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The General Theory and the Current Crisis: A Primer on Keynes Economics
Intro | Pt. I | Pt. II | Pt. III | Pt. IV

Introduction: The Revolutionary Who Wasnt

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eynes is often described as a revolutionary thinker. In one sense,

this is correct. Keynes was one of the most important economic
thinkers of modern times, and his ideas were at the center of a major
paradigm shift in economic theory and policy. He issued his
masterwork, The General Theory of Employment, Interest, and Money
(1936), at a critical juncture, in the middle of the Great Depression, when
the orthodox views from which he had broken seemed at a loss to explain
the crisis or a way out of it.

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Keynes was not the first major economic theorist to understand that
capitalist economies were prone to depressions (Marx had written on the
subject nearly a century before), nor was he the only major economist of his generation to arrive at the
basic insight that total demand could fall short of the level required to ensure full employment. (Some
others, most notably the Polish economist Michal Kalecki, came to the same conclusions separately
from, and even slightly earlier than, Keynes.) Keynes, however, was already a major figure in British
economics and politics at a time when Britain was a much more important world power than today, so his
ideas had a bigger impact in ruling circles than they would have coming from elsewhere, or from
economists with a more radical views about the changes necessary to cure the problem.

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As revolutionary a figure as Keynes was in the history of economic thought, he was, in another sense, a
profoundly anti-revolutionary thinker. This is not to say that the changes he proposed, particularly in the
role of government in capitalist economies, were trivial. He believed the problems of capitalismespecially
the arbitrary and inequitable distribution of income and wealth and the failure to provide full
employmentwere very serious, and he did not think that these outstanding faults of capitalist
economies would fix themselves. He thought that the state would have to play a major role in fixing them.
However, as much as it was his goal to get rid of what he considered bad about capitalist societies, he
also aimed to preserve what he considered good about them, which was a great deal.

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In The General Theory, Keynes praises in no uncertain terms what he considers the virtues of selfinterest, individualism, and private initiative and responsibility and their place in a capitalist society. His
motive for wanting to eliminate excessive inequality and unemployment was, to a great extent, that he
viewed them as threats to capitalism. In his view, these outstanding faults created the danger of
revolutionary upheaval. An enlargement of the role of government was the only practicable means for
eliminating these problems and avoiding the destruction of existing economic forms in their entirety. It is
easy to imagine Keynes lashing those who denounce government intervention in the economy as
socialism for their failure to recognize these policies as means of preserving a well-functioning capitalist
economy.
The Socialization of Investment
Keynes did not object to significant inequalities in income and wealth, and therefore did not aim to create
a society in which incomes and wealth were equally (or almost equally) distributed among all members of
society. He offered two justifications for inequality, as an incentive for productive activity and as a channel
for competitive impulses that otherwise, he thought, might take on more predatory forms. However, he did
think that existing inequalities were excessive, and that it would be desirable to reduce them.
Keynes did not believe that the accumulation of saving in the hands of the wealthyand the necessity of
this saving for financing investmentjustified inequality. He pointed out that the rates of interest
necessary to pry away the savings of the rich for use by society to finance investment were typically too
high to be consistent with full employment. With interest rates too high, Keynes argued, investment is too
low (since some investment projects that would be profitable at a lower rate of interest would not be
profitable, and therefore would not be undertaken, at a higher rate), and therefore so are total output and
employment.

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Keynes viewed income from interest (which he called rentier income) as basically parasitic. He
Economics
compared the interest income of the functionless investor to the rental income of landlords. Neither
Maynard Keynes
interest nor rent, he argued, required any genuine sacrifice on the part of their recipients. Rather, they
were merely rewards for owning scarce resources. He advocated, therefore, a reduction of the interest rate Miltons Keynes
to little or nothing and what he termed the euthanasia of the rentier. The cost of capital equipment, he
argued, would cover its production cost, as well as allowances for depreciation and risk, but not incomes for idle owners of capital.

2016

Keynes did not think that the dramatic reduction of interest rates need disrupt the functioning of a capitalist economy. First, he recognized
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Economic
Affairs
Bureau,
Inc.

that such a policy would increase the incentive to spend on present consumption. He did not agree with conventional economists, however,
that this would necessarily reduce overall saving or investment. He argued that increased consumption expenditures, by increasing
demand and resulting in higher incomes, could actually increase saving and investment. Second, he argued that higher interest rates
resulted in lower investment, since entrepreneurs would only engage in investment projects that produced returns at least equal to the rate
of interest. Therefore, lower interest rates, not higher, would result in higher investment and incomes. Third, Keynes argued that a major
government-directed investment program could eliminate the scarcity of capital and, with it, the oppressive power of the capitalist to
extract a tribute in the form of interest.
Keynes proposed that communal saving through the agency of the State take the place of private saving in financing investment. The
details in The General Theory are rather sketchy, but one can imagine a government investment fund that either supplies private
businesses with funds to finance the purchase of durable equipment or that finances the construction of such equipment directly and rents
it out to private businesses. Keynes does not go into detail on the sources of this saving, though he seems to be thinking primarily of tax
revenue (rather than voluntary deposits in a public bank). While he mentions higher taxation of larger incomes and inheritances as one
possibility, he does not come down firmly in favor of this idea. Nor does he come to any firm conclusions about the magnitude of such
savingsthe degree to which it is right and reasonable to call on the living generation to restrict their consumption for the benefit of future
generations.
What Keynes Did Not Have in Mind
Keynes did not favor the general socialization (public control) of productive enterprise. He regarded private enterprise as a source of
efficiency and a safeguard of personal liberty (379-381). He envisioned the state as regulating the overall levels of consumption and
investment, an enlarged role to be sure, but one perfectly consistent with leaving most of the economy in the hands of private actors. This
overall regulation could be accomplished, he argued, by such means as control of taxes and interest rates, and did not require the
ownership of the instruments of production by the state (378-379).
Keynes did not favor the elimination of all inequality of income or wealth, which he viewed as incentives for valuable human activities, nor
the elimination of all income from property. While Keynes criticized the landlord and rentier as parasitic, he certainly did not view business
owners in this way. (When he referred to the oppressive power of the capitalist to exploit the scarcity of capital, he was reserving the term
capitalist for the rentier. He usually used the term entrepreneur, rather than capitalist, for business owners.) Keynes suggested that
the elimination of interest incomefrom risk-free investmentswould still leave room for investor to profit from the exercise of enterprise
and skill in choosing among risky investments (221). He also thought that society could benefit from the intelligence and determination
and executive skill of business people, which could be harnessed on reasonable terms of reward (376-377) under a system of
progressive taxation.
Keynes did not aim at a major upheaval in the basic economic or political institutions of capitalist societies. He did not oppose private
property (over productive resources such as factories, mines, land, etc.), wage labor (workers being hired for pay by the owners of these
resources), or market exchange. Nor did he favor sudden or conflictive social change. Quite the contrary, Keynes clearly describes himself
as an enemy of revolution and insists that none of the changes that he proposes require one. He imagines the euthanasia of the rentier
as a quiet and incremental process, nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great
Britain, requiring no revolution (376). The overall government regulation of economic activity, he argues, could be introduced gradually and
without a break in the general traditions of society (378).
What Keynes Did Have in Mind
The picture that emerges, Keynes as an advocate of a regulated capitalism, with a substantially increased role for the state in economic
life (especially in guaranteeing full employment) and reduced inequality of incomes and wealth, is correct but incomplete. A fuller picture of
Keynes social vision comes from his political writings of the 1920s, especially a 1926 book titled Britains Industrial Future. While formally
issued by an economic commission of Britains Liberal Party, Keynes authored several sections outlining his view of the place of the large
corporation in Britains present and future.
Keynes views of the large corporation strongly paralleled those of a school of thought known as managerialism. (The Modern Corporation
and Private Property (1932), by U.S. economists Adolf Berle and Gardiner C. Means, is usually regarded as the founding statement of
managerialism. Keynes, however, actually anticipated its main conclusions by several years.) Managerialists argued that most large
corporations were controlled by paid managers (top executives and directors) rather than by individual owners or shareholders collectively.
The ownership of shares in a typical large corporation, they argued, were dispersed among such a large number of shareholders that it was
not typically possible for most of them to have much knowledge of or say in the corporations day-to-day decisions. Managerialists
concluded that this gave managers a highsome argued, nearly totaldiscretion in how to run those companies, effectively
disenfranchising the stockholders (their titular owners).
In Britains Industrial Future, Keynes argued, much as the U.S. managerialists would, that many corporations had passed out of the
effective control of their shareholders. Keynes argued that shareholders are so scattered and disorganized that it is seldom or never
practicable for them to control the composition of the management. As a result, in large companies of diffused ownership, he argues,
directorships come to resemble offices for life. Keynes did not think that the insulation of management from control by the stockholders
was necessarily a good thing. Directors, he argued, could be useless and without special qualifications, or command high [pay] relative
to the work done, and still keep their positions. Stockholders lack of information about the inner workings of a company could also permit
directors to take great advantage over other shareholders through their knowledge of the exact position of their concern (that is, to take
advantage of insider information).
Like the U.S. managerialists, however, Keynes hoped and believed that the separation between ownership and management might
liberate managers from the tyranny of the bottom line, and allow them to pursue other (hopefully, socially laudable) aims. In his essay The
End of Laissez-Faire (1926), Keynes suggests that large corporations may, under some circumstances, act with the social welfare, rather
than private gain, in mind. As management grew increasingly independent from ownership, Keynes argued, it tended to focus on the
general stability and reputation of the institution instead of the maximization of shareholder profits. Corporations, in his view, were
becoming more and more like quasi-public institutions whose criterion of action within their own field is solely the public good as they
understand it, and from whose deliberations motives of private advantage are excluded. More concerned with their public image than the

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bottom line, large private corporations, such as railroads, utilities, universities, banks, insurance companies, Keynes argued, were as time
goes on, socializing themselves.
Keynes, Technocracy, and Democracy
This argument reflects the strong technocratic streak in Keynes thought. Keynes thought that the world should be governed by an
educated elite that, in his view, would stand above conflicting class interests and govern in the public interest. He did not believe that
political, intellectual, or economic elites always acted in the best interests of society as a whole, but he did believe that the right elites
could. Moreover, he certainly did not believe that ordinary people could run society well, or should run it at all.
In The General Theory, Keynes frames his argument against State Socialismthat is, against the comprehensive nationalization of the
instruments of productionas a caution against the homogeneous or totalitarian state. Too much nationalization, he seems to suggest,
and youre in Stalinist Russia (or Nazi Germany or Fascist Italy). His argument against a socialism that would lift the working class to
power is different. Keynes famously wrote, in a rant against Marxism in the essay A Short View of Russia (1925): How can I adopt a
creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, whatever their
faults, are the quality in life and surely carry the seeds of all human advancement? That is not an argument against totalitarianism, but
against democracy.
Keynes certainly had no sympathy for the radically democratic ideas, advocated by some socialists in his day and ours, that the
principles of self-government should not end at the door to the workplace, and that no real democracy can exist in the political sphere as
long as the economic sphere is dominated by unelected captains of industry (whether owners or managers). Keynes undoubtedly would
have cringed at the idea of allowing the boorish proletariat to decide how a factory should be run, much less an entire economy. If
ordinary people were allowed to decide the fate of society, Keynes believed, their ignorance and lack of refinement would stand in the way
of human advancement.
Keynes outlook was consistent with political democracy, in the sense of a multiparty system with competitive elections, but not with a
very participatory version of it. He was even suspicious of labor-based political parties thatunlike the elite that he imagined standing
above all class interestshe denounced as class parties. As biographer Robert Skidelsky notes, Keynes believed society could be ruled
by an interconnected elite of business managers, bankers, civil servants, economists and scientists, all trained at Oxford and Cambridge
and imbued with a public service ethic. In other words, he thought it should be ruled by people rather suspiciously like him.
Alejandro Reuss is an historian and economist, and a member of the Dollars & Sense collective.
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