The General Theory and the Current Crisis: A Primer on Keynes’ Economics

Introduction: The “Revolutionary” Who Wasn’t

BY ALEJANDRO REUSS
This is a web-only article, available only at www.dollarsandsense.org.

Keynes is often described as a “revolutionary” thinker. In one sense, this is correct. Keynes was one of the most important economic thinkers of modern times, and his ideas were at the center of a major “paradigm shift” in economic theory and policy. He issued his masterwork, The General Theory of Employment, Interest, and Money(1936), at a critical juncture, in the middle of the Great Depression, when the orthodox views from which he had broken seemed at a loss to explain the crisis or a way out of it.

Keynes was not the first major economic theorist to understand that capitalist economies were prone to depressions (Marx had written on the subject nearly a century before), nor was he the only major economist of his generation to arrive at the basic insight that total demand could fall short of the level required to ensure full employment. (Some others, most notably the Polish economist Michal Kalecki, came to the same conclusions separately from, and even slightly earlier than, Keynes.) Keynes, however, was already a major figure in British economics and politics at a time when Britain was a much more important world power than today, so his ideas had a bigger impact in ruling circles than they would have coming from elsewhere, or from economists with a more radical views about the changes necessary to cure the problem.

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As “revolutionary” a figure as Keynes was in the history of economic thought, he was, in another sense, a profoundly anti-revolutionary thinker. This is not to say that the changes he proposed, particularly in the role of government in capitalist economies, were trivial. He believed the problems of capitalism—especially the “arbitrary and inequitable” distribution of income and wealth and the “failure to provide full employment”—were very serious, and he did not think that these “outstanding faults” of capitalist economies would fix themselves. He thought that the state would have to play a major role in fixing them. However, as much as it was his goal to get rid of what he considered bad about capitalist societies, he also aimed to preserve what he considered good about them, which was a great deal.

In The General Theory, Keynes praises in no uncertain terms what he considers the virtues of “self-interest,” “individualism,” and “private initiative and responsibility” and their place in a capitalist society. His motive for wanting to eliminate excessive inequality and unemployment was, to a great extent, that he viewed them as threats to capitalism. In his view, these “outstanding faults” created the danger of revolutionary upheaval. An enlargement of the role of government was the “only practicable means” for eliminating these problems and “avoiding the destruction of existing economic forms in their entirety.” It is easy to imagine Keynes lashing those who denounce government intervention in the economy as “socialism” for their failure to recognize these policies as means of preserving a well-functioning capitalist economy.

The “Socialization of Investment”

Keynes did not object to “significant inequalities” in income and wealth, and therefore did not aim to create a society in which incomes and wealth were equally (or almost equally) distributed among all members of society. He offered two justifications for inequality, as an incentive for productive activity and as a channel for competitive impulses that otherwise, he thought, might take on more predatory forms. However, he did think that existing inequalities were excessive, and that it would be desirable to reduce them.

Keynes did not believe that the accumulation of saving in the hands of the wealthy—and the necessity of this saving for financing investment—justified inequality. He pointed out that the rates of interest necessary to pry away the savings of the rich for use by society to finance investment were typically too high to be consistent with full employment. With interest rates too high, Keynes argued, investment is too low (since some investment projects that would be profitable at a lower rate of interest would not be profitable, and therefore would not be undertaken, at a higher rate), and therefore so are total output and employment.

Keynes viewed income from interest (which he called “rentier” income) as basically parasitic. He compared the interest income of the “functionless investor” to the rental income of landlords. Neither interest nor rent, he argued, required any “genuine sacrifice” on the part of their recipients. Rather, they were merely rewards for owning scarce resources. He advocated, therefore, a reduction of the interest rate to little or nothing and what he termed the “euthanasia of the rentier.” The cost of capital equipment, he argued, would cover its production cost, as well as allowances for depreciation and risk, but not incomes for idle owners of capital.

Keynes did not think that the dramatic reduction of interest rates need disrupt the functioning of a capitalist economy. First, he recognized that such a policy would increase the incentive to spend on present consumption. He did not agree with conventional economists, however, that this would necessarily reduce overall saving or investment. He argued that increased consumption expenditures, by increasing demand and resulting in higher incomes, could actually increase saving and investment. Second, he argued that higher interest rates resulted in lower investment, since entrepreneurs would only engage in investment projects that produced returns at least equal to the rate of interest. Therefore, lower interest rates, not higher, would result in higher investment and incomes. Third, Keynes argued that a major government-directed investment program could eliminate the scarcity of capital and, with it, the “oppressive power of the capitalist” to extract a tribute in the form of interest.

Keynes proposed that “communal saving through the agency of the State” take the place of private saving in financing investment. The details in The General Theory are rather sketchy, but one can imagine a government investment fund that either supplies private businesses with funds to finance the purchase of durable equipment or that finances the construction of such equipment directly and rents it out to private businesses. Keynes does not go into detail on the sources of this saving, though he seems to be thinking primarily of tax revenue (rather than voluntary deposits in a public bank). While he mentions “higher taxation of larger incomes and inheritances” as one possibility, he does not come down firmly in favor of this idea. Nor does he come to any firm conclusions about the magnitude of such savings—the degree to which it is “right and reasonable to call on the living generation to restrict their consumption” for the benefit of future generations.

What Keynes Did Not Have in Mind

Keynes did not favor the general socialization (public control) of productive enterprise. He regarded private enterprise as a source of “efficiency” and a “safeguard of personal liberty” (379-381). He envisioned the state as regulating the overall levels of consumption and investment, an enlarged role to be sure, but one perfectly consistent with leaving most of the economy in the hands of private actors. This overall regulation could be accomplished, he argued, by such means as control of taxes and interest rates, and did not require the “ownership of the instruments of production” by the state (378-379).

Keynes did not favor the elimination of all inequality of income or wealth, which he viewed as incentives for “valuable human activities,” nor the elimination of all income from property. While Keynes criticized the landlord and rentier as parasitic, he certainly did not view business owners in this way. (When he referred to the “oppressive power of the capitalist” to exploit the scarcity of capital, he was reserving the term “capitalist” for the rentier. He usually used the term “entrepreneur,” rather than “capitalist,” for business owners.) Keynes suggested that the elimination of interest income—from “risk-free” investments—would still leave room for investor to profit from the exercise of “enterprise and skill” in choosing among risky investments (221). He also thought that society could benefit from the “intelligence and determination and executive skill” of business people, which could be “harnessed … on reasonable terms of reward” (376-377) under a system of progressive taxation.

Keynes did not aim at a major upheaval in the basic economic or political institutions of capitalist societies. He did not oppose private property (over productive resources such as factories, mines, land, etc.), wage labor (workers being hired for pay by the owners of these resources), or market exchange. Nor did he favor sudden or conflictive social change. Quite the contrary, Keynes clearly describes himself as an enemy of revolution and insists that none of the changes that he proposes require one. He imagines the “euthanasia of the rentier” as a quiet and incremental process, “nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, requiring no revolution” (376). The overall government regulation of economic activity, he argues, could be “introduced gradually and without a break in the general traditions of society” (378).

What Keynes Did Have in Mind

The picture that emerges, Keynes as an advocate of a “regulated capitalism,” with a substantially increased role for the state in economic life (especially in guaranteeing full employment) and reduced inequality of incomes and wealth, is correct but incomplete. A fuller picture of Keynes’ social vision comes from his political writings of the 1920s, especially a 1926 book titled Britain’s Industrial Future. While formally issued by an economic commission of Britain’s Liberal Party, Keynes authored several sections outlining his view of the place of the large corporation in Britain’s present and future.

Keynes’ views of the large corporation strongly paralleled those of a school of thought known as “managerialism.” (The Modern Corporation and Private Property (1932), by U.S. economists Adolf Berle and Gardiner C. Means, is usually regarded as the founding statement of managerialism. Keynes, however, actually anticipated its main conclusions by several years.) Managerialists argued that most large corporations were controlled by paid managers (top executives and directors) rather than by individual owners or shareholders collectively. The ownership of shares in a typical large corporation, they argued, were dispersed among such a large number of shareholders that it was not typically possible for most of them to have much knowledge of or say in the corporation’s day-to-day decisions. Managerialists concluded that this gave managers a high—some argued, nearly total—discretion in how to run those companies, effectively disenfranchising the stockholders (their titular “owners”).

In Britain’s Industrial Future, Keynes argued, much as the U.S. managerialists would, that many corporations had “passed out of the effective control of their shareholders.” Keynes argued that “shareholders are so scattered and disorganized that it is seldom or never practicable” for them to control the composition of the management. As a result, in “large companies of diffused ownership,” he argues, directorships come to resemble “offices for life.” Keynes did not think that the insulation of management from control by the stockholders was necessarily a good thing. Directors, he argued, could be “useless” and “without special qualifications,” or command “high [pay] relative to the work done,” and still keep their positions. Stockholders’ lack of information about the inner workings of a company could also permit directors to “take great advantage over other shareholders through their knowledge of the exact position of their concern” (that is, to take advantage of insider information).

Like the U.S. managerialists, however, Keynes hoped and believed that the “separation between ownership and management” might liberate managers from the tyranny of the bottom line, and allow them to pursue other (hopefully, socially laudable) aims. In his essay “The End of Laissez-Faire” (1926), Keynes suggests that large corporations may, under some circumstances, act with the social welfare, rather than private gain, in mind. As management grew increasingly independent from ownership, Keynes argued, it tended to focus on the “general stability and reputation of the institution” instead of the maximization of shareholder profits. Corporations, in his view, were becoming more and more like quasi-public institutions “whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded.” More concerned with their public image than the bottom line, large private corporations, such as railroads, utilities, universities, banks, insurance companies, Keynes argued, were “as time goes on, socializing themselves.”

Keynes, Technocracy, and Democracy

This argument reflects the strong technocratic streak in Keynes’ thought. Keynes thought that the world should be governed by an educated elite that, in his view, would stand above conflicting class interests and govern in the public interest. He did not believe that political, intellectual, or economic elites always acted in the best interests of society as a whole, but he did believe that the right elites could. Moreover, he certainly did not believe that ordinary people could run society well, or should run it at all.

In The General Theory, Keynes frames his argument against “State Socialism”—that is, against the comprehensive nationalization of the “instruments of production”—as a caution against the “homogeneous or totalitarian state.” Too much nationalization, he seems to suggest, and you’re in Stalinist Russia (or Nazi Germany or Fascist Italy). His argument against a socialism that would lift the working class to power is different. Keynes famously wrote, in a rant against Marxism in the essay “A Short View of Russia” (1925): “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, whatever their faults, are the quality in life and surely carry the seeds of all human advancement?” That is not an argument against totalitarianism, but against democracy.

Keynes’ certainly had no sympathy for the radically democratic ideas, advocated by some socialists in his day and ours, that the principles of self-government should not end at the door to the workplace, and that no real democracy can exist in the political sphere as long as the economic sphere is dominated by unelected captains of industry (whether owners or managers). Keynes undoubtedly would have cringed at the idea of allowing the “boorish proletariat” to decide how a factory should be run, much less an entire economy. If ordinary people were allowed to decide the fate of society, Keynes believed, their ignorance and lack of refinement would stand in the way of “human advancement.”

Keynes’ outlook was consistent with political democracy, in the sense of a multiparty system with competitive elections, but not with a very participatory version of it. He was even suspicious of labor-based political parties that—unlike the elite that he imagined standing above all class interests—he denounced as “class” parties. As biographer Robert Skidelsky notes, Keynes believed society could be ruled by an “interconnected elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge and imbued with a public service ethic.” In other words, he thought it should be ruled by people rather suspiciously like him.

Alejandro Reuss is an historian and economist, and a member of the Dollars & Sense collective.

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It’s satisfying to watch rats flee a sinking ship.  This is because onlookers knew the ship was doomed long ago, and swimming rats signify that the drawn-out tragedy is nearing an end.  A collective sense of relief is a natural response.

The rats who propped up the broken boat of Obamacare are a collection of liberal and labor groups who frittered away their group’s resources—and integrity— to sell a crappy product to the American people.

Those in the deepest denial went “all in” for Obamacare— such as some unions and groups like Moveon.org— while the more conniving groups and individuals—like Michael Moore— playacted “critical” of Obamacare, while nevertheless declaring it “progressive”, in effect adding crucial political support to a project that deserved none.

But of course Obamacare was always more barrier than progress: we’ve wasted the last several years planning, debating, and reconstructing the national health care system, all the while going in the wrong direction— into the pockets of the insurance mega corporations.    A couple progressive patches on the sails won’t keep her afloat.  It’s shipbuilding time.

It was painful to watch otherwise intelligent people lend support to something that’s such an obviously bad idea.  So it’s with immense relief that liberals like Michael Moore, labor groups, and others are finally distancing themselves from Obamacare’s Titanic failure.   Now these individuals and groups can stop living in denial and the rest of us can proceed towards a rational discussion about a real health care solution.

The inevitable failure of Obamacare is not due to a bad website, but deeper issues.   The hammering of the nails in the coffin has begun:  millions of young people are suddenly realizing that Obamacare does not offer affordable health care.  It’s a lie, and they aren’t buying it, literally.

The system depends on sufficient young people to opt in and purchase plans, in order to offset the costs of the older, higher-needs population.    Poor young people with zero disposable income are being asked to pay monthly premiums of $150 and more, and they’re opting out, inevitably sinking Obamacare in the process.

Those young people who actually do buy Obamacare plans—to avoid the “mandate” fine— will be further enraged when they attempt to actually use their “insurance”.   Many of the cheapest plans—the obvious choice for most young people— have $5,000 deductibles before the insurance will pay for anything.   For poor young people this is no insurance at all, but a form of extortion.

At the same time millions of union members are being punished under Obamacare: those with decent insurance plans will suffer the “Cadillac” tax, which will push up the cost of their healthcare plans, and employers are already demanding concessions from union members in the form of higher health care premiums, co-pays, deductibles, etc.

Lower paid union workers will suffer as well.  Those who are part of the Taft Hartley insurance plans will be pressured to leave the plans and buy their own insurance, since they cannot keep their plans and get the subsidy that the lowest income workers get.   This has the potential to bust the whole Taft Hartley health care system that millions of union members benefit from, which is one of the reasons that labor leaders suddenly became outraged at Obamacare, after having wasted millions of union member’s dollars propping it up.

Ultimately, the American working class will collectively cheer Obamacare’s demise.   They just need labor and other lefties to cheer lead its destruction a little more fiercely.

Surprisingly, most of the rats are still clinging to Obama’s hopeless vessel, frantically bailing water.  Sure they’ve put on their life preservers and anxiously eyeing the lifeboats, but they’re also preaching about how to re-align the deckchairs.

For example, in his “critical” New York Times op-ed piece, Michael Moore called Obamacare “awful”, but also called it a “godsend”, singing his same tired tune.   Part of Moore’s solution for Obamacare—which was cheered on in the Daily Kos— is equally ludicrous, and follows his consistently flawed logic that Obamacare is worth saving, since its “progress” that we can build on.   Moore writes:

“Those who live in red [Republican dominated] states need the benefit of Medicaid expansion [a provision of Obamacare]…. In blue [Democrat dominated] states, let’s lobby for a public option on the insurance exchange — a health plan run by the state government, rather than a private insurer.”

This is Moore at his absolute worst.  He’s neck deep in the flooded hull of the U.S.S Obamacare and giving us advice on how to tread water.

Of course Moore doesn’t criticize the heart of Obamacare, the individual mandate, the most hated component.

Moore also relies on the trump card argument of the pro-Obamacare liberals: there are progressive aspects to the scheme—such as the expansion of Medicaid— and therefore the whole system is worth saving.

Of course it’s untrue that we need Obamacare to expand Medicaid.  In fact, the expansion of Medicaid acted more as a Trojan horse to introduce the pro-corporate heart of the system; a horse that Moore and other liberals nauseatingly continue to ride on.

But Moore’s sneakiest argument is his advice to blue states to  “…lobby for a public option on the insurance exchange…”

Again, Moore implies that it’s ok if we are “mandated” to buy health insurance, so long is there is a public option.  But that aside, the deeper scheme here is that Moore wants us to further waste our energy “reforming” Obamacare, rather than driving it to the bottom of the sea.

Moore surely knows that very few people are going to march in the streets demanding a public option at this point; he therefore knows that even this tiny reform of the system is unachievable. He’s wasting our time.  Real change only happens in politics when there is a surge of energy among large sections of the population, and it’s extremely unlikely that more than a handful of people are going to be active towards “fixing” Obamacare— they want to drown it.

Moore’s attempt to funnel people’s outrage at Obamacare towards a “public option” falls laughably short, and this is likely his intention, since his ongoing piecemeal “criticisms” of the system have only served to salvage a sunken ship.

Instead of wasting energy trying to pry Obamacare out of the grip of the corporations, Moore would be better served to focus exclusive energy towards expanding the movement for Medicare For All, which he claims that he also supports, while maintaining that somehow Obamacare will evolve into Single Payer system.

Most developed nations have achieved universal health care through a single payer system, which in the United States can be easily achieved by expanding Medicare to everybody.  Once the realities of Obamacare directly affect the majority of the population and exacerbates the crisis of U.S. healthcare, people will inevitably choose to support the movement of Medicare for All, the only real option for a sane health care system.

Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action (www.workerscompass.org).  He can be reached atshamuscooke@gmail.com 

In five-star hotels on Mumbai’s seafront, children of the rich squeal joyfully as they play hide and seek. Nearby, at the National Theatre for the Performing Arts, people arrive for the Mumbai Literary Festival: famous authors and notables drawn from India’s Raj class. They step deftly over a woman lying across the pavement, her birch brooms laid out for sale, her two children silhouettes in a banyan tree that is their home.

It is Children’s Day in India. On page nine of the Times of India, a study reports that every second child is malnourished. Nearly two million children under the age of five die every year from preventable illness as common as diarrhoea. Of those who survive, half are stunted due to a lack of nutrients. The national school dropout rate is 40 per cent.  Statistics like these flow like a river permanently in flood. No other country comes close. The small thin legs dangling in a banyan tree are poignant evidence.

The leviathan once known as Bombay is the centre for most of India’s foreign trade, global financial dealing and personal wealth. Yet at low tide on the Mithi River, in ditches, at the roadside, people are forced to defecate.  Half the city’s population is without sanitation and lives in slums without basic services. This has doubled since the 1990s when “Shining India” was invented by an American advertising firm as part of the Hindu nationalist BJP party’s propaganda that it was “liberating” India’s economy and “way of life”.

Barriers protecting industry, manufacturing and agriculture were demolished. Coke, Pizza Hut, Microsoft, Monsanto and Rupert Murdoch entered what had been forbidden territory. Limitless “growth” was now the measure of human progress, consuming both the BJP and Congress, the party of independence. Shining India would catch up China and become a superpower, a “tiger”, and the middle classes would get their proper entitlement in a society where there was no middle. As for the majority in the “world’s largest democracy”, they would vote and remain invisible.

There was no tiger economy for them. The hype about a high-tech India storming the barricades of the first world was largely a myth. This is not to deny India’s rise in pre-eminence in computer technology and engineering, but the new urban technocratic class is relatively tiny and the impact of its gains on the fortunes of the majority is negligible.

Indian slum: usually side by side with affluent areas.

When the national grid collapsed in 2012, leaving 700 million people powerless, almost half had so little electricity, they “barely noticed”, wrote one observer.  On my last two visits, the front pages boasted that India had “gatecrashed the super-exclusive ICBM (intercontinental ballistic missile) club” and launched its “largest ever” aircraft carrier and sent a rocket to Mars: the latter lauded by the government as “a historic moment for all of us to cheer”.

The cheering was inaudible in the rows of tarpaper shacks you see as you land at Mumbai international airport and in myriad villages denied  basic technology, such as light and safe water.  Here, land is life and the enemy is a rampant “free market”. Foreign multinationals’ dominance of food grains, genetically modified seed, fertilisers and pesticides has sucked small farmers into a ruthless global market and led to debt and destitution. More than 250,000 farmers have killed themselves since the mid-1990s – a figure that may be a fraction of the truth as local authorities wilfully misreport “accidental” deaths.

“Across the length and breadth of India,” says the acclaimed environmentalist Vandana Shiva, “the government has declared war on its own people.”  Using colonial-era laws, fertile land has been taken from poor farmers for as little as 300 rupees a square metre; developers have sold it for up to 600,000 rupees a square metre. In Uttar Pradesh, a new expressway serves “luxury” townships with sporting facilities and a Formula One racetrack, having eliminated 1225 villages. The farmers and their communities have fought back, as they do all over India; in 2011, four were killed and many injured in clashes with police.

For Britain, India is now a “priority market” – to quote the government’s arms sales unit. In 2010, David Cameron took the heads of the major British arms companies to Delhi and signed a $700 million contract to supply Hawk fighter-bombers. Disguised as “trainers”, these lethal aircraft were used against the villages of East Timor. They may well be the Cameron government’s biggest single “contribution” to Shining India.

The opportunism is understandable. India has become a model of the imperial cult of “neo-liberalism” – almost everything must be privatized, sold off. The worldwide assault on social democracy and the collusion of major parliamentary parties — begun in the US and Britain in the 1980s– has produced in India a dystopia of extremes and a spectre for us all.

Whereas Nehru’s democracy succeeded in granting the vote – today, there are 3.2 million elected representatives – it failed to build a semblance of social and economic justice. Widespread violence against women is only now precariously on a political agenda. Secularism may have been Nehru’s grand vision, but Muslims in India remain among the poorest, most discriminated against and brutalised minority on earth.  According to the 2006 Sachar Commission, in the elite institutes of technology, only four out of 100 students are Muslim, and in the cities Muslims have fewer chances of regular employment than the “untouchable” Dalits and indigenous Adivasis. “It is ironic,” wrote Khushwant Singh, “that the highest incidence of violence against Muslims and Christians has taken place in Gujarat, the home state of Bapu Gandhi.”

Gujarat is also the home state of Narendra  Modi, winner of three consecutive victories as BJP chief minister and the favourite to see off the diffident Rahul Gandhi in national elections in May.  With his xenophobic Hindutva ideology, Modi appeals directly to dispossessed Hindus who believe Muslims are “privileged”. Soon after he came to power in 2002, mobs slaughtered hundreds of Muslims. An investigating commission heard that Modi had ordered officials not to stop the rioters – which he denies. Admired by powerful industrialists, he boasts the highest “growth” in India.

In the face of these dangers, the great popular resistance that gave India its independence is stirring. The gang rape of a Delhi student in 2012 has brought vast numbers into the streets, reflecting disillusionment with the political elite and anger at its acceptance of injustice and a modernised feudalism. The popular movements are often led or inspired by extraordinary women — the likes of Medha Patkar, Binalakshmi Nepram, Vandana Shiva and Arundhati Roy – and they demonstrate that the poor and vulnerable need not be weak. This is India’s enduring gift to the world, and those with corrupted power ignore it at their peril.

John Pilger’s film, Utopia, about Australia, is released in cinemas on 15 November and broadcast on ITV in December. It is released in Australia in January. www.johnpilger.com