The Keynesian era in perspective

Geoffrey Barraclough

There are still people today—there always will be—who cherish the illusion, as plenty of others did in the 1920s, of a speedy return to 'normalcy,' by which they mean a return to the continuing 'self-sustaining' growth of the 1960s. But every sensible person knows that we stand at the end of an era in economic history. It is usually called the Keynesian era, but whether this is the right description is a different question. Every age, it seems, needs its father-figure, to praise or to abuse; and John Maynard Keynes has been saddled with many things for which he was not responsible. Marx in his old age said he was no Marxist; and Keynes, if he were alive today, or even if he had been alive in 1960, might feel similarly about the Keynesians. 'The Keynesian revolution' and 'the Keynesian era' are clichés which require analysis, not parrot-like repetition. hi saying this, I have no wish to engage in °, Ile or those sterile semantic debates so beloved of academics. There is no smoke Without fire, and Robert Skidelsky is right in saying that we cannot draw a hard-andfast line separating Keynes from the Keynesians. What Keynes contributed a,bove all else to the Keynesian armoury was tile fearsome weapon of aggregate demand rhallagement. What he did not know, and 01.11d not know, was the uses to which this weapon would be put. Nor could he know tnat a short-term remedy for a situation of chronic under-production and unemployMent would be turned into a magic longterm formula for continuous growth. , The key to Keynes's thought, and by I1°Plication to the Keynesian era, is his ,arnous remark : 'In the long run we are all :lad.' The Keynesians are concerned with 'ne long run; Keynes was not. When he Published The General Theory in 1936 there w‘sas enough to worry about in the short run. what Keynes was propounding, as the title el,r his famous treatise explicitly states, was a 'eneral Theory of Employment,* not a sovereign remedy for all and sundry erecmomic ills. It was written, in other words, it3r the 1930s, and not for the 1960s or Keynes knew that, in the practical :erld, the solution of one problem—in this laise, unemployment—is simply the begin ng of other problems. Whether, if he had ;The full title, of course, is The General but 0?')) Employment, Interest and Money; i._"1r-v the purpose of Keynes's discussion of I.:merest and money is to provide a theoretical enderPinning, sophisticated enough to a"vince the economic pundits, for his are about employment. Employ, or rather unemployment, is his "entral theme and evident concern.

not died prematurely in 1946, he would have turned his mind to these other problems, we do not know. But Joseph Davis reports him saying 'emphatically,' at a dinner in Washington in 1944 or 1945, that in the post-war world the danger from inflation would be greater than the danger from depression. If true, this prescient remark suggests that he might have been less than enthusiastic about the so-called Keynesian revolution, then getting under way.

Keynesianism, as it developed after 1946, drew on Keynes, but it also drew on other sources. There is no need to describe the stages—beginning, it is generally agreed, with Harrod's famous Essay in Dynamic Theory of 1939—by which Keynes's shortterm analysis of a particular historical situation was turned into a long-term recipe for steady growth. This is familiar territory for economists. But the real culprits (though that is not the epithet they would have used) were the bright boys on the banks of the Charles river, who reduced Keynesian economics to a bag of tools, available to any graduate of Harvard Business School or MIT, among which they could pick and choose at will, selecting those devices which suited their purpose and discarding the rest. They were the progenitors (illegitimate, as might be expected) of vulgar or commercialised Keynesianism, which they fathered on neo-classicism. The result, in Robert Lekachman's words, was 'a brew of Keynes and Adam Smith that displeases even the brewers.' It was a mixture of incompatible elements that was bound in the end to blow up in the alchemists' faces.

In retrospect, the surprising thing is how long the explosion was in coming. To begin with, as we all know, and for many years, the 'new economics' (as it soon came to be called) appeared to be succeeding beyond the boldest expectation. Whether it could have done otherwise in the circumstances— given, that is to say, the pent-up demand, the needs of post-war reconstruction, and the like—is another question. It was also carried on the back of a major wave of technological innovation, paid for happily by wartime expenditure and readily available for large-scale exploitation; and when the momentum seemed to flag, and pessimists predicted a repetition of the ,1921 slump, the Korean war arrived like a deus ex machina to keep the indices.moving in the right direction. But it would be wide of the mark to present the post-war expansion as simply a combination of luck and circumstance. If, for the industrialised countries (but not for the world as a whole), the twenty years between 1948 and 1968 were a time of unparalleled growth, there is no doubt that the commitment to growth and full employment, and the realisation that government could influence both, were a major factor; and this commitment had its root in Keynes. Of course, it was not maintained consistently; but it is what we mean by the Keynesian revolution.

Granted the Keynesian premises, the message, translated into the language of vulgar Keynesianism, was simple in the extreme. Put crudely, it was that any consumption which maintained aggregate demand at a level at which resources would be fully employed, was good. Keynes had dealt a death blow at the old ideals of prudence and saving; consumption was the new watchword. Of course, this simplification is unfair to the distinguished economists who joined the President's Council of Economic Advisers or who operated in Whitehall. But it was welcome news to the manufacturers for whom the business schools catered, particularly to the manufacturers of products which no one in his right mind would want to consume, unless he were brainwashed (as he or she was) by the media. •

Of course, there was more to it than this. The crude calculations of the marketplace are always with us. The foundations of the Keynesian era were not only economic but also psychological and political. Today it is easy to forget how profoundly attitudes— even economists' attitudes—were influenced in the 1950s by the cold war. It was not for nothing that Walt Rostow's once famous book, The Stages of Economic Growth, was sub-titled A Non-Communist Manifesto. Politically, it was necessary to show that capitalism could deliver the goods. Psychologically, the pre-war depression cast a long shadow. Contraction and slump were still the great enemies. Expansion was assumed to be benign, particularly if the gushing waters could be controlled by a spigot from the Keynesian bag of tools. But the great,

overriding object was to keep the wheels turning. When, during the so called 'Eisenhower recession' of 1957-58, the President took it upon himself to advise the public to buy, and was asked what, he answered: 'Anything!'

Underlying the President's advice was the familiar Keynesian axiom that if demand is right, supply will look after itself, businessmen will invest in new capital equipment, the economy will grow, there will be more for all, and some at least will 'trickle down' from the rich at the top to the poor at the bottom. In all this Keynes himself was certainly not innocent. He was more concerned with the size than with the nature of spending, and perhaps in the 1930s sheer spending was good enough. By the end of the 1960s, after a spending spree unparalleled in history, it was not. By then, as Galbraith pointed out, the affluent society was cluttered up, beyond the point of no return, with non-essentials. It may have been good for business, producing one gadget after another, from transistor radios to electric razors; but it is another question whether it was good for anyone else, or even whether in the long run it was good for business. But businessmen, like Keynes, are not very interested in the long run.

The reason why it was not good for business or for anyone else in the long run was, quite simply, that it could not last. The cardinal sin of the self-styled Keynesians was surely their insistence that it could, the blithe self-confidence with which they proclaimed that Keynesian economics had overcome the age-old cycle of boom and slump. Keynes himself, so far as I am aware, never suggested anything of the sort; but the notion was so congenial that it had only to be propounded to be believed. When—in 1968, of all years!—Andrew Shonfield predicted that 'a major set-back of Western economic growth seems on balance unlikely,' he was only echoing common opinion. Anti-cyclical policy, the magic of the Keynesian 'multiplier,' and the other brightly furbished tools, would do the trick. We know to our cost that they didn't. Keynes (Joan Robinson tells us) used to say: 'The long period is a subject for undergraduates.' He couldn't have been more wrong. What has happened is that the longterm cycle, thrown out of Keynes's front door, has come flying back through the window—and broken a lot of china in the process.

We speak airily of a 'Keynesian era,' but the economic history of the thirty years between 1945 and 1975 could almost be written—almost but not quite—without mentioning Keynes's name. Keynesian economics notwithstanding, the economic cycle scarcely deviated from its classic pattern. For those with long memories, the run-up to 1973 was all too reminiscent of the run-up to 1929. As the market became saturated with everything from aeroplanes and motor cars to hi-fl and cameras, investors switched to real estate (the selfsame alligator-infested swamps in Florida), 'high

flying' (but low-yielding) stocks and shares of dubious parentage (this was the era of John Bloom and Bernie Cornfeld), and any other speculation which offered a quick return; and, not surprisingly, the more speculative the venture, the higher the interest rate they'were charged. In terms of market philosophy it was a natural reaction : who would want to invest in General Motors, when unsold cars were piling up and the corporation's annual gross return over the last decade, measured by capital gains (if there were any) and dividends received, was around 0.3 per cent before tax and before allowing for depreciation of the dollar ? In any other terms, it was a disaster. What the boom created was not real resources but paper resources; and since the paper was intrinsically valueless, it depreciated rapidly. That is what we mean by inflation.

In this unhappy but all too familiar process Keynesianism played little part, but it played some. From Keynes, after all, derived the idea that, if demand were insufficient (if people simply would not buy another Ford car or eat more of those nauseating breakfast foods), the government should intervene to stimulate demand. It could do so in a number of ways: by programmes which put more money in the hands of consumers and sent them out on a spending spree, or by manipulating the rate of interest in such a way as to induce businessmen to borrow and invest. I am not sufficient of an economist to adjudge these remedies, but it is a matter of observation that they have not operated in fact as they should in theory. The consumer, it seems, has shown a disconcerting propensity not to spend. When he receives his tax-rebate he puts it in the savings bank instead of dashing off to buy a new washing-machine. The businessman's reactions are not dissimilar. Of course it makes some difference to his investment propensity whether the rate of interest he has to pay is 20 per cent or 5 per cent. But what dictates his investment decisions is the anticipated rate of profit; and if he sees no increased profit from an additional factory or new machinery—if, in other words, he concludes that there are already far too many pantyhose or freshfrozen pizzas on the market—he is not going to invest even if he can borrow money at the classical 21 per cent of nineteenth-century consols. Far better to use available funds to buy up a competitor on the cheap—which does nothing for employment or for the expansion of the economy.

This, in rough outline, was the route by which we reached the destination called `stagflation.' It is fashionable today to blame full employment, and by implication Keynes, the prophet of full employment. Full employment, it is said, hasP cushioned the unions and made it possible for them to demand ever higher wages, thus stoking the fires of cost-push inflation. It might be more relevant to point out the way full employment has cushioned big business. We all know that unemployment, by reducing demand, should push down prices. But what happened in 1974 when unemployment was soaring and huge unsold inventories were piling up The response of General Motors (quickly followed by its lesser brethren) was to raise prices per vehicle by 81,000 or the equivalent.

There is certainly nothing Keynesian about this, nothing that by any stretch of the imagination can be gleaned from Keynes's writings. Indeed, it has often been pointed out that 'oligopoly,' or the trend towards the concentration of economic power in the hands of huge corporations, does not enter into Keynes's calculations. That, it is argued, is one of the reasons for the 'failure' of Keynesian economics. There may be a grain of truth in this, but it is far from the whole truth. If Keynesian economics failed, it was because they were not Keynesian enough. 'The outstanding faults of the economic society in which we live,' Keynes wrote in The General Theory, 'are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and income.' The so-called Keynesian era wag the time when the first half of Keynes's lesson was avidly learnt and the second half utterly neglected. We shall never understand why it failed so critically to perform according to promise unless we take account of this selective, one-sided apPlicat ion of Keynes's teaching.

What happened, once economists recovered from the shocks of the 1930s, was that they turned their minds to remodelling and reassembling the Keynesian apparatus of demand management to suit the needs of the well-organised interests which employed them. Full employment, as already indicated, was acceptable to all parties for political reasons; it became (in Joan Robinson's words) 'the new defence of laissez-faire.' It was also extremely good for business. Income redistribution had a nasty Marxist smell, but the bright boys along the Charles river shrewdly perceived that, in a growing economy,. it could safely be ignored. Provided you baked a bigger cake there would be more for all, and no one was going to quibble if the lion's share went to the lucky few. At the end of the score the distribution of income in the United States and in the United Kingdom was virtuallY the same in 1975 as it had been in 1945; but there was certainly more to go round. Keynes himself was partly to blame for the perversion of his ideas. He was serious about income redistribution, if only for the reason that the poor (as he saw it) spend more of their income than the rich and therefore contribute more to stimulating aggregate demand. But he never really bent his mind to the question in detail, just .as, concerned to raise aggregate productivity, he never bent his mind seriously to the question of what production should be for. What he left behind were little more than asides—cryptic remarks about a 'somewhat, comprehensive socialisation of investment, or the well-known quips about pyramids and cathedrals and burying old bottles filled with banknotes—which an everyday

business economist could safely dismiss as visionary or impractical. He might have answered in defence that he could not be expected to analyse everything in detail, that it was surely enough for one man to have unravelled the knot of unemployment. But the consequence, so far as the vital questions of income distribution and the social purposes of economic activity were concerned, was that Keynes left the field clear for the corporate Keynesians, who couldn't have cared less about either.

The result was a gross misallocation of resources, compared with which the pyramids were a childish prank. Never before in the history of the world were the world's Perishable resources used up so quickly to SO little purpose as during the past twentyfive years. Ne pas gaspiller le pain, the notice in the Paris Metro used to read in my Younger days. The age of Keynes, as it is miscalled, was the age of gaspillage par excellence. The cause was the perversion of

Keynes's ideas which taught that the only way to keep the economy ticking over was to consume as much as possible, preferably of things of no durable value. Today, too late, we have wakened up—or have we?— to the realisation that resources are scarce and finite, that if we continue as we have been doing, even without acceleration (but without acceleration, what of growth ?), we are heading for catastrophe. That is the legacy of the so-called Keynesian era, and unfortunately it is the next generation that will have to pay for the sins of its fathers. That is why my generation—the Keynesian generation, or the pseudo-Keynesians who thought they had all the answers—should put its head in the gas oven, while there is still gas (real gas, not North Sea gas) to go round. It is not a record of which there is any reason to be proud, and future historians, looking back on the Keynesian era, will see it as an aberration—or worse, a challenge and opportunity that were missed.