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The C risis of Capitalism: Keynes Versus Marx

Robert SkidelskyMarx believed that the Ricardianclass struggle for shares of thenational product would be settleddecisively in favour of labour:capitalism would be abolished, andwith it the profits of capitalists andrents of landlords. But Marx missedihe grow th of a social balance be-tween the 'countervailing pow ers'of business, labour, and govern-ment, which put the revolution offthe agenda. Since the businessclass lost its ability to enforce thereal wage reductions necessary toits continued profitability, massunemployment became endemic inthe developed world. This was thesetting in w hich Keynes ' analysisin terms of 'under-employm entequilibrium ' could gain traction. Itpromised to break the social stasisby invoking the economic power ofthe state, argues the author.

RobertSkidetsky is Emeritus Professor at Universityof Warwick , UK. E- mai l : sk ide l skyrparliament.uk. Keynote address delivered at theBharat Ram Memorial Seminar in New Delhi on 4Jan. 2010. Proceedings ofthe Seminar is being

Return of the MasterJohn Mayn!rd Keynes keeps return-ing, like the ageing diva who goes ongiving farewell performances. What doesthis tell us? First, it tells us that in eco-nomics there are no final victories anddefeats. Rather, economic doctrines ebband flow, obedient to changes inconsciousness and in the world. But, sec-ondly, it tells us that as the worldchanges, so do its structures of power.The rise and fall of different schools ofeconomics is related to shifts in thebalance of social and economic power.Marx understood this, hence his placein my title.

The rise and fall of different schoolsof economics is related to shifts inthe balance of social and economicpower.

My purpose here is not to make thecase for Keynes, but to consider thepassage of his ideas from acceptance torejection in the context of changingpreoccupations and conditions. In this Ifollow the lead of the eminent Indianeconomist Amir Kumar Dasgupta, who


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Robert Skidelskyprovoked by a given set of circumstancesin the economy. As circumstanceschange, or people's attitude to themchanges, questions are revised, and anew system springs up' (Dasgupta1985:4). Dasgupta is right to distinguishbetween changes in circumstances andchanges in people's attitudes to thesechanges. There is a large gap betweenthe two. This approach will give us somesense of how durable the modest resur-gence of Keynes's economics today willprove to be .

Keynes ended The General Theoryof Employment, Interest, and Moneywith the famous words: 'But soon or late,it is ideas, not vested interests which aredangerous for good or evil' (Keynes1936: 383-4). Anyone involved in theproduction of ideas has to believe this,unless he is being paid by someone toproduce the ideas. In today's world, thechief manufactory of ideas is the Acad-emy. Pure research has long beenrecognised as an independent intellec-tual pursuit; its hallmark, disinterested-ness. Its purpose is the search for truth.The pecuniary interest of scholars is notdirectly involved in either the directionof their enquiry or its results (CoUini2009).Sociology of Success

At the same time, there is whatSchumpeter called the 'sociology of suc-cess.' Put crudely, why are some ideasacceptable, and others rejected ormarginalised? In the natural sciences this

than the older ones. For this reason,quantum physics replaced classicalphysics (Cartwright 1999:2). Reality isunchanging, only the theory changes asit improves our understanding of real-ity. Predictive power is the ultimate testofthe truth of a scientific hypothesis.'

The natural world does not inter-I fere with one's observation of it; thesocial world does.

In social sciences this is mtich lesstrue. The natural world does not inter-fere with one's observation of it; thesocial world does. It is the changeabil-ity of the object being studied whichdemarcates social sciences from naturalsciences. Social reality is constantlyshifting, problems crucial at one timebecome irrelevant at another. As a result,propositions in social science do not sat-isfy the 'universality criterion'. They arelimited in time and place. As Dasgupta(1985:1-2) points out, theories in eco-nomics are independent of each other,they do not supersede each other. Theo-ries in the social sciences can rarely besuccessfully confirmed or falsified, ex-cept briefly. Progress in econom ics con-sists of greater precision in stating ideas.1 Even in the physical sciences, the battle of ideashas a sociological dimension: old professorsresist, and delay the encroachment of new ideas.But as told by sociologists of science like Thom asKuhn and Imre Lakatos the agenda of science isinternalist. N o chang es in the world outside serveto explain changes in scientific theory. The vestedinterests which the progress of science encounters


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The Crisis of Capitalism: Keynes Versus Marxnot the greater explanatory power of theideas themselves; and the precision maybe at the expense of the explanation. Ineconomics, much more than in physics,the research agenda and structure ofpower within the profession reflect thestructure of power outside it. They havethe character of ideologies. And th is, ofcourse, was precisely Marx's contention,when he wrote "What else does thehistory of ideas prove, than that intel-lectual production changes in proportionas material production is changed? Theruling ideas of each age have ever beenthe ideas of its ruling class.' (Marx-Engels, Selected Works 1962,1,:52)Power & Ideas

The relationship between power andideas is not a simple base-superstructureone. Ideas are not at the m ercy of eventsin any straightforward way. The disci-plines which produce theories exhibitstability through tim e, in their concepts,techniques, and language. That is whyparadigm shifts are rare. It is true thatdisciplines turn to new top ics. But thereis no need to relate all new topics tochanges in the world. Theorists mightsimply get bored with the old topics,feeling that debate about them hasreached a dead end. Change of topic isalso connected with generational changewithin a discipline. It is nearer to ourtheme to say that ideas change when thefacts change. (Keynes is supposed tohave said, but probably didn't - 'Whenthe facts change, I change my mind.What do you do, sir?'). Up to a point thismust be true. But it presupposes a direct

which is plainly false. Facts can be in-terpreted in different ways. He who con-trols the interpretation controls the ideas.This brings us to the question of power.

He who controls the interpretationcontrols the ideas, power.Adapting Steven Lukes (1974), onemay think of ideas as a form of 'soft

power', which structures our debatesabout reality. Alternatively, and morecomprehensively, they may be seen asshaping our consciousness -th e way weinterpret our world.^ But jus t becauseideas are produced in institutions, wecannot ignore questions about the hardpower behind the soft power. Who fi-nances the institutions from which ideasspring? Who finances the disseminationof ideas in popular form -media, thinktanks? What are the incentives facing theproducers, disseminators, and popular-isers of ideas even in a society in whichdiscussion is 'fre e'? In short, what is theagenda of business? It is reasonable tosee business as the hard power behindthe soft power of ideas, not because thebusiness comniunity speaks with onevoice, or because there are not other cen-2 Lukes structures power along three dimensions.

In the first, A's preferences are made to prevailover B's, usually by coercion; in the second, Astructures the political (or professional) debateso as to exclude topics which are detrimental toA's preferences; in the third dimension, Ainfluences B by shaping his wants, with thoughtcontrol being exercised through control ofinformation, mass media, and the socialisationprocess. The supreme exercise of power is in


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Robert S kidelskytres of hard power (e.g . government) butbecause it is the main source of themoney without which the intellectualestate would wither and die.

Ideas are thus an independentsource of authority. Practical men -politicians, businessmen, civil servants-are consumers, not producers, ofideas. This gives the producers of ideasconsiderable latitude vis--vis theirusers. The vested interests are in noposition -ev en were they capable of it- to dictate the precise form ofthe in-tellectual defence offered for theirpreferences. Thus the econ om ist's ju s-tification of the free market is likelyto be both more general and also morecircumscribed than that offered by thebusiness class. For example, econo-mists have almost always opposed pro-tectionism and monopoly.' Ideas arethus capable of making self-interestseem more enlightened.

Ultimately the ideas in power servethe interests of the class in power;under capitalism, this is the capital-ist class.Assertion of the independence ofideas is a necessary modification of

3 It is true that there are conflicts of interest betweendifferent sections of capital -between exportingindustries and those producing for the homemarket; between big businessmen and smallbusinessmen. But it is usually the case that someof these interests are dominant in some periods,enabling one to speak, without too much

crude Marxism, which I dare say Marxhimself would have accepted. Neverthe-less, in the Marxist schem e, the intellec-tual class, like the state, attains only'relative autonomy'; and ideas rarelyoverturn the perception or promotion ofself-interest, however much they maymodify its expression. Practical men likenothing better than to have their preju-dices dressed up in scientific language.Ultimately the ideas in power serve theinterests ofthe class in power; undercapitalism, this is the capitalist class.Ricardian Foundations

Keynes strongly believed in the au-tonomy of ideas; he saw his own missionas being to correct ' intellectualerror'. On 1 January 1935, he wrote toBernard Shaw "To understand my stateof mind you have to know that I believemyself to be writing a book on economictheory, which will largely revolution-ise...the way the world thinks about eco-nomic problems...In particular, theRicardian foundations of Marxism will beknocked away" (Skidelsky 2003: 528).

What did he mean by knocking awaythe 'Ricardian foundations of Marxism?'Ricardian economics was famously 'aninquiry into the laws which determinethe division of the produce of industryamong the classes who concur in its for-mation'. The force of these laws wasconsidered to be on a par with the lawsof nature, immune to modification - ex-cept temporarily - by public action:hence the case for laissez-faire.


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The Crisis of Capitalism: Keynes Versus hiarxsubsistence - was based on M athus's lawof population. Marx substituted surplusvalue for surplus population. Malthusianpopulation cycles became Marxist em-ployment cycles: capitalist profits couldbe maintained only by constantly creat-ing and re-creating a 'reserve army ofthe unemployed'. For Marx, 'bourgeoiseconomics' simply provided a protectivebelt for exploitation, by proving thatwages were bound to be forced down tosubsistence." For Marxist -and perhapsfor most socialists of Keynes's age, itwas the encroachment of wages on prof-its which explained the mass unemploy-ment ofthe interwar years. Keynes'soverthrow of the 'Ricardian foundations'consisted in the claim that productionand employment could be limited by lackof effective demand; and that in mostcircumstances, and particularly whenunemployment was heavy, could beboosted by government action to in-crease effective demand.Keynes's overthrow ofthe 'Ricard-ian foundations' consisted in theclaim that production and employ-ment could be limited by lack ofeffective demand.

In making this claim, Keynes did notso much controvert the logic of classi-4 The marg inalist revolution associated withJevons and M enger can also be seen as offeringa protective cover for the business system ofthe

day. On the one side, it unified value theory byrooting the rewards to the factors of productionin subjective utility; but this was at the same time

cal reasoning, as to limit its domain ofapplicability. It applied only to the 'spe-cial case' of full employment. The'general case' was one in which fullemployment was only one of a numberof possible positions of equilibrium, andnot the most likely. In the 'special ca se ',the unfettered market economy was nor-mally at full employment; in the 'gen-era l' case, there is no such presumption,full employment being attained only inmoments of excitement, and by a chanceconjuncture of favourable conditions.

Profit drives Keynes's capitalist en-gine jus t as much as it does M arx's. Butwhereas for Marx, and the Ricardians,profits are determined by the businessclass's share of a fixed cake , for Keynesthey depend on business expectations ofthe future size of the cake. For Keynesthe class struggle over division of thecake affects profit expectations only atfull employment; for Marx the classstruggle determined the profit share atall times. For Marx, a 'reserve army ofthe unemployed' has to be created when-ever wages encroached on profits; forKeynes heavy unemployment dampensprofit expectations by reducing the ex-pected demand for goods.

Marx believed that the Ricardianclass struggle for shares ofthe nationalproduct would be settled decisively infavour of labour: capitalism would beabolished, and with it the profits ofcapitalists and rents of landlords. ButMarx failed to see the unavoidable con-sequences ofthe economic and techno-


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Robert Skidelskysummarized by Lowe ( 1965:192), were"the shift of political power to themiddle classes and the rise of stronglabour un ions... capable of making theirgrowing aspirations felt under a systemof widening franchise...This not onlydemocratized the spirit of modern gov-ernment but created the new adminis-trative key position for a progressivecontrol of economic by polit icalforces". In other words, Marx missedthe growth of a social balance between[omit] business, labour, and govern-ment, which put the revolution off theagenda.' At the same time, the businessclass lost its ability to enforce the realwage reductions necessary to its con-tinued profitability, except in the ex-treme cases of Germany and Italy. As aresult mass unemployment became en-demic in the developed world. This wasthe setting in which Keynes's analysisof the economic problem in terms of'under-employment equilibrium' couldgain traction. It promised to break thesocial stasis by invoking the economicpower of the state.Non-Marxist Explanation

In presenting the unemploymentproblem as one of insufficient demand,rather than struggle over supply, Keyneswas giving a non-Marxist explanationof mass unemployment. To say that amarket economy had no internal ten-dency to full employment was to makethe case for government action to se-cure full employment. Although his

theory undercut the case for socialism,it opened up the road for government'management' ofthe macro-economy toensure a quasi-optimal equilibrium.There would be no government inter-ference with managerial prerogatives ordecision-making; the governm ent's taskwas to guarantee full em ployment. Theattainment of full employment of poten-tial resources would be good for bothprofits and wages.

Keynes's economics was the eco-I nomics of the middle way; the bestdeal that liberal capitalism couldexpect in a world veering towardsthe political extremes.Such a theory, I suggest, could onlyhave become the basis of policy underconditions of social balance. Keynes'seconomics was the economics of themiddle way; the best deal that liberal capi-talism could expect in a world veeringtowards the political extremes. Keynesthought of his economics as the econom-ics of the general interest, for it encom-passed, while transcending, the sectionalinterests of both capital and labour. I be-lieve this to be true: it was the least ideo-logical, the least politicised, of all eco-nomic doctrines. His political genius wasto see that when the problem was one ofunused capacity, redistribution was a mi-nor question, which could be postponedtill later. But by the same token, his eco-nomics threw little light on what wouldhappen to class shares of wages and prof-

its when his own policies achieved fullemployment in conditions of strong union


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The Crisis of Capitalism: Keynes Versus Marxthe government need to recreate Marx's' eser 'e army o fth e unemployed' to re-strain wage demands? Or would it beforced to inflate to keep profits racingahead of wages? The latter is what JacobViner assumed would happen when soci-ety got accustomed to full employment.*Keynes himself admitted that he had "nosolution...to the wages problem in afull employment economy" (Keynes1945:385) Marxists, too, believed that at-tempts to overcome the class struggle byinflation would bring only temporary re-lief

To emphasise the political workwhich Keynes's economics did shouldnot lead one to underestimate its theo-retical originality. It was not intended toexplain just the Great Depression. It wasintended to explain why a decentralisedmarket economy was unable to exploitthe full potentialities of production ex-cept in 'moments of excitement'. Hisoriginal contribution was to demonstratethat it lacked any internal mechanism forthe maintenance of full employm ent. Be-hind this lay a profound insight: that theclassical theory of the self-regulatingmarket was true only when market par-ticipants had reliable knowledge of fu-ture events. Classical models were in-applicable to situations of uncertainty.But Keynes claimed that uncertainty wasthe typical situation facing the investor."The whole object ofthe accumulation6 In John Cunningham Wood (1983, ii:83) Vinerwrote: there would then be "a constant race

between the printing press and the trade unions,with the problem of unemp loymen t largely solvedif the printing press could maintain a constant

of wealth", Keynes wrote, " is to pro-duce results, or potential results, at acomparatively distant, and sometimes atan indefinitely distant, date. Thus thefact that our knowledge of the future isfluctuating, vague and uncertain, renderswealth a peculiarly unsuitable subject forthe methods of the classical economictheory". Over a large swathe of our for-ward-pointing decisions, we have "noscientiflc basis on which to form anycalculable probabil i ty whatever"(Keynes 1937:113). Models which as-sumed that we had calculable probabili-ties abstracted from the problem ofbreakdown caused by not knowing whattomorrow would bring.Risk &Uncertainty

To translate into today's language:central to Keynes's epistemology is thedistinction between risk and uncertainty.Risk is when probabilities can be mea-sured; uncertainty exists when no suchmeasure is possible. The existence ofirreduceable uncertainty is Keynes'sexplanation forthe mediocre secular per-formance and periodic breakdowns of adecentralised economy. By contrast, allthe mathematical models underlying ourrecently-crashed financial system as-sumed that it was possible to measurerisk and therefore insure or hedge againstCentral to Keynes's epistemology isthe distinction between risk anduncertainty. Risk iswhen probabili-ties can be measured; uncertaintyexists when no such measure ispossible.


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Robert S kidelskyloss. Individuals could miscalculate theodds, but, given the assumption of ra-t i o n a l i t y , t h e i r m i s t a k e s w o u l d b erandomised. Keynes 's theory explainswhy such models were bound to prom-ise much more than they could deliver.

What was it that rendered large partsof the future impe rvious to p robab ilisticcalculation? Keynes gave the exampleof an apple endowed w ith 'hu m an ' char-acteristics. Newtonian physics tells usthat it will always fall to the ground, ata speed dictated by the force exerted onit divided by its mass. But no such pre-^ diction can be made about the 'human'apple. "It is as though the fall of theapple to the ground depended on theapple's motives, on whether it is worthwh ile falling to the ground, and w hetherthe ground w anted the ap ple to fall, andon mistaken calculations on the part ofthe apple on how far it wa s from the cen-tre of the earth (Keynes 1938:303)

Some part of the uncertainty attachedto the speed of the ap ple 's fall can be pu tdown to mistakes on the apple's part .However, the main 'human' characteris-tic with which Keynes equips his appleis 'motives' and 'intentions'. It is thesewhich break the link between economicsand physics, and which make economicsa 'moral ' and not a 'natural ' science.Keynes's point is that economics "dealswith introspect ion and values . . . .withmotives, expectations, psychological un-cer taint ies" . The future can ' t be pre-dicted, because the future is changeable.It is changeable, in large part, because itis what we choose to make it. As Paul

world is 'non-rgodic' . ' This view im-plies a large restriction on the a pplic abil-i ty of econometrics. Basically Keynesbelieved it could be applied only to thosefields in which risk is measurable. Thisexcluded most of the risks incurred ininvestment markets.

The main technique w e adopt to copewith a 'non-e rgod ic' universe is to trans-form uncertainty into calculable risk bygiving it numbers. This is what math-ematical forecasting models do, usingsome version of Bayes theorem to trans-form prior into posterior probabilities.This gives us the assurance we need toinvest. But it is a fake assurance. Whilerepeated betting on horses allows you toupdate your 'priors ' to match the ' true'merits of the horses, no amount of dataon past economic events brings you anycloser to their true probabilities in thefuture because the future is bound to bedifferent from the past. What we do isto use mathematics to invent a world ofcalculable probabil i t ies which we taketo be an accurate reflection of the realworld.

Thinking about the future as riskyrather than uncertain is not foolish. Infact it is the only rational basis of indi-vidual action. It is also compatible, asKeynes notes, with a considerable mea-sure of stability. Mathem atical forecastscan shape the future they claim to pre-7 The "ergodic axiom...pres um es that all futureevents have already been determined, and cannot

subsequently be modified by human action, i.e.,the future outcome of any decision made today


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The Crisis of Capitalism: Keynes Versus Marxdiet, by shaping our expectations. Theymay produce what econom ists call 'boo t-strap ' paths or equilibria, paths w hich are. wha t they are not be cau se the world iswhat it is, but because beliefs about theworld are w hat they a re. They tell a storyabout the future which gives confidence,as long as nothing happens to shake con-fidence in the story. But prices thusformed are liable to 'sudden and violentchange', precisely because there is nofirm basis of conviction to hold themsteady (Keynes 1937:114-5)

Keynes puts uncertainty to work toexplain three leading features of eco-nomic life: the frequent breakdowns inthe investment machine, the persistenceof poverty in large parts of the world,and the possibil i ty of 'uhder-employ-ment eq uilib rium '. Le,t me ju st say a fewwords about the last two.Both the persistence of poverty andthe failure of a market economy toregain ful l employment quicklyafter a shoc k were con nected inKeynes 's mind with the role ofmoney as a store of value.

Poverty & Market EconomyBoth the persistence of poverty andthe failure of a market econom y to regainfull employment quickly after a shockwere connected in Keynes's mind withthe role of money as a store of value. Hethought that throug hout history the desire

to hoard savings had been stronger thanthe desire to invest them, because at all

surface, denting our optimism in the fu-ture, and creating a permanent bias to-wards preserving existing value ratherthan creating new value . Key nes believedthat investment came in bursts of opti-mism which he called 'an ima l s pirits '. Wecan trace these investment upsurges inhistory -from the railway boom ofthe 19*century to the dot. com boom whichended in 2000. But normally people pre-ferred to hoard rather than invest theirmoney, that is to say, there was a perma-nently high level of liquidity preferencewhich exerted a permanent upward pres-sure on interest rates. Hence, Keynes'ssupport for the medieval usury lawswhich he saw as an attempt to preventpeople making money by ho arding money.

Keynes's theory of economic historywas influenced, perhaps over influenced,by Jevons's famous description of Indiaas the 's ink o fthe precious me tals ' . "The' history of India at all tim es" , he wrote inth e General Theory "has provided an ex-ample of a country impoverished by apreference for liquidity amounting to sostrong a passion that even an enormousand chronic influx ofthe precious metalshas been insufficient to bring down therate of interest to a level wh ich w as com-patible with the growth of real wealth"(Keynes 1936:385). Keynes believed thatfrom ancient times onw ards, the Orien t'spropensity to hoard influxes of preciousmetals had set the Occident a permanentdeflationary problem . Sho rtage of gold inthe west had been relieved from time totime by discoveries of gold and silver inthe New World, and by Western seizureof Oriental temp le and palace hoa rds. He


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Robert S kidelskyanees of today as the reappearance of anancient pattern.

Uncertainty also lies at the heart ofKeynes's theory of persisting unemploy-ment, though this was less developed. AsAxel Leijonhufvud (1969) has pointedout, the main innovation of the GeneralTheory was to create a model in whichthe system reacts to a disturbance byquantity not wage level or price level ad-justments. Following a shock, output andprices both adjust. But prices adjustslower than output because people don'tknow what the disequilibrium price is. Sothey trade at disequilibrium prices. Thereis no auctioneer to establish a 'vector ofmarket clearing prices' before trade starts.Further, only in the very long term needlong-run interest rates conform to under-lying physical transformation possibilitiesand inter-temporal household prefer-ences. In the short run, speculation, insecurity markets will make them divergefrom levels that obtain under full infor-mation about transformation possibilitiesand 'tastes'. Hoarding and dis-hoardingare a concomitant of this speculative ac-tivity. Uncertainty may thus cause the realwage and long term rate of interest to re-main for years above the rates needed forfull employment. In short, uncertainty notonly brings about periodic collapses; itremoves the economy's postulated 'self-adjustment' mechanisms. The listing shipdoes not automatically right itself.

Uncertainty not only brings aboutperiodic collapses; it removes theeconomy's postulated 'self-adjust-

Public Investment & FullEmploymentKeynes's answer -the only logicalone following from his analysis - is forthe state to ensure enough investmentand/or consumption in the economy tomaintain continuous full employment. Asteady stream of public investmentwould, in particular, reduce the domainof uncertainty to modest dimensions.

Such investment would not necessarilybe proft-maximising. But provided ityielded positive returns, there would bea gain. If markets had perfect informa-tion, public investment would be ineffi-cient. But with uncertainty, there is again as against having no state invest-ment at all, because ofthe losses due touncertainty.Note here that it was essential toKeynes's purpose to establish the possi-bility of under-employment equilibrium,in both the long and the short run, to jus-tify a role for government to improve theequilibrium. A theory of cycles, even ofdeep cycles, would not have done thejob, since it was always open to busi-ness-cycle theorists to argue that cycleswere part of the normal mechanism ofeconomic progress and that thereforegovernment action to dampen or preventcycles was a sin against progress itself.Schumpeter's theory 'of creative de-struction' did amount to exactly this. Aneconomy stuck for decades, even centu-ries, in an under-employment equilib-rium was much more plausibly an ob-jec t of special government attention thanone whose dynamic exuberance occa-


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The Crisis of Capitalism: Keynes Versus MarxKeynes claimed his theory was more'general' than classical economics be-

cause it encompassed a variety of eco-nomic situations exhibiting differentstates of knowledge. The question is:how central is the Keynes case? If thecapitalist growth engine is subject togenuine ontological indeterminacy thenits mediocre performance and frequentbreakdowns are explained. If, on theother hand, uncertainty can be plausiblymodelled as an information problem, tobe overcome by learning and by moreefficient data processing, then Keynes'scase is marginalised, and the classicaltheory is reinstated as the central case.The comeback of classical economicsconsisted in marginalising the Keynescase, and reinserting its own theory ofthe self-regulating market based on 'per-fect information' as the 'general case'.

Keynesianism dominated the politi-cal economy of developed economiesfrom the 1950s through to the mid 1970s.As Thomas Palley (2009:3-4) argues,'economic policy was designed toachieve full employment, and theeconomy was characterized by a systemin which wages grew with productivity.This configuration created a virtuouscircle of growth. Rising wages meantrobust aggregate demand, which contrib-uted to full employment. Full employ-ment in turn provided an incentive toinvest, which raised productivity, there-fore supporting higher wages'.The New Economic Paradigm

price inflation (equities and housing);widening income inequality; detachmentof worker wages from productivitygrowth; rising household and corporateleverage ratios measured respectively indebt/income and debt/equity ratios; astrong dollar; trade deficits; disinfiationor low inflation; and manufacturing joblosses'. Workers were pressured on foursides: by globalization, reduction in thesize of government, increase of labourmarket fiexibility and retreat from fullemployment (Palley 2009:4-5). With themembership and influence of tradeunions sharply reduced and governmentweakened, business became the sole pre-vailing power. This brings one close tothe conditions ofthe Industrial Revolu-tion, analysed by Marx.'This meant shifting attention fromthe problem of insufficient demandto the problem of inefficient supply- a return, that is, to the classicalagenda of economics.

What accounts for this radical shiftin ideas and policies? Part of the ex-planation is almost too easy. We arenever content with what we've got.With the achievement of full employ-ment and vigorous growth under theKeynesian aegis it became easy to for-get what life had been like beforeKeynes. It became natural to assumethat full employment was the normalstate, and forget that it was achieved byconscious design. The ills of the mar-


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Robert S kidelskyket were forgotten: it was the ills ofgovernment which commanded atten-tion. In economic theory terms thismeant shifting attention from the prob-lem of insufficient demand to the prob-lem of inefficient supply - a return, thatis, to the classical agenda of econom-ics. More specifically, the key reasonsfor the shift (though not, exhaustive,and not in isolation from each other) arethe following:n On the intellectual side, the rehabili-tation ofthe market and the denigra-tion ofth e state. One can tell the fallof Keynesianism as a purely intel-lectual story, a counter-revolution ineconomics, starting with Friedmanand adaptive expectations and end-ing with the new classicals and ra-

tional expectations, real businesstheory, efficient market theory, etc.A major casualty on the way wasKeynes's fundamental insight of un-certainty, and the associated role ofmoney as a store of value. The up-shot was a mathematical reinstate-ment of the classical theory of theself-regulating market. The rehabili-tation of market didn't entirely de-pend on new classical models. Therehas been a notable revival of' Schumpeterian models -capitalismdepended on creative destruction,heroic entrepreneurs. In thisPromethean perspective, too muchstability destroys capitalism's dy-namic, so we must, in MeghnadDesa i's graphic phrase 'ride the surfand learn to enjoy it'. Coupled with

prise. Right-wing think tanks andjournalists simplified and popular-ised the academic celebration ofmarkets and revulsion against biggovernment.'Keynesianism's failure to solve theRicardo/Marx problem. Keynesianpolicy had created the full employ-ment economy which the classicaleconomists had assumed was 'natu-ral'. And in such an economy, asboth Ricardo and M arx had pointedout, there was a unique rate of profitcompatible with equilibrium. TheRicardians had explained inter-warunemployment by the encroachmentof wages on profits. In the 1970s,Keynesian governments used infla-tion to suppress a rise in the 'natu-ral ra te' of unemployment, and thenresorted to incomes policy to sup-press inflation. From this perspec-tive, inflation was a 'vent for socialcon flict': behind the increase in thequantity of money was the conflictbetween classes for income shares;behind incomes policy the aim of

9 It could be argued that the intellectual counter-revolution was facilitated by the truncated versionof Keynesianism -in the form ofthe neoclassicalsynthesis -which prevailed in the Americanacademy after the War. This, the achievem ent o fPaul Samuelson, mathematicised the classicalmodel of the self-regulating, but bolted ondownwardly rigid nominal wages to justifygovernment in te rvent ion to improve theequilibrium. Economists do not l ike ad hoctheorising and, failing to find any sufficienttheoretical justification for rigid w ages, droppedit from their models. Keynes himself did not


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The Crisis of Capitalism: Keynes Versus Marxrestoring the profit share. There issome evidence of a "fundamentaldecline in profitability which oc-curred in several countries in the1970s, itself a reflection of grow-ing labour strength at a time ofheightened international competi-tion" (Gough 1975:87). The failureof the Keynesian managers to pre-vent the encroachment of wages oncapital in the full employment,unionised economy they had cre-ated, destroyed the political utilityof Keynesian economics and pavedthe way for the counter-revolutionin policy. The theoretical languageof monetar ism provided ant i-Keynesians with the intellectualcover to pursue a policy of destroy-ing union control over the wage bar-gain by creating mass unemploy-ment.

The politica l shift against tradeunionism. The lack of a good theoryrelating employment to prices, thebig weakness in the Keynesian po-litical economy, meant that govern-ments in 1960s-70s relied on in-comes policy to achieve theiroverfull employment targets. Thisnot only led to stagflation as de-scribed by Friedman, but by increas-ing the monopoly power of orga-nized labour, turned people againsttrade unions, even their own mem-bers. Trade unions, in Great Britainat least, threatened to become theprevailing power. Labour Govern-ment programmes in early 1970senvisaged an economy run by the

with only a minor role for privatebusiness. Thatcherism was the politi-cal reaction to this.

The change in the structure of theeconomy. How much of this wasdue to autonomous technologicalinnovation, and how much due topolicies to restore profits? I knowof no good theory which endo-genises technological change. Buttwo structural changes seem to bekey:

o Consolidation of big business andbanking, and shift to a serviceeconomy. In the much enlarged fi-nancial sector, the degree of concen-tration has increased-e.g 5 bankscontrol 80% of UK lending. Thedrive to increase competitive mar-kets created a global network ofinterlinked oligopolies.

0 Globalization may be interpreted asthe effort of business to escape na-tional regulation. It was based onthe export of manufacturing jobswhere unions were strong, and re-building the economy on the basisof the service industry where theywere weak. Globalization was thebusiness response to the decliningrate of profit which Marx predicted.It was seen as the master key tooverall improvement in the positionof the business class. It increasedcorporate profits, reduced prices ofconsumer goods, and brought a biginflux of outside money into thewestern banking system. But, mostimportant, it was used as a bludgeon


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Robert S kidelskylate their economic and politicalpower.

Globalization was the businessresponse to the declining rate ofproft which Marx predicted.One consequence ofthe new paradigmis that the welfare state as the basis oft hesocial contract was replaced by access to

credit. "Maintaining growth of spendingon consumption requires continued exces-sive borrowing and continued reduction insavings rates. Continued excessive bor-rowing requires ever increasing assetprices and debt/income ratios; hence thesystematic need for bubbles (which even-tually burst). Meanwhile, when the sav-ings rate hits zero , little further reductionis possible. Consequently, bo th drivers ofdemand eventually exhaust themselves".And "the policy triump h of corporate glo-balization accelerated the process andtransform ed it into a financial cra sh"(Palley 200 9:14 ,16) . In my book, Keynes-The Return ofthe Master, I took seriouslyKeynes's well-known remark about prac-tical men being the slaves of some defuncteconom ist. Chicago do ctrines in the nameof which markets were largely de-regu-lated were an updated, super mathe-maticised version ofthe ideas Keynes hadchallenged seventy years earlier. Politi-cians, regulators, bankers, asset m anagers,financial journalists became slaves not todefunct economists but to a cluster ofNob el prize winning eco nom ists who heldchairs in the vicinity of Chicago Univer-sity. Today I would attach more importancethan I did when writing the book to the

demic producers of ideas and the worldof money-making has narrowed enor-mously since Keynes's day, and mainlybecause of the dominance of finance intoday 's economies and the dependence offmancial intermediation on mathematicalforecasting m odels. Financial acad emics,particularly in the United States, are nowin a position to profit directly from theirtheories. Many are involved in the finan-cial sector, as hedge fund managers, con-sultants, analysts, or strate gists. It shouldnot strain credu lity to assert that they pro-mote ideas which favour their financialinterests.Prospects of Keynesianism

What then are the prospects of a re-v iva l of K ey ne s ia n is m ? To be sureKeynes enjoyed a remarkable secondcom ing in the imm ediate aftermath of thefinancial crash. In confirmation of Rob-ert Lu cas's adm ission "I guess everyoneis a Keynesian in the foxhole", govern-ments the world over instituted stimu-lus policies to stop the slide into depre s-sion. This is in marked contrast to whathappened in the 1930s, and testifies tothe enduring power of Keynes's com-monsense. So far, so Keynes.

The question is whether w e can affordto go along with a system which crashesevery few yea rs, with increasingly serioussocial conseq uences. It is probably impos-sible, as well as und esirable, to restore thetrade unions as a 'countervailing power'in the Anglo-A merican type of econ omiesdominated by the service sector and high


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The Crisis of Capitalism: Keynes Versus Marx('trust busting' as the Americans used tocall it) is probably unavailable in the in-creasingly integrated global market. Thekey to any restoration of a Keynesian po-litical economy is thus the rehabilitationofthe state as an instrument ofthe publicinterest. It can be argued that nationalstates cannot control global capital and thata world state is unavailable. But a 'singleworld' model of globalization is not theonly one. It is far more plausible to thinkof global integration developing via re-gional integration. This offers a more fea-sible route to reinserting democratic over-sight of the economy. However, this is ahuge question which I cannot address to-day. Meanwhile, I wonder how many morecrashes there will have to be before ideasabout the future of society more sensiblethan those put forward by today's 'marketsentiment' win a sufficient hearing to in-fluence the course of events.

The key to any restoration of aKeynesian political economy is thusthe rehabilitation of the state as aninstrument of the public interest.ReferencesCollini, Stefan (2009), "Impact on Humanities",TLS 13 November.Cartwright, Nancy, (1999), The Dappled World,CUP, Cambridge.Dasgupta, Amir Kumar (1985), Epochs of Eco-nomic Theory, BSIL Blackwell, Oxford.Davidson, Paul (2007), John Maynard Keynes,Palgrave Macmillan, London.Galbraith, J.K. ( 1952), American Capitalism: The

Gough, Ian (1975), "State Expenditure in Ad-vanced Capitalism", New L eft Review, 92.Keynes, J.M (1936), The General Theory of Em-- ployment. Interest & Money, Macmillan,London, reproduced in The Collected Writ-ings of John Maynard Keynes, vol vii,Macmillan for the Royal Economic Soci-ety, London, 1973.Keynes, J.M. (1945), Letter to S.G. Macfarlane,5 June 1945, reproduced in the CollectedWritings of John Maynard Keynes, vol.xxvii, 1980.Keynes, J.M. (1937) "The General Theoryof Employment", Quarterly Journal ofEconomics, February; reproduced in TheCollected Writings of John MaynardKeynes, vol.xiv, 1973.Leijonhufvud, Axel (1969), Keynes and theClassics, Institute of" Economic Affairs,London.Lukes, Steven (1974), Power -A Radical View,

(reissued 2005), Palgrave Macmillan,London.Lowe, A (1965), On Economic Knowledge:Toward a Science of Political Economics,Harper and Row, New York.Marx-Engels Selected Works (1962), vol.1.Masch, Vladimir (2010), "An Application Risk-Constrained Optimization to a Problem ofInternational Trade", The International

Journal of Trade andQuantitative Man-agement, 16 (forthcoming).Pall, Thomas (2009), A merica's Exhausted Para-digm: Macroeconomic Causes ofthe Finan-cial Crisis and Great Recession, NewAmerican Foundation, Washington DC.Skidelsky, Robert. (2003), John Maynard Keynes1883-1946, Economist , Phi losopher,Statesman, Macmillan, London.Wood, John Cunningham (1983), John MeynardKeynes: Critical Assessments, 4 vols.Croom Helm, London.


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