The Keynesian “Revolution”
By David McDonagh
(This is the lightly revised text of a talk given to the Other LA)
We face the problem of “mind set” on this topic, as we haply do on all topics, where people tend to see what they expect to see. But note that this idea is quite distinct from seeing what we want to see, which is not humanly possible in any case at all, for we always see what seems to us to be the case.
Mark Blaug once retorted to Keynes’ statement that Ricardo had conquered England to a greater extent than had the Spanish Inquisition conquered Spain by saying that Keynes had conquered the economics profession even more successfully than Ricardo ever did.
Why did the Keynesian memes win out and how did they survive their rather clear refutation by the occurrence of stagflation during the 1970s? That is, the main problem I intend to consider below, but note that false theories are rather like human lives in that they may be very vulnerable to diseases at the infant stage, but once that is over, they can withstand attacks quite well up till old age when they, once again, seem to have weak defences. Similarly, false theories may not gain currency when they are first formed, but once a theory becomes popular, mere common sense objections will not matter much in science, or in wider academic study. This privilege against common sense is a major reason why Keynes’ theory survived the refutation of stagflation. Such objections become very potent, again, when the theory is on the decline, which can happen as a result a change in fashion, or if it is seen as being refuted by a rival paradigm, or by the external facts, –which is rather like a fatal accident.
Free, or freer, trade and state management or protectionism is often contrasted, with the latter often called socialism. Keynes favours management, never socialism, though his ideas were to a large extent shared with people like G.B. Shaw, who thought of himself as a socialist. Keynes preferred state management rather than the free market and thus belonged to the Radical-Joe-Chamberlain tradition of liberalism as opposed to that of the classical liberals, whom ebbed after Gladstone. But this means that for Keynes, as for Marx, it is really the lack of management or overall planning on the market that tends to irritate, rather than mass poverty, the problem of war [Marx] or mass unemployment [Keynes] that others thought were their main concern, though they did think they had solutions to those problems.. Keynes feels that the elite, the politicians, and others, have something to offer and he does not like the way economics has tended to be hostile towards politics or the civil service. He feels there should be some inequality in pay, but not much, and certainly not to the extent common in his own day. He admires the slow growth of taxation to curb the differences in income.
On the first page of the General Theory of Employment, Interest and Money (1936), Keynes’ main book, and the book I set out to criticise, as well as a partial critique of here, the author, oddly, openly confesses to “a solecism” (p3) but, instead of correcting it, he leaves it in the text. Has he set out to scotch grammar? That would be a very odd thing for any author to deliberately do. This solecism is (p3) that he sees the classical economists, not as Marx saw them, [viz. the authors who upheld the labour theory of value as against the ones who thought that supply and demand
were enough. Marx called the latter “the vulgar economists” as they settled for surface appearance rather than going to deep reality, which Marx took to be the proper job of any science.] but way more inclusive. Keynes sees the classical economists as being all the earlier economists. Many of those lived up to forty years after Keynes died [e.g. Hayek died in 1992 but Keynes in 1946].
The pristine classics were thrown out by “the Marginal Revolution”, which took place in the 1870s, when marginal theory replaced the labour theory of value paradigm. A few “vulgar economists”, Jevons, Menger and Walras, applied Ockham’s razor to the labour theory of value and marginal theory dispensed with the underlying reality. Keynes lets us know that he is to make a new revolution against those he terms “the classics” and he hopes it will be as complete as the one in the 1870s was.
The reader might realise that this is not a solecism at all, but an anachronism, i.e. an error of history rather than of grammar. The reader still might think it mighty odd that the author sees an error of any kind, but still leaves it in. But is it an error of any kind? After all, Plato seems to have been quite right when he says that no one can deliberately err. Is it not, rather, a clever and deliberate ploy that Keynes is here using, a device similar to the use that Nelson made of his blind eye? He is going to use this “solecism” device to pretend to see only what he wants to see. But no one can ever quite do that, if they remain sane.
Here we can see what sort of an author we are dealing with in Keynes. Richard Whately once said that “it makes all the difference in the world whether a man puts the truth in the first place or in the second place” and Keynes openly puts the truth in the service of his aims, and he aims to be revolutionary in theory even if he wants to remain Fabian and gradual in practice. But this “revolutionary” ploy does not mean that Keynes was insincere in what he wanted to say, but only that he was impatient to say it and that he also sought to dismiss the opposition; permanently.
It is fairly clear from reading the book that Keynes is largely attacking only one author, Arthur Cecil Pigou (1877-1959), and only others economists in so far as they agree with Pigou, so he has no need for an anachronism at all to do that. But Keynes clearly wants to say it is “the classics” that he rejects –he wants a revolution in theory to render his variously differing forerunners utterly defunct. And what he says, even of Pigou, ignores many things that Pigou says, even in the main book, _The Theory of Unemployment_ (1933), that Keynes, repeatedly, cites in this 1936 book.
Pigou repeatedly mentions the term “involuntary unemployment” in that 1933 book, for example, but Keynes, repeatedly, says that none before him even thought of that concept. Many authors conclude that Keynes had not read much, owing to him saying that “the classics” did not say this, or did not say that; when they so very clearly did. My guess is that he was quite well read in economics; even though he had values that were always in complete opposition to what he saw as the anarchy that the economists, though usually unwittingly, embraced. He rightly saw that economics was largely biased against politics and state planning. Marx with the same objection,
set out to be not only a hostile critic of economics, but also a supposed revolutionary to replace the market with moneyless communism. Keynes thought that money was vital and he was content with political demand management by means of inflation. He rather hoped that most of bourgeois society would go on much as before, but with the civil servants taking the place of the capitalist class in organising savings by taxation and so dealing with the problem of investment whilst unemployment might be cured by the stimulus of extra money in demand management. His epigones, in true Tory hyperbole, claimed that he saved the market from the Marxist threat, a brutum fulmen if ever there was one, rather like the imaginary wrath of God.
In any case, inflation is not really a stimulus, no more than is alcohol, though both may feel like it, for it destroys the power of money to relate to the real economy thus, ironically, destroying effective demand overall. This is the main fault in the Keynesian outlook; its main idea is false.
The ploy worked. Almost the whole of economics adopted the results of this “solecism” after 1936. This was “the Keynesian Revolution”, though Keynes did develop new terms in the theory of demand management, though little of the substance was unknown in the 150 years before Keynes, even if it was given a modern guise. But Keynes thought his forerunners, like Malthus, were misunderstood.
Oddly, the result in the textbooks fell out of Keynes’ hands and retained a few ideas he most hated, like equilibrium, as it owed almost as much to John Hicks, and others, many of whom did not fully comprehend Keynes.
Using his “solecism” ploy, Keynes said that the classics had no idea of the possibility of mass unemployment owing to Say’s Law, itself also redefined by Keynes. He described Say’s Law as maintaining that there was nothing for the entrepreneur to do, as supply exactly created its own demand automatically rather than merely boosting general demand with the coordination problem being the task of the entrepreneur, as Say, and most others before 1936, had it. Keynes also held that David Ricardo certainly had no knowledge of trade cycles, or of mass unemployment. Every economist after 1936, or very nearly everyone, took all this as the gospel truth, which it ironically was, for the Christian gospels, also, were more concerned with the message than with the truth, and they too were mere make believe. But their adherents were sincere, or at least convinced.
An illustration of the “mind set” that resulted after 1936 is shown by Thomas Sowell in _Black Education: Myth and Tragedies (1972). Sowell had copies of Robert Heilbroner’s _The Worldly Philosophers (1953), one of the many economists who adopted most, if not all, of the Keynesian outlook, on every desk, opened where Heilbroner says that Ricardo says nothing about the trade cycle, together with Ricardo’s _Principles of Political Economy and Taxation (1817) opened on the page where Ricardo begins his discussion of that topic. Sowell asked the class to read a bit of both books before asking them if what Heilbroner said about Ricardo was true. To his astonishment, they all replied that what Heilbroner said was true. When Sowell, flabbergasted, asked them why, he was told, in reply, that Heilbroner would not have written so if it is was not indeed the case.
I will say a bit about the myth of “revolution” in general. The word “revolution” is today a bit of romance jargon, and Keynes realised this, but he felt a dire need to make “the classics” defunct. He saw economic theory as part of the problem, not only of mass unemployment but also of the barbaric anarchy of modern times. Keynes knew there could be no actual fresh beginning, but something like one seemed to be needed. “Revolution” is actually just empty jargon, a constituted blank, which is often imposed on an account of the facts by the historians. When the vicar finds out that a couple indulges in sex before marriage he feels he has discovered yet another instance of
sin, but the idea that it is a sin is part of his ideology rather than the facts he has discovered about the couple in question.
The jargon word “revolution” clearly has a history and it was first used by the Whigs in 1688. It was taken from geometry, and it was, back then, used in the exact opposite of how it was used in 1789 by the Romantics and as how it is still largely used today. It was used to mean a return to the beginning of the drawing of a circle, to complete the revolution, and this meant exactly the same as “reactionary”, a reaction against recent innovation and an attempted return to the status quo ante. The idea was that James II had gone one half of a revolution away from how things should be, and that they needed to go back to how things were before he reigned, back before 1685. But in 1789 in France, the idea emerged with the new meaning being more like going off on a tangent than in
completing the revolution, for it introduced the current meaning of going on to a new epoch and leaving the past completely behind. But Keynes was right to think that gradualism was the case and that no event makes for a completely new beginning. At least he got one idea right.