Keynes and "Liberal Socialism" (1931-1932)

In several essays written in these years, Keynes outlined his vision of lib­eral or democratic socialism. Though most of his energy was engaged in dealing with the global financial crisis in 1930-1932, he continued to push the radical policies called for in BIF.

In December 1931, Keynes delivered an address to the Society for Socialist Inquiry (which appeared in early 1932 in The Political Quarterly). Perhaps the most interesting aspect of this address is that it makes clear Keynes's sympathy for, comfort with, and allegiance to beliefs that he referred to as "Liberal Socialism." This is clearly an address from one socialist to other socialists.

The real question is whether we are prepared to move out the nine­teenth-century laissez-faire state into an era of liberal socialism, by which I mean a system where we can act as an organised community for common purposes and to promote social and economic justice, whilst respecting and protecting the individual - his freedom of choice, his faith, his mind and its expression, his enterprise and his property.

(CW 21, p. 500, emphasis added)

The central message - an old theme for Keynes - was that the only sensible and effective way to move from the disastrous political economy of the pre­sent to an efficient and humane organization of economic life was through a thoughtful evolutionary transition toward a planned economy, one with a significant though clearly subsidiary role for markets and private enter­prise in determining the dynamic path of the British economy. As always, he argued against a revolutionary path that would "stir up the embers of the class war" and destroy the economic and political foundations neces­sary for the construction of his ideal republic.

For it will have to be on the basis of increased resources, not on the basis of poverty, that the grand experiment of the ideal republic will have to be made...

(CW 21, pp. 34-35)

He pointed to two important reasons to support evolutionary institu­tional and policy reform over a revolutionary strategy bound to be eco­nomically disastrous in the short run. The first is that, in the current era, the evolutionary reforms needed to restore prosperity in fact lead in the direction of the eventual socialist objective - a planned economy based on government control of the capital accumulation process and dedicated to social justice.

I am convinced that those things which are urgently called for on practical grounds, such as the central control of investment and the distribution of income in such a way as to provide purchasing power for the enormous potential output of modern productive technique, will also tend to produce a better kind of society on ideal grounds.

(CW 21, p. 36-37)

The second is that the economic payoff to society from unleashing the enormous potential productivity of today's economy, with its unused resources and its powerful technical and engineering knowledge, is simply too large to pass up. "For it may be capable of solving once for all the problem of poverty" (CW 21, p. 37). Thus, for Keynes, the evolu­tion toward middle-way planning was also the best initial path toward the future goal of socialism as well.

In March 1932, with the general unemployment rate at 17 percent and investment in a state of collapse, Keynes delivered a radio lecture (later published) titled "The State and Industry," enthusiastically supporting government economic planning. Its main message was that state planning is a good idea whose time has come; it is the wave of the near future.

There is a new conception in the air today - a new conception of the pos­sible functions of government... It is called planning - state planning; something for which we had no accustomed English word for even five years ago. It is not [state] Socialism; it is not Communism. We can accept the desirability and even the necessity of planning without

126 The Economic Consequences... to The General Theory being a Communist, a [state] Socialist or a Fascist. But whether it is going to prove possible to carry out planning in actual practice without a great change in the traditions and in the machinery of democratic government - that is the big question mark. It is perhaps the problem of problems which the post-war generation of young Englishmen, who will be in their prime of life over the next twenty years, have to solve.

(CW 21, p. 84, emphasis in original)

There are two forces driving state planning onto the British political agenda. The first is the example of those countries currently undertaking "magnificent experiments" with central planning.

The Russian Five-Year Plan has assaulted and captured the imagin­ation of the world.

[L]et us not belittle these magnificent experiments or refuse to learn from them. For it is a remarkable and a significant thing that the two most extraordinary political movements of the modern age, approaching their task from opposite moral and emotional poles, should agree in this vital particular - that state planning, that intelli­gence and deliberation at the centre must supersede the admired disorder of the 19th century.

(CW 20, pp. 85-86, emphasis added)

The second reason is that the "absolute failure in terms of their own potentialities" of the unplanned economies of England and the USA had established a "prima facie case for planning" (CW 21, p. 87).

The third reason is that central planning during the war was a huge success.

For what are the economic events of the modern world which must most strike the apprehension of the dullest observer? The extraor­dinary capacity for the production of material wealth. which we developed during the War; and the opposite picture today of starva­tion amidst plenty, our incredible inability to carry to our mouths the nourishment which we have produced with our hands. For the War was the nearest thing we have ever had in this country to a planned regime. The environment was unfavourable, the haste was excessive and hurried improvisations were inevitable. Yet it showed us the potentialities of modern technique to produce.

(CW 21, p. 87, emphasis added)

Keynes called his listeners' attention to the crucial distinction between Soviet-style planning and the planning he envisioned. He supported central control of the "general organisation of resources" - of the level of aggregate economic activity, the allocation of resources across broad categories of competing uses, and the distribution of income - "as dis­tinct from the particular problems of production and distribution which are the province of the individual business technician and engineer" (CW 21, p.

If the England of the coming generations can solve that problem - and my proud patriotic heart harbours a hope that our national qualities may be best of all suited to do it - we shall have contributed, I think, something more valuable to civilisation than the Bolshevist or the Fascist can; - though I do not overlook that each of these movements may be capable in its way of contributing something to the dignity of human nature which transcends the field and the scale of operation that I attributed to national planning however complete and how­ever successful... [S]tate planning... differs from [state] Socialism and from Communism in that it does not seek to aggrandise the prov­ince of the state for its own sake. It does not aim at superseding the individual within the fields of operations appropriate to the indi­vidual, or of transforming the wage system, or of abolishing the profit motive. Its object is to take deliberate hold of the central controls and to govern them with deliberate foresight and thus modify and condi­tion the environment within which the individual freely operates with and against other individuals.

(CW 21, p. 88)

Keynes went on to list various examples of appropriate areas for centralized decision-making, including town planning, rural preserva­tion, and "deliberate planning to influence the localisation of industry." The most important object of state planning is:

the maintenance of the general level of industrial production and activity at the optimum level and.

(CW 21, p. 91)

Keynes ended his talk with a repetition of his standard political themes. There is no need to suffer a loss of individual liberty and ini­tiative to enjoy the fruits of ambitious central planning. Totalitarianism could make the task of planning easier, but democratic planning will have the enthusiastic support that accompanies popular consent and will have greater and more disinterested talent available to it. As always, planning institutions should have "semi-autonomy" from democratic control, and "state planning by Public Corporations" will be the cornerstone of the planning system.

Moreover, it should be compatible with democratic and parliamen­tary government to introduce modern improvements and new organs of administration. State planning, as I conceive it, would not be administered or supervised in detail by democratically elected bodies. The latter would be judges, not of the first, but of the final instance, reserve forces to effect a change when grave mistakes have been made. The day-to-day tasks of state planning would be carried out in the same sort of way and with the same kind of instruments of adminis­tration under a democratic government as they would under an auto­cratic government. It may be that other countries will enjoy the rare opportunity of seeing three experiments carried on simultaneously, differing vastly on the surface yet each directed to the solution of the same essential problem, - the Five Year Plan in Russia; the Corporative State in Italy; and state planning by Public Corporations responsible to a democracy in Great Britain. And as lovers of our species, let us hope that they all will be successful.

(CW 21, p. 92, emphasis added)

In September 1932, Keynes published two important articles based on a talk at the Annual Conference of the Labour Party. Keep in mind that Keynes believed that his radical policy agenda could only be successfully implemented by an electoral alliance between the Liberal and Labour Parties, with Labour providing the bulk of the votes.

Keynes "warmly" applauded Labour's support for "the principle of setting up a National Investment Board," but argued it "did not go nearly far enough for me" (CW 21, p. 133). Capital controls and the huge size of capital assets held by public or semi-public bodies stressed here were, of

On the edge of the Great Depression 129 course, persistent themes for Keynes. Note that Keynes updates his data on the size of public and semi-public investment.

The real problems, as I see them, are concerned with the quantitative, rather than with the qualitative, control of new investment, and partly with securing that the amount of foreign lending should be appro­priate to the circumstances. The resolution... seems to overlook the smallness of the part which purely private enterprise now plays, and is likely to play in the future, in the direction of home investment... Apart from the control of overseas loans, which certainly should not be left in the future to laissez-faire,. the main issue is concerned with the regula­tion of the pace of that predominant proportion of new investment at home which has already passed irrevocably out of the control of private enterprise and into the control of public and semi-public bodies. Thus £200,000,000 was invested through [local authorities and building societies] in 1930 compared with £30,000,000 in 1914. The above omits capital expenditure by the central government (including the Post Office) or by public boards such as the Central Electricity Board, the Port of London, the Metropolitan Water Board, the Agricultural Mortgage Corporation, and the component parts of what will be the London Traffic Authority, or by universities and hospitals and the like. Thus in the two years 1930 and 1931 the aggregate finance provided by building societies was appreciably greater than the... aggregate of new capital for all purposes within the United Kingdom. In short, considered quantitatively private industrial investment is very far from being of the first importance. What we need is a coordinated policy to determine the rate of aggre­gate investment by public and semi-public bodies, in which case we could safely leave industry to raise what funds it needs as and when it chooses.

(CW 21, pp. 134-135, emphasis added)

That body would be the Board of National Investment. It would seek "the maintenance of equilibrium between the total flow of new invest­ment on the one hand, and on the other hand the total resources avail­able for investment. and secondly a division of new lending between foreign and domestic borrowers" (CW 21, p. 136). Though the Board would have to concern itself with preventing dysfunctional price movements, and thus in times of inflation might have to lower invest­ment, its main goal:

would be to maintain the level of investment at a high enough rate to ensure the optimum level of employment. Without such an instrumen­tality we may be sure that the disastrous fluctuations will continue in the future as severely as in the past, and perhaps more severely.

(CW 21, p. 137)

This warning is quite serious: the total unemployment rate in 1932 was 17 percent. The challenge for socialists like himself was quite clear. "The grappling with these central controls," he told the Convention, "is the rightly conceived socialism of the future" (CW 21, p. 137).

In May 1932, Harold Macmillan, who would later become Prime Minister in a Conservative government, circulated a policy paper advo­cating selective import protection, low interest rates, and an "Investment Development Board." Macmillan was considered a very liberal Conservative. Keynes sent him comments.

My main feeling is that you are not nearly bold enough with your proposals for developing the investment functions of the state. You are trying it would seem to get your results by a sort of combination of pri­vate enterprise and subsidy... But at the present time it would be extra­ordinarily difficult to bring about an adequate volume of investment even if one had the whole force of the state behind one. The greater part of investment is concerned with building, transport and public utilities, and the scope for private enterprise is in modern times somewhat limited.

(CW 21, p. 109)

MacMillan wrote Keynes that he agreed with all his criticisms "in theory." But, he said:

I am still trying the perhaps hopeless task of influencing the Government in the direction I want them to go, and, for this purpose, I have to conceal a certain amount and to preserve certain political tendencies! I am going to try to make some modification in the way you suggest, if I can do it without destroying the chance of anybody in my party reading and being influenced by my pamphlet.

(CW 21, p. 111)

It is important to understand, as noted above, that this was precisely the dilemma Keynes himself confronted whenever he found himself in a situation in which the best outcome he could possibly hope for was to convince those around him to support moderate and perhaps temporary measures to increase public investment. It helps explain the occasional modesty of some of Keynes's own policy proposals to or testimony before various government commissions. He too sometimes seemed to "conceal a certain amount" in order to attempt to influence conservative politicians and civil servants to support moderate positive policy initiatives. In situ­ations in which the best feasible outcome was moderate reform, Keynes at times supported moderate reform.

Keynes came to believe that the current government was too reac­tionary to be influenced by progressive argument. He stated this view in another letter to MacMillan.

The main point in my opinion is that we are now in the grip of reactionary forces, and however fair-spoken those in authority may be, they fully intend to take advantage of present circumstances to reverse a great deal of what they regard as semi-socialistic policy. They also conscientiously disbelieve in the kinds of schemes for planning, etc., which you and I favour. There is probably no practical sense in any efforts except those deliberately aimed at ousting them.

(CW 21, p. 127)

In early 1933, Keynes issued a major policy statement, both in Britain and in the USA, called "The Means to Prosperity." It provoked much dis­cussion in both countries. Its primary purpose was to support "schemes of capital development at home as a means to restore prosperity" (CW 9, p. 339). The importance of both these articles, in my view, is that they combined the "magic" of the multiplier with Keynes's long-held belief that there was a huge number of large-scale public investment projects that it made economic sense to undertake. Keynes's use of the multi­plier was always in support of reliance on public and semi-public invest­ment to restore and sustain prosperity.⁵ But in developing this analysis, Keynes was now armed with the formal multiplier theory that first appeared in Kahn's famous article in The Economic Journal in June 1931. It suggested that, for every new dollar of public investment, there would be an increase in output two or more times as large. The formalization of the multiplier also meant that he was closing in on the basic short­run model of income determination that would be a cornerstone of The General Theory.

After taking the reader through the potential "leakages" from the income stream following an injection of spending, Keynes estimated the value of the multiplier in Britain to be two (CW 9, p. 343), with the American multi­plier "greater than two" (CW 9, p. 345).⁶ Keynes assumed that it required "£150 of primary expenditure to put one man to work for a year," and that "Great Britain had the task of putting at least 1 million men back to work" (CW 9, p. 364). Keynes is clearly being conservative here because, in 1933, Britain had over 2.5 million people in insured unemployment alone. He thus estimated that "we should need an increased loan-expenditure plus an increased foreign balance amounting altogether to £150 million" (CW 9, p. 364, emphasis in original).

To calculate the effect of this level of spending on the government budget, he assumed that "the total benefit to the Exchequer of an additional loan­expenditure of £100 is at least £33 [reduced spending on the dole] plus £20 [increased taxes], or £53 altogether, i.e., a little more than a half of the loan-expenditure" (CW 9, p. 347). Since these projects will normally yield more than their cost in present-value terms and more than half the loan will be covered by reduced unemployment payments and increased taxes,

132 The Economic Consequences... to The General Theory they will actually lower government debt over time. Keynes believed that there was a vast reservoir of large-scale investment projects with positive net present values that could help move the economy back to full employ­ment. Thus, there was no budgetary impediment to undertaking a major program of public investment.

Take, for example, the proposal to spend £7 million on the new Cunarder [a large ocean liner]. I say that this will benefit the Exchequer by at least half this sum... which vastly exceeds the minimum aid which is being asked of the exchequer. Or take the expenditure of £100 million on housing whether for rebuilding slums or under the auspices of a National Housing Board, this would benefit the budget by the vast total of some £50 million - a sum far exceeding any needful subsidy. If the mind of the reader boggles at this and he feels that it must be too good to be true, let him recur carefully to the argument which has led up to it.

(CW 9, p. 348)

Since it is the depression itself that created the large budget deficits of the era, the argument that we should avoid large public investment programs because they will raise the deficit is tragically mistaken. "There is no possibility of balancing the budget except by increasing the national income, which is much the same thing as increasing employ­ment" (CW 9, p. 347).

With the budget deficit problem disposed of, Keynes pressed home the urgency of large-scale public investment. His standard caveats are here. Bank credit must be "cheap and abundant." The long-term interest rate must be "low for all reasonably sound borrowers" (CW 9, p. 353). The for­eign balance must be protected through capital controls from the deterior­ation that domestic expansion in a stagnant word economy would bring under laissez-faire. Finally, the task of domestic economic renewal would be easiest to accomplish if programs of public investment and easy money were undertaken worldwide, but since there is no chance of this taking place in the foreseeable future, Britain will have to go it alone. Thus, public investment is "the means to prosperity."

Keynes concluded the essay, as was his style, with the combination of an attractive policy solution and a dire warning to his powerful critics in and out of government. The warning is based on the fragility of finan­cial systems loaded with debt in the face of deflation and falling incomes. Governments have tried the deadly combination of trying to protect the value of the pound through high interest rates and shrinking domestic deficit spending (or loan expenditure). If they fail now to adopt debt- financed, large-scale public investment accompanied by capital controls, the outcome will be catastrophic.

On the other hand, Great Britain has the other combination still untried - the policy of protecting the foreign balance and at the same time doing all in our power to stimulate loan-expenditure. I plead, therefore, for a trial of this untried combination in our domestic policy; and for the [upcoming] World Economic Conference an advocacy by our representatives of an expansion of international reserve money on the general lines proposed above. For we have reached a critical point... Few of us doubt that we must, without much more delay, find an effective means to raise world prices; or we must expect the progressive breakdown of the existing structure of contract and instruments of indebt­edness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.

(CW 9, p. 366, emphasis added)

Keynes went to the USA again, arriving on May 15, 1934, and leaving on June 8. He met with a large number of important American political and financial figures. On May 28, he had an hour-long meeting with President Roosevelt. Keynes apparently found the meeting "fascinating," while FDR "reported that he had 'a grand talk with Keynes and liked him immensely' " (CW 21, pp. 320-321).

Before leaving the USA, Keynes wrote an analysis of Roosevelt's policy problems and perspectives for both the New York Times and the London Times. He provided a quantitative analysis of the fiscal policy of the pre­ceding year, one that is extremely important for our purposes. Stimulus to production and employment, he said, must depend chiefly on "the Government's [loan financed] emergency expenditure" (CW 21, p. 325). The specific programs mentioned are the Civil Works Administration and the Public Works Administration. Such spending had fluctuated between about $100 million and $400 million a month over the previous nine months. Each $100 million represented about 2.75 percent of monthly national income, according to Keynes. Thus, to raise such loan-financed spending from the lower figure to the higher represents an increase of a little over 8 percent of national income. Keynes believed that such a policy would "increase the national money income by 25 to 30 per cent" (CW 21, p. 326). By implication, he believed the applicable multiplier to be about 3.0-3.5. And he thought that fluctuations in US government spending and income over the past year have already confirmed his basic analyt­ical framework. Keynes also insisted that it was a great mistake for the Roosevelt administration to cut back on public spending as significantly as it did.

Some five months ago I wrote that the relapse [in income] in the latter half of 1933 was the predictable consequence of the failure of the Administration to organise new loan expenditure. on an adequate scale... Fortunately the expenditures did increase, rising from less than $100,000,000 in the month preceding my letter to an average of $300,000,000 in the next four months. As I predicted the fruits of this have been enjoyed, and I estimate that there has been an improve­ment of something like 15 per cent in output, incomes and employ­ment. This is an immense achievement in so short a time. But latterly, the expenditures have been declining and, once more as a predictable result, a recession of 3 per cent and perhaps 5 per cent is impending.

(CW 21, pp. 328-329)

In a Redbook piece in December 1934, Keynes is perhaps even more enthusiastic about the efficacy of public investment, raising his estimate of the American multiplier to a very - probably overly - optimistic level.

[F]or each man actually employed on the government scheme, three, or perhaps, four, additional men are employed in providing for his needs and for the needs of one another. In this way a given rate of government expenditure will give rise to four or five times as much employment as a crude calculation would suggest. Thus there would be some advantage even if the scheme itself were to yield but little revenue hereafter. If, however, it is even a moderately sound scheme capable of yielding (say) three per cent on its cost, the case for it is overwhelming.

(CW 21, p. 336)

In 1934 and especially 1935, Keynes was preoccupied with completing The General Theory.