The real Keynesian revolution begins

On May 24, 1924, Keynes published an article titled "Does Unemployment Need a Drastic Remedy?" in The Nation and Athenaeum, the Liberal Party journal. The piece was stimulated by policy proposals made by David Lloyd George, the Liberal candidate for Prime Minister.¹ The Liberal Party had made reduction of unemployment the focus of their Fall 1923 election campaign.

We examine this article in detail because it contains Keynes's initial presentation and defense of public investment as the key policy tool to be used to restore and sustain full employment in a current economic system otherwise incapable of this objective. This is a policy position he perfected and fought for, in one form or another, until his death in 1946. Though the theoretical defense of this policy position would not be fully formed until the publication of The General Theory, the broad outline of his perspec­tive on this question was clearly and permanently established in this 1924 debate. According to Skidelsky:

The years 1924 and 1925 were more obviously watershed years than 1923... Events and the processes of his own thought radicalised him, so that he emerged the self-conscious champion of a new economic and political order. New ideas came flooding in, and demanded expression. From 1924 Keynes knew what he wanted to do and, in very broad terms, why.

(Skidelsky 1992, p. 173)

It has been argued that Keynes neglected the effects of structural factors, especially the substantial decline of exports in industries in which Britain had been dominant before the war, on the high unemployment rate of

Public investment and state planning, 1924 49 the 1920s.

If the figures be analysed we find a great concentration of unemploy­ment in the shipbuilding and engineering industries (i.e., nearly four times the percentage elsewhere). Outside these industries, unemploy­ment amongst adult males does not now exceed much more than 4 per cent of the employable population.

(CW 19-I, p. 219)

The report stated that the unemployment rates for all unionized workers (largely though not exclusively male) were 15.2, 11.3, and 8.1 percent, respectively, in 1922, 1923, and 1924 (Mitchell and Deane 1962, p. 67).² But the Engineering, Metal and Shipbuilding Unions reported unemploy­ment rates of 27, 20.6, and 13.8 percent in those years. Since the all-unions number includes these high-unemployment industries, Keynes's esti­mate may not have been too far off the mark. The unemployment rate for all insured nonagricultural workers was 10.9 percent in 1924 (CW 19-I, p. 67).

But although progress had been made, Keynes believed that Britain was stuck in a temporary equilibrium with unemployment still too high. In retrospect, it is clear that the unemployment rate had stopped falling; the rate in the first half of 1924 had reached what would prove to be its interwar-periodlow.

Business is weighed down by timidity. It lacks conviction that any­thing good will continue for long. It watches anxiously for the signs of retrogression; and as soon as the army wavers, individuals bolt. No one is ready to plant seeds which only a long summer can bring to fruit.

(CW 19-I, p. 221)

Keynes suggested that full employment, or a "sustainable minimum" unemployment rate, was about 3 percent unemployment.³ Given the sig­nificance of structural unemployment, he argued that a transition to full employment required a combination of macroeconomic stimulus and industrial policies - large-scale public investment to create jobs on the one hand and targeted industrial and labor market policy on the other.

Part of [the unemployment] is due to the immobility of labour as between industries; part to the fault of trade unions; and part to a disparity of wages between what are called the sheltered and the unsheltered [or traded goods] industries.⁴ But we cannot cure these ills by the pressure of starvation, or by breaking the power for evil, and perhaps for good also, of the trade unions, or by reducing wages in the sheltered industries to the level of the unsheltered. From these thoughts the mind must be averted, for from such directions help will not come. Rather, we must seek to submerge the rocks in a rising sea, - not forcing labour out of what is depressed, but attracting it into what is prosperous; not crushing the blind strength of organised labour, but relieving its fears, not abating wages where they are high, but raising them where they are low.

(CW 19-I, p. 221)

Thus, the way to get to full employment was not through a direct attack on unions and wages in the depressed export industries as called for by the conventional wisdom. Rather, the structurally unemployed must instead be induced to move into newly created jobs generated by more rapid macroeconomic growth through public investment assisted by industrial policy.

Keynes proposed that the state should commit itself to increasing public investment by a substantial amount for a long period of time to stimulate an increase in general employment large enough to solve the jobs problem centered in the export sector. He argued that Britain "must look for succour to the principle that prosperity is cumulative. We have become stuck in a rut. We need an impulse, a jolt, an acceleration" (CW 19-I, p. 220, emphasis in original). The idea that "prosperity is cumulative" represented Keynes's initial attempt to link large-scale public investment with some vague form of the multiplier concept.

Keynes's concrete proposal was for the Treasury to initiate and finance "expenditures up to (say) £100,000,000 a year" - or about 2.6 percent of 1924 GDP - "on the construction of capital works at home, enlisting in various ways the aid of private genius, temperament, and skill" (CW 19-I, p. 222).

He did not hazard a guess in this article as to the number of jobs that might be created by public investment of £100,000,000 a year, but he did suggest, in an article published in July 1925, that such a sum would be "enough to make good the wastage of nearly 500,000 men in unemploy­ment" (CW 19-I, p. 427). The implicit assumption that each worker creates a net output of £200 is quite close to the figure of £220 used most often in the more careful calculations of the job-creating power of public invest­ment made by Keynes and the Liberal Party starting in 1929, when the

Public investment and state planning, 1924 51 multiplier concept and its role in the theory of AD first became consciously incorporated into his analysis.

It is important to understand that Keynes almost always used the con­cept of the multiplier coupled with a proposal for an increase in public investment. The role played by the multiplier in Keynes's decades-long effort to make public investment the centerpiece of Britain's economic policy was to show that every dollar of new public investment will raise output by two to three dollars. This means that full employment can be reached by achievable and sustainable increases in public investment. That is its role in chapter 10 of The General Theory, which is where the multiplier concept is introduced. In chapter 10, the examples he used of the effect of the multiplier all refer to the impact of public investment on output and employment.

Since insured unemployment was about 1.2 million in 1924, a reduction of half a million (among the insured unemployed) would have cut the unemployment rate from 10.3 to about 6 percent (Garside 1990, p.

The funds for the program were to be diverted from current contributions to the government's "sinking fund," which collected taxes to pre-fund interest and principal payments on the vast pubic debt generated in WWI. Keynes wanted to use these revenues to finance a sharp rise in public investment. Since every pound spent on public investment initially resulted in one additional pound of debt outstanding, the investment was, in effect, debt financed. In this way, Keynes explained in a metaphor he often used, the government could replace "unproductive debt with pro­ductive debt" (CW 19-I, p. 222).

What kinds of projects should the government fund? Consistent with his general position on such questions, Keynes insisted that expert advice must be sought on this crucial issue. "It is for the technicians of building, engineering, and transport to tell us in what direction the most fruitful new improvements are awaiting us" (CW 19I, p. 222). But he did mention three projects that "are already known to everyone in a general way." Each of these projects could involve huge investment expenditures over a very long time period:

a national scheme for the mass production of [working class] houses which would supplement the normal activities of the building industry and make up in five or ten years the deficiency with which the latter has proved unable to deal. The adaptation of road-building to the needs of motor transport... The development of economical means for the transmission of electrical power in this country. Unaided

private enterprise is not capable of dealing with any of these projects, even when their technical soundness is beyond doubt.

(CW 19-I, pp.222-223)

Keynes's argument reflects his belief that Britain had entered a period of stagnation. He said that previous eras of long-term prosperity in Britain had some powerful semi-exogenous engine of capital accumulation that had helped start and sustain the rapid growth process. His implicit assumption was that long eras of prosperity in capitalism require some great secular wave of transformative infrastructural, technological, and/ or market-expanding investment, carried on year after year without regard to short-run fluctuations in profitability and capable of creating a powerful ripple effect of induced capital accumulation across important sectors of the economy.

British prosperity in the nineteenth century owed very much to the railway boom in its first half, beginning at home and extending abroad, and to the immense building activity of its latter half... The boom in motors and in building combined, no doubt, with many favourable attendant circumstances, has carried the United States to an unprece­dented standard of living.

(CW 19-I, p. 221)

The reference to the "railway boom" is especially instructive. More than three decades long, the construction of the British railway system totally transformed the British economy. It induced an era of high non-rail invest­ment because it not only created widespread profitable investment oppor­tunities by expanding and integrating markets and creating preconditions for huge economies of scale, but also stimulated a surge in optimism and confidence among British capitalists in this period as well - prosperity is "cumulative." The potential for stagnation arises because there is no guarantee that the economy will always generate system-transforming innovations capable of generating rapid long-term growth.

Keynes's argument is that private firms operating solely through ordinary market incentives cannot, in the current era, carry on the long­term, large-scale capital projects required to accelerate long-term growth. It is thus left to the public sector to step in and help create an engine of long-term capital accumulation that can pull the economy out of its dis­tress and keep it buoyant. Note that Keynes's stated long-run objective is to create the "true socialism of the future."

Is there not a chance that we can best achieve [prosperity] by rec­reating the mood and conditions in which great works of construc­tion, requiring large capital outlays, can again be set on foot? Current savings are already available on a sufficient scale - savings which

Public investment and state planning, 1924 53 from a lack of outlet at home, are now drifting abroad to destinations from which we as a society shall gain the least advantage. Private enterprise unaided cannot stop this flow. The policy of preventing public utilities from yielding more than a modest profit has gone so far that it is no longer worth the while of private enterprise to run risk in a field where the gain is limited and the loss unlimited.⁷ We are in danger, therefore, of interfering with private initiative, yet sub­stituting nothing for it. The advances under the Trade Facilities Act, begun for a temporary emergency and on a small scale, point the way, perhaps to a new method of administering an important part of the saving of the public. The next developments of politico-economic evo­lution may be found in co-operation between private initiative and the public exchequer. The true socialism of the future will emerge, I think, from endless experiments directed towards discovering the respective appropriate spheres of the individual and the social, and the terms of fruitful alliance between these sister instincts.

(CW 19-I, p. 222, emphasis added)⁸

His concern about capital flight or British savings "drifting abroad" with little advantage to the domestic economy was not new, nor would it prove to be merely temporary.⁹ Indeed, it would receive increased emphasis in Keynes's work over the coming years.

It is worth noting that the ideas Keynes espoused here constituted heresy on a grand scale. It was not the line about "true socialism" that was heretical, for Keynes and many other radical Liberals thought of them­selves as liberal socialists (to be distinguished from the "State Socialists" of the Labour Party), and they referred to themselves as such. Rather, it is the fact that Keynes here added to his previous acts of sacrilege - rejec­tion of the gold standard and support for discretionary regulation of the credit system in pursuit of domestic objectives - his growing concern that Britain's current form of capitalism may be incapable of generating sustained full employment even under optimal monetary policy. This implied that the state might have to take upon itself direct control of a sub­stantial part of the capital accumulation process in addition to its exercise of indirect influence through control of the cost and availability of credit. To complete his list of sins against orthodox belief, he will, in the course of debate in The Nation, argue in favor of permanent controls over the movement of financial capital out of Britain, something he had supported since his days as a student.

Keynes concluded this article by stressing three key points. First, a com­bination of expansionary monetary policy and a program of state-guided investment is needed to achieve full employment. Second, public invest­ment on this scale combined with capital controls will help divert the flow of British financial capital away from largely unproductive foreign invest­ment to domestic investment. Third, carefully selected large-scale public

investments will not just increase employment in general; they can also be used as industrial policies to reduce structural unemployment.

I look, then, for the ultimate cure of unemployment, and for the stimulus which shall initiate a cumulative prosperity, to monetary reform - which will remove fear - and to the diversion of national savings from relatively barren foreign investment into state-encouraged con­structive enterprises at home - which will inspire confidence. That part of our recent unemployment, which is not attributable to an ill- controlled credit cycle, has been largely due to a slump in our con­structional industries. By conducting the national wealth into capital developments at home, we may restore the balance of our economy. Let us experiment with boldness on such lines - even though some of the schemes may turn out to be failures, which is very likely.

(CW 19-I, p. 223)

Keynes fleshed out these ideas in response to attacks by his critics. His main defense of his views appeared in a second Nation article in June 1924 called "A Drastic Remedy for Unemployment: Reply to Critics." In this defense, he put more stress than in the original article on: (1) the problem of excess saving - the balance between saving and investment that played such an important role in The General Theory had moved closer to the center of his thinking; (2) the problem of free capital mobility, which, under then- current conditions, led primarily to what he called "the flight of foreign capital"; and (3) the rigidity or lack of flexibility of the modern, postwar British economic system.

He reminded the reader that since the sinking fund throws up to £100 million a year on the capital market, it is essential that thought be given to "the supply of alternative investments" that might absorb such a sum. "At first, Local [government] Loans, home, municipal, and indus­trial debentures partly filled the bill. But with the advent of deflation, the Geddes Axe, and industrial depression, the supply [of new securities] has dried up" (CW 19-I. p. 226).¹⁰ Later on, Keynes would describe a situation like this as one in which savings at full employment exceeded investment at full employment by a large amount, causing the economy to be in a high-unemployment equilibrium.

Meanwhile, the rate of interest on foreign bonds floated in London had fallen about 1 per cent below the rate for similar bonds in New York. As a result: "We are lending too cheaply resources we can ill spare. Our trad­itional attitude toward foreign investment demands reconsideration; it is high time to give it a bad name and call it 'the flight of capital' " (CW 19-I, p. 227). His main concern was that outward capital flows in excess of net exports (inclusive of returns on previously invested capital) would exert downward pressure on the pound, which must continue until exports rise by enough to restore the payments balance. But Keynes argued that world

Public investment and state planning, 1924 55 demand for British exports had become relatively price inelastic, so that the required depreciation was potentially quite large. This created serious problems in his view because the postwar British economy did not have the elasticity, fluidity, or easy mobility of either capital or labor that would be required for the real economy to smoothly and quickly adjust to such severe exchange rate changes. It did not resemble the flexible economy constructed in Classical theory.

[T]here may be violent resistances to the process of adjustment. The fall of the exchange tends to raise the "cost of living," and the "sheltered" industries may struggle to avoid the reduction of real wages which this entails. Our economic structure is far from elastic, and much time may elapse and indirect loss result from the strains set up and the breakages incurred. Meanwhile, resources may lie idle and labour may be out of employment.

(CW 19-I, p. 228)

Skidelsky pointed out that Keynes's new argument amounted to the proposition that the British industrial system was so inflexible that, even with the exchange rate free to float downwards, British unemployment - concentrated in the export trades - could be alleviated only by public works (Skidelsky 1992, p. 187). This emphasis on the downward rigidity of nominal wages would continue to characterize Keynes's thinking for the next two decades.¹¹

The degree of resource flexibility required for either laissez-faire or the gold standard to operate effectively may have been present in the old regime, Keynes acknowledged, but it is not present in the new one.

The old principle of laissez-faire was to ignore these strains and to assume that capital and labour were fluid; it also assumed that, if investors choose to send their money abroad at 5 per cent, this must mean that there is nothing at home worth doing at 5 per cent. Fifty years ago this may have been a closer approximation to the truth than it is now. With the existing rigidity of the trade-union organisation of labour, with the undue preferences which the City organisation of new issues and the Trustee Acts afford to overseas investment, and with the caution which for many reasons, some good and some bad, now oppresses the undertaking of new capital investment at home, it does not work.

(CW 19-I, p. 228)¹²

In August, he would estimate that in 1923 "we invested abroad about two-thirds of what passed through the investment markets, and probably between half and a third of total savings" (CW 19-I, p. 284). In two months,

he would tell readers of The Nation that "The Treasury should use its power of license to... strictly ration overseas borrowers" (CW 19-I, p. 282).

The second prong is positive: stimulate the domestic demand for money-capital through a major program of large-scale government invest­ment. There is a wealth of large-scale investment projects that are eco­nomically efficient and socially productive to undertake: "Surely [critics] cannot maintain that England is a finished job, and that there is nothing worth doing on a 5 per cent basis" (CW 19-I, p. 228). But private capitalists cannot undertake them because while the downside risk of loss is limited only by the size of the financial commitment, the potential gains today are - in contrast to the nineteenth century - exceedingly modest, about what could be earned by investing in a safe security.¹³

Is it worth the while, or within the power, of anyone to organise a new project costing £20,000,000 with the expectation of a return of 5 per cent? These persons "exercising foresight" about new, costly, moder­ately remunerative projects do not exist. If there was no Manchester Ship Canal, does [anyone] suppose that a syndicate of private persons would spring up today to construct it?

(CW 19-I, p. 230)

Keynes made the point several times that regulatory constraints on the profits of those firms operating in the industries designated as public util­ities would not and should not be removed - "There is no going back on this." He does not explain at this point why there is no going back on this, but, as discussed in detail below, he later presented a theoretical and empirical defense of this proposition. The defense is based partly on the rise of economies of scale and scope in crucial industries that led to mon­opoly and oligopoly market structures across Britain. These industries could not possibly be left unregulated - and they weren't. The defense is also based on the destructive nature of competition in old export indus­tries like cotton and coal with their large numbers of small firms, a phe­nomenon I discuss in Chapter 7.

Where, then, is the domestic investment demand to come from?

In considering how to [raise the rate of capital accumulation], we are brought to my heresy - if it is a heresy. I bring in the State; I abandon laissez-faire, - not enthusiastically, not from contempt of that good old doctrine, but because, whether we like it or not, the conditions for its success have disappeared. It was a double doctrine, - it entrusted the public weal to private enterprise unchecked and unaided. Private enter­prise is no longer unchecked, it is checked and threatened in many ways. There is no going back on this. The forces which press us may be blind, but they exist and are strong. [T]he next developments of politico-economic evolution will emerge from new experiments

Public investment and state planning, 1924 57 directed towards determining the appropriate spheres of individual and government action. And to proceed to particulars, I suggest that the state encouragement of new capital undertakings, by employing the best technical advice to lay the foundations of great schemes, and by lending the credit and the guarantee of the Treasury to finance them more boldly than hitherto, is becoming an inevitable policy.

(CW 19-I, pp. 228-229, emphasis in original)

While testifying before the government Committee on National Debt and Taxation in early October of 1924, a committee member asked Keynes about his call for £100 million a year of publicly initiated and publicly financed capital investment. He responded as follows.

Owing to the control of profits and rates, and so forth, which is now popular, an investment in a public utility is very unlikely to yield the investor any unusual gains; he will never be allowed to obtain more than a certain rate of interest. On the other hand, he is not secured against losses. The result is that the inducement to the investment of money in large public utility enterprises is very much less than it was, for example, during the period of the railway boom, when our railways were built... I am, therefore, very doubtful whether, in present conditions, the railway system of England could be built by unaided private enterprise. I believe that considerations of this sort stand in the way at this moment of the development of our ports, of our transport system, and of our power system, and that the policy of leaving these to unaided private enterprise is a thing which is no longer practicable. As to the forms in which the state can help, I think there ought to be a great variety.

(CW 19-I, p. 322)

A statement Keynes made to the Committee on Industry and Trade in July 1925, after the election victory of the Conservatives in late October of 1924 and following Churchill's momentous announcement of the return to gold at par in April 1925, which Keynes vigorously opposed, might serve as a brief summary of his position at this time.¹⁴ It linked his call for public investment to what he saw as the permanent erosion of Britain's traditional export markets and placed enormous stress on the structural imbalance in labor markets this created. Large-scale public investment, he argued, would increase the general demand for labor in the country and, simul­taneously, create employment for export industry workers whose old jobs could not be saved.

[O]wing to changes in the external world. probably our export trades will be permanently on a lower scale in relation to population than they were in pre-war days. And I think we should do well to have

a transference of labour to some extent from the export trades to non­export trades, and balance our reduction of exports by investing less capital abroad and more capital at home... So that my long-period policy would be the gradual transference of labour from export indus­tries and a large programme of capital expenditures at home, which would absorb the savings which had previously found an outlet abroad. If we had any of the great schemes that have been proposed for capital development at home, that would certainly stimulate the employment of labour in the coal industry and in the iron and steel industry because they would require the products of those industries. [I]f there is an intake for labour the business of transfer is not an insuperable difficulty. What I think is so extraordinarily difficult is to absorb labour out of industries when the other industries are not wanting any labour. You must first of all create a condition of demand for labour in other industries.

(CW 19-I, pp.409-410)

Why did Keynes make this permanent radical left turn in mid-1924? Skidelsky notes that the economic upturn stopped and the economy stabilized in 1923. "As unemployment, despite the trade revival, remained obstinately stuck at 10 per cent of the insured workforce, his mind turned to 'drastic remedies'" (Skidelsky 1992, p. 184). Keynes feared that fiscal policy was unlikely to be used to reduce unemployment. The government's budget had moved into surplus, the war debt was in the process of being paid down, and the new Labour government was more orthodox than the Conservatives on budgetary matters.

To many [government officials], high spending was as bad as budget deficits. "It is no part of my job as [Labour] Chancellor of the Exchequer" stated Snowden in 1924, "to put before the House of Commons proposals for the expenditure of public money. The function of the Chancellor of the Exchequer, as I understand it, is to resist all demands for expenditure made by his colleagues and, when he can no longer resist, to limit the concession to the barest minimum of acceptance."

(Aldcroft 1986, p. 105)¹⁵

Both Labour and the Conservatives had pledged to return to gold at par at some point, and the embargo on gold exports was to expire at the end of 1925. Such thinking pointed toward monetary policy- or interest rate- induced deflation. From the middle of 1924 on, the authorities began to push up the exchange rate of the pound to a level that would make free convertibility possible. London rates of interest were raised substantially above those ruling in New York, and funds began to flow in. The belief that an attempt would be made to restore the pound to its old parity in

Public investment and state planning, 1924 59 the course of 1925, before inconvertibility would automatically lapse, attracted further funds. By April 1925, the pound had virtually reached its prewar parity with the dollar. Not only were interest rates expected to remain permanently high in defense of the pound, but, as Keynes repeat­edly pointed out, the pound at parity would be 10-15 percent overvalued with respect to the US dollar. This would lead to constant trade deficits that had to be met with constantly high interest rates in order to attract foreign capital. Moreover, Keynes consistently argued that British wages and therefore British prices were downwardly rigid, which meant that the Bank of England would be under strong pressure to keep interest rates very high in a deliberate attempt to keep unemployment high enough to break through this rigidity and force wages down - a disastrous and futile policy.¹⁶

The British historian Sidney Pollard observed that the decision to return to gold at the old parity "called forth a large volume of criticism, among the most intelligent and far-sighted of which was that associated with the name of J.M. Keynes" (Pollard 1983, p. 137). He cited not only Keynes's famous essay "The Economic Consequences of Mr. Churchill," published after the return to gold, but also the Tract on Monetary Reform, published in 1923. Pollard made the important point that the decision to return to gold at prewar parity would obviously do substantial damage to both businesses and workers in the real sector of the economy while benefitting finance capital.

The decision to return had taken appalling risks with British industry. It was a City [London financial center] decision, emphatically not a decision of the industrialists: had their views been given as much weight as those of the City, it is unlikely that the change would ever have been made.

(Pollard 1983, p. 138)¹⁷

In retrospect, it seems impossible to deny that the preparations and the return to gold at too high a rate contributed to the depressed conditions of British industry in 1925-9, at a time when much of the rest of the world enjoyed a prolific boom, just as the removal of the handicap in 1931 was responsible for the sudden spurt of British exports relative to other countries.

(Pollard 1983, p. 139)

Keynes's economic analysis and policy proposals at this juncture reflected his increasingly radical economic and political perspective, and they were perceived as such by those private interests including, of course, the "City" - the largest private banks and the Bank of England, plus the rentier class they represented - and the big industrialists who feared the political as much as the economic consequences of transferring such 60 The Economic Consequences... to The General Theory unprecedented power from economic elites and institutions to the state. They opposed most of Keynes's policy proposals throughout the interwar period.

W.R. Garside explained the main reason why Keynes's proposals for publicly controlled capital accumulation raised such fierce opposition.

There is no doubt, however, that to the majority of contemporary politicians, civil servants, city financiers and industrialists, a policy of deliberately unbalancing the budget in the hope of expanding employ­ment was a fearful prospect, not least in its potential for encouraging repeated demands for yet further increases in public expenditures... The other barrier to the adoption of a more positive public works policy was the fear of state intervention. The rules of "sound finance" were, as one writer pointed out, a defense not only against economic catastrophe but also against state socialism. Indeed, in calling for a more drastic remedy for unemployment via loan-financed public works, Keynes remarked in May 1924 that "the next development of pol­itico-economic evolution will emerge from new experiments directed towards determining the appropriate spheres of individual and of government action." And behind the Treasury's notorious rejection of increased government expenditure for such purposes lay the powerful conviction that it would undermine the democratic structure of local government and threaten private property rights. What worried contem­porary politicians (not least within the Labour Party) about the devel­opment programmes of Lloyd George and Oswald Mosley was their implicit assumption of a powerful executive, their rejection of the inherent efficacy of market forces in favour of some form of "managed capitalism," and a suggested timetable of action which smacked of bureaucratic dictatorship.

(Garside, 1990, pp. 551-552, emphasis added)

Notes

1 David Lloyd George was Chancellor of the Exchequer from 1908 to 1915 and Prime Minister of the wartime coalition government from 1916 to 1922. His central role at the Versailles Peace Conference in 1919 was mentioned earlier. Lloyd George was an avid supporter of the creation of an early version of the modern welfare state.

2 The unemployment rate for union members was always higher than the rate for all workers because above-average unemployment was concentrated in the highly unionized sectors that traditionally dominated exports.

3 In The General Theory, Keynes defined full employment in two different ways. One was the standard definition - the level of employment at which the supply of labor equals the demand for labor. The other was the level of employment at which an increase in AD led only to rising prices and not to

Public investment and state planning, 1924 61 additional employment. The latter definition is most compatible with his esti­mate here that sustainable full employment is reached at an unemployment rate of 3 percent.

4 Note that these are three of the "rigidities" Keynes referred to in the Tract.

5 This cumulative or multiplied effect of an initial increase in public invest­ment is consistent with Keynes's belief that long periods of prosperity create a general rise in what Keynes in The General Theory would call businessmen's "animal spirits" - in the willingness of the business class to take risks and undertake investments independently of short-run economic conditions. If public investment can create a large enough jolt or acceleration of economic growth that lasted long enough, it could induce a rise in animal spirits that would reinforce and extend the multiplier effect.

6 Aldcroft notes that "the use of government-financed public works for employment purposes already had a reputable lineage going back to at least Elizabethan times," but that "such works were to be employed [only] sporad­ically during the interwar years" (Aldcroft 1986, p. 23).

7 This reference to public utilities, which have to be regulated by the state because they are natural monopolies, is an incomplete explanation for the absence of a strong incentive to invest. We will deal with the causes of this inadequate incentive for long-term investment below.

8 The Trade Facilities Act to which Keynes refers was designed to provide credit at below-market interest rates to export-oriented firms.

9 In a 1922 article in defense of free trade (against the call for protectionism from Conservative Prime Minister Stanley Baldwin), Keynes expressed a similar worry. Capital is drifting abroad that is needed at home, in part because finan­cial markets are biased in favor of foreign loans. "Now, if we are to interfere at all with the natural course of trade, surely it should be with the object of keeping capital at home, not of driving it abroad. With our shortage of housing and the need of factories and equipment to render efficient our growing supply of labour, we need to keep more capital at home... There is already, in my opinion, too much encouragement to the export of our capital" (CW 19-I, pp. 148-149). And, he stressed, Britain gets little benefit from this outflow of capital, at least in the short run. Indeed, to the extent that foreign loans are used by her competitors to finance infrastructural or industrial investment, they will eventually worsen Britain's trade balance.

10 A report calling for sharp public spending cuts in the midst of a stagnant economy was generated by a Parliamentary Committee under the chairman­ship of Eric Geddes and was referred to as the Geddes Axe.

11 "He tried to explain why a modern industrial society could not stand a policy of laissez-faire. He developed an imagery of fluids and sticky masses to explain the contrast between old and new forms of industrial life, and to pinpoint the need for a new type of statesmanship. The building of an economic theory was much more difficult. He came to realise that the economics he had been taught simply assumed away the Sturm und Drang of actual economic life" (Skidelsky 1994, pp.173-174).

12 "The Trustee Acts restricted the type of investments which could be made by trustees of estates or charities to a ‘trustee list' which included all British and colonial government bonds, but excluded practically all shares of private

companies" (Skidelsky 1994, p. 183). See Crotty (1983) on Keynes's consistent commitment to capital controls.

13 The main problem here is the effect of the onset of secular stagnation caused by a chronically depressed expected rate of profit on capital accumulation. This point is stressed in The General Theory.

14 See "The Economic Consequences of Mr. Churchill" (CW 9). Britain had already suffered the consequences of the run-up to the return to gold, during which interest rates had been pushed up to attract additional gold to add to Britain's meager current holdings.

15 Though the Labour Party supported a revolutionary change from current- day capitalism to Soviet-style planning as their ultimate objective, they also believed that until this revolution was accomplished, the British government should, even under Labour Party leadership, adopt the conservative policies supported by British industry and, especially, finance.

16 In the end, it proved impossible to slash wages: "wages in 1929 stood at 99.5 (1924 = 100)" (Pollard 1983, p. 141). The deflation brought on by the return to gold also increased the burden of Britain's huge WWI debt and thus pressured the government to maintain high taxes even in a sluggish economy.

17 This is one reason why Keynes called for the "euthanasia of the rentier" in the final chapter of The General Theory.

5