Was Keynes A Socialist As Some Of His Contemporaries Have Said?

This is an essay from my undergraduate years at St. Francis College. I thought maybe someone could use it, in whatever way. Beware academic language.

John Maynard Keynes was one of the most influential economists in the 20th century. He was born in England in the year 1883, the same year Karl Marx died. His father was a Cambridge economist, and his mother worked in the public sector. He attended England’s exclusive Eton prep school and went on to be educated at Cambridge University. “He was a man of worldly affairs who loved the limelight and the social life, enjoyed the company of writers and artists, and was a devotee of cards, roulette, and speculations on Lombard Street and Wall Street.” (Skousen, The Making of Modern Economics, Keynes: Capitalism Faces Its Greatest Challenge)

Before Keynes, laissez-faire economics and the capitalistic system of free markets were the predominant paradigm. The belief was that markets should be left alone, and would solve every problem in the long run. The period in which this especially seemed to have worked was the time that was marked by prosperity, peace and stability after World War I, also known as the Roaring Twenties. Most people did not believe that interference by the government into the markets would actually have a positive effect on the economy. For instance, virtues of thrift, the gold standard, low taxes, and a balanced budget were all highly respected concepts of the classical school of economics. But the Great Depression changed that economic thinking. The lengthy and severe recession that started with a pop of the stock market bubble in 1929 was a very traumatic event. This was also in sharp contrast to the Roaring Twenties, which have been rather prosperous and joyful for most people. During the Great Depression in the United States, unemployment skyrocketed to 25%, industrial output fell by 30%, and stocks lost 90% of their value. In fact, there were many people actively seeking and willing to work hard, but were not able to find employment.

Keynes’s largest influence came from his book The General Theory of Employment, Interest and Money, which was published in 1936 during the midst of the Great Depression. In a letter to George Bernard Shaw, he writes: “… you have to know that I believe myself to be writing a book on economic theory which will largely revolutionize — not, I suppose, at once but in the course of the next ten years — the way the world thinks about economic problems.” (Keynes, Letter to G.B.Shaw, January 1933) He recognized that the markets are moved by reason, but by emotion what he calls animal spirit. “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” (Keynes, The General Theory, Chapter 4)

The General Theory challenged important concepts of classical economics and introduced new ones such as the multiplier effect, the marginal efficiency of capital, consumption function, aggregate demand and liquidity preference. “The multiplier tells us by how much their employment has to be increased to yield an increase in real income sufficient to induce them to do the necessary extra saving, and is a function of their psychological propensities. If saving is the pill and consumption is the jam, the extra jam has to be proportioned to the size of the additional pill. Unless the psychological propensities of the public are different from what we are supposing, we have here established the law that increased employment for investment must necessarily stimulate the industries producing for consumption and thus lead to a total increase of employment which is a multiple of the primary employment required by the investment itself.” (Keynes, The General Theory, Chapter 10)

His solution for slowing economies was for the government to run deficits to keep people fully employed, and control interest rates and the money supply. “If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again” (Keynes, The General Theory, Chapter 10) He wanted to stimulate the economy by giving money to the ones who will actually spend the money. He believed that individuals are inclined to consume less of their income as their income goes up.

In his view, the government has to fulfill that role because the private sector will not invest enough during a recession. When the market becomes saturated, business investment will be reduced which creates a cycle that is bad for the economy. Furthermore, the reduced amount of investment will result in fewer jobs and less consumption. Keynes believed that classical economics had a fundamental error. Classical economics assumes that full employment is assured by a balance between supply and demand. While classical economics only works in circumstances where there was full employment, his theory could be applied to all circumstances. “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” (Keynes, The General Theory, Chapter 24) Keynes thought that the economy was constantly fluctuating. Equilibrium to full employment was not possible due to an insufficient investment and savings excess. By replacing private investment with public investment the problem would be solved. Aggregate demand could be stimulated through fiscal policies such as deficits, taxes and spending. Even though the government would have to borrow the money to invest it into public works, this would create jobs, increase confidence and give the economy a chance to recover. “When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation. Up to this point, however, rising prices will be associated with an increasing aggregate real income.“ (Keynes, The General Theory, Chapter 10) Once the economy expands again, the spending would hopefully be cut back by the government. There would be no need for deficits and the classical model of economics could work again. In fact, Keynes only advocated deficit spending during times of recessions and depressions. When the economy was booming, he would not advise the governments to run deficits. This was often overlooked and led to the premature conclusion that Keynes must then be a socialist.

Paul Krugman recognizes the core concepts of The General Theory accurately: “(1) Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment. (2) The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully. (3) Government policies to increase demand, by contrast, can reduce unemployment quickly. (4) Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach. (Introduction by Paul Krugman to the General Theory)

One can say that Keynes was the father of macroeconomics, which is the study of the major general features of a country’s economy. His vision was for government to play a bigger role than it did in the past. Before the Great Depression, due to laissez-faire economics, there was practically no interference by the government. The vision of a bigger government and higher taxes according to his contemporaries was socialistic. His contemporaries, who followed classical economics rejected his ideas vehemently and favored budgets to be balanced. Franklin For example, D. Roosevelt was elected on the premise that he would balance the budget. At the beginning of his tenure, he was not interested in the policies that Keynes proposed. He introduced the New Deal, which was initiated to alleviate the economy, but it did not work out so well. In 1938 however, after many failed attempts of reviving the economy, Roosevelt turned to Keynes and his way of directing the economy. Nonetheless, what finally brought the U.S. out of the recession was the onslaught of World War II.

Keynes suggested a socialization of investment and government to take a greater role: “I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investments; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital … will be too great to be offset by any practicable changes in the rate of interest.” (Keynes, The General Theory, p.164). This greater responsibility for directly organizing investments was interpreted by his contemporaries as a threat to free market capitalism. In fact, Keynes encouraged debt financing, excess consumption and progressive taxation over balanced budgets, saving, and low taxes. This probably sounded quite radical to classical economists at the time who basically believed in the opposite. Especially people who did not study The General Theory in detail were fast in labeling him as a socialist. In reality, his critics saw his theory as a direct attack to the principles of economic freedom. According to his opponents, his theory provides a basis to pursue short term relief rather than thinking about the long run. It offered a far less hopeless diagnosis of the disease. More importantly, it offered a more immediate, less painful, and more effective cure in the form of budget deficits. He did not see the inefficiency that might occur when government is intervening into the markets. Keynes, on the other hand, had no patience with economic theorists who assumed that everything would work out in the long run. “This long run is a misleading guide to current affairs,” he wrote early in his career. “In the long run we are all dead.” (Keynes, A Tract on Monetary Reform, Chapter 3)

However, Keynes relies on competitive markets unlike Marx who relied on social directives. Keynes stance on Marxian Socialism was clear. “[It] must always remain a portent to the historians of Opinion — how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and, through them, the events of history.” (Keynes, The General Theory, Chapter 3)

However, if one examines his theory in detail, one recognizes that by using fiscal policies the market would still be decentralized. For example, Keynes explains why the virtue of saving preached by classical economists is not always appropriate. If every household decides to save more, this will cause a shift in the consumption function. As a result, total income will decrease, which in turn also will decrease savings. “The rise in the rate of interest might induce us to save more, if our incomes were unchanged. But if the higher rate of interest retards investment, our incomes will not, and cannot, be unchanged. They must necessarily fall, until the declining capacity to save has sufficiently offset the stimulus to save given by the higher rate of interest. The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance; the more our incomes will have to fall when interest rises relatively to the marginal efficiency of capital. Obstinacy can bring only a penalty and no reward. “ (Keynes, The General Theory, Chapter 8)

Keynes did not want the government to be a central planner. Unlike socialists, who want to run the economy in the interest of the majority, he simply wanted to save capitalism. One of his students explained: “Finally what Keynes supplied was hope: hope that prosperity could be restored.” (Commanding Heights: John Maynard Keynes, PBS) Many revolutions, such as the French revolution, occur during times of high unemployment. He recognized that capitalism is naturally stable and did not want capitalism be replaced by socialism and communism. In fact, his General Theory was intended to counteract movements in communism and socialism. Keynes believed that it was better to change a few things with capitalism, rather than throwing capitalism entirely overboard. For instance, he believed that important concepts of capitalism such as the price motive must be retained.

According to Paul Krugman, “Keynes was no socialist — he came to save capitalism, not to bury it.” When Keynes wrote The General Theory, there was literally mass unemployment, so there surely was doubt about the sustainability of capitalism. During the Great Depression, there were many people, who seriously doubted if capitalism was really sustainable. “A reasonable man might well have concluded that capitalism had failed and that only huge institutional changes — perhaps the nationalization of the means of production — could restore economic sanity… While many of his contemporaries were calling for government takeover of the whole economy, Keynes argued that much less intrusive government policies could ensure adequate effective demand, allowing the market economy to go on as before.” (Introduction by Paul Krugman to the General Theory)

“In his last article, which appeared posthumously in 1946, he wrote: In one I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance.” Interestingly, Keynes was able to find a balance between the extreme form of capitalism, namely laissez-faire, and socialism, namely complete control of the market by the government. Keynes had a far reaching impact: “In most Western economies Keynesian theory has laid the intellectual foundations for a managed and welfare-oriented form of capitalism. Indeed, the widespread absorption of the Keynesian message has in large measure been responsible for the generally high levels of employment achieved by most Western industrial countries since the Second World War and for a significant reorientation in attitudes toward the role of the state in economic life.” (Commanding Heights: John Maynard Keynes, PBS) In retrospect, Keynes was probably less socialistic than most of his contemporaries would acknowledge, and more capitalistic.