Keynes' Economic Program, Social Institutions, Ideology, and Property Rights.

Author:Henry, John F.

Conventional economists view the economy as a set of relationships independent of any larger society. The prevailing position is to construct theory by building the argument on the basis of a non-socially determined, hypothetical individual. As one illustration of this position, consider the statement of Frank Knight, one of the discipline's most eminent twentieth-century economists:

I do not see how we can talk sense about economics without considering the economic behavior of an isolated individual. Only in that way can we expect to get rid by abstraction of all the social relationships... (1960, 71)

From this foundation, economists then develop policy prescriptions that are claimed to move us closer to the optimal outcomes that would obtain if we allowed economic laws to run their natural course. Social norms, institutions, and behavior should conform to economic standards which are predicated on good theory, theory that is developed independent of any specific social context. In this regard, economic theory is seen as akin to natural law, and the closer the laws of economics are to the laws of physics, the more scientifically based the policy recommendations of economics will be (Mirowski 1989).

Various economists have protested this view of things. One such economist was John Maynard Keynes, who saw the economy as embedded in larger society. The following argument attempts to specify portions of Keynes' policy program as integral to the maintenance of a specific propertied society that must be correctly understood if effective policy is to be implemented to save such a society from itself.

It is well known that Keynes' general theory has been vulgarized (or bastardized, in Joan Robinson's words) to accommodate the equilibrium strictures of orthodox economics (Davidson 1991, 22-9; Robinson 1980, 120-9). One consequence of this vulgarization has been the lifting of Keynes' theory out of the economy he was examining and the conversion of that theory into terms acceptable to neoclassical theorists. Keynes' theory (so-called) was separated from the specific institutional and social relations of a monetary economy in a specific stage of development and subjected to analysis and criticism as a purely ideological construct. What has remained is a program centered on mere fiscal and monetary tinkering at the edges of an economy that is, at best, unspecified.

One effect of this vulgarization process has been to place the terms of the debate squarely in the hands of the vulgarians. To be sure, protests have been made over the last fifty years, most notably those originating in Cambridge, United Kingdom, but these skirmishes clearly have not been able to win the war of ideas.

What follows is an attempt to specify portions of a Keynesian economy and to demonstrate the relationship between such an economy and his general theory. Perhaps the most important argument contained in this paper is the demonstration that it is impossible to separate Keynes' theory from the economy that it attempts to explain. Indeed, as I will attempt to show, one must go further than this: it is impossible to separate the economy from the larger society that contains it. Keynes was quite mindful that the economy was not a separate entity and that public policy bearing on the economy had to take non-economic factors into account. To do otherwise would be to risk establishing a policy that would be so damaging of the social order based on specific property rights and relations that it could lead to social turmoil and potential destruction. Keynes was an embedded economist: institutions and social relations not only mattered, they had to be understood and their relation to economic activity had to be included in the theoretician's analysis.

The Nature of the Economy

The starting point for specifying some of the features of a Keynesian economy is a description of Keynes' general position on the nature of a modern (mid-century) capitalist or monetary economy. Initially, and most important, he distinguished this economy from that of the hypothetical "cooperative" economy that lies at the foundation of all forms of neoclassical theory.

[T]he characteristics of the special case assumed by the classical [sic] theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience. ([1936] 1973, 3; my emphasis)

The distinction between a co-operative economy and an entrepreneur economy bears some relation to a pregnant observation made by Karl Marx....He pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C-M-C' .... That may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M-C-M', i.e. of parting with money for order to obtain more money....([1933a] 1979, 81; emphasis in original) [1]

For Keynes, a capitalist economy was not one in which a symbiotic, mutually advantageous harmonious relationship existed between those who controlled property and the larger community: there is a discordance between the production of goods and the production of money. As noted by Dudley Dillard in a most perceptive paper on The General Theory: "Real goods appear to the individual producer as an artificial form of wealth until they are converted into money which appears as real wealth to the individual producer." From the community's perspective, goods are real wealth, while money appears as artificial (1954, 28-9). In a monetary economy, the objective of the firm is to generate the highest possible financial return. The production of material goods represents an intermediary stage through which such gains are created. The satisfying of the principal objective may well require what Thorstein Veblen termed the "sabotage" of productive output in order to realize maximum monetary gain.

From this vantage point, Keynes argued his position on the relationships among money, time, and uncertainty: a capitalist economy is a debt economy where money is the unit of account in which debts are both created and discharged ([1930a] 1971, 3); money is held because of our lack of prescience regarding the future ([1937a] 1971, 115-6); and money serves as the link between the present and an unknowable future ([1936] 1973, 293).

Second, by the turn of the century capitalism had been transformed from a roughly competitive form of organization to one characterized by large, noncompetitive, oligopolistic structures where management and ownership as well as production and finance had become separated. (Keynes dated this transition to 1870 ([1920] 1971, 9ff.). "Self-regulating" markets, which rely on competition, no longer prove reasonably efficacious, and, if this type of economy is to survive, institutional and ideological change must occur, moving society away from a laissez-faire program (however honored in the breech) toward some form of collectivist regulation:

Let us clear from the ground the metaphysical or general principles upon which...laissez-faire has been founded. It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no 'compact' conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened....Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately....

I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State--bodies whose criterion of action within their own is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded.... I propose a return ... toward medieval conceptions of separate autonomies. ([1926] 1972, 287-9; emphasis in original)

Third, Keynes recognized classes and class relations as determining the essential social structure of such an economy. He usually divided society into two general classes-workers (often called the "earning class") and capitalists, then further divided this second class into the "business class," or "entrepreneurs," and the "investing" or "saving" class, labeled "rentiers" in his later works:

For the purpose of this enquiry a triple classification of society is convenient--into the investing class, the business class, and the earning class. These classes overlap, and the same individual may earn, deal, and invest; but in the present organization of society such a division corresponds to a social cleavage and an actual divergence of interest. ([1923] 1971, 4)

Last, Keynes recognized that the continuation of capitalist society required a social acceptance based on an underlying ideological program. Capitalism is a system that fractures society through its promotion of individualism, greed, and the use of money (income and wealth) as a measuring rod of one's value to society ([1925b] 1972, 267-9). Its main (perhaps only) claim to survival is economic progress based on efficiency and rising income over time. In the modern period, however, doubt had developed as to the possibility of continued economic success, the ability of capitalism to "deliver the goods" (268).

Now, it is well known that Keynes exhibited a marked disdain for the Soviet experiment and its reliance on the "common man" for the success of that experiment. Yet he did observe in his brief visit to the Soviet Union something in that early socialism that could well overcome any economic inefficiency associated with...

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