Keynes: The Instability of Capitalism

The first part of this book will outline Keynes’s vision of capitalism, that is, his specific ideas of the basic features of an economic system based on free enterprise and on private capital accumulation. A vision of capitalism, in Schumpeter’s sense, implies an intuitive grasp of its key points, which in turn implies that certain economic phenomena are seen as of primary and others as of secondary importance in the logic underlying the historical evolution of capitalism as an operative system.

The First World War saw Keynes heavily engaged in serving his country as a civil servant at the Treasury. His teaching load and research at Cambridge, and the editorship of the Economic Journal, which he had assumed in 1912, would have been enough to fill a normal working day. Early in 1915 he nonetheless agreed to become assistant to Sir G. Paish, special adviser to David Lloyd George, who at that time was chancellor of the Exchequer. Teaching and theoretical research were obviously not enough to satisfy his passion to match himself in concrete economic problems or to satisfy a need he may well have felt to make a sacrifice for the nation by applying his professional talents in those sectors where they could prove most useful.¹

During the 1920s the economic performance of the Western world, especially of Great Britain, offered Keynes new opportunities to reflect on the perplexities of the capitalist system. The war and the peace talks had led him to consider the latent causes of instability in the process of capital accumulation; he had prophesied the enormous dangers to freedom and the menace to the democratic social order that would ensue from impossible exactions on the defeated powers. Now, European reconstruction and obstinate policies aimed at restoring prewar monetary mechanisms brought him face to face with a new and virulent form of instability: inflation (or, antithetically, deflation) and unemployment.

Difficult years followed Britain’s decision to return to gold. After the brief boom of 1924 unemployment increased persistently. The government, by devaluing sterling, had forced itself into a deflation corner; the monetary policy of the Bank of England, fully coherent with the government line, was to darken the situation. In the spring of 1926 came the crisis in the coal industry, which with its low profit margins had been the unsheltered industry most exposed to revaluation. Bearing in mind the competition of German and Polish coal on the European market, no other exporting industry was in more dire need of a cut in production costs. Unfortunately, any hope of greater productivity, at least in the short term, was considered illusory. The mine owners and the Conservative government insisted on slashing money wages, and the miners proclaimed an all-out strike with the other unions joined in solidarity. Thus, the first General Strike in the history of British trade unionism shook the country to its roots.

During the period Keynes was preparing the General Theory, after having abandoned the viewpoint of the Treatise, he took the opportunity in a short essay in honor of Arthur Spiethoff to give a summary of his fresh thinking on the role of money.¹ He had already revised the title of his Cambridge lecture course from “The Pure Theory of Money” to “The Monetary Theory of Production,” detailing the role of money in determining economic activity. The Spiethoff essay indicates the direction of his thought. His main objective was to discard the analytical strand which viewed money as “a neutral link between transactions in real things and real assets and does not allow it to enter into motives or decisions” (p. 408), as in the works of Marshall and Pigou where money plays a purely symbolic part and the system functions as in a barter economy and excludes money from crises or instability. Yet crises and instability appear precisely in monetary economies in which money exerts its potency on decisions to spend and on financial options. Previously, in the Treatise, Keynes had moved beyond the concept that money is in some way “neutral” and that variations in the quantity of money cannot affect real variables. Now, in this essay, he sought to approach capitalist reality more keenly in a theoretical schema capable of incorporating the fact that money modifies behavioral functions:

The theory which I desiderate would deal, in contradistinction to this, with an economy in which money plays a part of its own and effects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behavior of money between the first state and the last. And it is that which we ought to mean when we speak of a monetary economy. (pp. 408–9)

The criticisms contained in most reviews of the General Theory tended to seize on specific points. Few devoted themselves to its more general significance as a theoretical vision, as a political economy of capitalism. Even today, nearly half a century after the General Theory appeared, this aspect is still open. Of the many facets of the debate on the significance of Keynes’s work not unconnected to the stagflation crisis from which the Western world has been suffering since the early 1970s, I propose to confine myself here to a number of striking ideas which impose themselves from a complete reading (or rereading) of Keynes’s works.¹