The General Theory and concrete historical facts: secular stagnation1

Our survey of Keynes's ideas about the concrete historical and institu­tional reasons as to why Britain was "stuck in a rut" in the 1920s and why the USA, the UK, and much of the world were mired in depression in the 1930s is a useful example of his methodology as it was interpreted in the previous chapter.

High-unemployment long-run equilibrium 173 and larger-scale enterprises as was being done in the USA and Germany; the collapse of Britain's traditional export markets after WWI, in part because rising competitors such as the USA and Germany were now much more efficient in the production of tradable commodities - the decline in the size of Britain's traditional trade surplus in cotton textiles, coal, and shipbuilding are examples; destructive competition among nations to cut imports and expand imports in the 1930s - "beggar-thy-neighbor" trade policies; Britain's chronic export of financial capital to the world, which contributed to high domestic interest rates and helped finance modern­ization in competitor economies; the absence of job-creating, system­transforming innovation in the era²; the inability of unemployed workers and capital to move rapidly from deeply depressed regions to regions of higher growth because the economy was stagnant; the decision in Britain to return to gold at the prewar par that created a constant upward pressure on interest rates both before and after the return; a dramatic decline in the rate of Britain's population growth; the slowdown in the incorpor­ation of new areas of the world to exploit; a high propensity to save in the advanced countries due to a high level of inequality; and so on.

Keynes's macro theory provides the broad abstract concepts - mec, mpc, and interest rate - used to organize all of these "facts" and the logic of causality between them and income and employment.

Keynes did not expect these constraints on output and employment in the interwar years to disappear in the foreseeable future. He believed that long-term expectations of both the profit rate on capital investment and future security prices would remain both pessimistic and deeply rooted in the 1930s, a situation that did not end until the buildup to the prosecu­tion of WWII. Confidently held expectations of endless depression them­selves became a powerful "psychological" impediment to the restoration of prosperity precisely because they were based on strong institutional and empirical foundations.

Recall that Keynes repeatedly said of the nineteenth century that "pros­perity is cumulative" - that decades of high growth generated a firm belief that prosperity was permanent. This belief helped minimize the decline in investment spending even in cyclical downturns. But a long, deep depres­sion is also "cumulative" because it creates a strongly held expectation that the depression will continue for the foreseeable future. Deeply pes­simistic expectations can become self-fulfilling.

Keynes concluded from his concrete study of the period that the serious impediments to full employment in the interwar era were so strong and deeply rooted that it would require a socialist transformation of the UK and, hopefully, the rest of the "West" to restore long-term prosperity. As I will demonstrate in Chapter 20, Keynes repeatedly said in The General Theory that only what he elsewhere called "Liberal Socialism" could defeat secular stagnation, eliminate "insane" financial markets, and restore long­term prosperity.