Keynes's Liberal Socialist economic policy agenda

Keynes's economic policy agenda was designed to create a liberal and democratic variant of a government-guided socialist economy. This gov­ernment planning system did not incorporate most manufacturing and service-sector corporations; those firms that were in industries that were not oligopolistic would be left to operate in the market economy as before.

The primary objective of policy was to increase "public and semi-public" investment sufficiently so as to achieve and then sustain full employment over the long run, creating a dramatically improved economy and society in the process.

Keynes could only achieve his core policy objectives if the capital stock under public and semi-public control was extremely large, which it was. In 1927, Keynes estimated that "two-thirds of the typical large-scale enter­prise of this country had already been removed, mainly by Conservative and Liberal Governments, out of the category of pure private enterprise" (CW 19, pp. 695-696).¹ In 1943, while leading the group at the British Treasury responsible for post-WWII economic planning, Keynes insisted that the primary tool of postwar state economic planning was to be variations in the pace of public and semi-public investment to achieve the goal of sustained full employment. "If, as may be the case, something like two-thirds or three quarters of total investment will be under public or semi-public auspices [after the war], the amount of capital expenditures

Introduction 7 contemplated by the authorities will be the essential balancing factor" in achieving sustained full employment (CW 27, p. 352).²

In The General Theory, Keynes said:

I expect to see the State, which is a position to calculate the marginal efficiency of [or expected return to] capital goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment...

(CW 7, p. 164, emphasis added).

The criteria for project selection were not limited to the expected rate of monetary return. They included quality-of-life issues, contributions to arts, culture, and education, priorities for working-class housing, envir­onmental concerns, and so forth. In 1942, Keynes argued that, properly designed and implemented, state investment planning could be used to create what he called a "New Jerusalem" in Britain:

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.

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

In other words, in Liberal Socialism, the state, not the market, would make the bulk of the large-scale capital-investment decisions that are the main determinants of the economy's long-term growth path.

To prepare his readers to accept Liberal Socialism, Keynes first had to convince them that the laissez-faire capitalism in Britain after WWI was incapable of generating sustained prosperity over the long run. Contrary to the conventional wisdom that asserts that The General Theory deals solely with the short run, Keynes devotes considerable space in the book to an analysis of the long-run tendencies of laissez-faire capitalism. Keynes

became convinced at the end of WWI that Britain and other European countries faced dismal long-run growth prospects caused by deeply rooted structural dysfunctions in the capitalisms of his time, dysfunctions that he believed were unlikely to be eliminated in the foreseeable future. He extended this analysis to the USA and much of the world in the 1930s. His very pessimistic long-run economic outlook for Europe in 1919 is discussed in the next chapter.

In the absence of unexpected fundamental change in the economic environment - such as war, system-transforming technical change, or a substantial increase in the rate of population growth - Keynes expected the rate of profit on capital to continue to be too low and the interest rate too high to maintain a pace of private investment rapid enough to sus­tain low unemployment under capitalism.³ This was his version of the "secular stagnation" thesis that was popular in the 1930s and has emerged again in the wake of the global financial and economic crises that began in 2007.

Keynes also argued, in The General Theory and elsewhere, that if the state used increasing control over public and semi-public capital investment to guide the economy to sustained full employment and the foundations of stagnation remained in place, the rate of profit on capital would con­tinue to decline and eventually fall toward zero at what we might call a point of capital saturation.⁴ This had profound implications for the design of Keynes's new policy regime. The only way Liberal Socialism could succeed was if the risk-adjusted long-term rate of interest was allowed to fall toward zero along with the rate of profit on capital. To be able to force the long-term interest rate to follow a long-term downward trend required three dramatic changes in Britain's pre-WWI economic policy regime.

First, to gain control of its interest rate, Britain would have to go off the gold standard, which it did in 1931.

Second, Britain would have to enforce strict permanent capital controls to prevent capital flight as its interest rate fell below the higher rates available to investors in other countries. Keynes had been a supporter of capital controls for most of his professional life because he believed that excessive foreign lending kept the British interest rate too high to support adequate investment at home. In his role as chief negotiator for Britain in the discussions with the USA that were to determine the nature of the postwar international financial system, Keynes argued strongly in favor of mandatory, strict capital controls. If controls on outgoing funds were evaded, Keynes wanted the country receiving the funds to be obligated to return them to their country of origin.

Third, to sustain a policy of falling long-term interest rates, the Bank of England would have to be nationalized to end its allegiance to Britain's influential rentier class, whose major objective was high interest rates. It would also have to sever its cozy relationship with Britain's big banks, who represented rentier interests and who required free capital flows to retain their role as the center of world financial markets. Keynes believed that only a nationalized Bank of England could free itself from these class interests and support his Liberal Socialist economic agenda.

Keynes also wanted Britain to adopt a policy of "managed trade" to replace its hallowed traditional "free" trade regime (see Chapter 11). If Britain were to adopt Keynes's version of Liberal Socialism, it would grow faster than countries who remained mired in the Great Depression and would therefore run unsustainable balance of trade deficits. To avoid this fate, Britain would have to manage its imports to keep their growth in line with the growth of exports. During WWII, Keynes proposed that coun­tries that ran persistent balance of trade surpluses should pay a fine to the International Monetary Fund (IMF), which would motivate them to grow at a faster pace, inducing more imports from deficit countries.

Clearly, the dominant role in the evolution of the economy played by state investment planning to permanently sustain full employment did not exhaust the anti-capitalist dimensions of Liberal Socialism. Consider Keynes's insistence that the risk-free rate of interest had to be driven down to zero in order to sustain adequate investment spending as the profit rate fell toward zero.

[This] would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital... I see, therefore, the rentier aspect of capit­alism as a transitional phase which will disappear when it has done its work. Thus we might aim in practice. at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus.

(CW 7, p. 376, emphasis added)

Thus, a fall in the interest rate toward zero would not only reduce inequality and facilitate full employment, but also eliminate the "oppressive" and economically and politically powerful rentier class. It would be hard to get more radical than that in Britain in the mid-1980s or in the USA today.

Keynes also understood that permanent full employment brought about by a sustained high level of public investment would eliminate what Marx called the "reserve army" of unemployed. This would per­manently empower workers and weaken capitalists in their economic conflicts over wages and working conditions. As Keynes put it in The General Theory: "Labour is not more truculent in the depression than in the boom - far from it" (CW 7, p. 9). Moreover, permanent full employ­ment would strengthen workers and unions in their political conflicts with the capitalist class over government economic policy, including policies affecting the economic and political power of unions. This point was stressed by Michael Kalecki in his famous 1943 article explaining why capitalist-dominated governments will never permit sustained full employment (Kalecki 1943).

Reliance on public investment to generate aggregate demand (AD) would also eliminate the pressure on governments that builds up in recessions and depressions to adopt capital-friendly economic policies in the hope that these policies will tease out more investment and more jobs. In Keynes's Liberal Socialism, increased public investment could compen­sate for any loss in AD caused by a decline in private investment. This would dramatically decrease capital's influence on economic policy.

In the absence of capital controls, capital flight would be triggered whenever the domestic or international financial investors became dissat­isfied with, or even just nervous about, the general tenor of government economic policy. This would give the rentier class effective veto power over government policy. Capital controls remove this major source of policy influence exercised by the rentier class.

Finally, Keynes supported a dramatic increase in the progressivity of taxation of income and wealth. This would increase the percentage of national income devoted to consumption spending while simultan­eously weakening the economic and political influence of rentiers and big capitalists.

For all of these reasons, it is not an exaggeration to suggest that per­manently sustained full employment achieved through high rates of public investment accompanied by the "euthanasia" of the rentier class, an increase in the economic and political power of labor relative to cap­ital, radically progressive tax reform, strict capital controls, and managed trade would constitute a peaceful democratic revolution in the nature of Britain's economic system and in the structure of class power in Britain.

The conventional wisdom that Keynes wanted to save capitalism is thus either false or capitalism must be redefined to apply to any economic system in which markets, monetary incentives, and freedom of consumer choice are allowed to exist in some form, even if the most important economic decisions are determined collectively via democratic political processes before people get to choose in the marketplace. If we use the traditional definition of capitalism, it was clearly Keynes's goal to replace capitalism with a form of democratic socialism. It is my goal in this book to convince the reader that this conclusion is consistent with the historical record.