Essays on Keynesian and Kaldorian Economics

A. Thirlwall

• Éditeur: Palgrave Macmillan
• Année: 2015
• ISBN:
  9781137409485
• Sujet: Economics
• Sous-sujet: Econometrics

This volume of essays contains 16 papers the author has written over the last 40 years on various aspects of the life and work of John Maynard Keynes and Nicholas Kaldor. It covers both theoretical and applied topics and highlight the continued relevance of Keynesian and Kaldorian ideas for understanding the functioning of capitalist economies.

1

Keynesian Economics after Fifty Years*

Nicholas Kaldor

Introduction

Keynes’s General Theory of Employment, Interest and Money is undoubtedly regarded as the most important book on economics in the twentieth century, and this view would be shared, I think, by those who are wholly opposed to its teaching as well as by its adherents. Nearly 50 years after its appearance controversy still rages around its basic ideas and prescriptions, and I do not think that any major economist in the West would regard the issues raised by Keynes as finally settled. In this respect Keynes’s General Theory is in sharp contrast to all the previous pathbreaking books on economics – such as Adam Smith’s Wealth of Nations or Ricardo’s Principles or Marshall’s Principles – whose main tenets have not given rise to violent controversies in the same way as Keynes’s. The possible exception is Karl Marx’s Capital, but then Marx was a revolutionary which Keynes was certainly not – Keynes’s avowed purpose was to save the capitalist system, not to destroy it.

Why then all this turbulence? We have authors who have written several fat books on Keynes (and I presume still keep on writing them) the main message of which is that Keynes said nothing new, and others who spent the better part of their life-time in demonstrating (unsuccessfully in my view) that Keynes was entirely wrong.

I cannot point to any single dominant reason for this – I believe there must be several.

The first and perhaps the most important is that Keynes’s main message ran counter to the basic tenet of respectable practitioners of the art which always has been that production in general was confined by the scarcity of human and material resources; that human welfare can be improved only by ‘economizing’ in the use of scarce resources (whether of land, labour or capital) which means securing the best allocation of what is available. This meant that an ‘economy’ – a term which implied a community who satisfy their wants by mutual cooperation between their members – was necessarily constrained in its activities by its resource endowment: it was the poverty (or insufficiency) of resources which limited the satisfaction of wants. Since the endowment of resources available to a ‘community’ was supposed to be determined exogenously, the welfare of the community could be maximised (or its misery minimised) only by the free play of market forces under a free enterprise system, with the minimum of government interference and regulation.

Keynes asserted the contrary. His main proposition was that in normal circumstances, production in general was limited by effective demand which determined how much of potential resources were effectively utilised. Hence there was scope (in normal circumstances) for securing greater material welfare through the purposeful direction of the economy by a combination of fiscal and monetary policies which could secure full employment whilst avoiding inflation.

In order to explain how this could be done Keynes put forward a model of the interaction of a limited number of strategic variables operating on the economy which serve to explain how, in given circumstances, the level of output as a whole and its movement were determined. This gave birth to a new branch of economics, macro-economics, distinguished by the fact that unlike the prevailing economic theory it made empirical hypotheses concerning the behaviour of groups or categories of individuals, the validity of which could be refuted, by observation if not by experiment, and which made it possible to make quantitative forecasts of how the ‘economy’ would behave in response to either policy changes introduced by the Government, or to external changes due e.g. to new inventions or spontaneous changes in expectations.

Thus the main reason why Keynes’s book found such a widespread echo so soon after its publication was that it brought economics ‘back to earth’ – back to its original purpose of being an instrument for formulating rational policies concerning the economy.

Though the initial reactions by the economics profession was almost uniformly adverse – as shown by the reviews of the book by leading economists in English or American journals – the new ideas made rapid strides among academic economists of the younger generations, and also among civil servants, advisers to Ministers and even financial journalists. No doubt the outbreak of the war greatly lessened the normal resistance to new ideas. Thus in Britain in 1941 Keynes (by that time an adviser to the Chancellor of the Exchequer) managed to embody the new principles in the Budget, which meant aiming at the ‘right amount’ of fiscal deficit – a notion which only made sense in terms of a Keynesian model of the economy. From then on, and until the end of the 1970s, the annual ‘Budget judgement’ meant that the primary function of taxation was regarded as the avoidance of inflationary pressures whilst securing the right climate for expansion in the economy. And well before the end of the war, the Coalition Government gave a solemn undertaking that henceforth ‘the maintenance of a high and stable level of employment’ would be one of the Government’s principal obligations and responsibilities.¹ Much the same intellectual change occurred in the United States where the new principles of economic management were embodied in the Employment Act of 1946. They were also embodied in the new French Constitution of 1946, in Article 55 of the Charter of the United Nations, and Article 104 of the Rome Treaty. None of this would have occurred without the appearance of Keynes’s General Theory – since ‘maintaining full employment’ would not have occurred to economists or politicians as a feasible policy objective.

In the following quarter of a century – up to 1973 – the Western world did in fact experience an unprecedented period of economic expansion, combined in most countries with full employment or even ‘over–full employment’ in the sense that the demand for labour could only be satisfied through the various states allowing a considerable immigration from the surplus labour areas of less developed countries – whether from overseas dependencies or ex-dependencies (as in the case of Britain or France) or from the less developed countries of Europe (as in the case of Germany, Holland, Switzerland, Austria, etc.). How far this was the result of the adoption or the deliberate pursuit of Keynesian policies, or how far it would have happened in any case as a consequence of a prolonged economic boom is a complex question which admits of no simple answer. There were some countries (such as France) where the acceptance of Keynesian ideas led to state investment planning in the form of a succession of five year plans, carried out in cooperation between the state and private enterprises – with the result that France became the fastest growing country in Europe. The results for Britain were not nearly as good (mainly I think because there was too little investment at home and too much abroad; and a strong inborn resistance, absent in France, to the State ‘meddling’ in the affairs of business). Nevertheless the 25 years from 1948 to 1973 recorded a higher rate of progress than any earlier period of comparable length in British history, and, except for the last few years of that period, unemployment remained consistently low (well below Beveridge’s 3 per cent target) despite considerable immigration.²

In the 1970s this happy era came to an end with a rapid inflation of both commodity prices and industrial wages; as a result of which the Governments of industrial countries became pre-occupied with the dual problem of inflation and balance of payments deficits, both of which they believed could be corrected by monetary and fiscal policies. Hence the international conditions which Keynes had always regarded as essential for national full employment policies ceased to hold, and the cumulative process of credit contraction which he had much dreaded was finally unleashed in the post-war world.³

Hence recession hit a number of countries and it became generally believed (rightly or wrongly) that ‘Keynesian’ instruments of economic policy were unavailable for coping with this situation. At the same time the anti-Keynesian school of economists, the ‘new’ monetarists, rapidly gained followers among influential people more or less simultaneously in a number of countries and this was combined by widespread and rapidly growing antagonism to Keynesian ideas. The reason for this antagonism, not openly acknowledged, was the change in the power structure of society which the pursuit of Keynesian policies had brought about. This was foreseen well before the adoption of Keynesian methods of demand management. Thus in an article in The Times in January 1943 on post-war Full Employment it was stated:

Unemployment is not a mere accidental blemish in a private-enterprise economy. On the contrary, it is part of the essential mechanism of the system, and has a definitive function to fulfil. The first function of unemployment (which has always existed in open or disguised forms) is that it maintains the authority of masters over men. The master has normally been in a position to say: ‘If you don’t want the job, there are plenty of others who do’. When the man can say ‘If you don’t want to employ me there are plenty of others who will’ the situation is radically altered.⁴

The change in the workers’ bargaining position which should follow from the abolition of unemployment would show itself in another and more subtle way. Unemployment in a private enterprise economy has not only the function of preserving discipline in industry, but also indirectly the function of preserving the value of money. If free wage bargaining as we have known it hitherto, is continued in conditions of full employment, there would be a constant upward pressure upon money wage-rates. This phenomenon also exists at the present time, and is kept within bound by the appeal of patriotism. In peace-time the vicious spiral of wages and prices might become chronic.⁵

The second main point is that whereas the main proposition of Keynes’s General Theory concerning the critical role of demand in determining aggregate output and the possibility or likelihood of an ‘underemployment equilibrium’ with involuntary unemployment, withstood the attacks launched against it, many of the theoretical constructs which he invented or employed by way of proof or explanation did not. In other words his famous passage on Marshall (written on the occasion of his obituary of Marshall in the Economic Journal of 1924) sounds almost prophetic since it appears to be far more applicable to his own future work than to that of his great teacher:

It was an essential truth to which he held firmly that those individuals who are endowed with a special genius for the subject and have a powerful economic intuition will often be more right in their conclusions and implicit presumptions than in their explanations and explicit statements. That is to say, their intuitions will be in advance of their analysis and their terminology.

To this should perhaps be added the famous concluding paragraph to the Preface of the General Theory written in December, 1935:

The composition of this book has been for the author a long struggle to escape, and so must the reading of it be for most readers if the author’s assault upon him is to be successful – a struggle of escape from habitual modes of thought and expression ... The difficulty lies, not in the new ideas, but in escaping from the old ones which ramify, for those brought up as most of us have been, into every corner of our minds.⁶

The result was an extraordinary paradox in that while Keynes took every opportunity to emphasise the novelty of his approach, and his rejection of the ‘fundamental postulates’ of the ‘classical economists’ (by which he meant everybody who figures in ‘mainstream’ economics from Adam Smith to Marshall) this merely disguised the extent to which his theory suffered from an almost slavish adherence to prevailing (Marshallian) doctrine – to which his own ideas were ‘fitted’ more in the manner of erecting an extra floor or balcony here or there, while preserving the preexisting building. This, I hope to show, applies to Keynes’s most radical novelties, such as the principle of effective demand, the liquidity preference theory of interest, his ‘revision’ of the quantity theory of money as well as his retaining the fiction of a ‘closed economy’ which prevented him from analysing the more basic (or intriguing) question of why unemployment looms so much larger in some countries than in others.

In the following section I shall deal with each of these aspects in turn.

The principle of effective demand

The core of Keynes’s theory is the principle of effective demand which is best analysed as a development or refinement of Say’s law, rather than a complete rejection of the ideas behind that law. Say, like Ricardo or John Stuart Mill (or later Walras), takes as his starting point the proposition that ultimately all economic activity consists in the exchan...

Table des matières

• Cover
• Title
• Introduction
• 1  Keynesian Economics after Fifty Years
• 2  A Second Edition of Keynes General Theory (writing as John Maynard Keynes)
• 3  Keynesian Employment Theory Is Not Defunct
• 4  The Renaissance of Keynesian Economics
• 5  The Relevance of Keynes Today with Particular Reference to Unemployment in Rich and Poor Countries
• 6  Keynes, Economic Development and the Developing Countries
• 7  Keynes and Economic Development
• 8  A Keynesian View of the Current Financial and Economic Crisis in the World Economy: An Interview with John King
• 9  Nicholas Kaldor: A Biography
• 10  Kaldor as a Policy Adviser
• 11  Kaldors Vision of the Growth and Development Process
• 12  A Model of Regional Growth Rate Differences on Kaldorian Lines
• 13  A General Model of Growth and Development on Kaldorian Lines
• 14  A Plain Mans Guide to Kaldors Growth Laws
• 15  Testing Kaldors Growth Laws across the Countries of Africa
• 16  Talking about Kaldor: An Interview with John King
• Name Index
• Subject Index