New Statesman & Society, 23 February 1996

The free-market right has long dismissed the ideas of John Maynard Keynes as outmoded. Now much of the social-democratic left is doing the same. But has Keynesianism outlived its usefulness? Paul Anderson and Kevin Davey investigate

Sixty years ago this month, John Maynard Keynes published his magnum opus, The General Theory of Employment, Interest and Money, a book that even his detractors say revolutionised the way that the world thought about economics. Precisely what the legacy of that revolution comprises, however, is now seriously contested – and not just by the free-market right whose nostrums were Keynes’ target.

There are still some who echo the accepted wisdom of left and right in the 19508 and 19605, that The General Theory provides nothing less than a working theoretical framework for the management of the economy to secure full employment. But today these enthusiasts are outnumbered by sceptics. Even in social democratic circles, where Keynes enjoyed unparalleled influence for nearly 40 years after his death in 1946, his star is on the wane. Of the few social democrats who still call themselves Keynesians, most are careful to distance themselves from what is popularly known as” Keynesianism” – and there are many on the left who now argue that Keynes’ insights were specific to a time and a place long gone. For them, as for the new right, Keynes ‘most enduring achievement is to have established the discipline of macro-economics and to have pioneered the techniques we use to measure the performance of national economies.

Who is right? It might appear a cop-out to say so, but there isn’t an obvious answer. With Keynes, as with most other thinkers who have spawned an “ism”, there are protracted arguments about the relationship between what the master said and meant and what his followers – particularly those who popularised and systematised his ideas – interpreted him as saying.

As usual, however, it is easiest to start with the “ism” – which in Keynes’ case can be traced back to the transformation of the ideas of The General Theory into a neat (but somewhat crude) model of the way economies work by his disciples John Hicks and Alvin Hansen. What might be called the doctrine of Keynesianism used the Hicks-Hansen model to show that the state has the ability to secure full employment by borrowing to boost the overall level of demand in the economy. .

There is no doubt that Keynesianism in this sense had an enormous influence on economists. By the mid-1960s, it was dominant in just about every university economics faculty: even the arch-monetarist Milton Friedman declared in 1966: “We’re all Keynesians now.” The extent of its influence on government practice is, however, arguable. It used to be accepted wisdom that Keynesian demand management was responsible for the unprecedented long boom enjoyed by the western industrial economies in the 25 years after 1945. But in recent years, this idea has come increasingly under fire, as economic historians have demonstrated that even Britain and America, the two countries most directly influenced by Keynesianism, did not systematically run budget deficits to boost demand until the 1960s, while the two most successful economies during the long boom, Germany and Japan, were fiscally conservative. On this view, Keynesianism was not really applied until the end of the “golden age” was already in sight.

Nevertheless, there’s a strong case that Keynesianism did play a major part in the boom. In the words of Keynes’ biographer Robert Skidelsky: “The explicit or implicit commitment to avoid a collapse in demand – and just as important, the belief that Keynesian policy would work if required – may well have secured the expectations necessary to sustain the private investment boom for so long.” Even if government policy wasn’t particularly Keynesian, in other words, the postwar boom wouldn’t have occurred had investors not believed that Keynesianism had smoothed out the business cycle.

By the mid-igyos, however, the golden age was-over – and with it the hegemony of Keynesianism among economists and policy-makers. By the mid-1980s, Keynesianism was everywhere in retreat and the free-market right triumphant.

So what went wrong? The problem both for the real world of economic policy-making and for Keynesianism as an ideology is easy enough to identify: the arrival of “stagflation”, the coincidence of rising unemployment and rising inflation, in the late 1960s. But the causes of stagflation were hotly contested at the time and remain so today. The free-market monetarist right blamed Keynesianism, arguing that the assumption (not actually made by Keynes himself) that there was a simple trade-off between unemployment and inflation ceased to work as soon as people started taking inflation for granted. The constant boosting of demand simply fuelled inflation without having any effect on unemployment. Keynesians replied by blaming factors outside western policy-makers’ control: the oil-price shock of 1973-74, the explosion of wage militancy throughout the industrialised world after 1968, and the collapse of the Bretton Woods system of managed exchange rates.

At first, governments tried to muddle through. Most tried to maintain demand while attempting to dampen inflation with incomes policies. When that didn’t work, they allowed unemployment to rise to counter inflation. And when that in its turn proved painful, they allowed inflation to rise to counter unemployment.

By the mid-1970s, it had all spun out of control – and nowhere more so than here in Britain. Faced with rampant inflation, rising unemployment and a currency crisis, the Labour government went cap in hand to the International Monetary Fund for a loan – and the IMF insisted on swingeing spending cuts as a condition of lending the money. At the 1976 Labour conference, prime minister James Callaghan announced that the Keynesian era was over. “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending,” he said.” I tell you in all candour that this option no longer exists and insofar as it ever did exist, it injected a higher dose of inflation and a higher level of unemployment. Unemployment is caused by pricing ourselves out of jobs quite simply and unequivocally.”

The door back to the forgotten world of laissez-faire economics had been unlocked. In the next few years, every major industrialised country followed Britain’s lead. The last country to attempt a Keynesian dash for growth, France under Francois Mitterrand’s Socialist government in 1981-83, was forced into a humiliating U-turn by rising inflation and a balance of payments crisis. For the next decade, Keynesians were marginalised. Their theories were displaced by the market dogmas that Keynes thought he had disposed of, their old and apparently irrelevant tools of intervention – exchange controls, deficit financing – abandoned by governments unilaterally and through international treaties.

Keynesianism was, however, too deeply entrenched, and too productive, to disappear overnight. Indeed, it even remained an important feature of the avowedly anti-Keynesian governments of the 1980s. As in so many other ways, they said one thing and – when the occasion called for it – did another. By cutting personal taxation and increasing the budget deficit to finance military expenditure between 1983 and 1985, US president Ronald Reagan claimed to be providing supply-side incentives. In fact, he was clearly putting old-fashioned Keynesianism back into practice. In Britain, chancellor Nigel Lawson’s boom of the late 1980s – the product of tax cuts, low interest rates and rising public expenditure – was a similar exercise in hypocrisy. Even today, major infrastructure projects (like road-building and the Eurofighter) bring unacknowledged but indisputably Keynesian benefits to an economy.

Keynesianism by stealth is not the only type to have survived the free-market counter-revolution. Keynesian true-believers – such as the Cambridge School in Britain – were quick to foresee the consequences of savage deflation. In 1980, for example, Wynne Godley predicted that the government’s fiscal policies would produce three million unemployed within three years. He was ignored by the monetarists – but time proved him right. For a time, the majority of social democrats also kept the Keynesian faith. The Alternative Economic Strategy that dominated Labour thinking in the early 1980s was a strange hybrid of state socialism and Keynesianism, combining pre-Keynesian Labour emphases on the ownership, control and planning of industry with a commitment to reflation. Although such a perspective has long since been abandoned by the Labour leadership, its Keynesianism survives in the ideas of many dissidents in the party, from Peter Shore on the right to Roger Berry on the left.

Ever since the collapse of the French Keynesian experiment, however, there have been growing doubts among social democrats about the feasibility of “Keynesianism in one country” because of the increasing globalisation of the economy. No medium-sized nation-state, the argument goes, can possibly hope to counter the power of the markets. If Keynesianism, in the old sense of demand management to secure full employment, is ever to work, it will have to be at a regional or even global level. Such a point of view is certainly in keeping with the spirit of Keynes himself. An early exponent of the need for coordinated international economic policies, particularly on interest and exchange rates, he was one of the architects of the Bretton Woods system of managed exchange rates that lasted into the early 1970s.

But there are major obstacles to the creation of the institutions necessary for regional Keynesian intervention, as Europe shows. European Commission president Jacques Delors’ plans for a modest European Union programme of public works to compensate for the deflationary effects of the Maastricht treaty were killed by conservative opposition – and with the electoral prospects for social-democratic parties poor in every major EU country except Britain, it is unlikely that anything like them will be put into practice for the foreseeable future. To make matters worse, there’s also the question of whether regional Keynesianism would work even if there were the political will for it at intergovernmental level. To Meghnad Desai, the pace and scope of globalisation are such that even regional attempts to manage demand are doomed, “What most people think of as Keynesian economics and Keynesian policy is dead,” he says bluntly.

And indeed, if Keynesianism is about expansionist demand management, many of today’s self-styled Keynesians don’t really deserve the name. Will Hutton, for example, whose The State We ‘re In has been the best-selling book on economics in years, argues that Keynes has been traduced by his systematisers and popularisers: he was actually far more important as an advocate of reforms that would change the ways in which investors behave than as the father of high public spending demand management. Other “new Keynesians” are primarily interested in supply-side policies for the labour market, a topic on which Keynesianism had little to say at the height of its influence. This trend is reflected in mainstream social democratic politics, where the current emphasis is on curing unemployment through education and training rather than bv boosting demand.

For these economists and politicians, the legacy of Keynes has not been properly understood: “what most people think of as Keynesian economics” is not what Keynes meant at all. Robert Skidelsky agrees with them. He insists that, far from encouraging inflation, Keynes was implacablv opposed to it – and he was not averse to the idea of imposing old-fashioned austerity if it got out of control. The General Theory was not the theoretical licence to print money that 1960s-stvle Keynesianism claimed it was,” he argues. Neither would Keynes himself have endorsed the massive extension of the role and powers of the state that has come to be associated with his ideas.

On this reading, Keynes is neither the hero whose brilliant reworking of economics saved capitalism from the business cycle, nor the villain whose ideas were responsible for the inflationary crisis of the 19708. Which is probably an accurate assessment – but hardly the stuff on which a revival of his influence will be made.


“By bastardising Keynes into the simple advocacy of high government spending, both the right and the left secured important political objectives. The left was given the means to temper the Marxist/socialist tradition in British politics into a devotion to the idea of a high public spending social democracy, while the right translated Keynesianism straight into the tradition of paternalist intervention to preserve the status quo. It suited neither to interpret Keynesianism as it actually was: a demand for the state to change the behaviour of financiers and businessmen by prosecuting an active fiscal policy in tandem with an assault on the portfolio preferences of the financial institutions.”

WILL HUTTON The Revolution That Never Was, 1986

“Keynes saved capitalism from its worst crisis; it survived and revived and now has seen him off…The Gadarene volatile behaviour of thousands of operators on stock markets around the world imposes a real time constraint on governments. This is a discipline that is hard to fight against. Global coordination of economic policies may work to regulate these markets and global Keynesianism may be possible in theory. But such scenarios require a lot of consensus and a strong regulatory authority which can punish free-riders. We are a long way from that, much as we may wish otherwise.”

MEGHNAD DESAI What is Left of Keynes? 1994

“Keynesian policies come to us today wrapped up in a history of rising inflation, unsound public finance, expanding statism, collapsing corporatism, and general ungovernability, all of which have seemed inseparable fromthe Keynesian cure for the afflictions of industrial society. We do not want to traverse that path again. By the 1980s, Keynes, who was praised for having saved the world from Marxism, had joined Marx as the God that failed… If we are to draw a lesson from postwar historical experience, it is that Keynesianism works best as a discretionary resource in a rule-based framework which places strong constraints on the actions of governments and which promotes the well-being of peoples through the widest possible measures of free trade. Those who look for inspiration from Keynes today are more likely to be impressed by the care and thought which he gave to the design of the Bretton Woods system than with Keynesian prescriptions for the parochial diseases of individual economies.”



The history of Keynes influence on the left during his lifetime and on the Labour Party in particular, is complex. It began with his assault on the Versailles treaty’s insistence on punitive German reparations for war damage, The Economic Consequences of the Peace (1919). Keynes had resigned as a Treasury civil servant to write the pamphlet, which became a bestseller and according to his biographer Robert Skidelsky, made him “a hero of the left”: “Henceforth the intelligentsia of the left always listened with one ear to what Keynes was saying.”

But Keynes’ critique of laissez-faire economic orthodoxy from the mid-1920s, starting with his polemic against returning to the gold standard, A Tract on Monetary Reform (1923) at first found few takers in the Labour Party (let alone to its left). One reason was that Keynes was distrusted as a prominent member of the Liberal Party: in the late 1920s, he was the brains behind David Lloyd George’s radical Liberal programme for tackling unemployment, most famously spelt out in The Yellow Book: Britain’s Industrial Future in 1928.

Political tribalism was by no means the whole story, however. On one hand, the Labour leadership was unstintingly orthodox in its economics. The dominant figure in Labour economic policy-making in the 1920s was Philip Snowden, the chancellor of the exchequer in Ramsay Macdonald’s 1924 and 1929-31 Labour governments, a fierce proponent of free trade, low public spending and maintenance of the value of the currency. Keynes’s ideas were anathema to him. On the other hand, most of Snowden’s critics on the left took it as axiomatic that capitalism was on the verge of a fins-crisis and could not successfully be reformed. For them, Keynes’s alternative simply made no sense.

Not that Keynes thought much of Labour. Although he saw the potential for a Lib-Lab coalition, he disliked Labour’s class politics – “the class war will find me on the side of the educated bourgeoisie – and he was dismissive of the left’s anti-capitalism. “The Labour Party has got tied up with all sorts of encumbering and old-fashioned luggage,” he wrote in 1927. “They respond to anti-communist rubbish with anti-capitalist rubbish. The consequence of all that is that, whether in or out of office, the business of orderly evolution seems likely to remain with the Liberal Party.”

For all this, Keynes had sympathy with some of the ideas of the Independent Labour Party, which had at least realised that unemployment could be reduced by increasing the overall level of demand in the economy (although its policy ideas were far-removed from Keynes’s own). On the right of the Labour spectrum. Ernest Bevin, the general secretary of the Transport and General Workers Union, was close to Keynes on economic policy from the time of his warnings of the deflationary consequences of returning to the gold standard. And in Oswald Mosley, then a maverick Labour MP with a significant following on the left, Keynes had an articulate disciple who consistently advanced a programme of public works and monetary reform along the lines of Lloyd George’s proposals.

But Mosley flounced out of the Labour Party in early 1931, after the government rejected his pleas for protectionism and public spending to counter the effects of the slump that followed the 1929 Wall Street Crash. And the advice of Keynes and Bevin (who both sat on the Macmillan Committee on Finance and Industry set up by Snowden in 1929) was ignored by the government at every turn. In August 1931, Macdonald and Snowden infamously preferred to desert Labour to form a National government with the Tories and the laissez-faire wing of the Liberal Party, rather than deviate from plans for swingeing spending cuts, including reductions in unemployment benefit) as demanded by the bankers and the orthodox economists.

The general election that followed, which saw Labour reduced to 52 seats and the Lloyd George Liberals to four, was a sensational political victory for laissez-faire orthodoxy. But the debacle of 1931 also made Labour intellectuals much more receptive to Keynes as they struggled to understand what had gone wrong, and as he developed the over-arching economic theory that reached maturity in The General Theory of Employment, Interest and Money, published 60 years ago this month.

Well before The General Theory, Keynes’s polemical writings – he was a prolific contributor to newspapers and magazines, including the New Statesman, whose board he chaired after its merger with the Liberal Nation in 1931 – had had a profound effect on the “New Fabian” thinkers who were to play a key role in formulating the policies on which Labour won the 1945 election, among them G D H Cole, Hugh Dalton, Evan Durbin, Hugh Gaitskell and Douglas Jay. It was his magnum opus that realty made the difference, however. Cole described it in the New Statesman as the most important book on economics since Marx’s Capital: Jay embraced it enthusiastically in his widely read 1937 book, The Socialist Case.

Meanwhile, Keynes continued to contribute directly to Liberal thinking; and there were even some Tories who drew on his ideas (among them Harold Macmillan, whose The Middle Way was published in 1938). But it was in the United States, where President Franklin D Roosevelt’s New Deal programme for economic recovery drew heavily on his thinking, that Keynes’s impact in the1930s was greatest. In Britain it took the 1939-45 war for his influence to become pervasive.

Brought back to the Treasury after publishing How to Pay for the War in 1940, he played a central part in British wartime finance. He negotiated the Lend-Lease scheme with the US that provided Winston Churchill’s coalition government with arms after Britain’s money had run out, and in 1944 he was the chief British representative at the Bretton Woods conference that set up a managed postwar international currency system and brought about the World Bank and the International Monetary Fund.

After that, he negotiated the US loan that kept Britain afloat after the war had ended. Domestically Keynes played a significant role both in William Beveridge’s 1942 report that provided the blueprint for the postwar welfare state and in the 1944 White Paper on employment that famously accepted government responsibility for maintaining a high and stable level of employment. Earlier in 1944, someof Keynes’s most enthusiastic followers, among them Joan Robinson and Nicholas Kaldor, had drafted Labour’s own, much more explicit, policy document committing the party to full employment.

What Keynes’s influence on policy would have been had he lived longer has been the subject of much speculation. He was an adviser to the 1945 Labour government’s first chancellor, Hugh Dalton, and, according to Dalton’s biographer Ben Pimlott, his influence is discernable in Labour’s first two budgets to the extent that Dalton “accepted that fiscal policy could be used without qualms as a long-run full-employment weapon”.

Nevertheless, Dalton was by no means as enthusiastic a Keynesian as his successors. Keynes died of a heart attack in April 1946 at the age of 62 – before what can properly be termed the Keynesian era had really begun. (Paul Anderson)

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