A detailed analysis of the institutions to be used by the state to regulate capital accumulation in pursuit of full employment under Liberal Socialism

As mentioned above, Lloyd George put up the money to finance the "Liberal Industrial Inquiry" in July 1926. The purpose of this Inquiry was to provide the thoughtful research necessary to support a detailed new economic policy position for the Liberal Party.

In August 1927, Keynes, as was his practice, addressed the Liberal Party Summer School. He was heavily involved at this time with the Liberal Industrial Inquiry. The subject of Keynes's talk was "The Public and the Private Concern." Keynes opened his remarks with the statement that, on the one hand, all sensible people regard "a great deal of public enter­prise as unavoidable, necessary, and even desirable," while, on the other hand, "there is an enormous field of private enterprise which no one but a lunatic would seek to nationalize" (CW 19-II, p. 695). He then went on to discuss "what actually exists" with respect to capital assets held by public, semi-public, and not-for profit institutions.

The capital of all these contributed to the stupendous total of three hundred thousand five hundred millions, which was two-thirds of the total capital of large-scale undertakings in this country. This is the first fact to bear in mind - that two-thirds of the typical large-scale enterprise of this country had already been removed, mainly by Conservative and Liberal Governments, out of the category of pure private enterprise... I suggest that we should give up pretending that there are no public concerns. We should take a good look at that great body of public concerns which we already have and learn how to handle them wisely and efficiently.

(CW 19-II, pp. 695-696, emphasis added) This fact - "that two-thirds of the typical large-scale enterprise of this country had already been removed, mainly by Conservative and Liberal Governments, out of the category of pure private enterprise" - became the foundation of his defense of the proposition that state control of the lion's share of capital assets was a politically and economically feasible task that required no substantial additional nationalization of for-profit industries.

In February 1928, the Liberal Party's Industrial Inquiry group published BIF, the end product of an 18-month study of the economic problems troubling the country. This is the most important document of the 1920s for those who wish to understand precisely how Keynes envisioned the public and private institutions and policies that could be used to restruc­ture British industry and use state control of most large-scale capital investment to restore long-term prosperity.

The major contribution to our understanding of the evolution of Keynes's thinking about state direct and indirect control of capital investment in BIF is a detailed description of his proposed Board of National Investment, a permanent body that would both gather the necessary sources of finance and allocate them to pay for economically and socially efficient invest­ment projects in a manner calculated to ensure the full employment of labor over the long run. This was not just about using public investment to "kick-start" the economy and let private enterprise take over once again. As we will see, Keynes expressed support for state control of most large- scale capital spending as the main instrument of government economic policy in many places in The General Theory, but he did not tell us in detail how this could be accomplished, either in that book or in any other place that I am aware of.

Keynes was a member of the Inquiry's Executive Committee, along with such influential party figures as Lloyd George and Ramsey Muir. The historical record is unclear about the precise role played by Keynes and others in the collective work, but it is clear that he was a - and probably the - major force behind it. According to Harrod:

Keynes' contributions were of central importance. He was able to get endorsement for his ideas on currency management, the stimulation of domestic investment programmes, a public investment board, which would also have regard to the scale of foreign investment, an Economic General Staff, greater publicity for the finance of companies, and the encouragement of the semi-public concern as an agency of industrial oper­ation intermediate between the state and private enterprise.

(Harrod 1951, pp. 392-393, emphasis added)

We do know that he was primarily responsible for Book 2 - according to Moggridge he drafted most of it - and Book 5, along with several other chapters, and that he coauthored the chapters on taxation as well as the

BIF and the Board of National Investment 97 "Summary and Conclusions." He also went over the text as a whole before it was published.

It is thus hard to be completely sure where Keynes is presenting his own ideas in the book, where his influence is negligible, and where his more radical ideas (for he certainly was one of the most radical of the Liberals) may have been muted in response to opposition from more conservative members. Moggridge reported an important instance of muzzling by conservative voices. Robert Brand, an investment banker who was very influential in the Liberal Party, objected to Keynes's emphasis on the centrality of the state-regulated public corporation, as well as his stress on the need to "rationalize" or cartelize industries under government guidance and regulation as discussed in the previous section.

Brand's objections proved decisive. Most of Keynes's evolutionary speculations were omitted from Book II; a strong section on the virtues of individualism was inserted; Keynes's insistence that the public con­cern should become the typical unit of industrial organisation was dropped from that Book; and proposals for reorganising business structure largely limited to making the existing forms of public concerns more "lively and efficient."

(Skidelsky 1992, p. 267, emphasis added)

I consider BIF to be a crucial stage in the evolution of Keynes's plans for the construction of Liberal Socialism in Britain for reasons I discuss in this section. Moggridge, on the other hand, apparently thought it to be of such little significance that he devoted only a page and a half to it in his 800-plus page "economist's biography" of Keynes.

It seems fair to conclude that: (1) Keynes influenced much of the book and was probably in general sympathy with most of the opinions expressed therein; and (2) opinions expressed in the sections of the book most closely associated with Keynes - especially Book 2 - though quite radical, may have been more conservative than he would have pre­ferred, with more emphasis on the economic benefits of individualism and markets.

The book is surprisingly long for its intended role as a political inter­vention at almost 500 pages, and it contains an astounding amount of institutional detail about many aspects of the British economy and the economic role of the state. In a letter to his wife, Keynes noted that "The Liberal Inquiry has had a rather bad press." But he also said that the book:

deserves it. Long-winded, speaking when it had nothing to say, as well as when it does... It would have been much better at half the

length, speaking only what is new and interesting and important.

(CW 19-II, p. 735, emphasis in original)

The book draws on the institutional and policy experience of many European countries in dealing with the economic dislocations of the interwar years. It looks to new experiments with the economic role of the state in Germany, Italy, France, and other countries. Reflecting important developments in Europe in the 1920s usually referred to as the "rational­ization movement," BIF is a very corporatist document. Several sections discuss the importance of uniting all of the key actors in an industry - firms, labor, and the public - into a governing board that can make key industry decisions cooperatively. Such boards could then be integrated into a national decision-making body. The corporatist language on indus­trial relations is clearest and most administratively concrete, but other aspects of industry decisions are to be made through cooperation, amal­gamation, or combination.

The potentially destructive force of class antagonism in industry receives careful attention. In addition to labor representation on industry­wide industrial relations boards, the book proposes a more egalitarian distribution of both private wealth and public services to reduce class distinctions and class tensions, as well as mandatory reporting of business costs and profits so that unions would know to what extent companies were treating them fairly. It also proposed profit-sharing and the evolu­tionary buildup of worker ownership of the companies that employ them, though it opposed direct worker control.

For our purposes, the most interesting aspects of the book are: (1) it supported the proposal by Keynes and Lloyd George in 1924 for reli­ance on public investment as the foundation of macro policy in pursuit of sustained full employment and provided for the first time supporting institutional detail for the implementation of this policy centered around a "national board of investment"; and (2) it reflected Keynes's multidi­mensional approach to the solution of Britain's economic problems in this period, relying not only on public investment and capital controls, but also on state-guided industrial policies and a redistribution of wealth.

BIF argued that high unemployment was primarily the result of long­term structural problems in key export industries aggravated by defla­tionary government policies related to the return to gold at par.² The solution, then, must address these industry-level problems through the kind of state-guided industrial policy Keynes had been expounding for the past two years.

But, as Keynes often argued, the transfer of labor out of the depressed industries and areas into new industries and areas would not take place even given sensible industry restructuring without a long-term macro­economic stimulus to overall economic growth provided by a large-scale

BIF and the Board of National Investment 99 program of state-controlled public investment. Chapter XXI, which fleshed out the details of such a program under the guidance of a central government Board of National Investment, opened with an emphasis on this balanced approach, listing a few of the most important industries that could benefit from a large increase in investment.

We put therefore, in the forefront of our proposals a vigorous policy of national reconstruction embracing within its scope, inter alia, the rehabilitation of agriculture, still the largest of our national industries; an extensive programme of highway development; afforestation, reclamation, and drainage; electrification, slum clearance and town planning, and the development of canals, docks, and harbours.

(BIF, pp. 280-281)

Book 1 summarized the general condition of British industry. It stressed the great changes that had taken place in Britain's crucial export sector since the turn of the century and, especially, since the start of the WWI.

When the War ended and the short-lived post-war boom was over, Great Britain found herself faced not merely with internal dislocation, but with her pre-war international difficulties so gravely increased as to create a completely new situation. The War had produced not only in Europe but even in far-distant countries a condition of extreme eco­nomic isolation. Our customers in the Empire, the East, and elsewhere had been compelled to provide, either at home or from some alterna­tive source, the goods and services we had formerly provided.

(BIF, p. 10)

The decline in the volume of exports and the consequent stagnation of the industries which are mainly associated with export is the prin­cipal explanation of our formidable post-war unemployment. Coal, iron and steel, engineering, shipbuilding, cotton and wool, are our great exporting industries, and [represent] a large proportion of our unemployment.

(BIF, p. 23)

Solving the unemployment problem in the export trades was made espe­cially difficult by the fact that the capital employed there was substan­tially immobile, a problem assumed away in classical and neoclassical theory. We discussed this problem earlier. But, Keynes observed, labor is also burdened by irreversibility. Jobs are location-specific and skill­specific, and housing is location-specific and may plummet in value when a dominant local industry such as mining or ship-building or steel pro­duction goes into depression. Workers and their families are also part of social networks that are central to their well-being. This was not, in other 100 The Economic Consequences... to The General Theory words, a situation in which the decline in some particular industry is easily resolved by the free movement of redundant labor and capital from declining into expanding industries. These export industries:

represent a very high degree of specialisation of plant and skill. They are concentrated very largely in particular localities... It would be impossible to view their decline with the same comparative equa­nimity with which we have been able in the past to view the decline of other industries against whom the tide of fashion or economic oppor­tunity had turned. But it is only necessary to ask to what alternative purposes a coal-mine or blast furnace could be converted in order to realise that the decline of our basic industries would confront us with an altogether formidable problem.

(BIF, p. 40)

Book 1 pointed to the two kinds of solutions that are stressed in the rest of the work. First, "there is in some cases a certain amount of remediable inefficiency within the industries themselves," especially in coal, textiles, and steel (BIF, p. 42). Second, on a more macro level, help can be found by following Keynes's persistent advice to restrict foreign financial invest­ment and channel more of British savings into "a large expenditure of capital at home," "the setting up of new industries, the modernisation of old ones, the revolution in the modes of transport and in forms of power, the need to house our increased population, and to rebuild a part of our towns" (BIF, p. 44).

It seems to us, therefore, that the time is now ripe for a bolder pro­gramme of home development which will absorb and employ the national resources of capital and labour in new ways. Such a pro­gramme, which we develop in Book 4, seems to us to be not only recommended in the national interest as a means of exploiting the technical developments of the modern age, but also as the best avail­able method to break the vicious circle of unemployment.

(BIF, p. 46)

The crucial macro dimensions of the policy proposals of BIF are contained primarily in Book 2, written by Keynes, and Book 4, overseen by Lloyd George. Book 2 is central to understanding Keynes's commitment to public investment as the core of macroeconomic policy. It lists in great detail the various categories of public, semi-public, and not-for-profit concerns, documenting their immense size and significance. The demon­stration that, even with no additional nationalization, there were enor­mous capital assets already under the direct control or the guidance of the state had become a crucial part of his general line of argument. Book 2 also contained Keynes's first detailed public proposal for a powerful

BIF and the Board of National Investment 101 “Board of National Investment” - one central authority capable of selecting, overseeing, coordinating, and financing all public investment programs at every level of government. Finally, this section supported and augmented William Beveridge's proposal for the creation of an “Economic General Staff” - “a thinking department within the Administration, at the elbow of the inner ring of the Cabinet, which shall warn Ministers of what is ahead and advise them on all broad questions of economic policy” (BIF, p. 116).

Book 2 began with a forthright rejection of what it called the “compre­hensive State socialism” of the Labour Party. It stressed several advantages of decentralized enterprise decision-making, as well as the inefficiency that direct central-state control of companies can inflict. On the other hand, the chapter also acknowledged that “the pooling of knowledge, the elimination of the wastes of competition (which are very great), [and] the deliberate aiming at the general advantage... are real advantages in central control and ownership” (BIF, p. 65). Keynes vigorously defended the concept of public management of large-s cale business enterprises, rejecting the assumption that “the unrestricted private-profit motive” is the only way to motivate effort and efficiency in business decision-making.

The notion that the only way to get enough effort out of the brain­worker is to offer him unfettered opportunities of making an unlim­ited fortune is as baseless as the companion notion that the only way of getting enough effort out of the manual worker is to hold over him the perpetual threat of starvation and misery for himself and those he loves. It has never been even supposed to be true, at all events in England, of the soldier, the statesman, the civil servant, the teacher, the scientist, the technical expert.

(BIF, p. 66)

Since most managers of large private firms receive “a certain salary, plus the hope of promotion or a bonus” for their efforts, this is what man­agers and directors of public concerns should expect: “the performance of functions by Public Concerns in place of privately owned Companies and Corporations would make but little difference to the ordinary man” (BIF, p. 66).

As a general rule, the following kinds of private enterprises should be brought under public control: firms of great national importance that require large amounts of capital but may fail to obtain adequate private financing; large firms with monopoly or collective oligopoly power that make unregulated private enterprise dangerous to the public; or firms in which “the private shareholder has ceased to perform a useful function” (BIF, p. 75). The last criterion is of special interest because Keynes is on the record as believing that most large firms had evolved to a position of man­agerial as opposed to stockholder control.

Keynes's next task is crucial: to demonstrate that the public concerns over which the state already has direct or indirect control are, in the aggregate, so large that no substantial increment through nationaliza­tion is required to give the state potential control of the national capital­accumulation process. Section 2 of chapter VI ("The Public Concern") is called a "Survey of Existing Public Concerns." A Public Concern is "a form of organization which departs in one way or another from the principles of unrestricted private profit, and is operated or regulated in the public interest" (BIF, p. 63). Chapter VI organized the socialized or semi-socialized firms into various groups and presented crude estimates of the amount of capital controlled by each. "We think that most readers will be astonished by their magnitude" (BIF, p. 66). It is useful to recall here Moggridge's statement that only the heated objections of conserva­tive voices such as Robert Brand's prevented Keynes from arguing that the Public Concern might become the "typical unit of industrial organisation" in Britain (BIF, p. 267).

The list of Public Concerns begins with the "nationalised" enterprises under the direct, day-to-day control of Government Departments. Keynes called them "few in number"; the leading examples referred to are the Post Office, the Telegraph, and the Telephone. Next came "National Undertakings operated by officially appointed ad hoc Bodies," of which the leading examples are the British Broadcasting Company and the Central Electricity Board. Then came "Local Undertakings operated by the Local Authority itself." These include locally owned gas, electri­city, transportation, and water companies, as well as housing. They are followed by "Local Undertakings operated by officially appointed ad hoc Authorities" or Boards, including docks and harbors (of which the Port of London is the largest), Water Boards, and Public Authorities in London.

The list then moves on to the all-important residential construction industry with its large cooperative lending sector. Keynes believed that if the Board of National Investment lent money to the industry at low long-term interest rates, it could induce substantial growth in the level of residential construction. We "now come to another category, where profit enters in, but either not on the usual capitalistic lines (e.g. Co-operative Societies) or not without some measure of regulation or restriction of profit" (BIF, p. 70). The most important of these were the Building Societies that cooperatively financed home building and non-residential construc­tion. They grew rapidly over the 1920s, helping finance Britain's substan­tial housing boom. "These societies are now administering something like ten per cent of the total savings of the country," and they finance domestic rather than foreign capital accumulation (BIF, p. 71, emphasis added).

The penultimate category is "Parliamentary Companies," the leading categories of which were railways, tramways, and gas, water, and elec­tricity companies. Railways, gas, and electricity had very large capital

BIF and the Board of National Investment 103 stocks. They were subject to tight restrictions "on profits to be earned and rates to be charged" (BIF, p. 73). Finally, reference is made to "Independent Undertakings not run for Profit," consisting of the "Ecclesiastical Commission," the Universities, Schools, City Companies, and Charities.

Keynes conclusion about the cumulative size of these concerns and their implication for state planning is of the utmost importance. His use of the term "Socialism" here refers specifically to the program of the Labour Party, which supported, in principle if not in practice, Soviet-type planning with state control of all productive property.

Thus productive undertakings, mainly transport and public util­ities, representing a capital in the neighborhood of £2,750,000,000 or £4,000,000,000 if we include roads, are already administered according to a variety of methods, all of which depart in some respect from the principles of private capitalism and unrestricted individualism. The transportation undertakings and public utilities included in this total, measured by the amount of capital involved, must comprise at least two- thirds of what could be called the large-scale undertakings of this country, though it would be a smaller proportion, measured in terms of the number of workmen employed... This formidable total - amounting to over £4,000,000,000 under all heads - demonstrates what we have said above as to the unreal character of the supposed antithesis between Socialism and Individualism. What does the [Labour Party] Socialist think he could gain by assimilating all this valuable diversity, developed by experience to meet real problems and actual situations, to a single theoretical model? Are not the abuses of private capitalism and unrestricted individualism capable of being reformed, in so far as they are still to be found in these mixed types, by a further evolu­tion along the lines already set? On the other hand, is the individu­alist really prepared to scrap all this elaborate special legislation by Governments of every political complexion under pressure of actual circumstances, and hand over the vast capital of our public utilities and railway system to the operation of uncontrolled individualism? If not, then there is no question of principle at stake but only on of degree, of expediency, of method.

(BIF, pp. 74-75, emphasis added)

When the capital investment and financing decisions related to this huge and diverse set of undertakings is brought under the coordination of a Board of National Investment, the ability to achieve sustained or long­term full employment would be within reach. The Board would regulate public capital investment in pursuit of the goal of sustained full employ­ment, thus defeating the destructive forces of both secular stagnation and dysfunctional disequilibrium processes. If the Board was successful, the smaller private sector would also prosper. Expectations of future sales and 104 The Economic Consequences... to The General Theory profits would rise substantially and uncertainty about future demand sub­stantially would lower, increasing the incentive to invest.

Chapter IX of Book 2 ("The National Savings") introduced Keynes's proposal for the creation of a Board of National Investment. The emphasis in this chapter is on the Board's control over the flow of national savings that will provide much of the financing for the investment projects the Board decides to undertake. Lloyd George's Book 4 dealt with the question of what kinds of investments the Board should support.

The introduction to Book 4 stressed the fact that there were vast unmet economic and social needs that could be efficiently addressed by an ambi­tious program of public investment, and that there was a "great reservoir of unemployed labor [and] the necessary financial resources" (BIF, p. 285) to carry out this program under the guidance of the Board of National Investment. It noted that "many foreign countries have set us an example of what might be done in this kind of way," including Germany, Italy, and France (BIF, p. 285).

The book laid out an incredibly ambitious set of possible investment projects capable collectively of moving the country from stagnation to prosperity while greatly improving the quality of public and private life. In 1942, Keynes would argue that a vigorous program of wisely chosen public investment in economically and socially useful projects carried out for a substantial time could create a "New Jerusalem" in Britain, a bib­lical reference to the heaven that awaits the faithful at the end of time. The reference was meant to stress the incredible potential of the Board of National Investment.

Book 4 described a vast and detailed menu of productive investments and explained why each type of investment was well worth undertaking. This menu occupies 140 pages of the 502-page book.

How will these investments be paid for? The annual flow of new savings is estimated to be about £500 million, of which about £100 million currently passes through central and local governments. Keynes suggested that about half of the funds that currently flow abroad should now be allocated to the Board via capital controls to be spent on domestic investment. "[I]t would be to the advantage of the country if (say) £50,000,000 less were lent each year to public bodies abroad and £50,000,000 more were devoted to the devel­opment of the national resources and equipment at home" (BIF, p. 111).

It is imperative, Keynes argued, that the revenue flows to and the cap­ital expenditures by government agencies be consolidated under a single authority. A unified national "Budget of Capital Expenditure" needed to be prepared, similar to that prepared for the government of India. "With this object in view, we propose that there be established a Board of National Investment" as a subordinate department of the Treasury under the authority of the Chancellor of the Exchequer, "who should make peri­odic statements to Parliament and give opportunities for discussion" (BIF, p. 111).

BIF and the Board of National Investment 105 "All capital resources accruing in the hands of Government Departments should be pooled in the hands of this Board" (BIF, p. 111). The Board could also borrow on its own account, at the low interest rate made possible by central-government backing. It would be empowered to substitute its own debt for cash as payment from the Sinking Fund to holders of existing government debt, thus converting, as Keynes put it, unproductive into productive debt. The Board "should also be authorised to issue, when necessary, either for cash subscription or in substitution for existing Dead-weight Debt, National Investment Bonds (as they might be called) having a government guarantee" (BIF, p. 112). Since interest payments plus amortization of the National Debt is estimated later in the book to cost about 10 percent of national income (or about £800 million per year), the ability to substitute National Investment Bonds for cash repayments could provide a huge potential source of funding for the Board.

The funds generated by the Board would be used to finance "new capital expenditures by all central, local, or ad hoc bodies [i.e. all Public Concerns], by means of advances precisely on the lines of those now made from the Local Loans Fund" (BIF, p. 112).³ The interest rate charged by the Board would generally be slightly above the rate the Board itself had to pay. Since this is government debt, the interest rate charged by the Board would be lower than that paid by even large profitable pri­vate corporations. The scope of lending available to the Board would be quite wide. Lending to private companies for approved investment projects that were congruent with Board objectives was specifically authorized.

The Board should also be authorized to advance funds for new capital improvements to railways or other Parliamentary companies on terms to be mutually agreed, and also... to any other Public Company, on the lines of the Trade Facilities Act.

(BIF, p. 113) The Trade Facilities Act made loans "for approved purposes on behalf of private concerns but with the guarantee of the Government" (BIF, p. 103). Keynes had mentioned on several occasions that the purpose of the Trade Facilities Act - to give private concerns with investment projects considered to be in the national interest government backing for its loans - was quite sensible, but that its scope had been too limited.⁴

Keynes addressed the question of how to ensure that the management of Public Concerns would operate efficiently in great detail.

The best method of conducting large undertakings owned by the gov­ernment and run in the public interest is by means of an ad hoc Public

Board analogous to a Joint Stock Company, in which the capital is owned and the directors appointed by the State.

(BIF, p. 457)

There is no inherent reason "why such Boards... need be any less effi­cient than the Boards of large public companies, which are managed by salaried directors and officials subject to no real or effective control by their shareholders" (BIF, p. 77). He stressed the need to create a kind of Civil Service of highly trained managers and skilled directors to run the growing number of public corporations, "a class of officials for running them as cap­able as the General Managers of great industrial companies" (BIF, p. 81).

We need to build up an attractive career for business administration of this type open to all the talents. A regular service should be recruited for Public Concerns with a cadre and a pension scheme, with room for the rapid promotion of exceptional officials and with satisfactory prizes for those who reach the top.

(BIF, p. 80)

Keynes and the Liberals clearly had high hopes for the scale and the potential economic impact of the Board's operations. Keynes estimated that it would be able to allocate about £150 million annually to begin with and up to £300 million in the foreseeable future. "In the course of time the annual installments of repayments for loans previously made would double this sum" (BIF, p. 114).

To oversee and coordinate all the diverse regulatory and control functions proposed for the state, Keynes called for the "creation of what, following Sir William Beveridge, we may call an Economic General Staff" (BIF, p. 117). It was his belief that the Prime Minister and the Cabinet had no adequate source of skilled economic advice, yet the proposed expansions in the economic role of the state would confront government with economic responsibilities of unprecedented peacetime dimensions.

It is, therefore, a vital need for a modern State to create a thinking department within the Administration, at the elbow of the inner ring of the Cabinet, which shall warn Ministers of what is ahead and advise them on all broad questions of economic policy.

(BIF, p. 116)

In particular, it would be the duty of the Economic General Staff: "To suggest to the Government plans for solving fundamental economic dif­ficulties, such, for instance, as measures for stabilising trade conditions, avoiding unemployment, and developing national resources" (BIF, p. 118).

Continuing the military analogy, Keynes proposed that there be a Chief of the Economic General Staff, whose "position would be of such power and

BIF and the Board of National Investment 107 importance" that it would be comparable to that of the "First Sea Lord or the Chief of the Imperial General Staff" in time of war (BIF, p. 118). The members of the General Staff would include, in addition to the Chief, the Permanent Secretary of the Treasury and the permanent heads of the Board of Trade and the Ministries of Labour, Health, and Agriculture. Finally, Keynes envisioned a Committee of Economic Policy that would be a Standing Committee of the Cabinet under the chairmanship of the Prime Minister to which the Chief of the Economic General Staff would act as Secretary. This committee would consist of the Prime Minister, the Chancellor of the Exchequer, the President of the Board of Trade, and the Ministers of Labour, Health, and Agriculture. Ultimately, the new and more powerful economic regulatory and control authority granted to Government would be the responsibility of Government's most powerful administrators.

In Book 2, Keynes addressed the more micro-oriented issues of indus­trial policy that concerned him in his writings on the need for rational­ization in the coal and cotton industries. "In no country is an obstinate prejudice to what is called 'rationalisation' stronger than in Britain" (BIF, p. 128). He discussed the problems caused by "individualism instead of cooperation" in coal, steel, and flour-milling by way of example. The solu­tion to such problems cannot be left to anarchic competition among large numbers of firms in unregulated markets. It:

is not to be secured these days by mere attempts to restore the old conditions of competition, which often involve waste and effort, the uneconomical duplication of plant or equipment, and the impossi­bility of adopting the full advantages of large-scale production.

(BIF, p. 93)

BIF argued that Britain had entered an era in which large economies of scale in production and in distribution were quite common. In this era, the only rational and efficient way to harness these scale economies - at least until firms were so large they needed to become a Public Corporations or Public Concern⁵ - was through cooperative decision-making by industry associations and cartels. But, since such monopolistic institutions could easily operate in ways that did not serve the public good, the state would have to play a key role in regulating their activities.

In modern conditions a tendency towards some degree of monopoly in an ever-increasing number of industries is, in our opinion, inevit­able and even, quite often, desirable in the interests of efficiency.⁶ It is, therefore, no longer useful to treat cartels, combinations, holding com­panies, and trade associations as inexpedient abnormalities in the eco­nomic system to be prevented, checked and harried. The progression from purely private individualistic enterprises to the Public Concern is one of endless gradations and intermediate stages. We believe that

there is still room at one of these intermediate stages for large-scale enterprises of a semi-monopolistic character which are run for private profit and controlled by individuals. We must find a place for such enterprises within our national economic system and create an envir­onment for them in which they can function to the public advantage.

(BIF, p. 94)

Keynes and the Liberals had yet to develop a detailed and complete vision of the precise structures and functions of the state organs charged with regulating individual semi-monopolistic industries and coordinating their diverse activities. Keynes understood that it would take a great deal of experience and experimentation to finally arrive at an efficient system. He placed his hope in open-minded experimentation by the state and by private industry with various different kinds of structures and policies. That is, the shift from old system of laissez-faire to the new system of managed capitalism would take time and would require more informa­tion and experience. Given the radical nature of this shift, the need for time and experimentations is hardly surprising.

In conclusion, we would reiterate the idea which has been running through this and the preceding chapter, namely, that the divorce between responsibility and ownership worked out by the growth of Joint Stock Companies, an event which has occurred since the dog­matic ideas of [Labour Party] Socialists took shape, together with the prominence of legitimate tendencies towards combinations, cartels, and Trade Associations, provide one of the clues to the future. Private enterprise has been trying during the past fifty years to solve for itself the essential problem, which the Socialists in their day were trying to solve, mainly, how to establish an efficient system of production in which management and responsibility are in different hands from those which provide the capital, run the risk, and reap the profit, and where the usual safeguards of unfettered competition are partially ineffective. Private Enterprise has had the great advantage over the­oretical Socialism of being able to put forth a considerable range and variety of systems to put them into practice... Private Enterprise by itself has, indeed, far from succeeded in finding an entirely satisfac­tory solution, but, in combination with the hand of the State (which has slipped in much more often than either theorists or the general public have recognised), it has provided us with a fine laboratory and many experiments, the results of which, for good and, sometimes, for evil, we are just beginning to reap. The task of modern statesmanship is to take full advantage of what has been going on, and to discern in the light of these manifold experiments which ideas are profitable and which unprofitable.

(BIF, p. 100)

BIF and the Board of National Investment 109 Thus, in the Board of National Investment, Keynes believed he had proposed a concrete government body capable of efficiently organ­izing and implementing the public engine of capital accumulation that, he had argued in 1924 (in his essay "Does Unemployment Need a Drastic Remedy?"), was needed to solve Britain's seemingly intractable unemployment problem. The overriding goal of the Board was very ambi­tious indeed - to help recreate long-term boom conditions similar in vigor to those of the nineteenth century through public investment planning. This def­initely was not a short-term government stimulus program designed to "kick-start" a temporarily sluggish economy and then let free enterprise take over. In chapter IX, Keynes argued that the Board could be:

with the least possible disturbance, an instrument of great power for the development of the national wealth and the provision of employ­ment. An era of rapid progress in equipping the country with all the material adjuncts of modern civilisation might be inaugurated, which would rival the great Railway Age of the nineteenth century.

(BIF, p. 114, emphasis added)

From The Economic Consequences of the Peace in 1919 and throughout the 1920s, Keynes had consistently argued that the Golden Age of economic progress experienced in the nineteenth century was over and could not be resuscitated using nineteenth-century institutions, practices, policies, and economic theories. He believed that without radical restructuring of the economic machine, Britain faced a perpetually stagnant economy and a potential revolt by the working class. The industrial and macro pol­icies laid out in BIF constituted the most detailed radical program to put Britain on the path to long-term prosperity associated with Keynes in the interwar period.

To sum up: through his contribution to BIF, Keynes made a major effort to implement a peaceful economic revolution in Britain's economy in the face of bitter opposition from finance, industry, government, conservatives, some members of the Liberal Party, and most of the wealthy.

Upon publication of BIF in early 1928, Keynes argued that its proposed public investment plans would, over the longer haul, be substantially self-financing. In February 1928, he wrote that "a large number of things which we propose would involve only capital expenditure, and that of a remunerative kind, so that they would bring no burden on the Budget proper" (CW 19-II, p. 733). In spite of the almost universal belief among post-WWII commentators that the essence of Keynes's policy program was budget deficits to eliminate unemployment, the truth is that Keynes never proposed that the state incur long- term deficits. It was budget­neutral public investment over the long term, not deficit-augmenting tax cuts and transfer payments that was the core of Keynes's policy revolution.

In preparation for the 1929 election, the Liberal Party published a short version of BIF called The Orange Book as its economic platform. In March 1929, Keynes wrote a newspaper article in its support. The Orange Book proposed an initial public investment program of £250 million over two years, or about 3 percent of GDP each year. Keynes addressed the standard criticism that such spending will not lead to enough new jobs to make a serious dent in the unemployment problem in a newspaper article. Keynes's use of a "multiplier" concept here represented a theoretical and rhetorical breakthrough for him.

Would the demand for labour resulting from a practicable pro­gramme of capital development make an appreciable impression on the existing unemployment? It is reasonable to suppose that an investment of £250, in types of capital production which do not depend heavily on imports, will provide wages to employ the equivalent of at least one man for a year, after meeting outgoings other than wages, and that man, in spending his wages, will set further miscellaneous productive activity moving. Thus it is a con­servative estimate, in my opinion, to assume that each £1,000,000 of the kind of investment contemplated by Mr Lloyd George's pro­gramme will reduce unemployment by at least 5,000 to 6,000 men, and perhaps by more. For, once the impulse to prosperity has been started the effect will be cumulative. Accordingly, an investment programme of £100,000,000 might be expected to break the back of abnormal unemployment.

(CW 19-II, p. 807)

On Keynes's reasoning, a public investment program of the modest size proposed in The Orange Book would lower unemployment by between 625,000 and 750,000 people. Since total unemployment in 1929 was 1.5 million, or 8 percent of the total labor force, he was, in effect, shooting to lower the total unemployment rate to between 4 and 5 percent.⁷