Relevance of Keynes's radical policy positions for today's economies

The entry thesis for this chapter was that Keynes believed that our eco­nomic system must be constructed so as to conform to the requirements of society's commitment to economic and social justice rather than the other way around.

Keynes's simple macro model of capitalism asserts that the equilib­rium level of income is equal to the level of investment (as determined by the expected profit rate minus the interest rate) times the inverse of the mpc - or the "multiplier." Keynes's long-run theory stressed capitalism's tendency toward secular stagnation brought on by inadequate capital investment (caused by a falling rate of profit), a relatively high interest rate, and a low investment multiplier due to excessive inequality in the context of financial market instability. This simple macro model can also be used to construct an outline of Keynes's vision of Liberal Socialism. We have to add to the model: state planning and/or guidance of most large- scale investment projects; monetary policy designed to drive the risk- adjusted interest rate toward zero; and a sharp decline in the inequality of the distribution of income and wealth through progressive taxation that would increase the value of the mpc and thus of the investment "multi­plier." The long-term trajectory of the economy under Liberal Socialism would therefore be heavily influenced by societal preferences under an economic system designed to generate sustained full employment, sub­stantial income growth, and a more egalitarian society.

In the last chapter, we saw that Keynes was the central figure in the creation of the British government's plans for the reconstruction of the economy after WWII ended, plans that would build institutions and policies that embodied Keynes's vision of Liberal Socialism. We earlier quoted Schumpeter: "Everyone knows that during the war [Keynes] entered the Treasury again (1940) and that his influence grew, along with Churchill, until nobody thought of challenging it" (Schumpeter 1946, p. 518). Chapter 22 of this book laid out in detail Keynes's three-stage plan designed to achieve sustained full employment primarily through state planning of two-thirds to three-quarters of large- scale capital expenditures, a plan that was supported at the highest levels of government. Adoption

Relevance of Keynes's work today 375 of his plan would mean that the future trajectory of the economy would be primarily determined by societal preferences expressed through a democratic political process and only secondarily by the capitalist market system. State-guided investment policy was to be accompanied by a gen­erous social welfare system, highly progressive taxes, a low interest rate monetary policy (implemented by a nationalized Bank of England), strict capital controls, managed trade, and non-casino financial markets. We also saw that there was reason to expect that some variant of his radical view of the future organization of the British economy would be implemented even if the Conservative Party remained in power when the war ended. Keynes's economic revolution was not just a utopian dream; it had become a politically feasible project.

How times have changed! Social democracy is in retreat almost every­where. Authoritarian oligarchies are on the rise in many nominally democratic countries, including in the USA, and the globally integrated neoliberal system institutionally empowers rich investors and multi­national corporations to punish any country that does not play by their preferred rules of the game.

Of course, the fact that Keynes's preferred system of Liberal Socialism is not politically viable in the current era does not mean that Keynes has nothing to teach us about economic policy in today's world. On the con­trary, as I have argued throughout this book, many important aspects of his scathing critique of laissez-faire capitalism are applicable to today's capitalist economies. I offer four examples of Keynes-inspired policy interventions that could improve economic performance in the future. Even taken together they would not constitute a radical transformation of the economic system. At least three of them were widely used in the West after WWII. However, none of them are likely to be adopted unless society can manage to sharply reduce the political influence of its giant corporations and oligarchs.

First, as we argued above, we need more realistic theories of the per­formance of capitalist economies over the long run to serve as a policy guide for long-run economic planning. In both The General Theory and in much of his other writings throughout the interwar years, Keynes argued

that, left to its own devices, a modern capitalist economy has a tendency to stagnate over the long run, though it can also achieve spurts of rapid growth from time to time.

The policy lesson for the current era would be that government and other publicly oriented institutions should attempt to take responsibility for a larger share of total national investment spending and, in particular, should coordinate their annual capital investment expenditures in order both to sustain full employment and to achieve key social objectives over the long run. For example, it is widely understood that there is a need for much greater investment in infrastructure, in public utilities, in clean energy, in education, and so forth in the USA and elsewhere. The American Society of Civil Engineers in 2017 estimated that the amount of invest­ment needed to repair and modernize US infrastructure over the next ten years is on the order of $4.5 trillion, almost all of which will be funded by public authorities. If this infrastructural investment was planned and coordinated to achieve sustained full employment and other economic and social objectives, we might consider this to be a weak variant of Keynes's plan for a Board of National Investment. This would even be helpful in the intermediate run. If the USA had taken a coordinated approach to the determination of public and semi-public investment spending in the recession years from 2008 to 2015, it could have borrowed long term at extremely low real interest rates and increased investment by enough to substantially weaken the long recession of that period.

Second, Keynes taught us that highly liquid, loosely regulated, glo­bally integrated, excessively large, and non-transparent financial systems are, in his words, insane gambling casinos that can accelerate and sus­tain financial booms and economic expansions, but also create devastating financial- and real-sector crises. We have been living with a modern insane gambling casino for several decades.

The central policy implication of mainstream financial market theory is that governments should use a light touch in its regulation of financial markets. This consensus view of the economics profession lent support to the government's disastrous radical deregulation of US financial markets that began in the early 1980s and culminated in the global financial and

Relevance of Keynes's work today 377 economic crisis that broke out in 2008. This crisis is inexplicable within mainstream financial theory but is perfectly consistent with the Keynes- Minsky theory of financial markets.

The central policy implications of Keynes-Minsky theory are that finan­cial markets need to be much smaller, less complex, more transparent, less globally integrated, and more tightly regulated, and that financial firms have to be much smaller (eliminating "too big to fail" status), much less leveraged, much more transparent, barred from gambling activities with depositors' money, and forced to focus primarily on providing safe assets for depositors and financing productive investment activity. It would not take a political revolution to implement important pieces of this policy agenda. The economics profession could help in this task if it would end its allegiance to "efficient" financial market theory and adopt Keynes- Minsky theory.

Third, Keynes argued that high levels of income and wealth inequality not only violate norms of social justice, they also substantially reduce the mpc and thus lower the investment "multiplier." This leads to lower levels of income and employment.

Fourth, Keynes was vigorously opposed to having Britain so deeply embedded in an integrated global economic and financial system that it could not control its own economic future. Recall his tirade against excessive global integration in his 1933 essay "National Self-Sufficiency," which we discussed in Chapter 11 of this book: "let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national" (CW 21, pp. 235-37). The most urgent task facing Britain, he said, was to create a "transition towards greater national self-sufficiency and a planned domestic economy" (CW 21, p. 245). The planned investment regime at the heart of Liberal Socialism could not be achieved and sustained unless Britain adopted strict capital controls - to prevent capital from fleeing the country when British interest rates fell below rates offered elsewhere - and imposed managed trade, so that high domestic growth did not lead to chronic trade deficits. The extreme degree of global economic and financial integration under today's neoliberal order makes it extraordinarily difficult for any country to experiment with major institutional and structural changes in its political economy that are opposed by large corporations and wealthy elites. Capital controls and

managed trade are necessary but hardly sufficient conditions for societies to substantially increase their control over their own national economic outcomes in today's neoliberal global capitalism.