
the sack an effective weapon again and creating cowed and quiescent
workforces and greater potential surpluses for national and, increasingly,
international capital accumulation.
What was not realised
was that the emergence of heavy and sustained unemployment, initially
ostensibly to push short-run rates of unemployment above so-called natural
rates and then let them converge on natural rates where inflation could be
sustained at steady rates and accelerating rates of inflation would be things
of the past, would simultaneously have such an adverse effect on what Keynes
called the “animal spirits” of business people, the ultimate determinants of
rates of accumulation. Hence we have
had decades in many economies in which inflation has been drastically reduced
yet accumulation has been sluggish, certainly well below the levels needed to
offset full employment saving and the levels achieved during the years of the
long boom itself. In those countries
where this had not occurred, despised Keynesian policies have
continued to be used, sometimes unintelligent ones such as those implemented,
for example, during the last six years of Ronald Reagan’s Presidency in the
USA and now by President Bush the Second.
Since attaining full
employment by the use of fiscal policies was no longer on the agenda in the
former countries and monetary policies were mainly directed at general price
levels and exchange rates, contractionary forces
were widely prevalent in these countries, as the politicians and their
advisors waited (or said they were) in vain while the impersonal forces of
competitive markets allied with monetarist rules allowed the economies to
seek and find their natural rates.
VII
I think it is fair to
say that Keynes never completely threw off the vision of the working of
economies in terms of an equilibrium framework. He did, of course, argue that government
intervention was needed to help attain a satisfactory full employment
equilibrium (internal balance) in each economy – left alone, less
satisfactory equilibria or rest states would
emerge. This was an essential step
towards equilibrium associated with external balance in the international
system and the possibility then to take advantage of the classical principles
of free trade on which he had been brought up. (Skidelsky (1992,
xv) called him “the last of the great English liberals”.) The proposals he put forward at Bretton Woods were designed to provide the institutions
and the orders of magnitude of, for example, the provision of liquidity that
would make all this possible. That the
Americans, principally thorough Harry Dexter White, won out on both the
institutions and the orders of magnitude adopted for the post-war period was
a tragedy; for this ensured that the Bretton Woods
system contained within it the seeds of its own eventual destruction from its
very inception. (How Marx would have
laughed!)
One of the major
changes in vision since Keynes’s death about how markets, economies, even
whole systems work, associated with Keynes’s followers, especially Kaldor and Joan Robinson, is the concept of cumulative
causation. The concept has its origins
in Adam Smith (what has not?) and was brought into prominence in the modern
era by Allyn Young, Kaldor’s
teacher at the LSE, and subsequently championed by Kaldor
and independently by Gunar Myrdal,
especially in their post-war writings.
The way I illustrate the essential idea of the concept for my students
is through the analogy of a wolf pack (I am not a zoologist so I may be
completely wrong about how wolves behave; but as I am an economist, at least I
think so, let us assume I am right).
There are two major views on the workings of markets, economies, whole
systems. The dominant one is that akin
to a wolf pack running along. If one
or more wolves get ahead or fall behind, powerful forces come into play which
return them to the pack. (The
parallels with the existence of an equilibrium that is stable, and that the
forces responsible for existence are independent of those responsible for
stability are, I hope, obvious.) The
other view has the forces acting on the wolves who get ahead or fall behind
make them get further and further ahead or fall further and further behind,
at least for long periods of time.
This view captures the notion of virtuous or vile processes of
cumulative causation. My contention is
that, according to which view is “correct”, makes a drastic difference to our
understanding of the world and how specific policies may be perceived,
recommended and evaluated.
I illustrate with an
example, the case for freely floating exchange rates. A classic paper arguing for them is by
Milton Friedman (1953). Underlying his
argument is the first wolf pack analogy, that in a competitive setting there
exists a set of long-period stable equilibrium exchange rates that quickly
would be found and then kept by a free float.
Moreover, in this setting the systemic effects of speculation would be
beneficial, for speculators with their superior knowledge, intelligence and
information would help the system to reach the equilibrium pattern more
quickly than in their absence and then sustain it there.
But suppose that the
second wolf pack analogy is the correct or at least more correct description
of how foreign exchange markets work.
Then there is no set of stable equilibrium exchange rates “out there”
waiting to be found and now a float combined with speculative activity will
be systemically harmful, accelerating the movements away in both directions
of exchange rates from one another and also of systems, at least for long
periods of time. I submit that the
second scenario is more akin to what has happened over much of recent
decades, and provides a rationale for various schemes suggested to curb the
action of speculators. (My own
suggestions may be found in Harcourt (1994; 1995; 2001b). I had generalised the Tobin tax proposal
without, I must confess, being aware at the time of its existence!)
It is not only in
markets characterised by cumulative causation processes that speculation may
be systemically harmful. Any market in
which stocks dominate flows and expectations about the behaviour of other
participants in the market dominate the more usual economic factors –
preferences, cost of production – in the setting of prices may experience
periods when speculation is harmful.
(The seminal and classic paper on this is Kaldor
(1939).) An obvious example is the
stock exchange. On this we may recall
Keynes’s famous description in Chapter 12 of The General Theory of
what may happen when “enterprise becomes a bubble on a whirlpool of
speculation”, Keynes (1936; C.W.,
vol. VII, 1973, 159).
VIII
Let me close with
another example of how Keynes and Keynesian/Kaleckian/Marxian
ideas are still relevant for both our understanding and policy making. The ideas I present now are based on Kalecki’s famous 1943 paper, “Political aspects of full
employment” and the writings of my two greatest Australian mentors, the late
Eric Russell and the late Wilfred Salter, both devoted Keynesians, see
Harcourt (1997; 2001b) for the arguments and references.
Kalecki
set out graphically the vital difference between the political economy of
getting to full employment after a deep slump, when all classes are in favour
of this, the wage-earners in order to get jobs, business people in order to
receive higher profits, the government in order to reduce the risk of serious
social unrest, on the one hand, and the political economy of sustaining full
employment, on the other hand. In the
second situation, as I argued above, cumulatively economic, social and
political power shifts from capital to labour. The capitalist class, indeed conservative
elements generally, get more and more uneasy about the emerging
situation. An environment is created
in which, for example, monetarist ideas will be well received, and more than
one economist will be prepared to be a hired prize fighter in support of them
as government (and central bank) actions.
Is there a possible
answer to this, on the face of it, inescapable dilemma in our sorts of
economies? Keynes and his followers
recognized that attaining and then maintaining full employment would carry
with it cumulatively rising risks of inflationary pressures associated with
rising money-wage demands. It is no
accident that Joan Robinson always said that from 1936 on, “Incomes Policy”
was her middle name, a perceptive insight no doubt reinforced by having an
actual middle name of Violet. Russell
and Salter recognized this dilemma and argued in Australia for a full
employment policy that included an incomes policy implemented through our
centralised wage fixing body (then the Australian Arbitration
Commission). In broad outline, at a
starting point, money incomes were to be adjusted periodically for changes in
prices and in overall productivity.
Not only is this adjustment equitable, it is also efficient.
It is equitable because
at the level of the economy as a whole, capital and labour are complements
and the impact of their combined activity on overall productivity ought to be
reflected in changes in the real incomes of all citizens. It is efficient because with full
employment, such an overall policy discourages low productivity, often
declining industries whose time has passed and encourages high productivity,
often expanding industries whose time has come. The result is a regime with higher
increases in overall productivity than would occur otherwise, certainly than
would occur in a regime characterised by so-called flexible markets, such as
are the UK’s and the USA’s pride and joy.
There would be therefore an agreeable quid pro quo for money
income restraint in the form of rising real incomes, so providing a possible
solution to Kalecki’s dilemma. There are, of course, all sorts of
qualifications and modifications and exceptions to the starting rule – I
discuss these in the article referred to above. Here I wanted to set out the core argument
as starkly as possible.
IX
In
conclusion, may I say that Keynes and his ideas are still alive and well;
that subsequent developments by others complement agreeably his own
revolutionary contributions; and that people of good will who wish to see
established just and equitable societies world-wide have in these ideas an
essential starting point?
End
Notes
* A lecture given at the conference on “Keynes and
after”, held at the Faculty of Economics and Business Administration,
University of Iceland, Reykjavik, on 10 October 2003.
1. In a
letter to Keynes (28.6.1928) when he submitted the article to the Economic
Journal, he wrote: “Of course the whole thing is a waste of time”. It had distracted him from “a book on logic
… [because] it [was] much easier to concentrate on than philosophy and the
difficulties that arise rather [obsessed him]”
2. For some
policy implications of Minsky’s insights, see
Harcourt (2001a), ch. 15.
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______________________________
SUGGESTED CITATION:
G. C. Harcourt, “The economics of Keynes and
its theoretical and political importance: Or, what would Marx and Keynes have
made of the happenings of the past 30 years and more?”, post-autistic
economics review, issue no. 27, 9 September 2004,
article 1, http://wwwpaecon.net/PAEReview/issue27/Harcourt27.htm
|