The Ideas of John Maynard Keynes

The ideas of the English economist John Maynard Keynes, 1883-1946, achieved their greatest influence during the 1960s and early 1970s. In those days, Keynes was widely credited by his followers among the economists for saving capitalism itself.

The story told by the Keynesian economists went something like this. In the dark days of the Depression of the 1930s, capitalism to all appearances was approaching the end of its road. When the Depression began, the traditional liberal (1) economists, (2) who had long dominated the economics profession, claimed that capitalism would quickly recover from depression without government intervention. Therefore, these economists urged the government to do virtually nothing to encourage economic recovery.

After all, the traditional economists argued, this had always worked in the past. Recovery had always followed recession. But the Depression of the 1930s, the story goes, was different. The economy was showing no signs of recovering on its own. As a result, many young people, including a certain number from the ruling capitalist class itself, were turning toward Marxist ideas. (3) The replacement of capitalism by socialism seemed increasingly likely in the near future.

Then Britain’s leading economist, John Maynard Keynes, explained that capitalism could last indefinitely under the new conditions if certain traditional policies of the capitalist governments and central banks were changed. Looking back on the Depression years from the vantage point of the booming 1960s, the Keynesians smugly concluded that socialism was not necessary after all.

To save capitalism, the Keynesians claimed, all the government had to do was run a sufficiently large deficit to make up for any shortfall in spending by the private sector. If this were done, unemployment would give way to “full employment,” by which most Keynesians really meant just enough unemployment to keep the trade unions in check.

To prove their point, the Keynesian economists pointed to the huge deficits that enabled both industry and the young generation of the working class to be fully mobilized for the mass slaughter of World War II. The huge armies of unemployed that characterized the Depression years gave way to armies in the literal sense of the word, and unemployment vanished.

In the years that followed the war, there was widespread fear that the Depression would return. Would all those returning soldiers really be able to find jobs? Or if they did, wouldn’t the Depression return once the reconstruction boom that would follow the war had run its course? The Keynesians of the 1960s claimed that the Depression would likely have returned if governments had not adopted the new policies advocated by Keynes and his supporters during the 1930s.

Keynesian economists held that government spending during the 1950s prevented Depression and mass unemployment on anything like the scale of the 1930s. (4) However, according to these economists, the conservative Eisenhower—in the American sense of the word “conservative”—had only half-heartily adopted Keynesian polices. As a result, a series of “recessions” had occurred that could have been avoided if full-blooded Keynesian policies had been in effect. (5)

During the 1960s, the Democratic administrations of John F. Kennedy and Lyndon B. Johnson fully embraced Keynesian theory in the way that the Republican Eisenhower administration had not. For example, instead of raising taxes to finance its escalating war against Vietnam in the middle 1960s, the Johnson administration pushed through the U.S. Congress a huge and highly regressive tax cut. Johnson’s Keynesian economic advisors held that the tax cut would increase effective demand and end the high level of unemployment that had marked the U.S. economy since the recession of 1957-58.

By the middle of the 1960s, the U.S. and world capitalist economy was again booming, and U.S. unemployment levels were falling toward lows that had not been seen since the Korean War of 1950-53. In the future, the Keynesian economists claimed, not only major depressions would be banished but even “milder” recessions such as those of the 1950s could be avoided as long as the government made proper use of the “tool chest” of fiscal and monetary polices that the “new” Keynesian economics provided.

Keynesian doctrines were not only embraced by the U.S. Democratic Party. They were also adopted by virtually all the major political parties of Western Europe and Japan, whether on the left or the right.

On the left, the Social Democratic and Labor parties replaced Marx with Keynes. Parties on the right such as the various Christian Democratic and Liberal parties in Europe, including the Conservative Party in Britain, also adopted Keynesian economics.

In the United States, even the Republicans were coming around. No less a right-wing Republican than U.S. President Richard Nixon declared, “We are all Keynesians now.”

If the economy started to slow, the reigning Keynesian doctrines held, the slowdown would be nipped in the bud by increased deficit spending by the government backed up by interest rate cuts by the central bank. If it were inflation that was threatening, the government would balance the budget—or at least reduce deficits—by slowing down the rate of growth of spending and raising taxes. (6) If necessary, the central bank would help out by raising interest rates.

Many if not all Marxists of those times seemed to concede the main Keynesian claims. However, these “Keynesian Marxists” pointed out that much of the “Keynesian” government spending was for exploits such as the war against Vietnam and the “cold war” against the Soviet Union and its allies, rather than on peaceful public works and public housing programs that would really benefit the working class.

Postwar prosperity attributed to military spending

Starting as early as the late 1940s or early 1950s, when Keynesian ideas had already gained considerable influence, there were sections of the socialist press that “blamed” the postwar prosperity—which was frustrating hopes for a radicalization of the working class in the imperialist countries, especially in the United States—on the huge military expenditures of the early “cold war” and the hot war in Korea.

These socialists claimed that the massive military expenditures were stirring up a purely “artificial” prosperity. If the capitalist governments hadn’t engaged in such expenditures, these socialists argued, the Depression would have returned and with it the expected radicalization of the trade unions and the working class in general. According to these Marxists, capitalism was still bankrupt, since it was only preparation for war that was holding off a return to Depression levels of unemployment.

Naturally, these were merely assertions, and no proof was offered. (7) To the extent workers actually read these socialist papers, they would have been led to believe that as long as war with the Soviet Union threatened and military spending remained high, depression and unemployment would be kept at bay. (8) But if real peace ever broke out, there would be Depression and mass unemployment! Indeed, bourgeois papers and magazines were making similar claims as they scrambled to build support for the anti-communist crusade of the cold war.

Though few of us who grew up during the 1960s boom knew it, the capitalist economists had declared victory over the “business cycle,” or trade cycle as the English call it, many times before. For example, in last week’s post I explained how the authors of the British Bank Act of 1844 claimed that that reform would end crises.

Nor was the notion that war spending was the key to capitalist prosperity so new either. No less than Ricardo’s chief opponent among the English economists, the arch-reactionary Thomas Robert Malthus, had advocated massive government spending to counteract the danger of a “general glut” of commodities and the resulting unemployment.

In the posts over the coming weeks, I want to explore the real significance of the ideas of Keynes and put them into historical perspective. Keynes’s work represented a reaction against the ideas of economic liberalism that had dominated English political economy since the days of Adam Smith. (9)

Are Keynesian ideas more pro-working class than the traditional economic liberalism they challenged? What is the real relationship between Keynes’s critique of economic liberalism and Marx’s critique of bourgeois political economy? And was spending on arms really the key to the post-World War II prosperity as many American and British socialists held?

During the last two weeks, I examined the liberal doctrine of international trade, which is known by our present-day economists as the law of comparative advantage. But the theory of comparative advantage and the quantity theory of money and Say’s alleged law of markets, which the theory of comparative advantage depends on, form just a part of a broader economic school known as economic liberalism. Economic liberalism has also changed over time.

During its youth, which extends from the French Physiocrats and Adam Smith through David Ricardo, the economic liberals discovered that surplus value originates in the sphere of production rather than in circulation. This overthrew the old doctrine held by the early economists known as mercantilists, who believed that surplus value arises in the sphere of circulation. (10) The first hints of labor value found in the work of such pre-liberal pioneers as the late 17th-century English economist William Petty were brought to the heights reached in the work of David Ricardo.

The law of labor value that achieved its highest bourgeois form in the work of Ricardo was leading straight to the conclusion that the incomes of the “propertied classes”—the capitalists and landlords—were produced by the unpaid labor of the working class. ((11)) As the struggle developed between the capitalists and the workers, the economists took fright. Ricardo’s law of labor value was becoming the foundation of early socialist criticism of the capitalist system itself. It therefore had to go.

But what was to replace it? The bourgeois economists could come up with nothing better than the concept that objects of utility have value because they are scarce relative to subjective human needs. As this idea was developed further and formalized mathematically during the last third of the 19th century, it morphed into what is known as “marginalism.” This is what is taught to economics students today, especially in the field of modern bourgeois economics known as “micro-economics.”

The marginalist theory of value

The marginalists begin with the value of consumer goods. According to the marginalists, items of personal consumption have value because they are are subjectively valued by consumers according to their scarcity. It this scarcity that gives them “economic value.”

The fact that items of consumption are scarce implies that the means of producing them—what modern economists call the factors of production—land, labor and capital—are also scarce. Therefore each factor of production produces value according to its relative scarcity. As long as there is “free competition,” each factor of production—land represented by the landowners, capital represented by the capitalists, and labor represented by the workers—will receive incomes that correspond with the actual amount of value they produce.

According to the marginalists, as long as there is free competition no “factor of production” can exploit another “factor of production,” at least not for very long.

Suppose, for example, that the workers get less value in the form of wages than their labor is producing. According to Marx, this must always be the case under capitalist production; otherwise there would be no profit.

Not true, claim the marginalists. If the the workers are producing more than they are receiving in wages, the capitalists will find it profitable to hire additional workers to take advantage of the situation. The demand for “labor” goes up, and so will wages. This will continue, according to the marginalists, until the workers receive in the form of wages the full value that their labor produces. Not a penny more, and not a penny less.

But where then does profit come from? The marginalists claim that free competition drives the economy towards an “equilibrium” position where profit as such disappears! At most, the capitalists will earn interest. Okay, but where does the interest come from?

Interest, the marginalists explain, is produced by capital just like rent is produced by land, and wages are produced by labor. ((12)) By abstaining from consuming their capital, the capitalists are providing a “productive service,” just like the workers are doing when they choose labor for the reward of wages over “leisure.”

But the capitalists, being reasonable people, won’t perform their “service” for free. Just like wages rise when labor is “scarce” and fall when labor is plentiful, so “interest”—the capitalists’ reward for not squandering their capital on personal consumption—rises when capital is “scarce” and falls when capital is less scarce.

Marginalist economic liberalism and the trade unions

Economic liberals, or neoliberals as they are now called, are strongly opposed to trade unions, because they claim unions are monopolies that prevent free competition in the labor market. At most, the economic liberals will concede that unions benefit some workers at the expense of other workers.

According to economic liberals, by keeping wages at high “monopoly prices,” workers who lack skills are unable to find work because their labor produces less value than the “monopoly wages” defended by the unions. And workers who lack skills can only build up their skills by working. Therefore, as our liberal marginalist economists who now pretend to speak for the unskilled workers “explain,” the unions by keeping wages artificially high are trapping the unskilled in a vicious circle of unemployment and poverty.

The cause of unemployment, according to the economic liberals, is not the capitalist class, as it is in reality, but rather the unions and any pro-labor legislation that the workers’ movement has forced capitalist governments to grant.

The liberals—or conservatives in the American sense—hold that unemployment insurance and other forms of social insurance and minimum wage laws, along with unions, are all to blame for chronic unemployment and the poverty it brings. According to these economists, by keeping the “price of labor” above the value that less skilled workers are able to create, these less-skilled workers are unable to find work. Since the unskilled cannot find work, they cannot improve their skills. This, according to liberal economists, is the vicious circle of poverty. The result is what modern neoliberal economists such as Milton Friedman call a high “natural rate of unemployment.”

What then is the solution to chronic unemployment and poverty proposed by the liberal economists? Why bust unions, get rid of unemployment and other forms of social insurance, and repeal all minimum wage laws. This will, the economic liberals promise, reduce the “natural rate of unemployment” to something approaching zero. Chronic poverty and unemployment will, the neoliberals promise, then disappear.

In the closing decades of the last century, these were the theories and policies associated with Ronald Reagan and and British Prime Minister Margaret Thatcher, who did the best they could to put them into effect. Due to the resistance of the workers and their unions, Reagan and Thatcher were able only to implement a part of the neoliberal program.

The liberal doctrine of the state is sometimes called the “night watchman state.” The state should not, according to liberal doctrine, either engage in production itself or attempt to determine what is produced by the private capitalists. Nor should it concern itself with the plight of the unemployed and destitute. That should be left to private charity, or as it is said today, “faith-based organizations.”

Assuming neither unions nor pro-labor legislation opposed by economic liberals, such as unemployment insurance, minimum wage laws, and so on, get in the way, anybody who really needs a job will always be able to quickly find a job. If they lack skills, the liberals argue, their wages will initially be low, since their labor will create very little value. Unskilled labor is, after all, much less scarce than skilled labor.

But over time, they will tend to become more skilled and their wages will rise. Assuming there are no unions, minimum wage laws, and so on, only “frictional unemployment,” short-term unemployment of workers between jobs, and “voluntary unemployment” will exist.

The long-term unemployed are really choosing “leisure” over the wages that they could earn, given their skills. If any of these long-term unemployed really needed a job, they would always be able to find one, though perhaps initially at low wages corresponding to their lack of skills.

Therefore, the government should confine itself to enforcing laws that defend the “right to private property” and enforce contracts. The only real legitimate function of the state, according to liberal doctrine, is therefore to serve as a police force.

The origins of economic liberalism

The rise of economic liberalism as an ideology coincided with the the transition from early capitalist production, based on manufacture using artisan methods handed down from pre-capitalist times, to machine production with steam as the main motive power. This new stage of capitalism, which began to take hold beginning in Britain in the latter part of the 18th century, is called industrial capitalism. The transitional period between early capitalism and industrial capitalism—about 1760 to 1830—is called by historians the “industrial revolution.”

Before the rise of steam-powered industry, it was the commercial capitalists—the capitalists who deal in commodity capital rather than productive capital—who dominated the capitalist world. But under industrial capitalism, it was the industrial capitalists who emerged as the dominant section of the rising capitalist class. The focus was shifting from the accumulation of money capital in the form of gold and silver to the accumulation of industrial capital.

Economic liberalism and the climax of classical political economy

Just like a person goes through the stages of infancy, childhood, youth, mature middle age, and finally old age, so does bourgeois political economy. In its youth, in the hands of the classical economists, the law of labor value was developed and the origin of surplus value in the sphere of production, as opposed to the sphere of circulation, was discovered. And it was the classical economists who first realized that capitalist society is divided into three classes: landlords, whose income take the form of rent; capitalists, whose income takes the form of profit; and workers, whose income takes the form of wages.

And so with the industrial revolution—the time of Ricardo—classical political economy reached its climax. But then early representatives of the growing industrial proletariat began to turn Ricardo’s law of labor value against capital itself. Any further development of the Ricardian theory of value would inevitably emphasize the origin of surplus value in the unpaid labor of the working class. Therefore, the whole concept of labor value had to go. Economics on a bourgeois basis had reached its end as a science.

The further development of the Ricardian theory of value and of economic science itself was therefore surrendered by the bourgeois economists to the representatives of the working class—first to the Ricardian socialists, as they were called, and then to Marx.

With the end of the Ricardian period, around 1830, which was not long after the first worldwide economic crisis of overproduction in 1825, economic liberalism was already leaving behind its youth when it had been able to afford the luxury of actually exploring the economic laws of the rising capitalist system.

There could be no more Ricardos. The basic classes of capitalist society were replaced by the “households,” individuals, and “entrepreneurs” found in today’s economics textbooks. Classical political economy was a weapon in the hands of the capitalist class to fight feudal reaction as well as the working class. Marginalism, on the other hand, is only useful for fighting the working class.

Marginalism bars the door to any scientific understanding of crises

Since, according to marginalist theory, value ultimately arises from scarcity, there is no possibility of general overproduction of commodities. How could the supply of a commodity be “scarce” and “overproduced” at the same time? At most, there could be disproportionate production that would quickly be eliminated through free competition, but no general overproduction.

Unlike the case with the classical system, where Say’s Law is imposed from the outside, Say’s Law is built right into the foundations of the marginalist system. If economic crises broke out in the real world—and though they were played down, crises couldn’t be denied completely—they were dismissed as momentary imbalances between savings and investment, or a matter of temporary disproportions between the commodities that the industrial capitalists were producing and the consumers’ ever-changing tastes.

According to the marginalists, while the central banks such as the Bank of England would be expected to lower interest rates during periods of economic stagnation, any attempt beyond that by government to combat a crisis would do more harm than good.

Therefore, basic marginalist theory implies, recessions will never happen, but if they do anyway, the government should take no measures to either create jobs or otherwise help the unemployed. Any measures to help the unemployed will only lead to long-term involuntary unemployment, since the unemployed workers might prefer to collect unemployment insurance rather than build up their skills. What begins as “voluntary unemployment” over time will then become “involuntary unemployment.”

Sure, even the marginalists admit there are always workers looking for jobs. But this is, after all, a very good thing. As the economics professors explained—who were invariably recruited from the propertied classes and never themselves had to worry about unemployment in their personal lives—this was just short-term “frictional unemployment,” which the government need not concern itself with.

Any long-term unemployment, the liberals economists explained—assuming the government followed liberal economic polices and trade unions were absent—was really “voluntary” unemployment. And in a “free society,” unlike in a slave or feudal society, didn’t the people have a right to “choose leisure” over work? The government has no right to interfere with the free choices of individuals in a free society, after all.

Economic liberalism in its old age

However, just as the neoclassical marginalist system was being developed in the universities, free competition was beginning to break down in practice. Especially after the economic crisis that began in 1873, cartels and trusts began to grow within countries. Only Britain stuck with “free trade,” but even here Britain was increasingly getting the worst of it. And notwithstanding the claims of the marginalist economists, unemployment was growing during the “Long Depression” that followed the crisis of 1873. (13)

A growing protectionist movement began to develop in Britain itself, though for the time being it didn’t prevail. As the supply of commodities was increasingly tending to exceed the demand—the very situation that the marginalists had “proven” mathematically, no less, to be impossible—practical governments responded with protectionist measures.

Beginning about 1896, however, world capitalism entered into a period of accelerated growth and rising prices that was destined to last to the eve of World War I. During this “long wave of expansion,” (14) prices and profits rose, thus giving the economic liberals entrenched in the university economics departments a breather.

But after World I, economic liberalism—especially in Britain, the country that dominated political economy—was undermined by chronic mass unemployment. Unlike the United States, in Britain this mass unemployment began with the recession of 1920-21. It did not wait until 1929.

This created a fundamentally new situation. While the professors in Cambridge and Oxford could pretend that the unemployment that existed in Britain before World War I was really all “voluntary” and “frictional,” or simply the fault of the trade unions, it was much harder to do this when unemployment hovered around the 2 million mark for an entire decade.

It was against this background that the General Strike of 1926 broke out, the biggest movement of the British working class since the days of Chartism. Then came the crisis of 1929-33 itself. Mass unemployment was no longer confined to Britain and the countries that had been the losers in World War I. It now spread to the leading capitalist country, the United States. And the United States, with its very weak trade union movement and lack of any social insurance, was exactly the type of country that according to the tenets of marginalism should have virtually no unemployment problem.

John Maynard Keynes the man

The collapse of the booming U.S. economy into the Great Depression profoundly shook the confidence of the capitalists in their system. Even some of the scions of the ruling-class families who were studying economics in American and British universities began to turn towards Marxist ideas. Even as the crisis of 1929-33 was raging, the marginalist professors were teaching a doctrine that explained why what was happening in the real world could not occur!

For example, Paul Sweezy, a banker’s son, who was an economics major at Harvard in the early 1930s, and considered perhaps the most promising young American economist of his generation, “defected” to socialism. And unlike many other intellectuals radicalized in the 1930s, Sweezy remained a socialist throughout the rest of his long life.

It was in this climate that Britain’s leading bourgeois economist, John Maynard Keynes, attempted to salvage bourgeois economics and prevent economists of the younger generation from turning toward Marxism and thus becoming allies of the working class. But in order to do this, Keynes was forced to lead a retreat away from economic liberalism.

Keynes, who was born in 1883, was a true son of Britain’s ruling class. His father, John Neville Keynes, was, like his more famous son, also an economist. After receiving an education at Eton, a school open only to sons of the ruling class, the young Keynes had planned to study mathematics at Cambridge University.

But since Keynes was interested in politics as well as mathematics, Alfred Marshall, considered the leader of British marginalism, convinced him to study economics instead. In economics, Keynes could combine his interest in mathematics with politics.

A many-sided intellectual, Keynes had interests in literature and art as well as mathematics and economics. Among other things, he was a student of the life and collector of original copies of the writings of Sir Isaac Newton, Britain’s leading natural scientist and considered by many the greatest natural scientist of all time.

But economics was Keynes’s primary interest. At Cambridge, Keynes mastered neoclassical marginalist economics. A man with this background would not have been expected to become a champion of the working class, and Keynes proved no exception.

I should note, however, that Keynes did belong to one oppressed group. He was gay. In Keynes’s time, gays had to be discrete. No open homosexual would have been been able to play a role in public affairs. Indeed, this sorry situation lasted until the rise of the modern gay liberation movement that followed the 1969 Stonewall Rebellion in New York City. I am sorry to say that, in the United States at least, there were socialist organizations that banned open gays from membership as late as the 1960s.

Perhaps Keynes’s membership in this oppressed group did leave him more open to “unorthodox” ideas than would have normally been expected from a man of his class and background.

Keynes on the working class and bourgeoisie

“How can I accept the [Communist] doctrine,” Keynes wrote, “which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values.” (John Maynard Keynes, Essays in Persuasion, p. 300 [W. W. Norton & Company, 1963])

Here Keynes describes the working class as “mud.” No doubt Keynes was being ironic, which was indeed his style. Still, he does let slip his class attitudes and class loyalties. Unlike Marx, Keynes makes clear that he takes the side of the exploiters “who with their faults, are the quality of life.” Today, it would be hard to find a bourgeois economist or intellectual who is as frank as Keynes was when it comes to expressing publicly where they stand in the class struggle.

According to Ben Leach, writing in the Oct. 18, 2008, edition of the British newspaper The Telegraph, Keynes described eugenics as ‘the most important, significant and, I would add, genuine branch of sociology which exists.'”

In his dreams of breeding a master race, however, Keynes was hardly that unusual among the scions of the British ruling class. Such racists ideas were actually quite commonplace among the ruling classes of Europe and America. Hitler differed from these common ruling-class ideas only in the extremes to which he took them in both theory and in practice, and his willingness to apply them within Europe as opposed to Africa, Asia and Latin America.

But Keynes was not a stupid reactionary. He was an intelligent one. He opposed the punitive provisions of the infamous Treaty of Versailles, for example. In his pamphlet “The Economic Consequences of the Peace,” he pointed out that Germany could not possibly pay the sum that was demanded of it, and any attempt to enforce the treaty would destabilize the economies of not only Germany but Europe as a whole.

Starting in the 1920s, Keynes got together with the leader of the British Liberal Party Lloyd George to advocate a program of public works to combat mass unemployment. The proposal for public works by George and Keynes was an attempt to undercut the new British Labor Party.

The rise of the British Labor Party

During the 19th century, Britain had a two-party system consisting of the Conservative Party, also known by its nickname the Tory Party, and the Liberal Party. The Conservatives had traditionally been the party of the large landed interests, while the Liberals had represented the industrial capitalists. (15)

The British trade unions had historically supported the Liberals, much like the U.S. trade unions to this day support the Democrats, with similar results. But after World War I, the trade unions had shifted their support to the new Labor Party, a party based on the trade unions.

Though this party was in deeds if not always in words pro-capitalist and pro-imperialist, it was still a historical step forward for the British working class. One of the reasons why British workers enjoy a socialized health care system, under which health care is a right and and not a privilege for those able to pay as is still the case in the United States, is the existence of the Labor Party.

During the 1920s, the Labor Party under Ramsay McDonald had failed to put forward any program to deal with Britain’s unemployment crisis. The abandonment of the Liberal Party by the working class had left that party without its mass electoral base. Lloyd George and Keynes hoped to win this base back with their public works proposal.

For Keynes, however, there was a problem. He “knew” as a trained liberal marginalist economist that prolonged mass unemployment “could not” exist. Yet it plainly did. After the crisis began in 1929, Britain’s already grave unemployment crisis got considerably worse, even though the global economic crisis did not affect Britain as severely as it did the United States and Germany.

The mathematical and trained Cambridge economist Professor John Maynard Keynes was, unlike some of his more obtuse colleagues, plainly bothered by the glaring contradiction between marginalist theory and reality.

In 1936, Keynes published a book, “The General Theory of Employment, Interest, and Money,” in which he broke with many of the tenets of economic liberalism and considerably modified marginalist economic theory. In next week’s post, I will begin an examination of Keynes’s “General Theory,” which is considered the founding document of Keynesian economics.


1 The word liberal has a somewhat different meaning in the United States than it has in the rest of the world. In the United States, “liberals” support government intervention in the economy to maintain “full employment” and support to some extent labor rights—the right of workers to join trade unions and bargain collectively, for example. Opponents of government intervention and trade unions are generally labeled “conservatives” in the United States.

The somewhat different use of these terms in the United States reflects the divergent history of the United States and Europe. In Britain, the term “conservative” was adopted by the semi-feudal landed aristocracy, which wished to conserve as much of the old feudal society as possible within the framework of rising capitalism. The “liberals” represented the interests of the industrial capitalists, who desired to fully reshape society along the lines of industrial capitalism.

But the United States lacks a true feudal past. Therefore, the term “conservative” has been largely adopted by the financial and industrial capitalists themselves, who wish to “conserve” all the excesses of capitalism from the demands of both the working class and middle class reformers. Here when I use the term “liberal” or “neoliberal,” I am using it in the “European” and not the American sense unless otherwise indicated.

2 The diehard liberal economists of the 1930s such as Frederick Von Hayek and Ludwig Von Mises, who opposed Keynes, would have been horrified by the policies of the Democratic Obama administration and the Federal Reserve System under “moderate” Republican Ben Bernanke. These policies include deficits in the trillions of dollars and the virtual doubling of the supply of token money over a period of a few months. Over the next few years, the world will learn the consequences of these policies.

3 Marx and Engels noted that as the class struggle progresses a certain number of people from the capitalist class detach themselves from their class and support the working class. Marx and Engels themselves are examples of such revolutionary intellectuals. During periods of acute economic and social crisis, the numbers of the such revolutionary intellectuals increases. A revolution would not be possible without an inner disintegration of the old ruling class, which brings over some of the most brilliant and cultured people from the ranks of the ruling class to the side of the oppressed class.

4 In the United States, most of the Keynesian economists were and are associated with the Democratic Party. Those economists who opposed Keynes’s ideas from what would today be called a neoliberal position were and remain supporters of the Republican Party.

5 The most serious of these recessions was the recession of 1957-58. The violence of this recession caused the Federal Reserve System to lower interest rates “too fast.” As a result, the United States suffered its first serious external gold drain since the early 1930s. To halt the gold drain, the Fed was forced to sharply increase interest rates once again, which led to a secondary recessionary decline in 1960-61.

The “double dip” economic crisis of 1957-61 combined with the rapid advances of the economy of the Soviet Union led to widespread fears in ruling-class circles that the Soviet Union and its eastern European allies would overtake the capitalist system economically, dooming capitalism in the long run.

In the 1960 election, the Democratic candidate for president, Massachusetts Senator John F. Kennedy, ran on a platform of “getting America moving again.” Keynesian economists, who dominated Kennedy’s and his successor Lyndon B. Johnson’s economic advisors, urged that the U.S. government pursue much more vigorous Keynesian economic policies in order to boast economic growth in the United States and the capitalist world in general. They argued that this would also lower the high level of unemployment that was lingering in the wake of the 1957-61 economic crisis.

6 Keynesian economists were much more tolerant of “moderate” inflation than were the traditional liberal bourgeois economists. They often claimed that there was a trade-off between unemployment and inflation. Capitalist society, they held, could enjoy a faster rate of economic growth and lower unemployment if it was willing to tolerate a little more inflation.

7 During the Depression, some American followers of Keynes, especially Professor Alvin Hansen—who had done a rather sudden flip-flop, first opposing Keynes from a traditional economic liberal pespective, and then embracing him—put forward the doctrine that the U.S. economy had entered into a stage of “secular stagnation.” The only thing that could save American capitalism, Hansen argued, would be increasingly large doses of deficit spending.

Some American Marxists, most of whom were political and trade union activists who had little time to seriously study Marx’s critique of bourgeois political economy, embraced this view because it sounded radical. After the war, as the world capitalist economy entered a new expansionary phase, the call went up that “Marx has been refuted” by the return of what Marx had explained so well—capitalist economic growth.

Marx indeed always emphasized that capitalism was a system of expanded reproduction. If there was ever an economist of “growth,” it was Marx. While Marx had certainly not expected capitalist expanded reproduction to last forever, he nowhere wrote that capitalist expanded reproduction would continue only to the year 1929, after which it would become impossible.

Later on in these posts, I will examine the so-called breakdown theories proposed by Rosa Luxemburg and Henryk Grossman, who were Marxist thinkers who did seriously study both bourgeois political economy and the Marxist critique of it. In these posts, I will examine the ultimate historical limits to capitalist expanded reproduction and the relationship of the Depression of the 1930s to these limits.

8 This shows that there is more than one way in which bourgeois ideology can be introduced into the workers’ movement. This doesn’t mean that we can never learn anything from bourgeois economists. Marx, after all, took most of his ideas on economics from bourgeois economists and then developed them to their logical conclusion. But we must do so with eyes open, and not simply grab onto every intellectual fad among bourgeois economists simply because it sounds “radical.” That is why I am dedicating a considerable amount of space in these posts to dealing with Keynes and his ideas. Keynes deserves serious attention precisely because he has had such an influence among bourgeois and Marxist economists alike.

9 From Adam Smith to John Maynard Keynes, the British economists dominated political economy. This is not so surprising when you realize that Britain not only pioneered industrial capitalism from the later 18th century onward, but was also the first modern capitalist industrial country to experience economic decline. While Adam Smith and Ricardo represent the rise of British industrial capitalism, Keynes represents its decline.

10 Before the industrial revolution of 1760-1830, it was the merchant or trading capitalists who dominated the capitalist world, not the industrial capitalists. Since merchant capitalists make their profit by buying cheap and selling dear, the early economists—known as mercantilists—thought that profit or surplus value arose in the sphere of circulation.

11 Marx pointed out that scientific—classical—political economy could only exist in a period when class contradictions were immature. Once the class antagonism between the workers and capitalists developed to a certain point, scientific economics on a bourgeois basis became impossible. We see this today in the stubborn refusal of our modern bourgeois economists to return to the concept of labor value, which alone can really explain among other things economic crises such as the one we are going through today.

12 According to marginalist theory, the landowners who “represent” land as a “factor of production” somehow deserve the rent that land produces. The marginalists claim that capitalists “earn” interest because otherwise all of society’s capital would be consumed in personal consumption. But land is produced by nature and not by any “services” performed by landowners. Even if we accept the claim of the marginalists that land produces rent, then how exactly is the landowner supposed to “earn” the rent that according to even marginalist theory is produced not by the landowner but by the land itself.

13 The period between the 1873 and 1896 was marked by long periods of falling prices interrupted by shorter periods of rising prices. During the periods of rising prices that did occur, prices rose less than they fell during the longer periods of falling prices. Since periods of falling prices were associated with periods of stagnation and depression, the period became known as the “Great Depression.” Later, however, the term “Great Depression” was applied to the 1930s during which the crises and levels of unemployment far exceeded anything that had occurred between 1873 and 1896. However, the “Depression” of 1873-1896 did last much longer than the 1929-40 Great Depression, which lasted “only” a little more than a decade. In order to distinguish between these two episodes in economic history, some historians have renamed the 19th-century episode the “Long Depression.”

14 I have borrowed this terminology from Ernest Mandel. In later posts, I will examine Mandel’s theory of “long waves.”

15 The Liberal Party is descended from the Whig Party, which represented those members of Britain’s governing landed interests who were more sympathetic to the transformation of Britain along bourgeois lines than were the more conservative Tories, who were the forerunners of the modern British Conservative Party.

11 Responses to “The Ideas of John Maynard Keynes”

  1. Are Keynes and Marx Compatible? « A Critique of Crisis Theory Says:

    […] I have already written on Keynes and his relationship to Marx in my main posts, questions by readers and events demand that I take another look at the relationship between these […]

  2. Magpie Says:


    Very interesting and informative article.

    Thanks for posting it.

  3. Wolfgang Waldner Says:


    you don`t need any theory of long waves. The Great Depression has been caused to restore wages and prices to their pre-war gold value in GB and USA. Keynes wrote:

    “But I think that Mr. Churchill`s experts also misunderstood and underrated the technical difficulty of bringing about a general reduction of internal money values. When we raise the value of sterling by 10 per cent we transfer about £1,000,000,000 into the pockets of the rentiers out of the pockets of the rest of us, and we increase the real burden of the National Debt by some £750,000,000… I think that the minds of his advisers still dwelt in the imaginery academic world, peopled by City editors, members of Cunliffe and Currency Committees et hoc genus omne, where the necessary adjustments follow »automatically« from a »sound« policy by the Bank of England.”

    Keynes, »The Economic Consequences of Mr. Churchill« (1925), Essays, p. 250f.

    “The Bank of England is compelled to curtail credit by all the rules of the gold standard game. It is acting conscientiously and »soundly« in doing so. But this does not alter the fact that to keep a tight hold on credit – and no one will deny that the Bank is doing that – necessarily involves intensifying unemployment in the present circumstances of this country. What we need to restore prosperity to-day is an easy credit policy. We want to encourage business men to enter on new enterprises, not, as we are doing, to discourage them. Deflation does not reduce wages »automatically«. It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression.”

    Keynes, »The Economic Consequences of Mr. Churchill« (1925), Essays, p. 259.

    “The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.”

    Keynes, »The Great Slump of 1930« (1930), Essays, p. 135.

    “Moreover, even if we were to succeed eventually in re-establishing output at the lower level of money-wages appropriate to (say) the pre-war level of prices, our troubles would not be at an end. For since 1914 an immense burden of bonded debt, both national and international, has been contracted, which is fixed in terms of money. Thus every fall of prices increases the burden of this debt, because it increases the value of the money in which it is fixed. For example, if we were to settle down to the pre-war level of prices, the British National Debt would be nearly 40 per cent greater than it was in 1924 and double what it was in 1920; the Young Plan would weigh on Germany much more heavily than the Dawes Plan, which it was agreed she could not support; the indebtedness to the United States of her associates in the Great War would represent 40-50 per cent more goods and services than at the date when the settlements were made; the obligations of such debtor countries as those of South America and Australia would become insupportable without a reduction of their standard of life for the benefit of their creditors; agriculturists and householders throughout the world, who have borrowed on mortgage, would find themselves the victims of their creditors. In such a situation it must be doubtful whether the necessary adjustments could be made in time to prevent a series of bankruptcies, defaults, and repudiations which would shake the capitalist order to its foundations. Here would be a fertile soil for agitation, seditions, and revolution.”

    Keynes, »The Great Slump of 1930« (1930), Essays, p. 138f.

    Irving Fisher 1933:

    “38. On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.”

    “The Debt-Deflation Theory of Great Depressions”, Econometrica, S. 346

    Why did the Marxists not fight against the deflationary policy?

  4. Bri Says:

    Wow. This explanation of Keynes theory is really great. I am writing a paper on Keynes ideas for my History class and I was having quite a hard time trying to find the right information, it being explained well and correct. This explanation was truly helpful.

    • Jesús Muñoz Says:

      I ahve an article that resumes Keynes’s ideas in Keynes and macroeconomics after 70 years. Its name is “Keynes the Keynesian,,,”, EE, 2006, UMKC-CFEPS

      Jesús Muñoz

  5. PawelSz. Says:

    At first I would like to apologize for put this question here, but I don’t know how to send it to the Author or ask him by another way. I couldn’t find an e-mail contact.

    I want to ask what is your opinion about co-called “distributism” and other forms of “non-capitalist” free market economic theories, like mutualism and free-market anarchist anti-capitalism (sic!)? The problem is that, they reject the monopoly power of “Big Business” and the democractic-planned economy of socialism in favour of “petite-bourgeois” property of small individual producers and see the state as a assistant in economic activity. This is the most important difference with right-wing libertarianism and (neo)Austrian school of vulgar political economics.

    Here I post the text about the distributist ideas


  6. Says:

    U truly made quite a few good items with your blog, “The Ideas of John Maynard Keynes |
    A Critique of Crisis Theory”. I’ll remain heading back to ur page soon enough. Thx ,Milan

  7. kouakou Says:

    xlu c’est menard etudiant en sce eco juste pour apprecier keynes

  8. Rachel Says:

    Can anyone help please – I am extremely confused I am studying Keynes and I am required to assess what degree Keynesian approach can be abandoned (slow recovery) or whether the bank of England will adopt another ‘economic school’ – I would be so grateful if someone could lead me in the right direction – PLEASE

    Please reply – I am desperate

    Kind Regards xxx

  9. onyinye Says:

    The kynesian school of political economy can only work during the time of crisis and can do no more. Do you agree? pls ah need an answer to this….can any one help

  10. James W. McGillivray Says:

    I think that there is a great defect in the thinking of Keynes and his followers! They seem to be ignoring the fact that the greatest part of the Money Supply is not Gold not Silver nor even Paper money[Banknotes], whether the product of a Central Bank or a private ly owned bank, but rather it is Credit money or Bank Deposit money, which is a creation of the banking system. The result is that the money supply exists with a balancing debt and that this debt pays interest to the banks in the banking system. The result of this is that the economy of the country is subject to/ hostage to/ controlled by, the banking system. The result is a continuing inflation with interspersed economic depressions or recessions, and not a few mental depressions as well.
    There is a very good quote from Marx about this but I can not find it at the moment.
    What is needed is a serious examination of the benefits of fiat money, produced and controlled by the state, and actively and openly and publicly managed. The very mention of fiat money raises cries of heresy and leprosy to the unwashed, but it is fiat money that is used through all the world now . The fact is that 97% of the money supply is bank created and paying interest to the banks. It is a very good thing for them but not so good for the rest of us.
    Look up ‘Cash reserve ratio’ and see what it tells you!
    Read “Webb of Debt’ by Ellen Brown.

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