The theories of bourgeois economists down to David Ricardo were developed before there was a real awareness of the class issues that dominate capitalist society. Ricardo, as Marx wrote, “made the antagonism of class interests, of wages and profits, of profits and rent, the starting point of his investigations, naively taking this antagonism for a social law of nature. But by this start the science of bourgeois economy had reached the limits beyond which it could not pass,”^[1] for a further critical development could lead only to the recognition of the contradictions and limitations of the capitalist system of production. By doing what could not be done by bourgeois economists, Marx felt himself to be the true heir, and the destroyer as well, of bourgeois economy.

Though bourgeois economy was indeed unable to advance as Marx had said, it was able to change its appearance. Classical economists had emphasized production and the system as a whole. Their followers emphasized exchange and individual enterprise. Economic theory became increasingly apologetic until the whole problem of the social relations that underlie economic processes was done away with through the rejection of the classical value theory in favor of the subjective value concept of the marginal-utility school. Increasing economic difficulties, however, created an interest in the business cycle, in the factors that make for prosperity, crisis, and depression. The neo-classical school, whose best-known proponent was Alfred Marshall, attempted to transform economy into a practical science; it sought ways and means to influence market movements and to increase both the profitability of capital and the general social welfare.

In the midst of the Great Depression there appeared John Maynard Keynes’ work, The General Theory of Employment, Interest and Money, which was soon hailed as a “revolution” in economic thought and which led to the formation of a school of “Keynesian economics.” While persistent “orthodox” economists opposed this school as either “socialistic” or “illusory,” inconsistent socialists attempted to blend Marx with Keynes, accepting Keynes’ theories as the “Marxism” of our time. Marx’s skepticism about the future of bourgeois society was now said to indicate only his inability or unwillingness to criticize the classicists constructively. And of Keynes it was said that he made real Alfred Marshall’s aspirations for a reformed and improved capitalism.

John Maynard Keynes’ popularity is of long standing and was created by his book The Economic Consequences of the Peace. Keynes opposed the harshness of the Versailles Treaty because around “Germany as a central support the rest of the European economic system grouped itself, and on the prosperity and enterprise of Germany the prosperity of the rest of the Continent mainly depended.”^[2] It was suggested that Keynes’ conciliatory reasoning was motivated by his fear of an anti-capitalist revolution in the wake of the war. Others suspected that his constructive proposals with regard to the peace were merely subtle ways of furthering British postwar foreign policies. Though these two concerns undoubtedly played a part in the formulation of his opinion, Keynes’ opposition to the treaty was based mainly on economic considerations and was determined by his conviction that the capitalist world could operate rationally.

The war itself was to Keynes only an accidental and unhappy interlude in the liberalistic process of capital formation. In 1919, he feared an impairment of capital accumulation because “the laboring classes may no longer be willing to forego so largely, and the capitalist classes, no longer confident of the future, may seek to enjoy more fully their liberties of consumption so long as they last, and thus precipitate the hour of their confiscation.”^[3] The disturbed “accumulative habits” had to be restored; for at this time Keynes still unreservedly favored the “inequality of the distribution of wealth” as the best means for a vast amassing of capital. With the war’s end he expected a return to international free trade and unlimited investment opportunities. The simplest way to restore “normalcy” was, of course, to reinstitute pre-war conditions. This implied treating Germany as if there had been no war at all.

But after experiencing the period of “war-socialism” in England and on the Continent and witnessing the Bolshevik “experiment” in Russia, Keynes ceased to think that capitalism was restricted to laissez-faire economics; in fact, he now considered “laissez-faire a legend, a bit of metaphysical thinking.” He was convinced that the capitalist economy could be regulated so as to function better with out losing its capitalist character. And if the national economy could be steered into definite, desirable channels, it might also be coordinated with the economic needs of the world. Because schemes of control were conceivable, Keynes was confident that their practical realization merely depended upon the presence of wise men of good will. “He believed in the supreme value of intellectual leadership, in the wisdom of the chosen few,”^[4] and in their ability to influence the economic processes in a socially satisfactory way.

In bourgeois economic theory men behave rationally in a market where self-interest meets self-interest, each vying for advantage and each limiting the other. Through all the unhampered individual attempts to maximize want-satisfaction, the market establishes price relations which tend toward the most economical allocation of re sources. Keynes did not challenge the assertion that the optimum of economic self-interest leads to the maximum of social well-being; but he did find that people seldom know their real interests. The individualistic principle was not enough to recognize true self-interest. Savings and consumption restrictions, for instance, at times suit both the individual and society; but at other times they may impoverish both. To find out just when one or another policy is appropriate requires a social point of view.

The notion that the satisfaction of individualistic self-interest demands a consideration of the social system’s needs forced Keynes to turn from “micro-economics” to the “macro-economics” of the classicists. This involved a partial return to the labor theory of value; for the terms that describe the single firm and individual price determination are not suited to a theory discussing social aggregates such as total income, consumption, investment, employment and their economic interdependence. This change on Keynes’ part has been considered an “implicit fundamental criticism of the existing social order.”^[5] In reality it attests only to Keynes’ great concern for governmental controls “both as the only practical means of avoiding the destruction of the existing economic forms in their entirety and as a condition of the successful functioning of individual initiative.”^[6]

In an attempt to cope with growing economic difficulties, economists turned to monetary theory in order to influence the business cycle. Keynes was well suited to serve this trend. A speculator in international currency, Keynes was occupied with money questions and monetary reforms from his first publication Indian Currency and Finance (1913), down to his last contribution on the International Monetary Fund. The control of the monetary system had become essentially a control of credit by means of the rate of interest. In Keynes’ view, excessive inflation as well as excessive deflation – both capable of disturbing the stability of the economy – could be attributed to a disparity between savings and investments. If investments exceeded savings, inflation would occur; and if the reverse were true, deflation would set in. He traced the discrepancy between savings and investments to a lack of regulation of both. As individuals and groups made their separate decisions on savings and investments, there was no guarantee that these decisions would complement each other. Economic well-being depended, then, on a rate of interest that would keep savings in conformity with investments and thus stabilize the general price level.

Keynes held that production is limited by the rate of interest because this rate defines the standard for the profitability of investments. The rate of investment depends on entrepreneurs, who make investments according to their expected profitability. These entrepreneurs are supposed to compare their profit expectations with the current interest paid on borrowed money. Thus, lowering the interest rate would increase the inclination to invest. Keynes did not deny that a prolonged depression would reestablish a “proper” relationship between profit, interest and wages. But he felt sure that an inflationary course would accomplish the same results with fewer hardships. He looked upon his inflationary proposals not as a contrast to the classical doctrine, but as an answer to the violation of that doctrine which was already accomplished through artificially-maintained interest rates. He was convinced that control of the money and credit supply could establish an equilibrium rate of interest which would equate savings and in vestments and create the psychological conditions for “normal” capital expansion.

There is no need, for the moment, to follow Keynes’ numerous’ proposals on how to alleviate the economic ills by monetary means. His “originality” did not lie in this field: here he shared honors with Hawtrey, Harrod, Cassel, Wicksell, Fisher and a host of long-forgotten “money-cranks,” particularly Proudhon and Silvio Gesell.^[7] Proudhon envisioned an economic system of “mutualism” without exploitation, to be achieved by rendering capital incapable of earning interest. He proposed the establishment of a national bank, which would gratuitously grant credits to all callers in a society of independent producers and workers’ syndicates. While Proudhon imagined that the abolition of interest was the surest way toward “socialism,” Silvio Gesell found nothing wrong with the “Manchester system.” He was opposed to interest and rent as detriments to the continuous expansion of production. Money, according to Gesell, since it was not only a medium of exchange but also a store of wealth, had the tendency to leave the circulation process, thereby causing stagnation and decline. If the hoarding of money could be prevented, production could go on uninterruptedly. He suggested imposing a carrying-charge for money. Taxing all liquid funds would make the holding of money an expensive affair. He assumed that people would invest their money in “real capital” rather than pay a price for hoarding; and that the increase in investments would lead to an economy of abundance and general well-being.

While Keynes did not share Proudhon’s utopian longings, he was in full agreement with the attack upon the payment of interest, and he favored the gradual “euthanasia of the rentier.” And though he found Gesell’s theories rather impractical, he regarded them as sound in principle. He, too, thought the laissez-faire doctrine wrong in its assumption that a self-adjusting mechanism balanced the rate of interest and the volume of investment. Although he appreciated Gesell’s “pioneer work,” Keynes thought it unnecessary to apply it: a manipulated rate of interest could control investment well enough to maintain the necessary rate of capital expansion.

In distinction from those economists who believed that all economic problems could be solved by monetary means alone, Keynes presented his ideas as a “complete theory of a monetary economy” integrating monetary and value theory. He called his work a “General Theory of Employment, Interest and Money,” because in his opinion “the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical 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.”^[8]

Traditional or standard theory did not account for unemployment; until the General Theory, Keynes’ own arguments overlooked the problem. To be sure, his Treatise on Money (1930) anticipated the later attempt to approach the question of output and employment as a whole. But only in the General Theory does he seriously begin to deal with both the distribution and the quantity of employment, and with the forces that determine its changes.

Traditional theory was bound to the imaginary conditions of full employment because its proponents felt sure that wage levels would react to the forces of supply and demand and would never be so high for so long a time as to create or maintain unemployment. They were convinced that lower wages would increase employment, and they were confident that unemployment would reduce wages. Keynes shared their conviction but not their confidence. He found that a given “propensity to consume” and a given rate of investment determine between them a definite level of employment consistent with economic equilibrium. Although this level cannot be greater than full employment, it can be smaller. An equilibrium including full employment may exist; but it would be a special case. Generally, an increase in the level of employment necessitates a change either in the propensity to consume or in the rate of investment.

Keynes did not question the assertion that under certain conditions unemployment indicated the existence of real wages that are incompatible with economic equilibrium, and that lowering them would increase employment by raising the profitability of capital and thus the rate of investment. But he found that wages were less flexible than had been generally assumed. Workers had learned to resist wage reductions. And as long as the “socialist method” of wage-cutting by government decree was not, he said, a reality, the available methods of wage-cutting were not efficient enough to secure uniform wage-reductions for every class of labor. He also noticed that workers’ resistance is greater to a cut in money wages than to a lowering of real wages. This is true, of course; if only because it is easier to go on strike than resist rising prices. Keynes saw that this allowed for more subtle ways of wage-cutting than those traditionally employed. The subtle way was also the more general and effective way, he felt. A flexible wage policy could be created by a flexible money policy: an increase in the quantity of money would raise prices and reduce real wages if money-wages remained stationary or rose more slowly than the general price level. “Having regard to human nature and our institutions,” he wrote, “it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not available from the latter.”^[9]

Beyond these observations, however, Keynes held that employment in a developed capitalism is determined not by wage-bargains between workers and employers but by the existing “effective demand,” which depends on the propensity to consume and on the rate of capital expansion. Even with perfectly flexible wage-rates, unemployment would exist if there were a declining demand. The ruling assumption of “Say’s law” that “supply creates its own demand” is simply not true; capitalism is not the self-adjusting system it was supposed to be. While it is true that a reduction in money-wages which leaves the existing aggregate demand intact will increase employment, this will not be the case if the aggregate demand declines. From a “social” point of view, wage-reductions make sense only if they lead to an expansion of production which increases effective demand. And the market will not provide wage policies to secure and enlarge effective demand until full employment is reached. To this end, interferences of a monetary and, perhaps, an extra-monetary character are needed. The purpose of these interferences, however, is to make the market’s economic equilibrium operate under conditions of full employment. Say’s unworkable law of the market is to be made to work by extra-market means.

According to Say, all people produce either to consume or to sell and all sell in order to buy some other commodity to use or to consume; consequently, supply and demand are bound to balance. If there is too much of a particular commodity, its price will fall; if there is not enough, its price will rise; these price changes, tending to economic equilibrium, exclude the possibility of general overproduction. The market mechanism is here seen as a self-adjusting equilibrium mechanism which need only be left alone to produce the most economical and rational allocation of productive resources and distribution of commodities. As a corollary of the same doctrine, Keynes said, “it has been supposed that any individual act of abstaining from consumption necessarily leads to, and amounts to the same thing as, causing the labor and commodities thus released from supplying consumption to be invested in the production of capital wealth.”^[10]

Notwithstanding some theoretical inconsistencies, modern economic thought, according to Keynes, “is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.”^[11] Keynes admitted the plausibility of the idea “that the costs of output are always covered in the aggregate by the sale-proceeds resulting from demand.” This idea makes it natural to suppose “that the act of an individual, by which he enriches himself without apparently taking anything from anyone else, must also enrich the community as a whole; so that an act of individual saving inevitably leads to a parallel act of investment. For, it is indubitable that the sum of the net increment of the wealth of individuals must be exactly equal to the aggregate net increment of the wealth of the community.” But Keynes concluded that “those who think in this way were deceived, nevertheless, by an optical illusion, which makes two essentially different activities appear to be the same.”^[12]

From the assumption that the demand price of output as a whole equals its supply price follow all the other assumptions of neo-classical equilibrium theory, including its theory of employment. This theory allows only for “voluntary” or “frictional” unemployment, not for involuntary unemployment. Keynes, however, acknowledged the existence of involuntary unemployment: he described its absence as a state of “full employment.” It is not very plausible, he wrote, “to assert that unemployment in the United States in 1932 was due either to labor 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. Wide variations are experienced in the volume of employment without any apparent change either in the minimum real demands of labor or in its productivity.”^[13]

For Keynes the very fact of large-scale and prolonged unemployment indicated that “Say’s law” is not a general economic law but holds true only under the special conditions of equilibrium with full employment. In Keynes’ view, the economic system may be in equilibrium under conditions of less than full employment.

That is to say, a given level of employment short of full employment may be the most profitable for the entrepreneurs. No force then exists within the equilibrium to raise the level of employment to full employment. This can be brought about only externally, by selecting out of the mutually interdependent economic variables “those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live.”^[14] For Keynes, these determinable variables were the propensity to consume and the incentive to invest. Manipulation of these variables was to lead to a state of economic equilibrium with full employment. Once this was established, the static equilibrium analysis would hold good again. Keynes did not question the possibility of such an equilibrium; he doubted only that the system would adjust itself to create it. The theory which failed to fit the practice was countered by a practice to fit the theory.

Keynes found it convenient to sympathize with the doctrine “that everything is produced by labor,” because “much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labor, when we are dealing with the behavior of the economic system as a whole.”^[15] The basic unit of employment in his system is a working-hour of average productivity, as in Marx’s system skilled labor is reduced to unskilled labor. A wage-unit is the quantity of money received for an hour of work. The aggregates of production, income, and employment represent certain values in terms of wage-units and the latter are assumed to be of constant magnitude. Quantities of employment measured in wage units serve as an index for measuring the changes in the economic system.

Expressed in simplest terms, Keynes’ model represents a closed system divided into two departments of production – that of consumption goods and that of capital goods. The total money expenditures on consumption goods plus the total expenditures on capital goods constitute total income. When the aggregate demand – the demand for consumption and capital goods – equals total income, which implies that total savings equals total investments, the system is supposed to be in equilibrium. A decline of aggregate demand, implying a discrepancy between savings and investments, reduces total income and produces unemployment. In order to alter this situation, the aggregate demand must be increased to a point where total income implies full employment.

Because Ricardo “neglected the aggregate demand function,” Keynes felt himself anti-Ricardian and pro-Malthusian in raising the issue of “effective demand” as the fundamental principle of an economy of full employment. But while “Malthus was unable to explain clearly how and why effective demand could be deficient,”^[16] Keynes thought that he had discovered the reason in the psychological “propensity to consume.” Malthus saw that in capitalism the demand of the workers could not be large enough to enable the capitalists to realize their profits. And since prices included profits, they could not be realized in intra-capitalist exchange. Capital-labor relations contained and created a lack of demand which destroyed the incentive to accumulate capital. Malthus concluded that this demand must come forth from social layers other than labor and capital. In this way he justified the continued existence of the nonproductive feudal class: he deemed their consumption necessary for the proper functioning of the economy. However, “the great puzzle of effective demand with which Malthus wrestled, vanished from economic literature,”^[17] until resurrected by Keynes. His theory may thus be regarded as a modern version, elaboration, and possibly refinement of Malthus’ theory of accumulation.

Consumption, for Keynes, is the obvious end and object of all economic activity. Capital, he wrote, “is not a self-subsistent entity existing apart from consumption”; therefore “every weakening in the propensity to consume regarded as a permanent habit must weaken the demand for capital as well as the demand for consumption.”^[18] He believed that it is a “psychological law” that individuals tend to consume progressively smaller portions of their income as this income increases. When aggregate real income is increased consumption increases too, of course, but not so much as income. It is only in an economically backward society, Keynes wrote, that the propensity to consume is large enough to assure the employment of all hands. This propensity declines in a “mature” society. Since the propensity to consume declines with the enrichment of society, and since capital formation is the enrichment of society, it follows that to foster the enrichment of society is to support the decline of the propensity to consume. The accumulation of capital must, therefore, come to an end in the declining propensity to consume, which is the key to the decreasing effective demand. Keynes had set out to defeat Say’s law of the market on its own ground, that is, on the assumption that production is carried on for the benefit of consumption. And how could he have been more successful than by showing that just because of the “fact” that production serves consumption, supply does not create its own demand?

Keynes views the consumption of the mass of the population, miserable as it may be compared with potential and even actual production, as the community’s chosen consumption, which expresses its actual propensity to consume. Yet he thinks that even in the “mature” society effective demand might be increased by a change in the propensity to consume. He thus admits to a difference between what he considers the community’s chosen propensity to consume and the actually existing social consumption needs. This admission implies, of course, that consumption is not the end of economic activity in capitalism. If it were there would be no problem of effective demand.

When employment increases, Keynes wrote, “aggregate real income is increased. The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income. Hence employers would make a loss if the whole of the increased employment were to be devoted to satisfying the increased demand for immediate consumption. Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level. For unless there is this amount of investment, the receipts of the entrepreneurs will be less than is required to induce them to offer the given amount of employment.”^[19] This refutes, of course, Keynes’ own statement that capital is “not a self-subsistent entity,” and that “consumption is the sole end of production.”

It is true that, generally, bourgeois economy paid no attention to the question of effective demand. Marxism dealt with it, although, according to Keynes, only “furtively, below the surface, in the underworld” of economic theory. For Marx, capitalist production is oriented not towards consumption needs but towards the production of capital. Capitalism must produce in order to consume, it is true; but in order to produce it must first see the green light of profitability. Effective demand is composed of a demand for consumption goods and a demand for production goods. The relationship between the two sides of effective demand indicates whether the profitability of capital is rising or falling. Capital accumulation implies a decline of consumption relative to the faster-growing capital. In this sense, capital formation does diminish the propensity to consume; yet this is only another way of saying that in capitalism, capital accumulates.

“A lack of effective demand” is just another expression for a lack of capital accumulation and is not an explanation of it. Even in Keynes’ view, “employment can only increase pari passu with the increase in investments; unless, indeed, there is a change in the propensity to consume.”^[20] However, Keynes maintained that for the present the only rational and effective remedy for unemployment lay in the further expansion of capital. The problem could also be solved by a reduction of the working-time at the expense of investment and consumption; but, like most non-workers, Keynes was sure that “the great majority of individuals would prefer increased income to increased leisure.”^[21] Still, while Keynes was very much “impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce,” he was willing to “concede that the wisest course is to advance on both fronts at once . . .to promote investments and, at the same time, to promote consumption, not merely to the level which, with the existing propensity to consume, would correspond to the increased investment, but to a higher level still.”^[22] Under capitalist conditions, however, this “higher level still” would reduce the profitability of capital, decrease the level of employment, and initiate new demands for the increase of investments as a precondition for an increase of consumption.

Traditionally, profit has been regarded as a reward received by capitalists for their activity and, where there was no such activity, as a reward for their willingness to invest rather than consume their “savings.” Profit also rewarded them for taking “risks,” or for their social importance in developing “round-about methods” of production which, while leading to greater productivity, imply waiting-periods for long-term investments. In either case, capitalists, by abstaining from consumption at one time, earned the right to consume more at a later time; unless, of course, they wished to abstain still further. But there have been times when capitalists have refused to take “risks”; when instead of investing their and other peoples’ money they have held on to it, an attitude which Keynes calls “liquidity-preference.” Because recent history has recorded years of so-called “investment strikes,” Keynes found it advisable to alter the abstinence theory of profit and interest. He suggested that profit and interest should no longer be regarded as rewards for saving and investing money but as rewards for overcoming the desire not to invest, for opposing “liquidity-preference” – in other words, for the willingness on the part of the capitalist to remain a capitalist.

Actually, of course, it makes no difference at all whether one says that profits are rewards for investing capital or rewards for opposing liquidity. Quarrels among economists in this regard revolve around the question of whether liquidity-preference causes stagnation or the other way around. “When things look black,” wrote J. A. Schumpeter, “and people expect nothing but losses from any commitment they might contemplate, then, of course, they will refuse to invest their current savings ... or they will defer investment in order to profit by further reductions in prices. At the same time, savings will not only be reduced but increased by all those who expect impending losses of income, in their business or through unemployment. [But] no defense of any ‘over-saving’ theory can be based upon it because it occurs only as a consequence of a depression and hence cannot itself be explained by it.”^[23] In Keynes’ view, in contrast, “liquidity-preference” precedes stagnation because of the psychologically-determined tendency towards hoarding which is associated with the declining propensity to consume.

According to Keynes, to state his position once more, an increase of income increases consumption, but by less than income. On the assumption that all investment ultimately serves consumption needs, savings will increase faster than investments. As this occurs, aggregate demand declines and the actual level of employment falls short of the available labor supply. This happens in a “mature” society because the great size of the already-existing stock of capital depresses the marginal efficiency (profitability) of capital and thus depresses expectations about future capital yields. Wealth-owners would rather hold their savings in liquid form than invest in enterprises promising little or no reward. The short-run expectations of owners of wealth are, in Keynes’ view, based on long-term expectations, which are necessarily gloomy due to the decreasing scarcity of capital. How this long-term trend – decreasing marginal efficiency of capital – affects immediate investment decisions, Keynes does not make clear. He merely asserts that capitalists see in any actual decrease of profitability a still greater future decline; and that this dark outlook causes present-day business to decline even faster. In other words, the short-term outlook determines the long-term outlook and the latter determines behavior in the short-run. Relying on this “insight,” “foresight,” or “instinct,” capitalists show that they prefer a bird in the hand to one in the bush by not risking new investments.

Short of closing the gap between income and consumption, it follows from Keynes’ theory that “each time we assure today’s equilibrium by increasing investments we are aggravating the difficulty of securing equilibrium tomorrow.”^[24] But for the near future he thought these difficulties still surmountable and suggested a series of reforms designed to combat “liquidity-preference” and increase “effective demand,” despite the decreasing propensity to consume. He was confident that a rate of investment which would secure full employment was still a possibility. Even “pyramid-building, earthquakes, [or] ... wars may serve to increase wealth, if the education of our statesmen on the principles of classical economics stands in the way of anything better.”^[25] Already the First World War had shown that “war-socialism unquestionably achieved a production of wealth far greater than we knew in peace, for though the goods and services delivered were destined for immediate and fruitless extinction, none the less they were wealth.”^[26] Aside from the “accident” of war, however, if employment as “a function of the expected consumption and the expected investment,” was not full employment because expectations were pessimistic, these insufficient expectations could be augmented by an optimistic planning which need not destroy the basic fabric of capitalism. In Keynes’ view, full employment did not have to involve warfare, capital destruction, or superfluous production, but could be realized by way of public works of either great or doubtful utility which would increase income without enlarging savings, and thus keep the laborers busy.

The actual crises or business-cycle fitted only imperfectly into Keynes’ theory of “effective demand” based on the declining “propensity to consume,” because the business-cycle accompanied the most important period of capitalist development, not just its “mature” stage. It had to be considered largely a thing of the past, and in this capacity it served as a rather hazy illustration of society’s “maturing” process – a process in which, at intervals, the declining propensity to consume could still be immunized by profit expectations of considerable though diminishing force and by the “wealth-creating” power of numerous wars. Keynes often expressed the belief that capitalism had long since lost its ability to overcome depressions and that stagnation was the “normal” state of its existence unless government interventions in the investment market interrupted it. Some of Keynes’ disciples did not think it an “exaggeration to say that inflation and full employment are the normal conditions of a war-time economy and that deflation and unemployment are the normal conditions of a peace-time economy in the present stage of capitalist development.”^[27]

Whatever the objective reasons for depressions, as long as economists consider them unascertainable they have nothing to work on but the psychology of the class they represent. This psychology is explicable out of the real movements of capital production; it cannot in turn explain these movements. Even Keynes felt at times that such a procedure was insufficient and tried, to give his psychological interpretations a material base. Quite in contrast to his general tone of argumentation, he pointed out that the “duration of the slump should have a definite relationship to the length of life of durable assets and to the normal rate of growth in a given epoch.” At the outset of the slump, he continued, “there is probably much capital of which the marginal efficiency has become negligible or even negative. But the interval of time, which will have elapsed before the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency, may be a somewhat stable function of the average durability of capital in a given epoch.”^[28]

The reason for the low marginal efficiency of capital at the outset of (and during) the slump appears to be that an abundance of capital causes a lack of profitability. It follows from this that hastening the use, decay, and obsolescence of capital should increase its scarcity-value and, with this, its profitability. One method of achieving capital-scarcity is liquidity-preference. It implies a lack of new investments; and in the slump situation, new investments would only increase the quantity of capital, which is already too large to have satisfactory yields. So liquidity-preference would be one way, among others – such as pyramid-building and warfare – to maintain the scarcity of capital and thus its profitability. But, unlike pyramid-building and warfare, liquidity-preference means unemployment. Keynes opposes it for precisely this reason.

In Keynes’ view, capital stagnation expresses the capitalist inability or unwillingness to accept a decreasing profitability. The crisis results from an “over-investment” prompted by “expectations which are destined to disappointment.” The crisis occurs not because “the community as a whole has no reasonable use for any more investments,” but because “doubts suddenly arise concerning the reliability of their respective yields,” and “once doubt begins, it spreads rapidly.” During the boom “disillusion falls upon an over-optimistic and much over-bought market,” and “leads to a sharp in crease in liquidity-preference.” This creates the crisis.

The “over-investment” exists because investments have been associated with profit-expectations that prove to be highly unrealistic. “Instead of getting a hoped-for 6%, for instance, investments may yield only 2% and this disappointment changes an ‘error of optimism’ into an ‘error of pessimism’ with the result that the investments, which would in fact yield 2%, in conditions of full employment, are expected to yield nothing; and the resulting collapse of new investments then leads to a state of unemployment in which investments, which would have yielded 2%, in condition of full employment, in fact yield less than nothing.” The ensuing sudden collapse of the marginal efficiency of capital, “determined by the uncontrollable and disobedient psychology of the business world, lowers the existing propensity to consume by involving a severe decline in the market-value of stock equities.”^[29] And thus the decline feeds on itself, until it is arrested by an increase of the marginal efficiency of capital within the crisis situation or by an expansion of capital despite its lower marginal efficiency.

To hope for a rise of the marginal efficiency of capital within, the crisis situation means to await the return of a sufficient scarcity of capital. In “mature” capitalism this may well be disastrous: large-scale unemployment of long duration has severe social con sequences. To overcome the depression it is necessary both to improve the profitability of capital and to expand production beyond the limits of private capital formation. Although Keynes came to see interest-rate manipulations as a possibly minor, or even totally ineffective instrument for raising the incentive to invest, he held on to it nevertheless as part of an extensive onslaught on “liquidity-preference.” As we know, he favored a reduction in the rate of interest not only because “it plays a peculiar part in setting a limit to the level of employment, since it sets a standard to which the marginal efficiency of a capital-asset must attain if it is to accrue,”^[30] but also because he favored the elimination of the “function-less investor” in principle, because “interest today rewards no genuine sacrifice.”^[31] As “mature” capitalism signifies a lower marginal efficiency of capital, the greater risk implied in new investments could be at least partly reduced by eliminating the “lender’s risk” altogether.

In view of the precarious state of investment markets, Keynes came finally to the conclusion that “the duty of ordering the current volume of investment cannot safely be left in private hands.”^[32] The goal of all governmental policies was to be full employment, for “only in condition of full employment is a low propensity to consume conducive to the growth of capital.”^[33] And as it is only during a boom that capitalism comes nearest to full employment, the “right remedy for the trade-cycle,” in Keynes’ view, is to be found in “abolishing slumps and thus keeping us permanently in a quasi-boom.”^[34] With full employment the criterion, the effectiveness of various government interventions in the market economy could be tested by experiment. Whatever did not lead to full employment was not enough.

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1. K. Marx, Capital, Kerr ed., Vol. I, p. 17.

2. J. M. Keynes, The Economic Consequences of the Peace, New York, 1929, p. 146

3. Ibid., p. 22

4. R. F. Harrod, The Life of John Maynard Keynes, London, 1951, p. 332.

5. D. Dillard, The Economics of John Maynard Keynes, New York, 1948, p.

6. J. M. Keynes, The General Theory of Employment, Interest and Money, New York, 1936, p. 380.

7. S. Gesell, Die Naturliche Wirtschaftsordnung durch Freiland und Freigeld, Berlin, 1916.

8. The General Theory p. 3

9. Ibid., p. 268

10. Ibid., p. 19.

11. Ibid., p. 20.

12. Ibid., p. 21.

13. Ibid. P 9.

14. Ibid., p. 247.

15. Ibid., p. 43

16. Ibid., p. 32

17. Ibid., p. 32

18. Ibid., p. 106

19. ibid., p. 27

20. ibid., p. 98

21. Ibid., p. 326

22. Ibid., p. 325

23. J. A. Schumpeter, Capitalism, Socialism and Democracy, New York, 1947, p. 395

24. The General Theory, p. 105

25. Ibid., p. 129.

26. M. Keynes, Laissez-Faire and Communism, New York, 1926, p. 48.

27. D. Dillard, The Economics of John Maynard Keynes, p. 241.

28. The General Theory, p. 318.

29. Ibid., pp. 317, 319, 321, 322.

30. Ibid., p. 222

31. Ibid., p. 376.

32. Ibid, p. 320.

33. Ibid., p. 373.

34. Ibid., p. 322.