The Keynesian approach advances a critique of claims for market self­regulation common among classical and neoclassical thinkers.

The Keynesian critique questions the claim that an unregulated market system will fully exploit society’s productive potential.

At its core, the argument for market self-regulation contends that the market system will bring together wants and means in such a way as to satisfy those wants so far as is possible given the means available.

In this argument, individual producers may fail to sell all they produce, or can produce, because what they have to sell is not wanted by those with the purchasing power to buy it. They have miscalculated in their decisions regarding the line of investment for their capital and produced the wrong goods. The low profit and income of these producers is the fate that befalls those who do not provide what consumers want. This can happen to the individual, but not to the aggregate of sellers.

The Keynesian critique argues that failure to find buyers can be a systemic problem having nothing to do with a bad fit between what has been produced and what is needed. It can result from the failure of the market mechanism to assure adequate purchasing power. It can thus fail to bring together wants and means, underutilizing society’s existing productive capacity. This failure of aggregate demand differs fundamentally from the failure of particular demand. If the market tends systematically to generate failure of aggregate demand, this will affect how we judge its use as a mechanism for satisfying wants. This judgment bears on how we think of the relation of the world of private affairs to public authority, and therefore of the separability of the economy and its dominance over public life.

The Keynesian critique encourages us to reconsider the relation of politics to markets. Yet many Keynesian economists have drawn the conclusion that aggregate demand failure need not and should not be treated as a political problem. They argue instead that stability and adequate market functioning can be assured by the introduction of automatic mechanisms, and thus by administrative rather than political means.

This claim is, of course, debatable. But, the debate shifts the core issues of political economy onto a different plane. New questions arise, including: In what way does state management of the economy entail a political agenda rather than a purely administrative function? What is that agenda and what sorts of social conflict might it involve? How does state management affect collective judgment of the limits of the market? How does it change the way we think of the relation between public and private?

Before addressing these questions directly, we need to consider the Keynes­ian critique of market self-regulation in some detail. A significant revision of the way we think about market economy is implied in the Keynesian critique. This revision in itself bears on central issues of political economy concerning the nature, social purpose, and therefore limits of the property system.

The Keynesian approach focuses on the instability of the process of re­production and growth in capitalist economy.^[XIX] For reasons we will develop in this chapter, capitalist economies incorporate processes that make their reproduction unstable and therefore uncertain. Such processes cast doubt on the appropriateness of the self-regulating market as the institution through which society should organize the production and distribution of goods.

This perception of the nature of capitalist economy has a long history. Among nineteenth-century economists, Karl Marx stands out as the most vigorous critic of the idea of the self-ordering market. Marx argued that capitalist economies have an inherent tendency toward crises involving the widespread unemployment of labor and the failure of product markets to provide adequate outlets for the existing productive capacity of capital equip­ment.

Keynes shared Marx’s view up to a point. Although he did not think about the disruptions of the capitalist reproduction process in the violent language typical of Marx, he equally denied the ability of the market to maintain employment and smooth reproduction. Indeed, while rejecting the hypothesis that capitalism is violently unstable, Keynes concluded that left to its own devices, the capitalist economy might settle into a situation of significant underutilization of resources:

In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse. Moreover, the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence. (Keynes, 1936:249-50)

Thus, Keynes argued against both the notion of equilibrium characteristic of late nineteenth- and early twentieth-century economics and the notion of the “invisible hand,” favored by Adam Smith and the early advocates of laissez-faire.

The Polish economist Michal Kalecki came to a similar conclusion based less on a notion of chronic unemployment, and more explicitly on the im­plications of cyclical instability:

Even on the average the degree of utilization throughout the business cycle will be substantially below the maximum reached during the boom. Fluctuations in the utilization of available labor parallel those in the utilization of equipment.

Thus, for Kalecki, cyclical instability implies that the economy must, aside from exceptional circumstances (the peak of the boom), fail to fully utilize the human annd material resources available to it. This failure implies a high cost in human terms resulting from high levels of unemployment.

Economists working in the Keynesian tradition accept the argument that capitalist economies, left to their own devices, will not make full use of the resources available to them. This failure necessitates government interven­tion. In this sense, the instability of capitalist economy casts doubt on the hypothesis of the invisible hand and therefore also on the implications that hypothesis has for political economy. It leads to arguments in favor of gov­ernment policy aimed at assuring a stable process of reproduction and ade­quate levels of employment.

In 1965 President Johnson was making a controversial statement when he said: “I do not believe recessions are inevitable.” That statement is no longer controversial. Recessions are now generally considered to be fundamentally preventable, like air­plane crashes and unlike hurricanes. But we have not banished air crashes from the land, and it is not clear that we have the wisdom or the ability to eliminate recessions. The danger has not disappeared. The forces that produced recurrent recessions are still in the wings, merely waiting for their cue. (Okun, 1970:33-4)

Okun goes on to identify the source of the problem in the “vulnerability of the economy to cumulative movements upward and downward” (p. 34). In this chapter, we investigate those cumulative movements and the possibility that government policy may offset them.

Instability undermines the conclusion that markets regulate themselves. By so doing, instability supports the conclusion that the social and private ends whose pursuit justifies organization of our economic lives through mar­kets also justifies restricting movements within markets through institutional changes in property relations (regulation and policy). Instability characterizes capitalist economies because processes within such economies (movements of output, investment, employment, and prices) tend to be self-reinforcing or cumulative. Limiting cumulative processes requires appropriate changes in property relations and the types of contracts agents enter into. In order to understand these changes, we first consider those features of capitalist economies that lead to cumulative movements. Fundamentally, the features are of the following kinds: (1) those having to do with the circularity of economic processes, (2) those having to do with the motivations of agents and with the kinds of information the organization of the economy makes available to agents, and (3) those having to do with the kinds of contracts agents enter into.

The desire on the part of agents to stabilize their environment has two implications with special importance for political economy: First, it sets limits to the pure property system and changes the nature of some of its most important contractual relations (including the wage contract). Second, it involves the state in regulating the production and distribution of wealth, thus reducing the scope of market self-regulation. We take up both of these implications in this chapter.