Was Keynes a revolutionary in economic thought and policy? Was he at least radical in his ideas? Or was he a reactionary opposed to the interests of working people and a conservative in economic theory? Ann Pettifor is a leading economic advisor to the British leftist Labour leaders, Jeremy Corbyn and John McDonnell. She is director of Prime Economics, a left-wing economics consultancy and author of several books, in particular the recent The Production of Money. And she has just won Germany’s Hannah Arendt prize for political thought – for focusing on “the political and societal impact of the current money production system, mainly operated by banks through digital lending” and as effective critic of “the global financial industry, which operates outside of the scope of political influence and democratic control”.
So Ann Pettifor is an undoubted battler against the austerity economics of the neoclassical school and a promoter of government measures to restore public services and boost the economy. But to achieve that, she relies entirely on the theories and policies of JM Keynes and ‘Keynesianism’. Recently she published a short article for the prestigious Times Literary Supplement, entitled The indefatigable efforts of J. M. Keynes. This is part of Footnotes to Plato, a TLS Online series appraising the works and legacies of the great thinkers and philosophers.
In this article, Pettifor compares Keynes’ theories as being as game-changing in economics as the discovery of evolution by Charles Darwin in biology. In her view, Keynes ‘invented’ macroeconomics, the study of trends in economies at the aggregate level, escaping the stifling neoclassical obsession with microeconomics (the study of value and markets at the level of the individual unit). She concurs with Keynes’s theory of money and his explanation of crises under capitalism as being caused by ‘hoarding’ money rather than spending it; and she praises his ‘internationalism’ in arguing for international financial institutions to control financial speculation and avoid instability in market capitalism. She finishes with the concern that Keynes’ ideas and policies have been reneged on and rejected and there has been a return to ‘decadent’ capitalism, far removed from the golden age of the post-1945 period when Keynesian policies were applied to make capitalism work effectively for all. She concludes with the call that “It is time to restore the revolutionary Keynes.”
Well, I beg to differ on this view of Keynes and Keynesian theories and policies. For a start, it is inflated to suggest that Keynes’ ideas are on a par with those of Darwin. Yes, there may be a few creationists who reckon that God designed the world and its living beings in his own image and preserved it accordingly. But no sane person thinks this has any validity. The evidence is overwhelming that Darwin was broadly right on the evolution of life. But can we say that Keynes is broadly right about the laws of motion and trends in the capitalist economy? I don’t think so – and I’ll briefly attempt to show why.
For a start, Pettifor is wrong when she says that ‘classical economics’ was microeconomics as we know it now. The use of the term ‘classical’ used by Keynes bunched all the great early 19th century economists like Adam Smith, James Mill and David Ricardo and their grand studies of economies with the reactionary marginalist, subjectivist, equilibrium theories of the mid to late 19th century of Jevons, Senior, Bohm-Bawerk, Walrus and Mises. Keynes rejected the former while continuing to accept the microeconomics of the latter. For the classical economists of the early 19th century capitalism, there was no distinction between the micro and the macro. The task was to analyse the motion and trends in ‘economies’ and for that a theory of value was a necessary tool but not an end in itself.
Microeconomics became an end in itself as a way of combating the dangerous development in classical economy towards a theory of value that implied the exploitation of labour and conflicting social relations. So the labour theory of value was replaced with the marginal utility of purchase by the consumer as a result. ‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists. But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), economics quickly moved to deny that reality. Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value; and Say’s law replacing crises.
Macroeconomics appears in the 20th century as a response to the failure of capitalist production – in particular, the great depression of the 1930s. Something had to be done. Keynes kept marginalist theory from his mentor, Alfred Marshall, but dynamically moved it beyond supply and demand among individual consumers and producers onto the aggregate. Mainstream ‘bourgeois’ economics could no longer rely on the comforting theory that marginal utility would equate with marginal productivity to deliver a general equilibrium of supply and demand and thus a harmonious and stable growth path for production, investment, incomes and employment. The automatic equality of supply and demand, Say’s law, was now questioned. It had to be recognised that capitalism was subject to booms and slumps, to (permanent?) disequilibria, and thus to regular crises. And these crises had to be dealt with – to be ‘managed’. That required macroeconomic analysis. In a sense, bourgeois economics had to put back the economic clock to classical economics – the study of aggregate trends – but without returning to ‘political economy’, which recognised that economics was really about social structure and relations (class exploitation) and not a theory of ‘scarcity’ and ‘market prices’.
Contrary to Pettifor’s account, it only appeared that Keynesian macroeconomics had done the trick in saving capitalism. In the ‘golden age’ of post-1948 capitalism, economic growth was strong, employment was full and incomes high. So (macro) economics could appear to provide policies to ‘manage’ capitalism successfully. But this was just a momentary illusion. The golden age soon lost its glitter. Keynesian theory and policy was exposed with the first simultaneous international recession of 1974-5 and was followed by the deep slump of 1980-2. Remember these major collapses in production and investment internationally took place during the supposed operation of Keynesian policies of macroeconomic management, in Pettifor’s account.
Pettifor says the crises of late 20th century were the result of “the decision by public authorities the world over to abandon the regulation of credit creation and capital mobility after the 1960s and early 70s”, in other words, a lack of regulation over the reckless bankers. But the question not answered is: why the strategists of capital dropped Keynesian-style management and control and opted for de-regulation etc if it was all working so well in the 1950s and 1960s? The reason that pro-capitalist governments swung to monetarism and neoliberal policies was that Keynesianism had failed. And it failed in the most important area for capitalism – in sustaining the profitability of capital.
The big change from the mid-1960s onwards up to the early 1980s was a collapse in the profitability of capital in the major economies leading to a succession of slumps in 1970, 1974 and then 1980-2. This is what provoked capitalist theorists and policy makers to break with Keynes. Public services, the welfare state, good wages and full employment could no longer be ‘afforded’ and, as Pettifor says, Keynesianism was seen to be “state interventionist, soft on government deficit spending.” But all these policy reversals came after the slump of the 1970s before which finance capital was ‘regulated’, currencies were ‘managed’, trade unions had rights, the government could intervene fiscally, and there was little privatisation. It was the failure of capitalist production and the inability of Keynesian ideas to work that caused the change in theory and policy, not vice versa.
Nevertheless, Pettifor argues, dropping Keynesianism was a mistake for the ‘powers that be’ because Keynes had all the answers to avoid crises and get capitalist economies going. You see Keynes had developed a “revolutionary theory” of money – his Liquidity Preference Theory. This explained that crises occur when investors or holders of money do not spend it, but hoard it. They do this for some subjective reasons – a lack of ‘animal spirits’, a loss of belief that any spending or investing will deliver sufficient return. So a surplus of money builds up that is not spent. The answer, claims Pettifor, is for the monetary authorities to intervene and drive down the cost of borrowing by ‘printing’ money, so that interest rates on borrowing fall below the perceived return on investing. This will encourage money hoarders to invest. Such policies are “still considered too radical to be acceptable today”.
In her book, The Production of Money, Pettifor tells us that “money is nothing more than a promise to pay” and that as “we’re creating money all the time by making these promises”, money is infinite and not limited in its production, so society can print as much of it as it likes in order to invest in its social choices without any detrimental economic consequences. And through the Keynesian multiplier effect, incomes and jobs can expand. And “it makes no difference where the government invests its money, if doing so creates employment”. The only issue is to keep the cost of money, interest rates, as low as possible, to ensure the expansion of money (or is it credit?) to drive the capitalist economy forward. Thus there is no need for any change in the mode of production for profit; just take control of the money machine to ensure an infinite flow of money and all will be well.
Well, capitalism is a monetary economy but it is not a money economy (alone). Money cannot make more money if no new value is created and realized. And that requires the employment and exploitation of labour power. Marx said it was a fetish to think that money can create more money out of the air. Yet this version of Keynesianism seems to think it can. When central banks expand the money supply through printing ‘fiat’ money or creating bank reserves (deposits), more recently so-called ‘quantitative easing’, this does not expand value. It would only do so if this money is then put to productive use in increasing the means of production or the workforce to increase output and so increase value.
But, as Marx argued way back in the 1840s against the ‘quantity theory of money’, just expanding the supply of ‘fiat’ money will not increase value and production but is more likely to inflate prices and thus devalue the national currency, and/or inflate financial asset prices. It is the latter that has mostly happened in the recent period of money printing. Quantitative easing has not ended the current global depression but merely sparked new financial speculation. This version of Keynesian economics is thus hardly ‘revolutionary’ or ‘radical’ at all, as it was adopted by all central banks after the Great Recession in 2008 and has failed to restore economic growth, productive investment and average incomes.
Actually, during the Great Depression of the 1930s, as it worsened, Keynes himself came to dispense with monetary solutions to the slumps and opted for fiscal stimulus and even proposed the ‘socialisation of investment’, a much more radical policy than the production of more money. In his Treatise on Money, written in 1930 at the start of the Great Depression, Keynes argued that central banks would have to intervene with what we now call ‘unconventional monetary policies’ designed to lower the cost of borrowing and raise sufficient liquidity for investment. Just trying to get the official interest rate down would not be enough. But by 1936 after five more years of depression (similar to the time since the Great Recession now), Keynes became less convinced that ‘unconventional monetary policies’ would work. In his famous General Theory of Employment, Interest and Money, Keynes moved on.
Why did just the production of more money fail, according to Keynes? The problem was that ““I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest”. And so Keynes moved on to advocating fiscal spending and state intervention to complement or pump-prime failing business investment. Pettifor has latched onto that part of Keynesian macro theory and policy, monetary easing, to the neglect of fiscal stimulus, let alone the more radical policy of the ‘socialisation of investment’ (not even mentioned by Pettifor). Thus Pettifor’s account of Keynes’s economics is at his least ‘revolutionary’.
Part Two to follow: Was Keynes a revolutionary internationalist or reactionary nationalist?