Keynes’s state planning: from Bolshevism to The General Theory

Abstract

The purpose of this paper is to present Keynes’s view on state planning in an orderly manner, as elements of his vision appeared scattered here and there from the 1920s until the publication of his General Theory. One could argue that Keynes’ ideas on planning were influenced by Soviet planning; the Great Depression and Roosevelt’s New Deal; and in parallel, the theoretical transition Keynes was going through. His conception consolidated when he established that it was necessary to control investment and income distribution, although he believed planning should walk hand in hand with democracy.

Keywords:

• Keynes’s planning
• state planning
• planning and democracy
• types of uncertainty
• New Deal

JELCODES:

• B31
• B22
• B29

Acknowledgments

I am grateful for the two anonymous reviewers for their insightful comments and constructive remarks on a previous version of this article. The usual disclaimer applies

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 This term quasi-boom was used by Keynes: “The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom” (Keynes 1973, 322). Aside from that, Keynes stated that “the outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (Keynes 1973, 372). 

2 Keynes acknowledged that “… a second force of example – Italian Fascism which – attacking the same problem with an opposite mentality — seems to have saved Italy from chaos and to have established a modest level of material prosperity within a poor and over-populated country” (Keynes 2013f, 85). Nonetheless, one cannot find in his writings long and detailed references to the Italian state planning experience, as he did to the Russian case. Keynes’ intellectual relationship with Bolshevist Russia is richer than his relationship with Fascist Italy – and no analysis of this country’s planning experience is to be found in his writings. In a classical book, The Universal Aspects of Fascism, James Strachey Barnes suggested that Keynes’ ideas and fascist economics might converge: “…Fascism entirely agrees with Mr. Maynard Keynes despite the latter’s prominent position as a Liberal. In fact, Mr. Keynes’ excellent little book, The End of Laissez-faire (…) might, so far as it goes, serve as a useful introduction to fascist economics” (Barnes 1928, 113–114). One must mention that during the 1920s and 1930s, a fertile debate on planning took place in some continental European countries. For instance, Emil Lederer and Carl Landauer were prominent economists debating this theme in Germany. Some of their most important works about planning were written in German and published at the beginning of the 1930s. However, they did not seem to have had any influence on Keynes, as he never cited these authors in his works on planning. On the other hand, Lederer is known to have read and cited Keynes’s macroeconomic works during the 1920s (see Allgoewer 2003, 328). Both Landauer and Lederer faced extreme persecution under the Nazi regime and immigrated to America in 1933, where they started to write in English. Landauer released his book Theory of National Economic Planning in 1944, where he commented on Keynes’ macroeconomic model.

3 It is a well-known fact that Bernard Shaw, a friend of Keynes who was a Fabian socialist, was sympathetic to Benito Mussolini, Stalin, and their political regimes. Keynes disagreed with him for supporting tyrants and accepting supposedly easier ways. Keynes said: “I suspect that Bernard Shaw's preference for tyrants is mainly due to his being impressed with the difficulties of persuasion. It is easier to persuade a tyrant to adopt one's policy than to persuade the democracy” (Keynes 2013c, 36).

4 Cardim de Carvalho (2019, 26n) pointed out to the existence of these uncertainties noted in Keynes’s writings.

5 Herbert Stein, a famous scholar of fiscal policy in the US, argued that, after Keynes, fiscal policy should no longer be used only as an emergency measure (as is commonly accepted) but rather as a policy to be used permanently: “Without Keynes, and especially without the interpretation of Keynes by his followers, expansionist fiscal policy might have remained an occasional emergency measure and not become a way of life (Stein 1988, 39).

6 An implication of Keynes’ planning is that income and wealth redistribution should be pursued because it is efficient (not necessarily because it is socially fair). Keynes combined income distribution, propensity to consume, and his multiplier, to make full employment policies more efficient. This is part of Keynes’ General Theory model.

7 Cardim de Carvalho presented an excellent summary of the president's diagnosis: “Franklin Roosevelt held definite ideas about the causes of the economic contraction initiated in the United States in the late 1920s. In his view, the violence and depth of the crisis was due to the unchecked accumulation of sectoral imbalances, especially between agriculture and manufacturing. In the 1920s, rural activities had suffered a strong negative shock. In the immediate aftermath of World War I, agricultural output had increased dramatically in response to the expansion of domestic and international demand. However, in the early 1920s, this impulse was exhausted, and prices for agricultural goods and livestock stagnated or fell, and rural incomes sagged for the rest of the decade. Meanwhile, manufacturing was booming until the end of the decade. Rising output and prices of industrial goods allowed the manufacturing sector to increase its share of national income at the expense of rural producers. As a result, demand from agriculture for industrial goods fell below the necessary level to maintain full capacity utilization in the manufacturing sector. For a while these pressures were masked by alternative demands of a speculative nature, fuelled by easy credit policies. Once the credit ‘bubble’ exploded in 1929, however, there was nothing to stop the meltdown of the manufacturing sector” (Cardim de Carvalho 2019, 4). Balisciano presented Tugwell’s diagnosis, which was very similar to the president’s: “Tugwell (…) surveyed the debris of the depression and concluded that America’s economic problem was an undirected and uncoordinated economic system focused on the profit motive rather than production based on social need. Pursuit of profit for profit’s sake had resulted in structural imbalance between sectors …” (Balisciano 1998, 159).

8 There is a website with detailed information about all the programs of the New Deal; see https://livingnewdeal.org/.

9 To confirm Stein’s words, see Buttenheim (1932), Sawyer (1932), Loucks (1932), and Foster (1932). These articles are in the annals of the thirty-sixth annual meeting of the American Academy of Political and Social Science, which had planning as the main topic for discussion.

10 According to Keyserling, “The proposal that the government spend more to employ people when unemployment is very high, and thus run a deficit, came well before Keynes was in vogue, and cannot be attributed to anyone man or school” (Keyserling 1972, 134). Keyserling said that this idea was, for example, in Senator Wagner's Economic Stabilization Act of 1929, which proposed increased public works spending, as private indexes of economic activity were decreasing.

11 Mimeographed document that belongs to University of Chicago partially reproduced by Stein (1990).

12 “… Eccles had not then, in the early 1930s, read anything by Keynes and never in his life read very much by him. Moreover, Eccles was not aware of deriving his views on fiscal policy from anything he ever read or heard” (Stein 1990, 148). In a conversation with Stein, Eccles gave a reason for arriving at his unorthodoxy position: “he had never been to college and therefore did not have any orthodoxy economics to unlearn” (Stein 1990, 485). Alan Sweezy presented a different assessment: “Eccles has attributed the advanced character of his thinking to the fact that (a) he was a country banker, and (b) he had never gone to college. That explanation, attractive though it is, would not stand up under the most elementary statistical test. There must have been hundreds of country bankers who enjoyed the advantage of never having gone to college but who contributed nothing whatever to thinking about fiscal and monetary policy. The explanation rather is that Eccles combined unusual ability to cut through to the essentials of an economic argument with the intellectual independence and courage to say publicly exactly what he thought” (Sweezy 1972, 117).

13 The five original members of Roosevelt’s small group of closest advisers were labelled the “Brains Trust”; this group, which had a major influenced on the elaboration of the New Deal, included Rexford Tugwell (an economist), Raymond Moley (an expert on criminal justice), Adolph A. Berle, Jr. (a lawyer), Basil O'Connor (a lawyer), and Samuel Rosenman (a lawyer) (source: https://livingnewdeal.org/).

14 “… industry is conceived in strictly national terms, as, in fact, a rounded and self-sufficient system. And this involves agriculture and the other extractive employments as well as home-industry, the factory system, and external trade” (Tugwell, 1928a, 165). “It is astonishing to recollect that this experimentalism is at work in a national effort which involves nearly 150,000,000 people and one-sixth of the area of the globe, with the whole of its industry and all its social institutions. Education, social insurance, and the publishing of books come as prominently within its purview as does the operation of the steel works in the Donetz basin” (Tugwell 1928a, 167).

15 “The planning takes place as a result of the varied activities of the Council of Labor and Defense, having as its right arm Gosplan, the National Planning Commission. It is done in budgeting fashion” (Tugwell 1928a, 170). “The most unique instrument for their purpose to achieve a multiplied productivity was discovered when Gosplan was invented. Its business is to look ahead toward what is possible in view of the past and the present. Its members are regarding at present a point fifteen years away” (Tugwell 1928a, 174).

16 It should be noted that Keynes supported the supply-side policies of the New Deal during the deepest period of the crisis, for example, its policies to reduce stocks: “When President Roosevelt’s substantial loan expenditure began, stocks of all kinds – and particularly of agricultural products – still stood at a very high level. The ‘New Deal’ partly consisted in a strenuous attempt to reduce these stocks – by curtailment of current output and in all sorts of ways. The reduction of stocks to a normal level was a necessary process – a phase which had to be endured. But so long as it lasted, namely, about two years, it constituted a substantial offset to the loan expenditure which was being incurred in other directions. Only when it had been completed was the way prepared for substantial recovery” (Keynes 1973, 331–332).

17 The distance between Keynes’s and Tugwell’s conceptions of planning was not that the former pursued less control or planning than the latter; rather, they differed from one another over whether demand and supply should be controlled or the focus should be only on demand. In a letter to Hayek, dated 28 June 1944, Keynes wrote: “I should say that what we want is not no planning or even less planning, indeed I should say that we almost certainly want more” (Keynes 2013d, 387), and in a second open letter to Roosevelt, published in the New York Times on 10 June 1934, Keynes suggested to the president that an office be established to rigorously control government spending so that the expected results could be met: “A small office should be set up, attached presumably to the Executive Committee, to collate the spending programmes, both realised and prospective, of the various emergency organisations, to compare estimates with results, and to report to the President weekly. If the volume or pace of prospective estimates appears to be deficient, the emergency organisation should be instructed to report urgently on further available projects. Housing and the railroads appear to offer the outstanding opportunities” (Keynes 2013f, 327).

18 Regarding this point, Feuer was emphatic: “… American liberals must understand rather than repress the chapter of the Soviet influence from their history of the past” (Feuer 1962, 148).

19 One can say that ideally, Soviet planning attempted to follow a large input-output matrix: each sector needed to produce enough output to cover final demands for its goods and also to cover the intermediate demand of the other producing sectors (see Bernard 1966, 67–77). In Bernard’s words: “Soviet planning is essentially an enormous administrative machine, the working of which depends on the cooperation of a very large number of individuals and organizations” (Bernard 1966, 68). The planning goal was capital accumulation to bring about rapid economic growth. One can perceive that this type of planning is quite different from Keynes's. The latter is mostly concerned with organising and influencing macro-aggregates (by means of economic policies and structural elements). The Soviet input-output matrix as a planning instrument does not fit in Keynes' conception. But this does not mean that Keynes had not suggested specific and detailed initiatives, for example: “Why not pull down the whole of South London from Westminster to Greenwich, and make a good job of it – housing on that convenient area near to their work a much greater population than at present, in far better buildings with all the conveniences of modern life, yet at the same time providing hundreds of acres of squares and avenues, parks and public spaces, having, when it was finished, something magnificent to the eye, yet useful and convenient to human life as a monument to our age” (Keynes 2013b, 139).

20 Keyserling was Tugwell’s student, an important New Dealer, a consulting economist for the Senate, and a member of the Council of Economic Advisers.

21 The NIRA/NRA lasted for two years before they were struck down by the Supreme Court as unconstitutional. They “effectively fixed prices and wages, established production quotas, and imposed restrictions on entry of other companies into the alliances” (Our Documents, from the secondary source: https://livingnewdeal.org/glossary/national-industrial-recovery-act-1933/). The Supreme Court decided that the NIRA/NRA had given the central administration too much power to control the economy. It is also important to present how Myron E. Sharp described entrepreneurs' sentiments about several programs of the New Deal: “… the government was invading their turf. It was telling business what to do. It was violating the sacred right of the businessman and the worker to make a contract without outside interference. And the government was going into business for itself, competing with legitimate private interests. What, then, was the business program? Go away. Leave us alone” (Sharpe 1995, 62).