Keynes and government postwar economic planning for “Liberal Socialism” during the war: 1939- 1945

Britain entered WWII on September 3, 1939. Though Keynes had no important title in Britain's wartime economic administration, he was by far the most influential individual in the country in the determination of: its wartime domestic and international financial policy; its strategy and tactics in the long-drawn-out and ultimately failed negotiations with the USA over the postwar international financial system¹; its economic planning for the war; and, more importantly for my purposes in this book, its postwar economic planning.

There are two main objectives in this chapter. The first is to demon­strate that in all his work on postwar economic planning in this period he continued to argue in favor of the same socialist transformation of Britain's political economy he had supported since the mid-1920s. I will show that neither his theory of capitalism nor his radical policy positions were meant to apply only to the conditions of the Great Depression, to be discarded when the economy recovered. The second objective is to demonstrate that during the war Keynes became the most powerful figure in the government's internal debate about postwar economic planning and used his influence with considerable success to move the government toward his radical views. It is one thing for an economist to create a theory critical of capitalism and use this theory to support policy proposals designed to generate radical change. Many economists have done that. It is quite another thing to actually convince government policy-makers at the highest level to support much of the radical change proposed.

We will comment only in passing about Keynes's important work on financing the war and his central role in the negotiations between Britain and America in the construction of the postwar international financial system.

For the first two years of the war, Keynes spent most of his time working out an efficient and fair system to pay for the war.

Keynes put the social functions of the [1941] budget centre stage.. The purpose of the wartime budget was not to divert resources to the government - that would have happened anyway - but to do so with justice and efficiency. "The importance of a war budget," Keynes wrote, "is social; to prevent the social evils of inflation now and later [and] to do this in a way which satisfies the popular sense of social justice."

(Skidelsky 2002, p. 89)

In October 1941, the government set up an interdepartmental Committee on Post-War Internal Economic Problems, which included the Treasury and the Economic Section of the War Cabinet, charged with identifying prospective major economic problems of the postwar era, analyzing them, and recommending solutions to the appropriate ministers. According to Skidelsky, Keynes eventually became the most influential member of this crucial Committee involved in the debates on postwar economic planning.

The emergence of an economic secretariat at the heart of government happened by necessity rather than design. The planning system needed technicians not administrators. Following the change in government in 1940, the Central Economic Information Service... was greatly enlarged to serve the new super committees; in January 1941 it was split into an Economic Section and a Central Statistical Office, both based in the War Cabinet Offices, the former under the direct control of the Lord President of the Council. [T]he Economic Section had between nine and twelve economists, the Central Statistical Office another seven or eight. Together they formed the statistical "brain" of the centrally planned war economy. Keynes called it "the nucleus of that economic general staff which we have long talked about."². Once the planning system was set up and running, members of the Economic Section like James Meade were left free to think about post-war problems.

Keynes served as the main bridge between the Treasury and the economists recruited into the Economic Section, the Central Statistical Office and the Ministries. These were his professional colleagues, many of them former students for whom he was the natural leader and ally. Keynes himself was suggested as first head of the CSO, in December 1940, but refused, preferring to remain footloose in the Treasury. The Economic Section was immediately seen as a dangerous rival by the Treasury, which tried to curtail its scope and functions. Keynes played an important role in arranging a modus vivendi, and he and Lionel Robbins, director of the Economic Section from September 1941 to November 1945, "worked together in great harmony," despite their pre-war quarrels. Keynes was happy with these fluid arrangements.

(Skidelsky 2002, pp. 139-140)

In April 1942, Keynes gave a radio address as part of a BBC series on postwar planning that reflected his general state of mind on the economics and politics of this issue. Though the address was supposed to focus on the financial aspects of planning, most of the talk was devoted to general issues related to state planning after the war.

Keynes first comments on the critical difference in public expectations about the retention of the wartime economic controls into the postwar era between the First and Second World Wars.

In 1919 public opinion and political opinion were determined to get back to 1914 by scrapping at the first possible moment many of the controls which were making the technical task [of war planning] easier. I do not notice today the same enthusiasm to get back to 1939. I hope and believe that this time public opinion will give the technicians a fair chance by letting them retain so long as they think necessary many of the controls over the financial machinery which we are finding useful, and indeed, essential.

(CW 27, p. 266)

For Keynes, the first priority was to meet the minimum daily needs of the country and to rebuild the export industry.

To make sure of good employment we must have ready an ample pro­gramme of re-stocking and of development over a wide field, indus­trial, engineering, transport and agriculture - not merely building. Having prepared our blue-prints, covering the whole field of our requirements and not building alone - and these can be as ambitious and glorious as the minds of our engineers and architects and social planners can conceive - those in charge must then concentrate on the vital task of central management, the pace at which the programme is put into operation, neither so slow as to cause unemployment nor so rapid as to cause inflation... It is extremely difficult to predict accurately in advance the scale and pace on which [building and con­struction plans] can be carried out. In the long run almost anything is possible. Therefore do not be afraid of large and bold schemes. Let our plans be big, significant, but not hasty.

(CW 27, p. 268, emphasis in original)³

The key to an efficient economic plan is consistency: for example, the building industry cannot be made to grow or shrink in a short period of time. It is therefore essential that there be a believable commitment to a

Postwar economic planning 329 long-term plan. The firm expectation of sustained full employment is cru­cial to the success of all parts of the plan. "For if the building industry is to expand in an orderly fashion, it must have some assurance of continuing employment for the larger labour force" (CW 27, p. 268).

Keynes then makes some crude guesses about the likely initial level of construction spending in the immediate postwar period.

Now these are very large sums. Continued, year by year, over a period of ten years or more, they are enormous.

(CW 27, p. 269, emphasis in original)

This statement helps explain why Keynes argued in several places in The General Theory that under state control of most large-scale capital accumu­lation the capital stock could be increased to such a degree in one or two generations that capital would cease to be scarce and the profit rate could be driven to zero. He foresaw a great expansion of the nation's capital stock - for example, doubling the number of buildings in the country - under the guidance of a powerful Board of National Investment as a prac­tical and politically achievable goal.

It was not just the provision of the basic necessities of daily life that could be achieved through successful planning. Properly designed and implemented, state planning can enormously enrich social, cultural, and public life in Britain as well. Indeed, it can be used to create a "New Jerusalem" in Britain. This is quite important to Keynes.

I should like to see that the war memorials of this tragic struggle take the shape of an enrichment of the civic life of every great centre of population. Why should we not set aside, let us say, £50 million a year for the next twenty years to add in every substantial city of the realm the dignity of an ancient university or a European capital to our local schools and their surroundings, to our local government and its offices, and above all perhaps, to provide a local centre of refreshment and entertainment with an ample theatre, a concert hall, a dance hall, a gallery, a British restaurant, canteens, cafes and so forth. Assuredly we can afford this and much more. Anything we can actually do we can afford. Once done, it is there. Nothing can take it from us... Yet these must be only the trimmings on the more solid, urgent and neces­sary outgoings on housing the people, on reconstructing industry and transport and on re-planning the environment of our daily life.

employment good for many years to come. We shall, in fact, have built our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness.

(CW 27, p. 270, emphasis in original)

Keynes's memoranda and letters about postwar economic planning through 1943 are of the greatest possible significance to anyone interested in the policy views of the mature Keynes. By 1944, his attention would be focused almost exclusively on British-American negotiations over the shape of the postwar international financial system and the size and character of the American loan. Thus, it is primarily to the 1943 writings - especially those related to the government's evolving "White Paper on [Postwar] Employment Policy" - we must turn in order to understand Keynes's role in postwar economic planning.

One of the key roles played by Keynes in these discussions was to serve as a counterweight to the pessimism of some of the representatives of the Treasury on the Committee on Post-War Internal Economic Problems about the economic prospects of postwar Britain, including his old friend and current enemy Hubert Henderson, who wrote a pes­simistic memorandum on the subject.⁴ The Treasury foresaw a few years of inflationary boom after the war ended followed by a downturn and sluggish growth - just as was the case after WWI - as well as a slow rate of technical progress. All of Keynes's interventions assumed fairly rapid technical progress and an average rate of unemployment after the war of between 3 and 5 percent as the result of effective planning. "I do not at all share the pessimism" in Henderson's memo, Keynes asserted. "I think the memorandum greatly under-estimates the consequences of full employment and of the improvement in technical production, which will not cease to take place but will in some directions have been even accelerated during the war period" (CW 27, p. 272). This debate affected all others; it obviously made an enormous difference to the potential generosity of social welfare policy; for example, whether the economy would be in a slump or running at full capacity after the war.⁵ The paper coauthored by Keynes and Richard Stone⁶ titled "National Income and Expenditure After the War" (CW 27, pp. 280-298) formed the centerpiece of the debate.

One of the strongest of Keynes's arguments in support of his working assumption of an unemployment rate of 5 percent or less was his continued insistence that the postwar public would not politically tolerate any­thing higher. He believed that the high unemployment rates of the interwar years would no longer be politically feasible after the war once the public had experienced the effectiveness of wartime planning and had irrefutable evidence that the state could maintain full employment through planning if it had the will to do so. Put somewhat differently, the working class that had sacrificed and died for king and country in the war would not meekly accept economic stagnation and penury thereafter. He forcefully reminded the reader of this political fact of life.

But it is quite a misunderstanding to suppose that the 5 per cent [figure I have been assuming] is a prophesy of what will happen if nothing is done and pre-war methods, generally speaking, are continued. Mr Stone and I chose as our basic assumption [5 percent unemployment] chiefly on the ground that it seemed to us that this was about the highest that the public would stand in post-war conditions without demanding something very drastic to be done about it, coupled with the fact that it did not seem to us impracticable to take drastic steps which would bring down the figure to this total. If one was to put in, as Sir H. Henderson suggests, a figure approaching 2 million men normally out of work after the war [or 12.5 percent unemployed], I should have expected the rejoinder that we were wasting our time in assuming a situation which could not possibly happen.

(CW 27, p. 299)

Keynes reinforced this position in a memo.

I consider [5 percent] rather on the pessimistic side. It certainly does not assume a continuance of the pre-war situation... That is to say, we are assuming a reasonable government policy in the face of the actual circumstances and the change which will have taken place in public opinion in the light of war experience as to the practical possibilities of keeping unemployment at a reasonable figure. I am afraid I am quite impenitent after having read the comments up to date about our assumptions being too optimistic. Indeed, further reflection is leading me, if anything, rather in the other direction.

(CW 27, pp. 303-304)⁷

Some of Keynes's early 1940s comments on postwar economic policy were stimulated by a debate kicked off by the radical reorganization and expansion of Britain's social welfare system proposed by William Beveridge, a plan that eventuated in the modern British welfare state. In 1945, the Labour Party won the general election and implemented many of Beveridge's proposals, creating comprehensive unemployment com­pensation, national health care, and a substantial welfare system.

Keynes and Beveridge had a very lengthy exchange of letters about his plan - 61 pages of volume 27 of the CW are given over to this exchange. Keynes tried to help Beveridge get serious government consideration for his proposals by suggesting cost reductions while also arguing against the pessimistic Treasury view that postwar economic conditions would not be prosperous enough to afford some reasonable variant of the program. Keynes wrote to Beveridge in his initial letter (of March 17, 1942) that, though he had concerns about particular elements of the program and about its cost, he was "in a state of wild enthusiasm for your general scheme" (CW 27, p. 204). He also told Beveridge in October 1942 that the final draft was "a grand document" (CW 27, p. 205).

Indeed, Keynes devoted the draft of his upcoming maiden speech before the House of Lords on February 24, 1943, to his enthusiastic support of the Beveridge Report. The draft argued that the Beveridge proposals were unlikely to create substantial budgetary problems, even in the long run. Against criticism by the Treasury Department and others that postwar Britain could not afford to finance such an ambitious set of social programs given the uncertainty of economic conditions when the war ended, Keynes argued that the funds generated by the Plan would more than cover its costs, provided that the postwar economy was not allowed to fall back into depression.

I am... at a loss to know how it is proposed to save money from the budget by not having the Beveridge Plan. It is, therefore, precisely because I am deeply concerned about the Budget position in the early years after the war that I welcome the Beveridge proposals.

(CW 27, p. 258, emphasis in original)

The Plan was surely fiscally sound in the early decades, Keynes argued, because it would collect contributions from a large number of current workers and initially make payments to a small number of current pensioners.

Keynes's optimism about the affordability of the Plan over the longer run was largely based on his belief that substantial parts of his desired eco­nomic policies, including a high rate of growth in the capital stock under state planning, would be adopted and that technological progress would be rapid. "We could increase output in both industry and in agriculture by at least 50 per cent compared with 1938 merely by putting to work modern methods and techniques that already exist" while sustaining full employment (CW 27, p. 259). The Plan would be soundly funded even "with merely normal technical progress such as we experienced for many years" (CW 27, p. 259).

Keynes ended his draft by issuing a general call to defeat the pessimists who opposed Beveridge's comprehensive social welfare reform out of fear that it would be too expensive. The only thing that could make it too expensive would be a refusal to follow Keynes along the path to radical progressive change. It was Keynes's version of Roosevelt's famous "the only thing we have to fear is fear itself" first inaugural address.

The future will be what we choose to make it. If we approach it with cringing and timidity, we shall get what we deserve. If we march on with confidence and vigour the facts will respond. It would be a

Postwar economic planning 333 monstrous thing to reserve all our courage and powers of will for War and then, crowned with victory, to approach the Peace as a bunch of bankrupt defeatists... The real problems of the future are first of all the maintenance of peace, of international co-operation and amity, and beyond that the profound moral and social problems of how to organise material abundance to yield up the fruits of a good life. These are the heroic tasks of the future. But there is nothing, my Lords, in what we are discussing today which needs frighten a mouse.

(CW 27, pp. 260-261)

However, the day before Keynes was to deliver this speech, he wrote a letter to his mother telling her that he had decided against speaking in support of the Beveridge Plan because of vigorous opposition from the government, especially from his long-time nemesis, the Treasury. On the surface, it appears to be shocking that he would undercut the Beveridge Plan for which he had such genuine enthusiasm in order to avoid offending his traditional enemies at the Treasury. We know that Keynes was nor­mally quite comfortable speaking unpalatable truth to power.

Do not be disappointed when you see no speech from me in the papers on Thursday. Great pressure has been put on me not to speak. They [at the Treasury] have all got themselves into a hideous mess over this [Beveridge] Report, and it has become a very sore political mess. They think, perhaps truly, that, if I make a candid statement of the position, it will not rebound to their advantage. [and] my general relations with the Treasury might become somewhat embarrassed. I am not convinced by all this. I think a few honest words generally do more good than harm; all the same, I have given way and agreed not to speak. I value too highly my present relations with everyone in the Treasury to want to run the risk or disobliging them.

(CW 27, p. 256, emphasis added)

I have already hinted at the explanation for this seeming inexplicable act of political cowardice. To understand it, we first need to explain why Keynes made peace with the Treasury during the war and, indeed, became surprisingly protective of its institutional interests. The reason he did this was simple: he eventually became the dominant figure in the Treasury during the war. In the immortal words of Pogo: "We have met the enemy and he is us."⁸

Keynes retained his anomalous position at the Treasury from August 1940 till he died in 1946. He was enormously influential. This influ­ence was based on personal authority rather than official position. Officially he remained an unpaid, part-time advisor to the Chancellor of the Exchequer. He was "in the Treasury but not of it." Despite this,

he "was the Treasury," according to one of his colleagues, who cited in support of this contention the "masterly war-time Budgets, the conception of Bretton Woods, and the gradual domination of over­seas financial policy."... Keynes's eye ranged over the whole field of economic policy, lighting on whatever interested him. As often as not it was a memorandum from Keynes which clarified the intellec­tual and technical issues involved in some proposal, and thus nerved the Treasury's "administrators" to back it. If Keynes chose to get fully engaged in something, his influence tended to be decisive, in the sense that policy was made with the framework of Keynes's analysis of the problem. This was as true in big matters as in small.

(Skidelsky 2002, pp. 135-136, emphasis added)

In his narrower, and subordinate, sphere, Keynes rivaled Churchill. He was, in fact, the Churchill of war finance and post-war financial planning. His achievement was the more remarkable in that he held no official position. In a Presidential (or dictatorial) system he prob­ably would have been Minister of Finance. In the British system he was for many purposes, de facto Chancellor of the Exchequer [or head of the Treasury]. Sometimes he was regarded as such by the Americans, and sometimes as President of the Board of Trade as well.

(Skidelsky 2002, p. xvi, emphasis added)

Schumpeter put the matter more concisely in his 1946 survey of Keynes's contributions to economic theory and policy in the American Economic Review. "Everyone knows that during the war he entered the Treasury again (1940) and that his influence grew, along with Churchill, until nobody thought of challenging it" (Schumpeter 1946, p. 518).

The speech in support of Beveridge was to be delivered in early 1943, just as Keynes was guiding the Treasury toward a postwar planning pro­cess whose institutions and policies would be devoted to the pursuit of his socialist agenda. This goal was far too important to him to risk undercut­ting it by offending those at the Treasury who were not in full support of the Beveridge Plan.

James Meade, an avid admirer of Keynes who was attached to the Economic Section of the War Cabinet Secretariat, was an extremely important contributor to the debates over postwar economic planning. Skidelsky described Meade as follows:

Meade, a future Nobel Prize winner, was the most powerful economic thinker in the [Economics] Section, as well as its main visionary. Early in the war, he was chiefly involved, with Richard Stone at the Central Statistical Office, in setting up the system of national income accounts [inspired by and based on the categories of Keynes's macro model]. Later he concentrated on post-war employment and commercial

Postwar economic planning 335 policy. Meade was a liberal socialist... Meade worshipped Keynes without being overawed by him. Keynes greatly respected Meade's analytical powers - at meetings of officials he would sometimes call on Meade to expound "Keynesian" theory - but was skeptical of his utopianism, and, as we shall see, gave only limited support for sta­bilizing demand by varying national insurance contributions [he thought the main emphasis should be on managing investment] and was much less of a free trader than Meade was.

(Skidelsky 2002, p. 149)⁹

Keynes's correspondence with Meade on postwar policy and planning provides important information about Keynes's ideas on this critical issue. We begin with Meade's proposal that automatic variations in the contributions to the social insurance fund be used as part of countercyclical fiscal policy after the war. In May 1942, while focused on the Beveridge Report, Keynes wrote to Meade saying that while he found Meade's plan interesting, he thought there were rather tight limits on the extent to which one can stabilize consumption in the face of downturns caused by reductions in investment demand. "One can prevent perhaps an aggrava­tion of the falling off of effective demand by stabilising consumption," he wrote, "but that is the best one can hope for" (CW 27, pp. 206-207). On the other hand, he wrote more optimistically about Meade's proposal to Sir Richard Hopkins, Permanent Secretary to the Treasury.

Mr Meade will be putting forward a proposal, which I think deserves consideration, namely, that the amount of contribution from employers and employed to the Social Security Fund should vary in amount according to the state of employment, rising when unemployment falls below a critical figure and falling when it rises above it.

(CW 27, p. 278)

Since, under the Beveridge Plan, contributions for social security could be made to fluctuate between £400 million and zero per year, "there is a fairly large sum to play with, quite free from the objections to interfering with the normal tax system for such a purpose" (CW 27, p. 278).

In this memorandum, Keynes also reiterated his belief that fluctuations in public investment should be the main tool of countercyclical policy. He con­sistently took this position.

I should aim at having a surplus on the ordinary Budget, which would be transferred to the capital Budget, thus gradually replacing dead-weight debt by productive or semi-productive debt on the lines which the Government of India have successfully pursued for many years. But this would not involve repayment of debt, since I should expect for a long time to come that the government debt

or government-guaranteed debt would be continually increasing in grand total.

It is probable that the amount of such surplus would fluctuate from year to year for the usual causes. But I should not aim at attempting to compensate for cyclical fluctuations by means of the ordinary Budget. I should leave this duty to the capital Budget.

(CW 27, pp. 277-278)

Correspondence with Meade over his proposal in September 1942 again showed restrained enthusiasm. One problem was that Meade was using a long-run assumption in a short-term argument according to Keynes, by asserting that the reduction in employers' contributions in the presumably short-term downturn would lead them either to increase jobs (due to increased profit margins) or to substantially cut prices. These are "likely not to happen at all precisely because the reduction in question is by hypothesis temporary." He suggested that Meade limit the proposal to employees' contributions, where there might be more bang per buck. Still, he agreed, it was an "important and interesting contribution to a vital problem" (CW 27, p. 311).

Keynes then wrote a memo defending the Meade proposal against its Treasury critics. The memo opens with a reference to "the great potenti­alities of the Meade proposals." It then notes Meade's assumption that virtually everyone now believes that the state should and will take respon­sibility for the maintenance of full employment through AD management at war 's end.

[Meade] was assuming that measures of increased general purchasing power as a cure for unemployment were now widely approved, both by experts and the general public, and he was considering the best tech­nique for injecting purchasing power, assuming one wishes to do so.

(CW 27, p. 311)

Keynes next discussed the merits of Meade's proposal, which suggested that social insurance contributions should drop by about 1 percent of national income for every 2 percent rise in the rate of unemployment above its target level. "The multiplier is generally taken as being, in this country, a trifle above 3," but Keynes assumes a value of 2 for purposes of analysis. Given this assumption, he argues that the mechanism might function effectively.¹⁰ But, he warns:

neither Meade nor anyone else has suggested that his proposal is in fact adequate by itself to maintain a constancy of employment. But he can argue, I think, that its quantitative effect is highly significant rela­tive to the evil it attacks.

(CW 27, p. 312, emphasis in original)

In January 1943, James Meade wrote Keynes a fascinating letter in which he tried to get Keynes to take the lead in the internal government debate over postwar employment policy in a rather public way. It was a flattering letter, with an offer that, if Keynes accepted the writer's premises, would seem awfully hard for him to refuse. It essentially asked Keynes to write the definitive government report on postwar domestic economic planning, make the report public, and call it the "Keynes Report."

The great public support which the Beveridge Report has received has suggested to me that there ought really to be a similar publication on the subject of post-war employment. The enthusiastic public recep­tion of the social security proposals shows that there is an exceedingly strong feeling in the country about post-war internal reconstruction and that people are in such a mood as they have never been before for the reception of imaginative ideas for social reform... People do not realise that the Government is giving any serious attention to [the prevention of large-scale postwar unemployment] and it would be my guess that a really imaginative approach to this problem would now have such a reception as permanently to influence the course of post­war policy. A public investigation and report on this topic should not be very politically controversial, but would put new heart into the public and would probably ensure once and for all that a sensible government policy in this field would in fact have to be adopted by any post-war government. It may be that there are better methods of getting these ideas across, but it occurs to me, to be quite frank, that what we really require is a Keynes Report to follow up the Beveridge Report.

(CW 27, pp. 314-315, emphasis added)

Keynes wrote a surprisingly brief (thirteen-line), surprisingly negative reply to this seemingly attractive proposition. Keynes was rarely bashful about taking the lead on key policy issues. His proposals on war finance, for example, were referred to as the "Keynes Plan." He said that three key differences between postwar social welfare and postwar employment policies informed his negative response. First, policy planning cannot be concretized and neatly packaged into the precise form required for legis­lation, and no new legislation is necessary to get the job done: "Post-war unemployment is far less a question of a really concrete plan and would involve little, if any, definite legislation" (CW 27, p. 315). Second, the operation of employment planning will depend on the nature of the new international financial institutions, the size of the US loan, and the state of British exports: "it is very much more mixed up with external policy" (CW 27, p. 315) about which no hard expectations could be formed with confidence. Third, several government bodies are already working on the problem and progress is being made:

Above all, all sorts of aspects of it are already being worked out by different Departments and by various Hurst Committees. It seems to me impossible to have a new commission working alongside all the present activities. Moreover, it is much too soon to decide that those activities are not being quite well and fruitfully conducted.

(CW 27, p. 315)

I think what Keynes meant was: first, that the most important thing was to solidify the government's ironclad commitment to sustained full employment as the cornerstone of postwar economic policy and public and semi-public investment as the main policy tool to achieve it; and second, to outline the basic structures of economic planning without yet concretizing them. It was not necessary at this point, he believed, to pre­pare a fully detailed, time-specific plan. It is also quite likely that Keynes did not want his work at the Treasury on economic planning, which he believed was going extremely well at this point in time, to be disrupted by an announcement that there was a new grand "Keynes Plan" for employ­ment planning in the works.

Work on postwar employment planning moved ahead. James Meade contributed a paper on the maintenance of full employment to the inter­departmental Committee on Reconstruction Priorities that would become the focus of debate and conflict about postwar economic policy. For that reason, we explore Keynes's role in this debate at some length.

Meade wrote Keynes a letter in April 1943 expressing concern with Keynes's insistence that the budget be divided into a current and a capital budget, with the former kept strictly in balance. Meade's paper supported Keynes's insistence that the state should rely on changes in the level of total capital investment spending regulated by public capital investment to prevent any serious fluctuations in national income around the full­employment target. But Meade was concerned that the level of total invest­ment could not always be altered "fully and promptly" enough to do the job. "We argue in our paper that one should try to control investment in such a way as to prevent violent fluctuations in national income, but we suggest that this may not alone be successful" because the government may not be able to fine-tune total investment spending to the degree required (CW 27, p. 317). In this case, tax cuts to stimulate consumption might be needed. His plan for countercyclical social insurance contributions would help, especially because they were "an instantaneous automatic stabiliser" and therefore required no change in the tax laws (CW 27, p. 318). Moreover, the state must consider situations in which it foresees a future slump in demand coming and needs to cut taxes in anticipation of it. But this requires the freedom to run intentional budget deficits. Meade wrote:

[W]e must be free to plan taxation (and so the deficit of the current budget) ahead. I conclude, therefore, that we want both a potent "instantaneous automatic stabiliser" such as the social security scheme and freedom to plan ahead year by year for a deficit or a surplus in the current budget; and I fear that the latter freedom would be prejudiced by a division of the budget.

(CW 27, p. 318)

The main point made in Keynes's response is that fluctuations in invest­ment, not consumption, should be the centerpiece even of countercyclical policy. If there is need for a cyclical stimulus to AD, new investment projects from the portfolio of potential investment projects prepared by the Board of National Investment should be undertaken sooner and/ or ongoing projects should be accelerated. There are two reasons why this is the case, Keynes said. First, since people have customary standards of living that they will not alter substantially in the face of temporary changes in income, a countercyclical policy that relies primarily on shifting tax burdens onto consumers will not work.

People have established standards of life. Nothing will upset them more than to be subject to pressure constantly to vary them up and down. A remission of taxation on which people could only rely for an indefinitely short period might have very limited effects in stimu­lating their consumption. And, if it was successful, it would be extra­ordinarily difficult from the political angle to reimpose the taxation again when employment improved.

(CW 27, p. 319)

In the late 1960s, macroeconomists rediscovered the insight that income tax cuts understood by their recipients to be temporary would not have a significant impact on consumption. Many criticized Keynes for bequeathing the profession a simplistic and misleading theory of con­sumption on which to base countercyclical policy. This is but one example of a number of instances in which Keynes's views were first severely distorted and then oversimplified by his followers, after which he was criticized for being naively simplistic. The two chapters on consump­tion theory in The General Theory demonstrate quite clearly that Keynes anticipated almost all of the subsequent so-called revisions to his version of consumption theory.

To the extent that changes in personal tax rates were to be used for this purpose, Keynes preferred the automatic stabilizer property of Meade's social insurance scheme to discretionary changes in income tax rates. Not only is Meade's plan automatic, but it puts purchasing power into the hands of the working class, who are most likely to respond with some alteration of spending. Income tax cuts involve "a huge time lag" between policy change and consumer response and "short-run changes are most inconvenient" politically (CW 27, p. 319).

Second, there are several positive reasons to rely primarily on raising public investment to sustain employment in the face of declining demand. The state already has the power to alter public investment. And recessions provide an opportunity to accelerate the pace of capital accumulation, which is desirable for reasons independent of its ability to raise AD: "it is better for all of us that periods of deficiency expend­iture should be made the occasion of capital development until our economy is much more saturated with capital goods than it is at pre­sent" (CW 27, p. 320).

Finally, public investment is less likely than income tax cuts to raise budget deficits. It had been Keynes's consistent position that the lion's share of investment projects he envisioned would have positive gross, if not net, expected present value, and therefore involve at most very modest direct budgetary subsidies that would likely be more than compensated for over time by the tax revenue increases, user fees, and unemployment compensation reductions they induce. Tax cuts are:

a much more violent version of deficit budgeting. Capital expend­iture would, at least partially, if not wholly, pay for itself... Moreover, the very reason that capital expenditure is capable of paying for itself makes it much better budgetwise and does not involve the progres­sive increase of budgetary difficulties, which deficit budgeting for the sake of consumption may bring about or, at any rate, would be accused of bringing about.

(CW 27, p. 320)

In May 1943, Meade circulated the final version of his memorandum on postwar employment policy. This was the all-important "White Paper" on this crucial subject. The memorandum led to intense debate at the Treasury. Hubert Henderson, Keynes's persistent antagonist, responded with a pessimistic evaluation of Meade's memorandum. Keynes wrote a critique of the Henderson analysis entitled "The Long-Term Problem of Full Employment."

Keynes's response is of the greatest importance because it shows that he never abandoned his belief in his version of the secular stagnation thesis or in the neces­sity for the government to rely on public and semi-public investment to gen­erate and sustain full employment in the postwar period until the rate of profit on investment was driven to zero. Since he would shortly be devoting almost all of his time to the UK-US negotiations over the shape of the postwar inter­national financial order, this might be considered his last major input to postwar domestic economic planning.

Keynes begins by explaining that the institutions and social and behav­ioral practices prevalent at war's end would determine the level of savings generated at full employment. He called this the "indicated" level of savings. The main task of employment policy was to see that investment

Postwar economic planning 341 equaled the indicated full-employment savings level. There were likely to be "three phases" of the unfolding of the postwar era. The immediate postwar phase was likely to see a boom fueled by pent-up demand, with an excess of investment over indicated savings "in the absence of rationing and other controls" (CW 27, p. 321). This was phase 1.

Phase 2 would be the period:

when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it is still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment.

(CW 27, p. 321)

Phase 3 would begin when the point Keynes here calls "capital satur­ation" was achieved, when all potentially productive capital investments had already been made: "when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises" because the profit rate on new investment would, at this point, be zero (CW 27, p. 321).¹¹ When the economy enters phase 3, Keynes argued, fiscal policy should begin to shift its emphasis from public investment to tax cuts designed to progressively redistribute income, both for the sake of social justice and to raise the propensity to consume.

Keynes's memorandum conclusively demonstrates that, seven years after the publication of The General Theory and only three years before his death, he continued to defend both the tendency of the rate of profit to fall in a context of rapid capital accumulation and the "socialist" economic policies developed in that book and elsewhere to deal with this problem. Moreover, he had by now maneuvered himself into a position where he could defend this theory and these policies to the most important officials and senior staff in the Treasury and the Economic Section of the War Cabinet, the two most important government agencies involved in postwar economic planning.

In the first phase, demand will have to be restrained by controls on all kinds of investments, by consumption rationing "and the like." Guiding the economy through this will be a "ticklish business," he admits: it "will require a sensitive touch and the method of trial and error operating through small changes." This phase might last five years - "it is anybody's guess" (CW 27, p. 322).

The second phase is the crucial period for Keynes. His vision for planning in this period is quite clear, extremely ambitious, and consistent with all of his thinking in the previous two decades. His “two-thirds or three-quarters” estimate of the share of public and semi-public investment in total investment is consistent with the estimates he made in the late 1920s.

Sooner or later it should be possible to abandon both types of controls [on private consumption and investment] entirely (apart from controls on foreign lending). We then enter the second phase which is the main point of emphasis in the paper of the Economic Section. If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy... The main task should be to prevent large fluctuations by a stable long-term programme. If this is successful it should not be too difficult to offset small fluctuations by expediting or retarding some items in the long-term [investment] programme.

(CW 27, p. 322, emphasis added)

Keynes goes on to acknowledge that the size of the purely public investment spending (as distinct from semi-public investment) that will be required to balance total savings and maintain full employment is dif­ficult to accurately predict, but in any case, it will be quite large - perhaps as much as 20 percent of net national income.

It will depend on the social habits and propensities of a community with a distribution of taxed income significantly different from any of which we have experience, on the nature of the tax system and on the practices and conventions of business. But perhaps one can say that it is unlikely to be less than 7.5 per cent or more than 20 per cent of the net national income, except under new influences, deliberate or acci­dental, which are not yet in sight.

(CW 27, p. 323)

Keynes states that the secular trend of public investment in phase 2 should be set so as to maintain full employment, which, as he has made abundantly clear, refers to a measured unemployment rate of at most 5 percent and no less than 3 percent. Of course, uncontrolled and even unforeseeable shifts in private segments of AD will, from time to time, generate disequilibrium problems. But he is also clear, again, that delib­erate fluctuations in the pace of public investment must bear the primary burden of countercyclical policy.

Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuation. If a large fluctuation is allowed to occur, it will be difficult to find adequate off­setting measures of sufficiently quick action. This can only be done through flexible methods by means of trial and error on the basis of experience which has still to be gained. If the authorities know quite clearly what they are trying to do and are given sufficient powers, reasonable success in the performance of the tasks should not be too difficult. I doubt if much is to be hoped from proposals to offset unforeseen short-period fluctuations in investment by stimulating short-period changes in consumption. But I see very great attractions and practical advantage in Mr Meade's proposal for varying social security contributions according to the state of employment.

(CW 27, pp. 323-324)

Keynes is surprisingly optimistic about how long it will take to achieve the "golden age" of capital saturation. Whereas in The General Theory he speculated that it might take at least a "generation," here he suggests that it could be as soon as "five or ten years" (CW 27, p. 323). On the other hand, by way of balance, a few months later, he estimates it will take "twenty years of large-scale investment" (CW 27, p. 350). In any case, once we reach the third phase, in which the scarcity of capital has been virtually eliminated by massive public and semi-public investment:

It becomes necessary to encourage wise consumption and dis­courage saving, - and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours. Various means will be open to us with the onset of this golden age. The object will be slowly to change social practices and habits so as to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required.

(CW 27, p. 323, emphasis added)

This paper clearly demonstrates that Keynes believed that his theory of secular stagnation as developed in The General Theory would continue to apply to the postwar economy, as it did in the Great Depression, and that his radical interwar policy scheme would be required to maintain full employment in the post-WWII era.

Keynes concluded this particular intervention by associating himself with certain general perspectives expressed in Henderson's paper. He approvingly quotes Henderson as follows:

Opponents of Socialism are on strong ground when they argue that the State would be unlikely in practice to run complicated industries more efficiently that they are run at present. Socialists are on strong ground when they argue that reliance on supply and demand, and the forces of market competition, as the mainspring of our economic system, produces most unsatisfactory results. Might we not conceiv­ably find a modus vivendi for the next decade or so in an arrangement under which the State would fill the vacant post of entrepreneur-in- chief, while not interfering with the ownership or management of par­ticular businesses, or rather only doing so on the merits of the case and not at the behest of dogma?¹²

(CW 27, p. 324)

Sir Wilfred Eady, the controller of finance, wrote Keynes a note in May 1943 in which he agreed to the circulation of Keynes's critique of Henderson to cabinet ministers. But, Eady added, Keynes's ideas are "a voyage in the stratosphere for most of us... You will find your official colleagues obtuse, bat-eyed and obstinate on much of this!" (CW 27, p. 325). Keynes's answer suggests that he was not amused by Eady's comments.¹³ Keynes said that he believed that his ambitious hopes for the impact of The General Theory on the thinking of younger economists had been realized. "There is scarcely an undergraduate of the modern generation from which these truths are hidden."

Very sorry, but it does seem to me quite essential that all of you should become accustomed to the stratosphere - if that really is what it is! For, if the argument which I have tried to bring into the open in my paper is not understood by those responsible, they are understanding nothing whatever. And, after all, it is very easily understood! There is scarcely an undergraduate of the modern gen­eration from which these truths are hidden. And once they have been digested and have entered into the apparatus of the mind, it is possible for most people to move fairly safely over a terrain other­wise most dangerous.

(CW 27, pp. 325-326)

Keynes sent his memorandum on Henderson's paper along to Meade, with an accompanying letter evaluating Meade's employment paper. He criticized Meade's short-run focus, noting again his own stress on the use of public investment to influence the long-term trajectory of the economy. He repeats here his insistence in his memorandum that the key to postwar prosperity was that the "the bulk of investment" must be "under public or semipublic control," with the growth rate of capital accumulation selected to sustain full employment over time. Moreover, by ensuring a relatively steady rate of public and semi-public capital accumulation, the state could provide a kind of center of gravity for the rate of economic growth that would drastically reduce private corporations' sense of uncertainty, thereby making private investment larger and more stable as well.

(1) I think you lay too much stress on cure and too little on prevention. It is quite true that a fluctuating volume of public works at short notice is a clumsy form of cure and not likely to be completely successful. On the other hand, if the bulk of investment is under public or semi-public control and we go in for a stable long-term pro­gramme, serious fluctuations are enormously less likely to occur. I feel, therefore, that you do a little less than justice to investment under public auspices by emphasising the deficiencies of this method in the short period, whilst underestimating their efficiency for preventa­tive purposes and as a means of avoiding the sharp fluctuations which, once they have occurred, it is so difficult to offset.

(2) I have much less confidence than you have in off-setting proposals which aim at short-period changes in consumption. I agree with Henderson that one has to pay great attention to securing the right long-period trend in the propensity to consume. But the amount one can do in the short period is likely to be meagre.

(CW 27, p. 326, emphasis added)

Keynes concluded the letter with a puzzling comment that there was no reason for the government to immediately begin work on the design and implementation of the structures of state investment planning. This seems quite strange given the ambitious goals he had set for government planning and the obvious necessity for institutional innovation and stra­tegic planning if his hopes were to have any chance of fulfillment at war's end - not to mention Keynes's own statements about the need to create new planning institutions. Moreover, some set of fairly elaborate govern­ment economic controls would have to be used in phase 1 to guide the economy, and decisions would thus have to be made about the relation of these controls to the phase 2 planning apparatus.

It did not seem to me that Henderson's document was really incon­sistent with yours. It was largely concerned with a more distant period. Both of you are getting a little too academic for the purposes of the Ministers. The only matters about which it is necessary that they should take immediate decisions relate to the first phase, whereas you, as it seems to me, are largely concerned with the second phase, and Henderson with the third phase.

(CW 27, p. 327)

James Meade believed there was a fundamental problem in Keynes's position. In early June of 1943, he and Keynes exchanged two quite important letters concerning Meade's belief that the government had to begin to make decisions now about the institutions and practices that would constitute the phase 2 postwar economic system (CW 27, pp. 326­327). Meade's letters outline in some detail the important tasks that the government had to confront at the moment in order to be in a position at war's end to successfully plan the postwar economy. Their significance lies in the fact that, at the end of this discussion, Keynes expressed complete agreement with Meade on the key issues regarding phase 2 economic planning. This is why I quote Meade at such unusual length.

The first letter implored Keynes to prod the government to begin at once to create the institutions and policies that would be needed in the crucial phase 2 for a number of reasons. Among these are the fact that, having taken numerous decisions about how to manage the immediate postwar years, ministers need to tie these into the transition to the crucial phase 2, as well as the fact that the public will demand to have mechanisms put in place right away that ensure the maintenance of full employment in the new economic regime.

I confess, however, that I cannot so readily assent to your suggestion that Ministers need not at the moment take decisions relating to any­thing later than the first post-war period in which supplies will be scarce and effective demand will be high. There are a number of reasons for taking the opposite view:

(i) If it is possible (even if it were not probable) that we shall, after two years of peace, be back where we were in the 1930s, Ministers should by the end, say, of the first year of peace have taken more or less final decisions on the broad lines on which they intend to deal with the situation. In view of all the complex problems they will have to deal with in the post-war period and of the hectic political situation in which they will have to operate, it is certainly not too soon for them to start work on this subject now in the calm of war.

(ii) Much work has already been done and many decisions by Ministers have already been taken on the immediate post-war problems... Having taken general decisions on the first stage, and having started detailed work on that stage, they are being asked now to prepare to take general preliminary decisions on a stage only a little further on.

(iii) What we plan to do in the immediate post-war transitional period should be related to our longer aims. There is a grave danger that Whitehall will plan to deal with these immediate transitional problems as if the problems were completely separate from the subsequent problems [of phase 2]. For example, Civil Servants always treat the problems of "physical reconstruction" and of "public works policy" as if they existed in separate universes. In your note you properly show that, fundamentally, the same analysis applies to the three periods which you analyse; and the same should be true to a certain degree in our administrative mechanisms for dealing with them. In fact, some of the imme­diate post-war mechanisms. can be used to stabilise and stimu­late as well as restrain, and it might be wise to turn these into more or less permanent features of the economy from the start. Is it, for example, really political wisdom to suppose that we shall have any chance of success if we put off discussing the scheme for variations in social security contributions until the close of the transitional period... when the willingness on the part of politicians to consider radical change will have passed? This is the surest way to assure that we shall get no such scheme.

(iv) The public are, I am told, more concerned about employment prospects after the war than about any other post-war issue. As the prospects of victory become clearer, this public interest will become more and more marked. Already Beveridge has set up his bureau to deal with the problem. He will probably get the answer wrong; but if his is the only answer in the field, and if the Government has not its own answer ready (and an answer which does not refer merely to good projects for employment for a year or so after the war) there will be another first-class political row.

(v) Finally, I feel it would be truly tragic if this opportunity were lost. The policy which is advocated is one which is in the interests of all political parties; it is one for the success of which intellectual enlightenment rather than a change of heart is required and we have at the moment the unique opportunity of all political parties in a government which is seriously willing to consider social innovations. The opportunity is unlikely to recur. Perhaps you would allow me to add the personal note that, in these matters of a full employment policy, I have always regarded you as the guiding intellect and the moving force; and I believe that in this I am typical of the younger generation of economists.

(CW 27, pp. 327-329)

Keynes's response to this letter from Meade was surprisingly brief. He claims to not understand precisely what it is that Meade wants him to pressure the ministers to do. He tells Meade:

I should find it easier to say whether I agree with you that there are further decisions which Ministers ought to take in the near future if you would tell me what the decisions are which you think they ought to take. You will have noticed that in my paper I deliberately excepted your social security contributions proposal from deferment. I agree with you that it deserves early consideration. But I am not clear what else there is, which does not depend on the actual progress of events for it to be ripe for ministerial decision at this stage.

(CW 21, pp. 329-330)

Meade responded to Keynes's letter with one of his own the very next day, listing critical issues on planning the postwar economy about which "Ministers might fruitfully take decisions in the near future." Meade presented Keynes with an ambitious ministerial agenda for his consideration.

There are decisions which should be taken now on the control of investment. It should be realised that the forward planning, control and timing of public investment is important both in the immediate transitional period, in order to restrain and spread out the demands for physical reconstruction, and also in the longer period for the stimula­tion of such investment. For example, it might be decided, in principle, that public authorities should prepare and revise annually a five-year plan for their future capital works, and this should be reviewed peri­odically by a central body for the purpose of the timing of expenditure. Certain inducements might be considered to persuade local authorities to keep in step with such a plan, e.g., by varying the rate of state grants for different types of works, according to the period in which they were undertaken. Here surely is a field of action and of administra­tion, which is equally relevant to the immediate war period of restraint and to the subsequent period of stimulation. The danger is that if Civil Servants and Ministers concentrate exclusively on ad hoc mechanisms of restraint immediately after the war, they will fail to have built their controls in a way which will also be useful for stimulation later on...

I am pretty sure that the same principle might be applied in perhaps a lesser degree to the control of private investment. Various measures will be used immediately after the war for its restraint. Which of these measures of control will, and which will not, be useful after to stimu­late private investment? The question should be considered now, since it should influence the way in which the controls are constituted in the immediate post-war transitional period.

We have suggested in our paper. that it may be worthwhile con­trolling the terms of hire-purchase finance [i.e. purchase of goods on an installment plan] in such a way as to impede such purchases when restraint is needed and to ease them when stimulation is required. Here again is a mechanism which. could subsequently be readily used to stimulate buying.

There are broad issues on which Ministerial decisions should be sought for the purpose of dealing with "structural" unemployment. Labour movement must be regarded as a continuing [postwar] need, and decisions should be take now to perpetuate, and, in certain cases, to develop so much of the Ministry of Labour machinery as is considered desirable. Here, in my view, is an outstanding case of the need for considering the long-term problem when decisions are being taken on the maintenance of controls for the transitional period.

The same is true of the location of industry. The problem of bringing work to the men (as a supplement to bringing men to the work) should be regarded as a continuing one.

The above are examples of important economic issues on the long- run aspects of which discussions and decisions should be started now... [As] I mentioned in my earlier letter... many of these things will require considerable legislative or administrative changes and that these changes may be politically possible now or immediately after the war, and impossible later on.

The overriding argument, in fact, for taking decisions now, in my opinion, is yet another political consideration. The public are demanding plans for post-war employment policy; and if the Government have not fairly soon reached preliminary decisions on the matter (extending well beyond the immediate post-war transition) there will be another political explosion.

May I end by an argumentum ad hominem? In the international sphere you have advocated an International Clearing Union. In the immediate post-war years the principles of such a Union could not be fully applied. The Clearing Union scheme is, in essence, a longer- term measure for more normal times. Why, in this case, did Ministers need to take these decisions of long-term principle before they considered all the detailed hugger mugger of the process of adjust­ment? The answer, in my view, is clear: it was in order that they might see where they were going before they started to go there. Is this not true of internal policy as well?

(CW 27, pp. 330-332)

The letter called for detailed legislative, administrative, and policy changes to implement Keynes's central vision of long-run postwar planning for sustained full employment. The changes proposed need to be integrated with those mechanisms that will be used to reconvert the economy from a wartime footing to normalcy. Public investment policy is, of course, the key, but administration and planning must also be prepared for guiding private investment through a kind of indicative planning, for creating a system of state-guided credit allocation, and for creating indus­trial policies to deal with labor mobility and the location of new industry to help reduce structural unemployment. The political environment is now ideal for organizing to achieve government approval for a radical reconstitution of the economic role of the state, Meade argues. The public will demand it and all parties will support some variant of it. Failure to do so might trigger a political explosion. Finally, the scope and detail of these plans should be similar to those contained in Keynes's superbly ambi­tious International Clearing Union, which contained a detailed plan for a postwar international financial system radically different from the old gold standard. All of these phase 2 policy institutions and plans need to be created now.

In his letter responding to Meade, Keynes expressed complete agreement with Meade's position. The misunderstanding arose, according to Keynes, because he could not see that any of the key proposals in Meade's and Henderson's memoranda required immediate ministerial attention. Of course, he agrees, such attention is required by those constructing the blueprints for the implementation of state economic planning that ministers will have to approve. This is the institutional infrastructure Keynes needed in order to construct his postwar Liberal Socialist economy in Britain.

Substantially there is nothing with which I disagree in the list given in your letter of June 3rd of the main points on which Ministers might take early decisions. Indeed, the first page and a half of your letter seems to me to give much more suitable material for a brief memorandum for Ministers that the documents actually in their hands. When I said there was nothing on which Ministers could take early decisions, I did not mean to rule out these various important matters. My point - not clearly expressed - was that it did not seem to me that any matters arose either out of yours or out of Henderson's memorandum which led up to decisions which ought to be taken now... These points have the great advantage of bringing the issues back to practical matters and away from a debate [between Meade and Henderson], which seemed to me was getting academic and might be endless.

(CW 27, pp. 332-333)

The Treasury was working on a response to the Economic Section memorandum by Meade in the summer of 1943. Keynes wrote a lengthy critique of a draft reply by Sir Wilfred Eady. Keynes again insists that the primary tool of postwar state economic planning was to be variations in public and semi-public investment. This was the tool that would guide the long-run equilibrium path of the economy so as to achieve sustained full employment. To accomplish this task: "two-thirds or three quarters of total investment [must be] under public or semi-public" control.

The capital budget will be a necessary ingredient in this exposition of the prospects of investment under all heads. If, as may be the case, something like two-thirds or three quarters of total investment will be under public or semi-public auspices, the amount of cap­ital expenditures contemplated by the authorities will be the essen­tial balancing factor. It has nothing whatever to do with deficit financing.

(CW 27, p. 352)

Countercyclical policy is a decidedly secondary though not unim­portant concern, and even here changes in the volume of public invest­ment were to be the first line of defense. Moreover, current account deficits were to be avoided if possible.

Quite apart from this is the proposal that if, for one reason or another, the volume of planned investment fails to produce equilibrium, the lack of balance would be met by unbalancing one way or another the current Budget. Admittedly this would be a last resort, only to come into play if the machinery of capital budgeting had broken down. Thus the capital budgeting is a method of maintaining equilibrium; the def­icit budgeting is a means of attempting to cure [short-term] disequilib­rium if and when it arises... Personally I like Meade's social security proposal. It is not open to many of the objections of other forms of deficit finance. Indeed, it can be defended on the ground that it will actually promote stability of the social security fund itself. It is argu­able, that is to say, that in periods of increasing unemployment the fund will actually make up a significant part of what it loses through reduced contributions through having to pay out less unemployment relief than would otherwise be the case. About other forms of deficit financing I am inclined to lie low because I am sure that, if serious unemployment does develop, deficit financing is absolutely certain to happen, and I should like to keep free to object hereafter to the more objectionable forms of it. So very decidedly I should. not lead the critics to think that the Chancellor is confusing the fundamental idea of a capital budget with the particular, rather desperate expedient of def­icit financing.

(CW 27, pp. 352-354, emphasis added)

Keynes next agrees that it is appropriate to focus on structural unemployment, but he warns Eady against the Treasury's tendency to overstress structural unemployment relative to unemployment caused by a deficiency of "effective demand."

But I wonder if the Chancellor of the Exchequer appreciates into what deep water the adoption of the more pessimistic expectation on this heading leads him. The optimistic view on this, and also on some other matters, which I am charged with maintaining is by no means intended as a prophecy of what is certain to happen. I regard it much more as the only hypothesis on which the kind of economic future which the Chancellor and probably most other people in the Treasury envisage as desirable really has a chance. It might turn out to be true that anything at all closely resembling free enterprise is incap­able of dealing with the problem of structural unemployment. If so, I feel sure that free enterprise will go by the board to the necessary extent. I have not abandoned the view that something like free enter­prise can be made to work. I think we ought to have a good try at it. And that try ought to be based on the assumption that the underlying conditions are not such as to make it impossible. I fancy he will find himself open to some rather unexpected rejoinders if he takes a defeatist line about the possibility of free enterprise dealing satis­factorily with the outstanding problem of the age... Would it not be much better to end up with a recommendation for the preparation of detailed proposals how to handle structural unemployment in a free enterprise environment?

(CW 27, pp. 354-355)

On the other hand, as he stressed in chapter 24 of The General Theory, if the state can sustain full employment through public and semi-public investment (supported by capital controls, managed trade, and various industrial policies), much of the rest of the economy can be organized through free enterprise. Of course, as he continued to emphasize, only a third to a quarter of the large-scale capital investment in the economy will be under the control of private-sector bodies.

Keynes concludes by suggesting a more positive and activist tone for the memorandum, with investment planning used as the primary tool to manage AD and various industrial policies focused on curing structural unemployment.

The Chancellor could then conclude by saying that the problem really seems to divide itself into two main headings. The first is the means of ensuring stability in the long-term investment pro­gramme coupled with proposals for adjusting its tempo to unfore­seen changes¹⁴. The second aspect is the problem of structural unemployment. This comprises the question of the location of industry and inducements of private enterprise to come here rather than go there. It also involves the mobility of labour with particular reference to social security. Finally it is particularly concerned with the question of our new industries, where we start with a fairly free hand as to location. Pari passu, therefore, with the study of the investment programme should be a study of structural unemploy­ment under the above headings.

(CW 27, p. 357)

In yet another letter to Eady in July 1943, Keynes commented on an Economic Section paper on "the maintenance of investment" (CW 27, p. 359). He clearly sees this as a secular problem. He again refers to the policy switch point at capital saturation, at which a progressive redistri­bution of wealth must be undertaken.

[S]ooner or later, we shall be faced, if not with saturation of invest­ment, at any rate with increased difficulty in finding satisfactory outlets for new investment. It is very difficult to predict when this will come about. When it does come about, we shall then have to start

Postwar economic planning 353 on very important social changes, aimed at the discouragement of savings and a redistribution of the national wealth and a tax system which encourages consumption and discourages saving.

(CW 27, p. 360)

By late 1943, Keynes's work on British-American negotiations concerning the postwar international financial order had begun to monop­olize his time, though he did keep "a protective eye on the Meade scheme" (CW 27, p. 364). When he returned from a trip to America in early 1944, he wrote a critical evaluation of the Steering Committee's report of January 1944 on "Post-War Employment Policy." His order of points, which I follow, reflects the structure of the Steering Committee document. He begins by supporting "the possibility of directly influencing the pace of private investment" through a kind of indicative planning. "Something might be done," he suggests, "if the major, private firms were brought to regard it as their duty to pay attention to the indications of the official bar­ometer" (CW 27, p. 365).

The next point is crucial and harkens back to his correspondence with Meade over the need to create more effective planning institutions. The report points out the inadequacy of present government procedures for approving investment projects and refers to "the delays to [public] invest­ment caused by the present complicated parliamentary procedure." Improved administration of investment planning is essential. "This is very important. Should not there be a specific recommendation for the improvement of the existing expensive and out-of-date machinery of the private bill?" (CW 21, p. 365).

The longest section of Keynes's note is devoted to exposing the fallacy embodied in the report that full-employment planning entails substantial budget deficits. "Exactly the opposite is the truth." The notion that the maintenance of full employment must:

unstabilise the national budget, is surely topsy-turvy. It would be a failure to adopt a remedy for severe cyclical unemployment which might have that effect. There appears to be no glimmer of recognition that measures to stabilise the national income are ipso facto measures to sta­bilise the national budget. The additional charges falling on the budget in years of bad unemployment are, in fact, almost negligible; whilst the effect on the revenue of maintaining the national income should be obvious. The Committee give the impression that, whilst the measures they propose to avoid unemployment are necessary and advisable, a price has to be paid for them in the shape of budgetary deficits and per­haps a weakening in international confidence in our position. Exactly the opposite is the truth. It would be a failure to take such measures which would inevitably unstabilise the budget and weaken confidence. (CW 27, p. 366, emphasis in original)

Keynes sees two key reasons why the Committee report is marred by this error. First, in spite of the fact that The General Theory was published more than seven years prior, "there is no hint of the operation of what economists call 'the multiplier', that is to say the effect of injecting add­itional demand into the system in increasing national income by at least double its own amount" (CW 27, pp. 365-366). Second, the report fails to incorporate into its analysis of the postwar budget the revenues to be generated by the investment projects that are the core of employment policy. This point is absolutely essential for understanding Keynes's argu­ment that postwar employment policy will not involve secular budget deficits. Public investment projects such as housing, roadbuilding, public utilities, and so forth will produce enough direct tax revenue over their lifetimes that they ultimately will require at most modest subsidies; and these subsidies will be smaller than the induced or indirect taxes that will flow from the rise in national income created by the multiplied effects of the new investment. Keynes uses a hypothetical example to make these two points crystal clear.

Suppose for example that additional investment of £100 increases the total national income and output by £200 (which is probably an under-statement), and that the additional investment will not have a genuine permanent value in excess of £80 (which, one may hope, will also be an understatement). It follows that the net result to the nation's production, strictly valued, will not be a loss of £20 (as some once argued) but a gain of £180. It follows that, if the increment of [tax] rev­enue exceeds one ninth of the increment of national income (which it certainly does), the transaction taken as a whole positively benefits the Exchequer there and then. The additional taxes, collected as a result of the induced investment in that very year in which it takes place, should be more than enough to write off the excess of the investment's cost over its true value. How slow dies the inbred fallacy that it is an act of financial imprudence to put men to work!

(CW 27, p. 367)

Thus, Keynes criticizes the Committee not for its concern over large- scale budget deficits - "By all means emphasise the importance of maintaining budget equilibrium" - but for associating large secular budget deficits with the public investment program. Let an analysis of the policy's effect on the budget "be represented as an important argument in [its] favour... as it most truly is, and not as an argument against [it]" (CW 27, p. 367).

Keynes then discussed the importance of a detailed capital budget to the planning process.

A capital budget, in the sense in which I understand it, means a regular survey and analysis of the relationship between sources of savings

Postwar economic planning 355 and different types of investment and a balance sheet showing how they have been brought into equality for the past year, and a fore­cast of the same for the year to come. If aggregate demand gave signs of being deficient, the analysis would indicate a deflationary gap exactly corresponding to the inflationary gap which we have so often discussed during the war. This survey and balance sheet might well be presented on the occasion of the regular Budget Statement and form a part of the Budget White Paper. It would give an annual opportunity for examining whether the state of demand during the ensuing year looked like being adequate to maintain employment and national income at the desirable level and for the Government to explain to Parliament what steps it had in view to remedy a prospective disequi­librium in either direction. Such a procedure as this might give greatly increased confidence to the public that the maintenance of employ­ment and national income was now an avowed and deliberate aim of financial and economic policy.

(CW 27, p. 369)

The note contains yet another urgent plea by Keynes for the govern­ment to dramatically upgrade its collection, analysis, and dissemination of economic statistics so as to make efficient investment planning feasible. For example, he wants the Board of Inland Revenue to have a statistical staff "on the scale of the statistical staff of the Bank of England." Once that enlarged staff was in place, extraordinary improvements in fiscal policy and in general administration, as well as in the information, analysis, and forecasting needed to plan investment effectively, would become possible.

With the Ministry of Labour handling labour statistics on the lines proposed, the Board of Trade conducting a continuous census of pro­duction,... the Inland Revenue digesting and analysing the vast body of information which passes through its files, and the Bank of England continuing its running analysis of our external position, the new era of the "Joy through Statistics' (I do not write ironically) can begin.

(CW 27, p. 371) Theoretical economic analysis has now reached a point where it is fit to be applied. Its application only awaits the collection of the detailed facts which the economist, unlike the scientist, cannot collect in a laboratory by private enterprise. The authors of the Report would, I think, have written with more confidence about their plans for the future and in a spirit of more buoyant hope if they had fully appreciated what knowledge is capable of doing in making the future different from the past as soon as we decide to furnish the social sciences with data comparable to the data of the other sciences. [Until this is done], no one can quantify his recommendations or say except in the most

general terms what ought to be done, and [when such data are avail­able], it will all be obvious and as clear as the daylight with no room left for argument.

(CW 27, p. 371-372, emphasis in original)

In this 1944 document, Keynes put great faith in the historic import­ance of Britain's project of constructing an effective and democratic state planning process to maintain full employment, one that could elim­inate the gross inefficiency of laissez-faire yet avoid the severe problems he believed were inevitably associated with totalitarian planning. He hopes it

will be the role of this country to develop a middle way of economic life which will preserve the liberty, the initiative and (what we are so rich in) the idiosyncrasy of the individual in a framework serving the public good and seeking equality of contentment among all.

(CW 27, p. 369)

The official government "White Paper on Employment Policy" was drafted in March and April 1944. It was designed to be the most important document in determining the character of Britain's postwar economic policy regime, which helps explain why there was so much conflict associated with it. Keynes was ill during this period and gener­ally engrossed in British-American negotiations over the postwar inter­national financial system. As a result, he had little direct input into the White Paper. But Hubert Henderson sent Keynes a copy of a memorandum he wrote condemning the White Paper. Keynes circulated his response to Henderson's views.

Henderson believed Britain's postwar export situation would be bleak, a fact that the White Paper failed to sufficiently consider in its recommen­dation for a full-employment policy. Keynes agreed that the export pic­ture was not good, but he drew different conclusions than Henderson. He argued that Britain would have to manage trade; in particular, imports would have to be restricted. But import restrictions would be good for the effort to raise domestic employment. Henderson also believed it would be good for Britain's access to international credit "if we allow large-scale unemployment." Keynes thought this to be a "plain delusion... It will improve our external credit if we are seen tackling the problem of internal unemployment vigorously, and just to stand aside will have the opposite effect" (CW 27, p. 374).

Keynes's trump card against Henderson's position was the fear of domestic unrest in the face of a postwar depression. Remember that the necessity to raise unemployment at home to improve the balance of trade was the Achilles' heel of the gold standard. Keynes warned again here that, as he had put it in the exit chapter of The General Theory, "the world

Postwar economic planning 357 will not much longer tolerate the unemployment which is... inevitably associated with capitalist individualism" (CW 27, p. 381).

Finally, Sir H. Henderson does not appear to expect, or does not at any rate attach any importance to, the social and political consequences of deliberately using domestic unemployment as a remedy for external disequilibrium. Even if this policy had its advantages, it is surely obvi­ously out of the question and might mean the downfall of our present system of democratic government.

(CW 27, p. 374, emphasis added)

The White Paper was distributed in May 1944. Keynes sent the Chancellor of the Exchequer suggestions for his consideration in pre­paring his speech to the House of Commons in defense of it. Much of the material is quite familiar. Keynes repeats his prohibition against the use of high interest rates to restrain the boom. And he stresses the fact that a full-employment policy centered on public investment will help avoid budget deficits, not create them. "A forward employment policy is therefore entirely compatible with budgetary equilibrium; and not only so, but it is in fact the best way of ensuring budgetary equilibrium" (CW 27, p. 377).

A key focus is on the possible criticism that the White Paper, while putting the government behind the principles of postwar planning, does not specify its unemployment target or the precise policies required to achieve it. Keynes agrees that the "illustrative" figures presented are on the cautious side. (After all, he had been a persistent internal critic of the timidity of the White Paper.) But his main point is that the specifics of planning - the blueprints - cannot be constructed until after the govern­ment approves the general lines of the policies proposed. Obtaining the commitment of the government and the public to sustained full employment as the main policy goal and to public investment as the main policy tool, along with a commitment to the broad outline of the proposed policy process, is the most important thing for Keynes. Once this commitment was firm, the experts and technicians inside and outside the government could finally get on with the creation of the administrative, legislative, and strategic infrastructure needed to make his vision a reality.

All that the Government is attempting to lay down at this stage is the general line and purpose of policy, the basic assumptions on which it proposes to accept as correct. The quantitative and detailed working out can only be done satisfactorily over a period of time. It would be quite premature to attempt something of that sort now and any attempt that might be made would almost certainly be proved inaccurate by events. As soon, however, as the general policy has been laid down, then it will be the duty of the various Departments

and all other authorities concerned, to work out the details, with far greater particularity than has been done, or could be done, up to this point. The object of the White Paper is to choose the pattern of our future policy. This must not be confused with the technical working out of the very extensive blue prints, which will be needed to imple­ment this policy, when it has been approved by Parliament. To the preparation of these blue prints, those concerned will of course pro­ceed, as soon as the general line has been laid down and approved by Parliament.

(CW 27, pp. 378-379)

Keynes expressed the same position about the White Paper more con­cisely in a letter to Austin Robinson in June 1944.

[I]t is better to have something, even if it is wrong in detail, because I believe the Civil Service has infinite power of making things work out if it is clear it intends to work it. My own feeling is that the first sentence [committing the government to the maintenance of full employment] is more valuable than the whole of the rest.

(Moggridge 1992, p. 709)

Keynes had been appointed to the National Debt Enquiry committee, which was to advise the government on postwar monetary policy in gen­eral and on the problem of the postwar interest burden of the national debt in particular. In March and April 1945, Keynes made several presentations to the Enquiry concerning postwar monetary policy and other subjects. His main messages in these presentations was that, with the existence of exchange and import controls, capital controls, and the removal of interest rates from countercyclical policy, the monetary authorities can achieve whatever rates of interest they desire. "The monetary authorities can have any rate of interest they want" (CW 27, p. 390). He argued that low interest rates were desirable because they both helped sustain invest­ment spending and minimized the interest burden on the Treasury. He proposed a 0.5 percent Treasury bill rate and 1.5 and 2 percent rates on five- and ten-year Treasury bonds, respectively.¹⁵

In June 1945, less than a year before his death, Keynes presented a memo­randum to the National Enquiry on "The Concept of a Capital Budget," devoted primarily to the mechanics of state investment planning. In it, Keynes distinguished between an Exchequer (Treasury) Capital Budget, a Public Capital Budget, and a National Investment Budget. The first referred to the costs and revenues associated with longer-term projects under the direct control of the central government.¹⁶ A more inclusive Public Capital Budget is needed, to be financed by sources of investible funds similar to those that were to be used to support the ambitious investment agenda of the National Investment Board in BIF (CW 27, pp. 407-408).

It has been the practice of this country hitherto to entrust most cap­ital expenditure of a public character to Local Authorities or Public Boards. I am not aware of any intention to change this. If so, the sig­nificance of the Exchequer Budget will be incomplete if taken in isola­tion, and it should be regarded rather as an item required in building up the Public Capital Budget, which should also comprise the capital expenditure of all bodies, boards, authorities and institutions which are scheduled as belonging to the public, as distinct from the private, sector of the national economy.

(CW 27, p. 408)1⁷

The primary burden of maintaining full employment continued to be placed on public capital investment. The major policy planning tool is to be the annual National Investment Budget derived from the longer-term investment plans of the Exchequer Budget. The Investment Budget will project total investment spending - including expected private-sector investment and those public investment projects previously approved - for the coming period. If total national investment spending for the coming period appears to be too small to sustain full employment, the Treasury will be the body responsible for accelerating public investment - and vice versa.

It is an integral part of the Government's full employment policy, as I understand it, that some authority will exist (the Treasury I hope) charged with the duty of examining and reporting on the state of the Public Capital Budget as a whole, not merely after the event but also prospectively. At one time I had conceived that this should be the task of a semi-independent statutory authority to be called the National Investment Board. But with modern developments of policy, decisions on such matters have become so much a part of the Government's economic programme as a whole that they should not be dissociated from the Chancellor of the Exchequer as the responsible Minister and his offi­cial Department. Nevertheless, in this event the Treasury will have to be as self-conscious and publicly explicit as a National Investment Board would have been.

(CW 27, p. 408, emphasis added)

Since Keynes had become the dominant force at Treasury with respect to postwar economic planning (and much else), he was in effect proposing to cede the power to control total investment spending in pursuit of sustained full employment to himself and his friends, allies, and acolytes.

Let us sum up Keynes's proposals for postwar economic planning in Britain in the year of 1945. They represent the institutional concretization of his vision of Liberal Socialism constructed over the interwar period, defended in The General Theory, and considered for adoption at the highest levels of the wartime government. The core agenda of BIF, published in 1928, and indeed of all of Keynes's important interwar policy positions, remained intact in 1945. The policy perspective developed at the Treasury under Keynes's influence has little in common with the understanding of Keynes's policy views by today's “Keynesian” economists.

The main institutional change in the 1940s from Keynes's interwar views is that the functions previously to be vested in an independent National Board of Investment were now to be ceded to the Treasury. The main function of the Treasury in this regard would be to try to ensure that total national investment, public and private, would remain equal to what Keynes called the "indicated" or full-employment level of national savings, thereby ensuring sustained full employment. It would accom­plish its goal through its control of the approximately 70 percent of total investment represented by public and semi-public investment. In the crit­ical phase 2, the mandate to the Treasury was to increase total investment spending rapidly enough to drive the profit rate down toward zero over a few decades. Given the high propensity to save, this was the only way to keep investment equal to the indicated level of national savings.

The central bank was to be nationalized (which it was in 1946), and its main objective was to keep the long-term interest rate below the rate of profit on new capital investment. Since, in Keynes's view, the rate of profit would fall toward zero due to the rapid growth of the capital stock, rentier capitalism would eventually be eliminated, just as Keynes hoped it would be in the last chapter of The General Theory. Of course, the interest rate could not be driven toward zero without effective capital controls.¹⁸ As noted, even under the final, weakened form of the Bretton Woods Agreement, all countries were permitted to adopt strict capital controls.¹⁹ The Bank of England was willing to follow a low-interest rate policy during the war and immediately thereafter because it made it easier for the government to pay interest on its expanding debt.

The Treasury was also empowered to raise or lower the pace of public and semi-public investment in order to moderate the amplitude of business cycles around the full-employment trend. This was to be the major tool for cycle control, though a minor role was reserved for auto­matic fiscal stabilizers such as Meade's scheme for automatically adjusting the rate of contributions to the national pension fund. If successful, state control of investment spending would create a form of indicative planning for private investment substantially reducing investing firms' sense of uncertainty.

There were to be no planned deficits in the government's current account, but the all-important capital budget could run short-term deficits when necessary. However, the portfolio of investment projects to be supported by the Treasury would be expected to pay for themselves over the long run.²⁰

Once the stock of capital was no longer scarce, the main tool to be used to sustain AD at a level consistent with full employment was to be more progressive income and wealth taxes that would raise society's propensity to consume and reduce inequality.

Finally, the ability of the government to sustain high investment and a full-employment economy over the longer run was to be supported by capital controls, tightly managed trade, and the panoply of industrial pol­icies discussed in this book.

The proposed postwar economic system Keynes put before the key ministries from 1943 through 1945 clearly constituted an economic revo­lution against traditional British capitalism in support of democratic or Liberal Socialism. As argued earlier, it was a revolution in class power as well. The planned decline in the interest rate would eventually lead to the "euthanasia" of Britain's powerful rentier class, while the nationalization of the Bank of England and the shift in the status of the Treasury from an enemy of Keynes's policies to an ally would further weaken rentier polit­ical power. Meanwhile, sustained full employment would empower labor in its multidimensional struggles with capital. There would be no signifi­cant "reserve army" of unemployed to weaken labor 's bargaining power, and the new welfare state would dramatically increase labor's "fallback" position in its negotiations with capital. Capital controls would eliminate the ability of the capitalist class to force labor and the government to acqui­esce to their policy demands under the threat of capital flight. This is the true Keynesian revolution in economic theory and policy that Keynes put before the British government during WWII.

In June 1944, on his way to the USA for the Bretton Woods negoti­ations, Keynes read Hayek's The Road to Serfdom. When he arrived, he wrote Hayek a letter about his reaction to the book. This letter again demonstrates his hostility toward totalitarian planning, as well as his belief that Hayek's unplanned capitalism would be catastrophic.²¹ Keynes argued that while the totalitarian planned economies had demonstrated the economic superiority of planning, technical progress would permit both prosperity and individual liberty even in a less economically effi­cient democratic planning process. He stressed his belief in the centrality of the "moral values" of the planners and the community in determining the social and political outcomes of planning. It will be safe to grant sub­stantial economic power to state planners, he argued, if both the planners and the community that democratically control them hold liberal rather than authoritarian values. Since this interchange is between the most pres­tigious economists associated with the opposing sides of this great histor­ical clash of ideas, I quote Keynes at length.

In my opinion it is a grand book... Morally and philosophically I find myself in agreement with virtually the whole of it. It seems to me. that the Communist doctrine is so desperately out-of-date, at least in its application to U.S.A. and Western Europe. They ask us to con­centrate on economic conditions more exclusively than in any earlier period in the world's history precisely at the moment when by their own showing technical achievement is making this sacrifice unneces­sary. This preoccupation with the economic problem is brought to its most intense at a phase in our evolution when it is becoming ever less necessary. The line of argument you yourself take depends on the very doubtful assumption that planning is not more efficient. Quite likely from the purely economic point of view it is efficient. That is why I say that it would be more in line with your general argument to point out that even if the extreme planners can claim their tech­nique to be more efficient, nevertheless technical advancement even in a less planned community is so considerable that we do not today require the superfluous sacrifice of liberties which they themselves would have to admit have some value... I come finally to what is my only serious criticism of the book. You admit here and there that it is a question of knowing where to draw the line [between plan and market]. You agree that the line has to be drawn somewhere, and the logical extreme is not possible. But you give us no guidance whatever as to where to draw it. In this sense you are shirking the practical issue. It is true that you and I would probably draw it in different places. I should guess that according to my ideas you greatly under­estimate the practicability of the middle course. But as soon as you admit that the extreme is not possible, and that a line has to be drawn, you are, on your own argument, done for, since you are trying to per­suade us that as soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice. I should therefore conclude your theme rather differently. I should say that what we want is not no planning, or even less planning, indeed I should say that we almost certainly want more planning. But the planning should take place in a community in which as many people as possible, both leaders and followers, wholly share your own moral position. Moderate planning will be safe if those carrying it out are rightly oriented in their own minds and hearts to the moral issue. This is in fact already true of some of them. But the curse is that there is also an important section who could almost be said to want planning not in order to enjoy its fruits but because morally they hold ideas exactly the opposite of yours, and wish to serve not God but the devil. Reading the New Statesman & Nation one sometimes feels that those who write there, while they cannot safely oppose moderate planning, are really hoping in their hearts that it will not succeed; and so prejudice more violent action. They fear that if moderate measures are sufficiently successful, this will allow a reaction in what you think the right and they think the wrong direction. What we need therefore, in my opinion, is not a

Postwar economic planning 363 change in our economic programmes, which could lead in practice to disillusion with your philosophy; but perhaps even the contrary, namely an enlargement of them. Your greatest danger ahead is the probable practical failure of the application of your philosophy in the U.S. in a fairly extreme form. No, what we need is the restoration of right moral thinking - a return to proper moral values in our social philosophy. If only you could turn your crusade in that direction you would not look or feel quite so much like Don Quixote. I accuse you of perhaps confusing a little bit the moral and the material issues. Dangerous acts can be done safely in a community which thinks and feels rightly, which would be the way to hell if they were executed by those who think and feel wrongly.

(CW 27, pp. 385-388)

Keynes died on April 21, 1946.

Notes

1 See Crotty (1983) for a defense of the proposition that Keynes was so disappointed in the outcome of these negotiations that he seriously considered speaking in favor of rejection in the debate in Parliament over the Bretton Woods arrangements.

2 Keynes's use of the term "economic general staff" here presumably refers to the proposal of an economic general staff in the Liberal Industrial Inquiry (1928).

3 Keynes stressed the need for central coordination. "The problem of pace can be determined rightly only in the light of the competing programmes in all other directions" (CW 27, p. 268).

4 According to Skidelsky: "Henderson was the biggest thorn in Keynes's side throughout the war" (2002, p. 148).

5 Keynes hammered home the same basic point in a June 1943 piece esti­mating likely postwar income and employment. He criticized a report that forecast average postwar unemployment to be 1,200,000, or 7.5 percent of the workforce. Note again his complete confidence that there would be a near­universal, effective political demand after the war that the unemployment rate be maintained at or near full employment. "[E]ven 1,200,000 is a pessim­istic assumption in the light of the greater knowledge and experience of these problems and, above all, of the greater will to grapple with them and to regard their solution as one of our primary responsibilities, which exists in all quarters. We cannot, on this view, regard the unemployment problem as substantially solved so long as the average figure is greater than 800,000, namely 5 per cent of the wage-earning population, or rest content without resort to drastic changes of policy so long as it exceeds 1 million" (CW 27, p. 335, emphasis in original).

6 Stone won the Noble Prize in Economics in 1984.

7 The 5 percent figure, he argued, includes reasonable estimates of the virtu­ally unemployable, seasonal factors, men moving between jobs, and "misfits of trade or locality due to lack of mobility." "It compares with ... less than 1 per cent. unemployed at the present time" (CW 27, p. 305).

8 Pogo was the title of a popular comic strip in the USA. This sentence was used in support of the first "Earth Day," a celebration dedicated to protecting the environment.

9 Skidelsky seems to me to be consistently reluctant to acknowledge Keynes's persistent commitment to Liberal Socialism.

10 Of course, the impact of a change in employees' income on AD will depend on the short-run propensity to consume, which is, as Keynes stressed in The General Theory, quite variable over the cycle.

11 Keynes's analysis appears to neglect the effect of technical change on the profit rate of new investment projects. This is confusing because, as we know, he had stressed the rapidity of technical progress in the recent past and extrapolated it into the intermediate future. On the other hand, we also know that Keynes believed that private industrial investment, where much of the technical change was taking place, was dominated quantitatively by public and semi­public investment. Perhaps he thought that the rate of technical change was much more modest in these public sectors.

12 In addition to expressing Keynes's view on nationalization quite well, this statement is reminiscent of one he made in the Treatise on Money in 1930: "But the choice may conceivably lie between assuming the burden of a prospective loss, allowing the slump to continue, and socialistic action by which some offi­cial body steps into the shoes which the feet of the entrepreneurs are too cold to occupy" (CW 6, p. 335).

13 Skidelsky said that Keynes "never established the same rapport with Sir Wilfrid Eady, the new controller of finance" in 1943 as he had with his pre­decessor. "Keynes once said to him, after some argument, 'If I had taken you very young, I might have taught you the elements of economics'... Because, however, [Eady] lacked authority, he could annoy Keynes but not thwart him. At the end, only Richard ('Otto') Clarke, another outsider, could stand up to Keynes in the Treasury. But he was a much younger man and, like everyone else, in awe of him. Keynes was left as a solitary mountain towering over the foothills" (Skidelsky 2002, pp. 147-148).

14 Keynes stressed again that "long-term stability of employment may largely depend on having a stable long-term investment programme." Thus, we shall "have to have a periodic survey of investment prospects of which the capital budget may be an important ingredient; and, if we can find ways of retarding or accelerating the long-term programme to offset unforeseen short-term fluctuations, so much the better" (CW 27, p. 356).

15 Keynes made several other arguments worth noting. One referred to the asym­metric effect of the interest rate on investment spending. "Experience shows, however, that whilst a high rate of interest is capable of having a dominating effect on inducement to invest, it becomes relatively unimportant at low levels compared with the [profit rate] expectations affecting the inducement" (CW 27, p. 390).

16 Keynes argued that monetary profit or loss should not be a major criterion for the selection of investment projects: "With a full employment policy, we should not be biased as between two useful projects because one will bring in a direct cash return and the other a social or indirect cash return" (CW 27, p. 407).

17 Keynes stressed that the Public Capital Budget would not "facilitate deficit spending" (CW 27, p. 406).

18 We know from the ferocity of Keynes's attack on "insane" unregulated or lightly regulated national and international "casino" financial markets in the 1930s that he was in favor of tightly regulated national financial markets supported by strict capital controls in the post-WWII period. However, I have not found any specific sources to support this hypothesis with respect to national financial markets during the war years. In the case of the UK, which, of course, was his main concern, this may well be because, as I demonstrated earlier, he did not believe that the UK financial markets were insane casinos. His main complaints were about the government's policy commitment to a strong pound and high interest rates and its facilitation of overseas at the expense of domestic investment. The USA, on the other hand, was the home of the insane casino gambling that triggered the global financial and economic crisis in the 1930s. However, in response to the financial market collapse in the USA in the early 1930s, the government dramatically increased its regulation of financial institutions and markets in order to remove their sources of vola­tility and fragility. And, of course, government control of financial markets in the USA during the war was especially tight, as it was in the UK. By the 1940s, Keynes presumably assumed that casino capitalism in the USA was dead and buried, which it was, more or less, in the first two decades after the war, after which insane casino financial markets returned.

19 In the proposals for a postwar international financial regime Keynes worked out with Harry Dexter White, the chief US negotiator, capital controls were mandatory. Indeed, countries that received illegal capital transfers were obligated to return the funds to the country of origin. Even under the final agreement imposed on Britain by its dominant and dominating partner, all nations had the right to maintain strict capital controls. Moreover, in a letter to Kalecki in 1944, Keynes stressed the centrality of managed trade to postwar employment planning. "If, as is alleged, I said that the International Monetary Plan ‘would ensure the conditions necessary to maintain full employment at home irrespective of conditions abroad', I must have been out of my mind" (CW 27, pp. 382-383).

20 The nationalization of major industries, such as those that took place under the Labour government after the war, was not inconsistent with Keynes's plans. As mentioned above, he supported nationalization when it made eco­nomic sense. But he also believed that the government already had control or influence over such a large percentage of capital investment that there was no need in principal to support further nationalization. He argued that proposed nationalizations should be decided on their merit on a case-by-case basis.

21 Though Keynes and Hayek disagreed on many things, they both believed that fundamental uncertainty was an inherent characteristic of the nature of agent economic choice.

23