Keynes’ denial of conflict: Why The General Theory is a misleading guide to capitalism and stagnation

Abstract

Keynes’ General Theory was a huge step forward relative to classical economics, but it was also a step backward in its denial of the conflictual nature of capitalism. There is need to understand Keynes’ technical contributions regarding the workings of monetary economies, but also need to understand the flaws within his thinking and the consequences thereof. Keynes made a fundamental contribution elucidating the mechanism of effective demand, and he also has claim to be the preeminent monetary theorist. However, his critique of classical economics was technocratic and focused on the interest rate mechanism. Reflecting his own liberal political economic disposition, he denied the conflictual nature of capitalism. That is the “original sin” in Keynesian economics, and it has far-reaching implications. It explains why establishment Keynesian economics struggles to explain the current tendency to stagnation. Even more importantly, it has kept economics locked into a false conception of capitalism that undermines the case for Social Democracy.

Keywords:

• Bastard Keynesians
• capitalism
• conflict
• Keynes
• stagnation
• The General Theory

Acknowledgement

I thank an anonymous referee for some very useful comments. All errors and opinions expressed are mine.

Notes

1 In defense of Keynes, his disparagement of Socialist Russia was justified as regards Stalin’s horrific oppression, and his rejection of the Labor Party was justified given Labor’s opposition to government budget deficits. That said, his disparagement was also based on his resistance to their political economic diagnosis of the problems of capitalism in terms of class conflict, plus resistance to their solutions framed in terms of changed ownership of the means of production. It is Keynes’ resistance to those features which put him at odds with Socialism.

2 The Marxist economist Michael Roberts (2019) rejects Crotty’s (2019) claim, arguing the attribution of Socialism is explicitly at odds with what Keynes wrote (as also documented by Bartlett, 1984, 2009), and most of Keynes’ positions were developed in the context of the emergencies of the Great Depression and World War II. Roberts counters that Crotty’s claim of “liberal Socialism” is neither liberal nor socialist but is elitist and capitalist. A Socialist cynic might say Keynes’ positions reflect the Marxist slogan that the state serves as the managing committee of the bourgeoisie.

3 Some Post Keynesians hold that Keynes (1936) did not subscribe to either an aggregate production function (Hayes 2007) or the Neoclassical marginal product of capital. To this author, that is not correct. Keynes (1936, chapter 11) sought to emphasize that the MEK is a future oriented construct that depends on expectations, which in turn are formed in a world of fundamental uncertainty. However, the MEK remains a fundamentally Neoclassical concept whereby it declines with capital-deepening.

4 Keynes (1936, 183) also refers to the “natural” rate as the “neutral” rate.

5 Keynes (1936, 236) argument is that non-produced assets can be an obstacle to increasing investment by lowering interest rates. If the marginal efficiency of investment falls below the return on non-produced assets, firms will prefer to accumulate non-produced assets rather than invest.

6 Source: 2023 President’s Budget, OMB, White House, Table 1.2. Historical Tables | OMB | The White House.

7 That said, Keynes might have quarreled with central banks regarding their estimates of R*. Central banks see it as structural and stable, whereas Keynes argued it (the neutral rate) fluctuated with AD conditions. Additionally, both Keynes and classical economists might argue central bank set R* too high owing to their political economic prejudices. Ironically, having central banks target interest rates and act as a surrogate LF market opens the door for a revised version of the Friedman and Schwartz (1963) argument that central banks are the problem. Friedman and Schwartz argued the Federal Reserve caused the Great Depression by mistakenly contracting the money supply in 1929. Now, it can be argued central banks are repeating that mistake by setting R* too high. In that fashion, the ghosts of Friedman and Schwartz can be revived.

8 Ironically, Keynes (1933b) later came to support protectionism. Joan Robinson (1973, 9) seems to suggest that Keynes never really engaged Marxism. According to her, he seems to have identified it with “Stalinism”.

9 Bortz (2017) has argued that conflict is present in Keynes’ thinking. However, Bortz does not distinguish between the role of conflict in Keynes’ theoretical framework versus the role of conflict in policy. Conflict is essentially absent in Keynes’ theory regarding the workings of capitalism (i.e., The General Theory), but Keynes was a practical man of affairs and recognized the role of conflicting interests in policy. Bankers and financiers have their own self-interests, which they push to get policy outcomes they desire. That is a fundamentally different argument from the one in this paper, which concerns the role of conflict in the primitive functioning of the economy. In that connection, Professor James Devine wrote to me about a distinction between “antagonistic” and “non-antagonistic” conflict made by Mao-Tse-Tung. Antagonistic conflict is structural (e.g., class conflict) and poses contradiction that cannot be resolved without structural change. Non-antagonistic conflict concerns interest group conflict (e.g., finance capital versus industrial capital) and can potentially be resolved by tactical compromise. Keynes was aware of non-antagonistic conflict but in denial of antagonistic conflict.

10 Borrowing from Post Keynesian macroeconomics (Palley 1996), mainstream economics (Carlin and Soskice 2005) has introduced conflict regarding inflation. Distributional conflict produces inflation that induces the monetary authority to raise interest rates, thereby increasing unemployment. However, the conflict approach to inflation is a small minority position within mainstream economics. More importantly, it is restricted to inflation and stops far short of characterizing the economic system and nature of economic activity.

11 In a famous letter dated March 31, 1937, Keynes wrote approvingly to Hicks (Hicks 1937) of his ISLM model: “At long last I have caught up with my reading and have been through the enclosed. I found it very interesting and have next to nothing to say by way of criticism (Keynes [1937] 1973, 79).”

12 Carter (2020, 370–394) provides an excellent account of the intolerant conservative reaction against Keynesianism in the late 1940s and 1950s which road the coattails of the Cold War and paranoia about communism and the Soviet Union.

13 The major differences between Neo-Keynesianism and New Keynesianism are methodological rather than analytical. Thus, Neo-Keynesian aggregate macroeconomic modelling has been replaced by microeconomic representative agent general equilibrium modelling. Additionally, Neo-Keynesianism’s AD constraint has been replaced by a representative imperfectly competitive firm with temporarily fixed prices. As regards representative agent behavior, New Keynesians use the micro-founded theory developed by Neo-Keynesians to explain consumption behavior, investment behavior, money demand, and portfolio behavior. Both the Neo-Keynesian and New Keynesian approach to production and distribution are based on the Neoclassical theory of the firm and marginal product theory, which Keynes also accepted subject to the addition of an effective demand constraint.

14 As documented by Crotty (2019), Keynes’ policy writings go far beyond The General Theory in their recommendation of policy activism and are far more radical. Those policy writings likely contributed to the misreading of The General Theory as a socially radical text.

15 Keynes’ comment about the euthanasia of the rentier is widely misunderstood by many Post Keynesians who mis-interpret him as endorsing socialist change. Furthermore, as discussed earlier in Section “A brief digression”, Keynes was wrong in terms of his own Neoclassical logic as shown by Solow (1956).

16 Keynes was very supportive of the New Deal, as evidenced in his correspondence with President Roosevelt. On December 31, 1933, The New York Times published an open letter from Keynes to Roosevelt supportive of the New Deal. US business was staunchly opposed to the New Deal, as evidenced by the anti-New Deal campaign of the National Association of Manufacturers. Evidence of the establishment’s hostility to Keynesianism is also provided by Parker’s (2005, chapters 2 and 11, 228–232) discussion of Harvard University’s economics department’s opposition to the New Deal and the controversy surrounding J. K. Galbraith’s 1948/9 Harvard tenure case.

17 Keynes’ ethical positions on the economy are akin to a form of “Christian Socialism”, rather than secular Socialism rooted in political economic critique. If the moniker Socialist is to be applied to Keynes, it should only be applied in that spirit.

18 The terminology of soft-core vs. hardcore Neoliberalism is used by Palley (2012, 197–198).

19 Modern Neoliberalism is closely identified with Hayek. The claim that Keynes was a Neoliberal may seem odd given that Keynes was a severe critic of Hayek, beginning with Keynes (1931) response to Hayek’s [1929] 1931 review of his Treatise on Money (Keynes, 1930). Keynes agreed with Hayek about the deep economic and political merits of capitalism. His difference with Hayek was technical and about how free markets worked. Keynes was critical of both Hayek’s (1933) specific theory of the slump and his general belief that the market would restore full employment automatically and relatively quickly. Misunderstanding of that distinction has led to an erroneous view that Hayek and Keynes were philosophically apart. The reality is they were technically apart. The one place of possible ambiguity concerns government spending in recession where Keynes (Keynes et al. 1932) saw no adverse long-run productive or political consequences, whereas Hayek (Gregory et al. 1932) did.

20 The expression “slouching its way to Utopia” is loosely borrowed from the title of DeLong’s (2022) recent book on the economic history of 20th century capitalism.