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Keynes's VisionA New Political Economy$

Athol Fitzgibbons

Print publication date: 1990

Print ISBN-13: 9780198283201

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198283202.001.0001

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Socialism and Equality

Socialism and Equality

Chapter:
(p.181) 10 Socialism and Equality
Source:
Keynes's Vision
Author(s):

Athol Fitzgibbons

Publisher:
Oxford University Press
DOI:10.1093/0198283202.003.0010

Abstract and Keywords

This chapter is a continuation of the previous chapter, and it evaluates Keynes's attitudes and contributions to equalitarianism.

Keywords:   equalitarianism, social welfare

The State would have to intervene at many points. Yet the structure of a free economy with its scope for individual initiative must be preserved. Keynes remained essentially an individualist. In the twenty years that followed many others have had the same idea; Keynes deserves study because he related it to the fundamental principles of economics and worked out its detailed applications. His work may still prove to be the foundation of a new kind of free economy, if freedom is indeed preserved.

R. F. Harrod, The Life of John Maynard Keynes

The paradox that should be before us now is that one of the most effective equalitarians was apparently opposed to equality. Yet I am unaware of any economist, apart from Joan Robinson, who has in recent years referred to Keynes's equalitarianism, and the incongruence of Keynes's ideas on the subject seems to have been resolved by the disappearance of one of its terms. In the years immediately after the Second World War, when economists were less aware of Keynes's politics, they could take his economic equalitarianism for granted. In 1943, for example, the Marxist economist Michael Kalecki did not dispute that the new (Keynesian) macroeconomics would have radical equalitarian implications, his point being only that these implications were so equalitarian that a capitalist economy would not dare to adopt them (see Kalecki 1943). The orthodox economist Dudley Dillard, who later wrote a standard textbook on Keynesian economics, interpreted Keynes as saying that the functionless property‐earner was a major obstacle to full employment. ‘The ever falling rate of interest, which allows capital accumulation to proceed unimpeded, leads to a fundamental change in the social structure of capitalism, the euthanasia of the rentier capitalist, or functionless investor’ (Dillard 1946/1983:222).

(p.182) This was also how Joan Robinson (1975) interpreted Keynes,1 and quite reasonably so; but in later years Keynes's equalitarianism was forgotten, perhaps because a better notion of his politics was abroad. Paul Davidson briefly says that Keynes thought economic equality was of lesser importance (Davidson 1982:4). Skidelsky is more cautious, but he warns against taking Keynes at face value, and insists that, appearances perhaps to the contrary, Keynes was not an equalitarian (Skidelsky 1987:75). Harrod wrote enigmatically that Keynes ‘had no equalitarian sentiment; he wanted to improve the lot of the poor and that quickly . . . but in order to make their lives happier and better’ (Harrod 1951:333).

The evidence from the Collected Writings runs in only one direction. Those who deny that Keynes was an equalitarian have the far harder case to prove, and their argument must be to some extent that he did not mean what he said. If we do take Keynes at his word, then he wanted more economic equality, as a step towards his economic Utopia:

We shall use the new found bounty of nature quite differently from the way in which the rich use it today, and will map out for ourselves a plan of life quite otherwise than theirs. . . . Three hour shifts or a fifteen hour week may put off the problem [of adjusting to leisure] for a great while. (IX:328–9)

The difficulty is that Keynes simultaneously held two principles which he regarded as compatible, but which, according to modern political theory, are inconsistent. He advocated—systematically, and not incidentally—both economic equality and political inequality. The new awareness of Keynes's philosophy of political inequality has eclipsed his arguments for economic equality.

Equality

Recent views notwithstanding, economic equality was a long‐standing feature of Keynes's politics, beginning with the revolt from Burke. His commitment to political inequality follows the Burkean doctrine of political expediency, because the case for political equality can only ever be conditional and never absolute. However, economic equality was a counter‐stroke (p.183) against Burke's sanctity of property and in favour of the new economic order.

Because Keynes's equalitarianism arose out of his political philosophy, it was more categorical than a diffuse feeling of sympathy for the poor. He advocated the euthanasia of the functional investor, not because that was his value judgement, but because the hereditary transmission of wealth was an archaic feudal hangover incompatible with a creative society (IX:299). More to the point, Keynes consciously provided the theoretical basis for the equalitarian economic policies that have been adopted in Western countries since the Second World War. He advocated, and showed how to implement, a regime that ‘deliberately aims at controlling and directing economic forces in the interests of social justice and social stability’ (IX:305).

1. By demolishing the theory of the natural rate of interest, which justifies the rate of profit in terms of the productivity of capital and the rewards to saving, Keynes was able to show that the distribution of income was ‘arbitrary and inequitable’. The return on capital is related to interest rates, and Keynes argued that these are determined by expectations and psychological factors. Consequently, the relative shares going to labour and capital could, as he also suggested, be changed by policy, without necessarily affecting economic growth. His theory of interest was the basis for those low interest rate policies, pursued everywhere in the decade after 1945, which deliberately eroded private wealth.

2. Keynes's macroeconomic theory was used as a planning basis for the modern welfare state. Government spending would not be restricted, as before, by the availability of government finance, which was always low at times when it was most needed. After the General Theory, spending by the government did not need to balance the Treasury budget, but would balance demand and supply in the whole economy, so providing more scope for the expansion of social welfare. In How to Pay for the War Keynes first showed how the new macroeconomics could be used to develop an extended social welfare programme:

In the first version I was mainly concerned with questions of financial technique and did not secure the full gain in social justice for which this technique opened the way. In this revision, therefore, I have endeavoured to snatch from the exigency of war positive social improvements. The (p.184) complete scheme now proposed, including universal family allowances in cash, the accumulation of working‐class wealth under working‐class control, a cheap ration of necessities, and a capital levy (or tax) after the war, embodies an advance towards economic equality greater than any we have made in recent times. (IX:368)

D. E. Moggridge notes that ‘Keynes' proposals lay at the heart of the policy eventually adopted by the authorities, as did his macroeconomic [policy] method’ (Moggridge 1975: 182).

3. Keynes exonerated the trade unions as causes of unemployment, with major consequences for macroeconomic and labour policy for decades later.2 ‘It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money‐wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing’ (GT:9).

Keynes's equalitarianism should not be overstated, as it was only a means rather than an end and so was subject to qualification. Truth is far above equality and is by no means the same thing; Keynes accused Marshall of debasing his economics by devoting his attention to bettering the life of the poor, instead of following the flow of his intellectual fancy or the hot economic controversy of the day. ‘Marshall was too anxious to do good’ (X:200), for the working class in particular. Keynes did see ‘social and psychological justification for significant inequalities of incomes and wealth’ (GT:374), because they were a good stimulus to economic growth and a not too anti‐social channel for egoism. He also believed that the health of the middle class, ‘out of which most good things have sprung’, would determine the health of science and art. Yet a theory for full employment, a new theory of economic distribution, the blueprint of the modern welfare state and the exoneration of the trade unions as major causes of unemployment were all major steps to equality. If they are forgotten or disparaged, it is because we live in a world that Keynes partly created.

The strongest argument against Keynes's economic equalitarianism is that he did not envisage a general movement to Utopia, but rather a series of steps. Successive cohorts of people would pass over the threshold of economic necessity into the land (p.185) of economic freedom, thereby being liberated to assimilate the new ethics.

It has already begun. The course of affairs will simply be that there will be ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed. The critical difference will be realized when this condition has become so general that the nature of one's duty to one's neighbour is changed. For it will remain reasonable to be economically purposive for others after it has ceased to be reasonable for oneself. (IX:331)

This is perhaps an extension of the politics of Burke, who advocated the enlargement of the sinecured classes. Keynes hoped economic growth would give everybody a sinecure, because the full Utopia, when purposelessness became possible in a real sense, would arrive only after everyone had passed beyond the line of economic need.

And yet he was a political élitist who was particularly sceptical of democracy.

The Politics of Power

According to modern political philosophy, which begins with Machiavelli and Hobbes, whichever political group gets power exploits the situation for itself. However, Keynes's programme combined political inequality with economic equality, because he did not believe in the political superiority of power. He recognized that there was a struggle between capital and labour, but he did not think that anything conclusive or good was to be gained from it. He did not regard the class struggle theory as a specifically socialist theory of politics, but understood it as a materialist theory of politics, similar to the theory of power in international relations.

Force would settle nothing—no more in the class war than in the wars of nations or in the wars of religion. An understanding of the historical process, to which Trotsky is so fond of appealing, declares not for, but against, force at this juncture of things. We lack more than usual a coherent scheme of progress, a tangible ideal. (X:67)

Keynes criticized the French Prime Minister Clemenceau, whom he regarded as the author of the Versailles policy to crush (p.186) Germany. Clemenceau represented the politics of the Hobbesian bellum omnium inter omnes, which, believing that each person finds his liberty through power over others, concludes that power must be the supreme principle of the state. Clemenceau ‘had one illusion: France: and one disillusion—mankind, including Frenchmen’; ‘The glory of the nation you love is a desirable end—but generally to be obtained at your neighbour's expense’; ‘The German understands . . . nothing but intimidation. . . . But it is doubtful how far he thought these characteristics peculiar to Germany’ (II:21–2). Power is the principle of the state, but as there is no power to overawe sovereign states they must each, for advantage or out of fear, strive to extend their power. Believing that political ideals are irrelevant and the politics of power is inevitable, Clemenceau pursued a Carthaginian peace at Versailles, meaning a peace that would see Carthage (Germany) finally destroyed. In reply, Keynes said that Clemenceau had anticipated neither the coming economic order nor the organic consequences of injustice; and

[Clemenceau] sees the issue in terms of France and Germany, not of humanity . . . struggling forwards to a new order. . . . It happens, however, that it is not only an ideal question that is at issue. My purpose in this book is to show that the Carthaginian peace is not practically right or possible. (II:23)

Likewise, the socialists who concentrated on the politics of power overlooked the ‘moral and intellectual problems of the future transformation of society’. They wrongly assumed that a conception of the future already existed, and they failed to appreciate that it would have to convince many people. The general error of the materialists was that they separated their logic and their ideals.

The next step forward must come, not from political agitation or premature experiments, but from thought. We need an effort of the mind to elucidate our own feelings. . . . In the field of action reformers will not be successful until they can steadily pursue a clear and definite object with their intellects and their feelings in tune. (IX:294)

But Keynes rejected the politics which says that power is everything, in favour of a politics which says that power is nothing, that ideals are everything. He did not ever formulate a balance between idealism and materialism. In heaven, where (p.187) only ideas can rule, Keynes's own ideas may have exerted all the force necessary to show Germany that a higher life than militarism is possible. In heaven too, from where the flux of politics can be seen, cultural continuity and the viability of the state are as irrelevant as Keynes originally believed them to be. In heaven, rich and poor will unite to work towards a high and just conception. But down on earth, I agree with Keynes's critics, and cite Keynes himself, that his emphasis on reason and the rule of ideas was unrealistic and superficial. It is too easy to see through the long reaches of history that kings have ruled over people and that self‐interest has ruled over kings. Likewise, any modern society evaluates itself according to its inbuilt criteria, which is for example the purport of the neo‐Keynesians when they criticize conventional economics as a rationalization for capitalist values. Keynes's politics was the story of Snow White, but it left out the wicked queen and the magic mirror which tells her she is the fairest in the land. Perhaps it was better than a socialist politics, which is only about the wicked queen, but it was still unrealistic.

In defence of Keynes, it may be said that he fought on two fields: one because he envisaged a Europe united by trade and psychic bonds, and the other because he envisaged a prosperous national economy, united by justice and a moral ideal. In each case the idea he opposed, behind combatative nationalism or the class struggle, was the primacy of power, materialism without a higher conception. Against the ideas of history, nationalism looking to the past, socialism to the future, he had only the method of reason.

His intuition of political goals was right, but Keynes over‐estimated the weak political force of reason. He always held to the priority of ideas in the field of knowledge, which is a reasonable position to take, especially given his theories of creativity and intuition; but he extended it to the political sphere, believing wrongly that truth, beauty and love could always overcome material force.

In only one way can we influence those hidden [political] currents—by setting in motion those forces of instruction and imagination which change opinion. The assertion of truth, the unveiling of illusion, the dissipation of hate . . . must be the means. (II:188)

(p.188) It would have been more realistic to say that truth and love lead only to themselves and so are powerless to enforce political justice.

Socialism

As the class struggle has been a fundamental principle of socialism since the time of Marx, it can be said definitively that Keynes was not a socialist. Yet I have already noted that Lambert, whose work is very scholarly, puts Keynes on the left wing of politics, and in this he is not alone. Keynes was anti‐doctrinaire, said Austin Robinson, ‘but he was never anti‐socialist’ (Robinson 1947/1983:124). Other scholars have located Keynes on the right wing. ‘He thought of himself as a radical,’ said Elizabeth Johnson, ‘but he took a conservative and even archaic view of society’ (Johnson 1974/1983:191).

I suggest that the resolution is that Keynes's political theory was both archaic (in structure), as Johnson says, and left‐wing (in intention), as Lambert says, and that Keynes expressed this duality with a particular terminological distinction. Keynes often said that he was on the left and yet he often denounced socialism; and the point of this distinction was that Keynes opposed socialist materialism. To be on the left was not to be a materialist, but to be a socialist was.

Keynes opposed socialism, but he was sympathetic to many socialist ideals. Burke's mistake had been to seize on the illogical qualities in materialistic liberalism, without considering that this illogical ideology might nevertheless liberate the men who had lived on the husks of feudalism. By comparison, although Keynes thought materialistic socialism was illogical, he wanted, according to the principles of justice, to (eventually) liberate the men who lived on the husks of capitalism.

Being on the left meant that Keynes shared with the socialists a commitment to greater economic equality; he rejected capitalist values; he was willing to countenance government intervention in the economy; and he believed that the purpose of economic progress is the moral transformation of humanity.

However, Keynes disagreed with socialists concerning both the rate of change and the method. He agreed with Burke that revolutionaries typically do not count the transitional costs of (p.189) revolution. ‘These fellows want a revolution for its own sake’, Burke had said, emphasizing the utter frivolity of the old liberals. If possible, Keynes went even further: in an advanced and complex society, a revolution could mean widespread death, and he stressed the need for gradualness of any change. In a complex society, we can never be sure of the full outcome of change, which is often not reversible.

In opposition to the principles of socialist materialism, he stood for intuition and creativity instead of the qualitative sameness of all labour; for the mediation of the virtues rather than a notion of the social good; for the superior relevance of the contest of ideas to the class struggle; and for the primacy of the distinction between good and evil, rather than the dialectic of the forces of production. In short, he stood for his philosophy of action instead of socialist ideas, and for the principle not of society, but of the creative mind. These differences meant that Keynes sometimes supported socialist goals and sometimes opposed them. Sometimes too, the differences or agreements were according to circumstance, and sometimes they were according to principle. Matters that were absolutes for socialists were technical questions for Keynes, to be determined according to the circumstances, and constrained only by higher principles.

The fiercest contests [about socialism] and the most deeply felt division of opinion are likely to be waged in the coming years not round technical questions, where the arguments on either side are mainly economic, but round those which, for want of better words, may be called psychological, or perhaps moral. (IX:293)

So Keynes regarded the socialization of industry as a matter for judgement rather than dogmatism. Industry that was still strongly motivated was not to be socialized, but tired industries that had lost their entrepreneurial drive were to be subject to social pressures to act for the public good. They were not to be nationalized or otherwise used to advance a socialist state, but they were to be socialized to advance the rule of moral reason. Keynes's socialization did not imply state control or a coordinated economic plan, and although the socialized industries were to be ‘semi‐autonomous’, Keynes meant by semi‐autonomy only the Burkean democratic backstop against the abuse of power. (p.190)

Progress lies in the growth and the recognition of semi‐autonomous bodies within the State—bodies whose criterion of action within their own field is solely the public good as they understand it . . . I propose a return, it may be said, toward medieval conceptions of separate autonomies . . .

We must probably prefer semi‐autonomous corporations to the organs of the central government. (IX:288–90)

Our task must be to decentralize and devolve wherever we can, and in particular to establish semi‐independent corporations and organs of administration, to which duties of government, new and old, will be entrusted. (IX:302)

As the economic problem was solved, the idea was to expand the duty part of industry against the purposive part, provided that the economic cost was not too high. The ‘public good’ referred to above corresponds to Burke's ‘happiness of the people’ and is unlike the utilitarian ‘social good’ of Bentham; it means actions in the public sphere in conformity with ethics.

In particular, Keynes did not advocate the expansion of the state through the use of his macroeconomic policies. A Keynesian macroeconomic policy means that the government should run a deficit and expand its spending when there is a shortfall of demand in the economy. If, however, the government runs a deficit at such times, and if it only balances the budget during periods of boom, then over time the state will expand at the expense of the private economy. A Keynesian macroeconomic strategy may therefore be the easiest and most natural way to socialize the economy, but it was not Keynes's policy.3

Because socialists breathe the air of materialism, they misunderstand Keynes and the nature of his difference with them. The objections that the American Marxist economist, Paul Sweezy, had against Keynes are typical—Keynes remained a neo‐classical economist; he thought that capitalism was the only possible form of civilized society; he never studied the economy in its historical setting; and he could not see the economy as an interrelated part of an integrated whole (Sweezy 1946/1983: 73). More recently, Michael Bleaney (1985:Ch. 1) made similar points, and added that Keynes's theories do not bear upon Marxism.4 But all of these criticisms, however understandable, are wrong. Keynes was not a neo‐classical economist but the formulator of a new economic method; he wanted capitalism to (p.191) be eventually replaced by a non‐Marxist socialism; he was as much an historical utopian as was Marx; and he analysed the economy as part of an organic whole. Finally, if Keynes's economic method is right, then the Marxian method, which includes the long‐run dialectic and is based on Ricardo's scientific approach to economics, is wrong. Keynes's world view was as inclusive as that of Marx, although it began from a different point.

Keynes's objections to socialism reduce to his objections to materialism and its arbitrary values. Since laissez‐faire is also materialistic, and also postulates arbitrary values, Keynes's objections to socialism reduce his objections to the philosophy that laissez‐faire and socialism share in common. Socialism and laissez‐faire are only ‘different reactions to the same intellectual atmosphere’.

I criticize doctrinaire State Socialism, not because it seeks to engage men's altruistic impulses in the service of society, or because it departs from laissez‐faire, or because it takes away from man's natural liberty to make a million, or because it has courage for bold experiments. All these things I applaud. I criticize it because it misses the significance of what is actually happening; because it is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago. Nineteenth‐century State Socialism sprang from Bentham, free competition, etc., and is in some respects a clearer, in some respects a more muddled, version of just the same philosophy as underlies nineteenth‐century individualism. (IX:290)

The ‘same intellectual atmosphere’ underlying both nineteenth‐century socialism and laissez‐faire was the philosophy of Locke and Hume. Because liberalism had failed to reconcile liberty with the claims of society, it became a divided doctrine, one branch of which began with Rousseau and Bentham's social utility, which was in turn a variation on Hume's individual utility. The school of social utility in turn divided, a sub‐branch leading to (materialist) socialism. The appropriate construction to put on Keynes's comment that Marx is ‘Bentham reductio ad absurdum’ is not that Keynes thought Marx was a utilitarian like Bentham, but that Marxism presumes there is a social good rather than a transcendental good, or that Marxism is materialistic.

I have drawn an abstract based on The End of Laissez‐Faire, (p.192) showing how Keynes understood the kinship of ideas between socialism and laissez‐faire, and how his objections to socialism begin not with Marx but with Hume and the rights of man (see figure).

                      Socialism and Equality

Communism

If, as is usually assumed, Keynes's politics were in material space, and if he really was a participant in the class struggle, then his criticisms of socialism should have signalled an even stronger criticism of communism. To the contrary, shortly after the Russian revolution, Keynes's initial attitude to communism was more favourable than it was to socialism, because he thought that communist values were based on a new morality. Keynes described Russia after the revolution as dull, drab, hypocritical, persecutory and ecumenical, led by men who regarded themselves as exempt from the bonds of truth or mercy. But he was struck by a phrase from Trotsky which referred to the Kingdom of Freedom, and in which, when the revolution had done its work, ‘disinterested friendship, love for one's neighbour, sympathy, will be the mighty ringing chords of socialist poetry’. He sympathized with Communist attempts to create a new society with economic plenty but without the profit motive, which was the aim of his own Utopia. The ideals of the West—money and a tired Church—were not true ideals tuned to the new age. The Russians had at least conceived of a moral transformation of man through a realm of economic freedom which at the same time was free of capitalist money values.

The moral problem of our age is concerned with the love of money. . . . The decaying religions around us, which have less and less interest for (p.193) most people unless it be as an agreeable form of magical ceremonial or of social observance, have lost their moral significance just because—unlike some of their earlier versions—they do not touch in the least degree on these essential matters. A revolution in our ways of thinking and feeling about money may become the growing purpose of the contemporary embodiments of the ideal. Perhaps, therefore, Russian Communism does represent the first confused stirrings of a great [anti‐supernatural] religion. (IX:268–9)

Laissez‐faire put business and religion in separate compartments of the soul, whereas Keynes did not, and Russian communism did not.

But communism was flawed because it assumed the rights of man and the equality of values. ‘In one respect Communism but follows the other famous religions. It exalts the common man and makes him everything. Here there is nothing new’ (IX:259). Keynes took the transcendental road. Unlike the Communists, he would recognize individualism, so that instead of being persecutory and intolerant he would harness economic egoism in the air of truth and freedom. Unlike the Communists, again, Keynes would base his methods not on the turgid theology of Marx, but upon a philosophical reason rooted in duty and the ideals. On both grounds, he opposed communism because of the inferiority of its conception. Keynes instead would harness the muscular horse of capitalism to the winged steed of the ideals, and drive towards a new world. In practice this meant capitalism, increasingly qualified by equality and a decentralized moral socialism, and supervised by an active and élitist state.

Notes to Chapter 10

(1.) Keynes ‘welcomed the euthanasia of the rentier. He was only afraid that the prospect might be spoiled by failure to get the rate of interest to fall fast enough’ (Robinson 1975:130).

(2.) I have quoted this well‐known passage from the General Theory because T. W. Hutchison so strongly denies that Keynes did exonerate the trade unions. However, Hutchison's argument does not refer to the General Theory, and draws only on the ‘Keynesian’ system, which is by no means Keynes's system (see Hutchison 1981:130 et seq.). Whatever the logic of the ‘Keynesian’ system that Franco Modigliani developed, in Ch. 19 of the General Theory Keynes (p.194) refuted the classical theory of wages, which had provided the theoretical rationale for blaming the trade unions for unemployment. The classical system had not taken account of the effects of changing wage rates upon total demand in the economy.

(3.) A study of XXVII:264–379 shows that Keynes's recommendation of a budget deficit was in the special context of immediate postwar Britain. He advocated a capital budget to supplement the normal fiscal budget of the Treasury. The capital budget would balance national savings (mainly private) with national investment (which he thought would have to be mainly public). There could also be a deficit in the fiscal budget, but this would be a ‘desperate expedient’ for the short term.

It would be stretching a point to depict Keynes's capital budget as a mere rationalization for the government to run an overall budget deficit, although some economists did regard it as such at the time. Keynes's reasoning was that (1) interest rates could not be lowered sufficiently to encourage heavy private investment immediately after the war, but (2) in these very circumstances Britain needed capital formation much more than it needed increased consumption.

The deficit was to run for about ten years, by which point capital saturation would be adequately reached, whereupon the deficit in the capital budget could be removed.

(4.) John Eatwell takes a similar line: ‘Keynes failed to present any significant critique of orthodox theory’ (Eatwell 1985:37).

Notes:

(1.) Keynes ‘welcomed the euthanasia of the rentier. He was only afraid that the prospect might be spoiled by failure to get the rate of interest to fall fast enough’ (Robinson 1975:130).

(2.) I have quoted this well‐known passage from the General Theory because T. W. Hutchison so strongly denies that Keynes did exonerate the trade unions. However, Hutchison's argument does not refer to the General Theory, and draws only on the ‘Keynesian’ system, which is by no means Keynes's system (see Hutchison 1981:130 et seq.). Whatever the logic of the ‘Keynesian’ system that Franco Modigliani developed, in Ch. 19 of the General Theory Keynes (p.194) refuted the classical theory of wages, which had provided the theoretical rationale for blaming the trade unions for unemployment. The classical system had not taken account of the effects of changing wage rates upon total demand in the economy.

(3.) A study of XXVII:264–379 shows that Keynes's recommendation of a budget deficit was in the special context of immediate postwar Britain. He advocated a capital budget to supplement the normal fiscal budget of the Treasury. The capital budget would balance national savings (mainly private) with national investment (which he thought would have to be mainly public). There could also be a deficit in the fiscal budget, but this would be a ‘desperate expedient’ for the short term.

It would be stretching a point to depict Keynes's capital budget as a mere rationalization for the government to run an overall budget deficit, although some economists did regard it as such at the time. Keynes's reasoning was that (1) interest rates could not be lowered sufficiently to encourage heavy private investment immediately after the war, but (2) in these very circumstances Britain needed capital formation much more than it needed increased consumption.

The deficit was to run for about ten years, by which point capital saturation would be adequately reached, whereupon the deficit in the capital budget could be removed.

(4.) John Eatwell takes a similar line: ‘Keynes failed to present any significant critique of orthodox theory’ (Eatwell 1985:37).