Keynes and the General Theory 1

Really and truly I do not know how to thank the many friends who continue to visit this humble site. At the risk of having the 'Krisis' book pillaged (only joking!) and seeing how popular the discussions of Keynes and Schumpeter have proved (but believe me, friends - Nietzsche may be a lot more difficult, yet he is far more significant in terms of reaching a critique of the bourgeois Rationalisierung), I am consolidating here my notes on 'Keynes and the Neo-Classics', between the October Revolution and the New Deal. Fascinating stuff, I hope you agree.

Incidentally, we are now close to the 100,000th visit! Small wonder we have shot up to the top of most Google Searches on "Economics” and social theory! Ciao a tutti.

In a recent intervention, Kenneth Rogoff has opined that the historically low levels of interest rates seen since "the Great Moderation" were probably due all along more to central-bank policies than to what Bernanke called "the savings glut" from so-called emerging markets. A related talking point is provided by Lawrence Khoo, who claims that the transmission mechanism between monetary policy and investment and its effects on asset prices bears little relation to what "normal economic science" suggests.
All throughout, what we are witnessing is a growing need to devote less attention to what Marshall called "the universal truths" of Political Economy (Classical and Neo-Classical) and more to "the concrete truths" of bourgeois capitalist institutional practice. (The New Institutional Economics, from Coase to Williamson is a very flawed first attempt to do just this.) For this purpose, I have collated some of my commentary (both here and at Martin Wolf Exchange) in a two-part blog called "Keynes and the General Theory". One of the interesting conclusions that I suggest is that Keynes never intended to write a "General Theory" and that indeed the entire thrust of that work (contrary to the "Treatise on Money") is precisely to argue the opposite - and that is, that a "general" theory of economics is impossible and that we must pay close attention to the institutional reality of each "stage of capitalism" (something that people like Schumpeter and Minsky were eager to do).

1. – Theoretical Origins of the Crisis-State

The most important distinguishing mark of neoclassical economic theory is its pure “subjectivism”. Under the pretext of championing “individualism” and contrasting “collectivism”, the Neoclassical Revolution is an intransigent and powerful reaction to the rising tide of working-class movements in Europe that contrast the rule of the bourgeoisie under the banner of Socialism. The life-and-death problem for European bourgeoisies still tied to feudal and dynastic aristocratic traditions of government is how “to include” the mass of industrial proletarian workers that the First Industrial Revolution has spawned and concentrated “dangerously”  in urban industrial centres in which the interdependence of “social labour” requires a level and intensity of political co-ordination that the old laissez-faire attitude theorized by Adam Smith and the Anglo-Saxon liberalists simply cannot supply. The threat of socialist revolution is present and growing by the hour. Imponent mass parties representing the rights of “labour” are surging in every nation and demanding “representation”, even the opportunity to govern in their own right (!) in the old “parliaments” that were previously the preserve of the nobles and notables.

The French and American Revolutions have made a return to the old aristocratic order envisaged by the Congress of Vienna absolutely untenable. When Napoleon declared to the ageing Goethe that “Nowadays, fate is Politics”, what he meant was that the only way to prevent revolutions and to preserve bourgeois public order is to integrate these vast “labouring and dangerous classes” under the political banner of nationalism. The old European state armies cobbled together and then disbanded at the whim of local “princes” will count for nothing and be ignominiously and definitively defeated and smashed by the new Napoleonic Grande Armee fighting with fervor and fierce conviction for the ideals of “Liberte’, Egalite’, Fraternite’”.

The Neoclassical Revolution stubbornly and cynically refuses to accept this new reality of the Political. Not the Political of the old Classical Political Economy and of Liberalism in which the “equilibrium” of the “self-regulating market” ensures simultaneously the ever-growing rational “growth” of “the wealth of nations”, of their “common-wealths”, and at the same time preserve a “public sphere” in which individuals may express their “free political and religious and moral opinions” so long as these do not interfere with the “operation of the free market” now elevated to a “science” governed by the “economic laws” mathematically formalized with increasing accuracy and rigor by the neoclassical school from Gossen through to Menger and Jevons, and then to the opposing extremes of mathematical formalism with Walras and of institutional practice with Marshall.

Just as the real subsumption of the production process by the bourgeoisie requires the accumulation of value the better to be able to combat the antagonism of workers to the wage relation, so this growing “intensification” of the labour process to maximize profit entails the “rationalization” of every aspect of social life – at first only those aspects connected with the process of production inside the workplace, but later also those aspects of social conduct that have to do with consumption and distribution and also with the supply of resources horizontally and vertically for production. This process of “rationalization” proceeds with the “quantification” and “measurement” of every aspect of individual and social life. Because the satisfaction of the growing needs of the workforce is seen as the increase of “wealth” due to rationalization, both Classical Political Economy and the Neoclassics see the discovery of mathematical relationships between production and distribution of the product as vital to determining the most efficient methods of production consistent with the most equitable distribution of the product. The question for economics is to define “wealth”, to describe its efficient distribution in proportion to the contribution of the various factors of production.

In the best of his “Essays In Biography”, Keynes describes with a brilliant simile the peculiarity of Marshall’s approach to the mathematical methods to be applied to economics:

Jevons saw the kettle boil and cried out with the delighted voice of a child; Marshall too had seen the kettle boil and sat down silently to build an engine. (pp.155-6)

For Marshall, Jevons has merely suggested a formal mathematical framework of interpretation of a given social reality – a “concrete truth”. But this “framework” must in no guise be mistaken for a “universal truth”: it is merely an “economic dogma” because, as Marshall well knew, “utility” itself is a purely “subjective” notion and, as such, far form leading to “concrete truths”, it may well represent the height of irrationalism, it may amount to nothing more than sheer “metaphysical dogma”. All one can do is to construct “an engine”, a “tool” or instrument for the discovery of those “regularities” of social behaviour that can guide enlightened public policy.

While attributing high and transcendent universality to the central scheme of economic reasoning, I do not assign any universality to economic dogmas. It is not a body of concrete truth, but an engine for the discovery of concrete truth. (p171)

(Keynes himself in the General Theory will not renounce the reactionary irrationalism of marginal utility theory: instead, he will compound it with his own brand of mysticism dragged to the cynical depths of “animal spirits” and “uncertainty” – and indeed of “black magic” as in his strangely sympathetic portrait of Newton’s arcane experimental practices in these ‘Essays’.)

The essential point to grasp here is that both theories of economics – the neoclassical and the socialist - take “the factors of production” as given: they differ only in how the actual “output” ought to be distributed (socialism) and about the effects of “political intervention” on the operation of the market (neoclassic). In both cases “the economy” is seen as a “given” set of technologies and a “given” set of “inputs” that can only result in a “given amount of output”. In this way, the early reflection on “economic science” is “locked out of the factory”, as it were; it does not scrutinize the process of production; like Marshall, the economic “socialists” (who form in fact the vast majority of “economists”) are concerned not so much with the inequality of income but rather with the inequality of opportunities. In other words, it is the “interference” with the proper operation of “the economy” – the production of goods and services and its “fair” sale on the market – that concerns economists: there is no notion on either the socialist or the “liberal” side that “the economy” itself, the process of production, involves an “impossible exchange”!

The economy therefore is seen as a “mechanism” that functions “objectively” in terms of “inputs” and “outputs” whose “quantity” can be determined “mathematically”. The economy can function “automatically” like a machine; it cab be operated “scientifically”, as in a laboratory experiment, for the greatest good of the greatest possible number. The “utility” of the individual matches therefore the implicit utilitarianism and egalitarianism of the Sozialismus: it is under this deception that the workers’ movement will labour from its inception to the present day. Yet it is quite evident that “the economy” does not operate automatically because it is subject to violent fluctuations and investment cycles that shake society from booms of full employment and prosperity to busts of high unemployment and depression. It is equally obvious that these “deviations” from what ought to be an “objective mechanism” manageable “scientifically” must be caused by some “interference” that relates not to the process of production itself but rather to the “distribution” of the “industrial output”.

The “hiatus”, the “gap”, lies between the moment goods are produced and the moment they are purchased: the process of production itself is not even remotely put in question either by the promoters of Socialism or by their “bourgeois” counterparts. The fact that the means of technology utilized in production and the “goods” produced for consumption (and therefore also the “materials” used for their production) may be the result of political antagonism, that they may “embody” the antagonism of the wage relation, does not in the least surface among the considerations of “economic analysis” either Classical or Neo-classical. But this “hiatus” that leads to the frequent “observable crises”, to the cycle of boom and bust of capitalist industry, and so of output and employment – this “hiatus” has to do either with the excess of consumption on the part of workers whose wages are excessive or else it is caused by the excess of investment on the part of capitalists whose unusual “profits” lead straight to “overproduction” or “underconsumption” on the part of workers whose money wages are insufficient to consume the product. In either case it is the presence of “money” that clearly causes the distortions, the “discrepancies” between production and consumption that cause “the economy” to sway from excessive production to excessive consumption, with corresponding falls in profitability, investment and employment.

In this framework of analysis of capitalist production and society, whether it is the Socialists who condemn capitalism for its “anarchical”, “unplanned” excesses that cause misery for the unemployed, or whether it is the laissez-faire liberals who blame “political interference” and the misguided attempts by “Socialist” governments to interfere with the free market operation – in both cases all “economists” can agree that it is the presence of “money” as the “veil”, the “intermediary” between production and consumption, that is – as it always was from the dawn of Christianity – “the root of all evil”.

Two central features emerge then from the peculiar Weltanschauung that both Socialism and Liberalism come to share at the end of the nineteenth century and at the beginning of the last one: the first is that “the economy” is a sphere of social activity that can function “automatically” and that is governed by “objective economic laws” provided that these are allowed to operate freely; the second is that the objective operation of the economy must be managed and planned scientifically by the State, for the Socialists, or, for the Liberals, it must be allowed to work through the self-regulation of the market without interference from the State. The role of the State “to regulate” the economy is achieved therefore through the monetary medium, either through the control of the monetary mass and the interest rate, or else through social policy that redistributes income between the social classes, or else still through direct intervention by the State in the economy through policies aimed at “buffering” the extreme swings of the market economy.

Neither in the Socialist vision of Economics, nor in the Liberal one is there any room for the State as a rightful “factor” in economic analysis: for both political positions, the State remains “external” to the operation of what is seen as a “market economy” whose only “disturbances” or “crises” are derived not internally from production but externally through distribution – distribution that boils down ultimately to “monetary” factors, whether in terms of monetary magnitudes or of monetary redistribution of income through fiscal intervention by the State. The idea of the State as an essential and necessary component of the economy was as foreign to laissez-faire liberalism as it was to the most revolutionary members of the Linkskommunismus. True it is that the Leninist faction of the Second International advocates a “dictatorship of the proletariat”. But this “dictatorship” is the equivalent of changing the drivers of the same vehicle: the idea that subtends all Socialist dogma from Proudhon to Social Democracy and Bolshevism is that the proletariat will take over the capitalist machinery of production to run it in its own interests. There is no suggestion that the social relations of production and, with them, both the means of production and the products and the methods of consumption and distribution will change as well! Even Lenin’s extensive pronouncements on the strategy and tactics of the revolutionary party will limit themselves precisely to these “strategies” in favour of the “skilled workers” who are being “supplanted by machines” and whose “artisanal skills” are lost to the universal alienation of Taylorism (lampooned by Charlie Chaplin in ‘Modern Times’) and loss of “totality” in the labour process that only the proletariat as “the individual subject-object of history” can restore! (Lukacs) It was Lenin after all, and now the fact should not seem so surprising, who stated that “Politics is a concentrate of Economics”.

Lenin has no doubts that his Bolshevik Revolution represents a leap too far – such is the “backwardness” of Russian capitalism that its “economy” will have to be “upgraded” to the level of technical and managerial leadership of German industry (see his ‘The Development of Capitalism in Russia’). But the October Revolution of 1917 will offer Keynes as early as the Versailles Treaty conference (cf. his explicit reference to Lenin in ‘Economic Consequences of the Peace’) with the “challenge” that Leninism represents for Western capitalism: here is the first and most troubling epoch-making historical and social evidence of the fact that “the economy” cannot be separated from “society” and that the Political in the final instance can destroy what had seemed until then to be “the economic laws” of any social organization. (Absurd must have seemed to Keynes the farcical attempts of Von Mises and Hayek “to prove the impossibility of a socialist economy” (!) in response to Bolshevism, written as early as the late 1920s –cf. Mises’s book, Socialism and introduction by Hayek.)

We will look in more detail at the effect of the New Deal on Keynes’s General Theory in our next piece. For now, let us end this discussion with the interesting parallel of the effect that the Bolshevik Revolution had on the two highest exponents of bourgeois economics in the 1930s – an effect that was only to be reinforced by the advent of the Rooseveltian New Deal as a portentous capitalist response to the Leninist challenge. Both Keynes and Schumpeter, in fact, who up until that time had confined themselves to critiques of neoclassical theory that were more in the nature of “cosmetic” improvements or corrections and who had shared unquestioningly the schema that we have presented here of a capitalist economic “mechanism” independent of politics and the State, following these two epochal “revolutions” in the institutional asset of the nation-state – one Leninist and the other Rooseveltian – transformed their own theoretical approaches to include precisely the possibility – and indeed the inevitability – of a fundamental role of the State, of the Political, in the essential operation and functioning of any Economy. After the Red October and after the Hundred Days, it seems, the old bourgeois illusion of the epistemological separation of Economics and Politics – of their “homologation” in separate spheres of social reality – becomes absolutely impossible. “Lenin is quoted as saying,” relates Keynes in the ‘Economic Consequences of the Peace’ (but the statement has never been corroborated), “that the best way to undermine a country is to debase its currency.”


References: http://www.scribd.com/doc/32301930/Essays-in-Biography (Keynes)

http://www.scribd.com/doc/51671231/keynes-and-the-capitalist-theory-of-the-state (This is an almost literatim - but strangely unacknowledged - translation of a brilliant piece on Keynes by Antonio Negri first published in Operai e Stato. The translation and some unauthorised intrusions make the reading sound more "triumphalist" than was even the original. But it is a useful review that some of you may wish to peruse.)

 

 

2. Science, Economy and Society

If “the economy” is a “mechanism” that connects automatically a given quantity of “inputs” with a given quantity of “outputs”, it is “axiomatic” that there must be a “scientific and mathematical” way of ensuring that this “economy” functions “automatically” – and that can be obviously by eliminating or avoiding any “disturbances” (external shocks) or “interferences” (political measures and institutions) from influencing or disrupting its operation. “Crises” therefore are not “internal” to the economy, but entirely “external”. Indeed it can be said that if the economic laws of the marketplace economy are kept in place, its reproduction will be in large part “spontaneous” or “automatic”. And it is equally obvious that for a society to reproduce the aggregate “savings” of the society must equal the aggregate “investments”: this, in a nutshell, is the meaning of Say’s Law: it is what must obtain to ensure that the sought-after “equilibrium” of the economy is attained, whether one adopts “socialist” or “liberal” policies. 

Say’s Law is the tangential point that connects the socialist circle with the liberal line. And it is Say’s Law – the fundamental Law of Economics – that makes possible the determination of an “economy” that operates “spontaneously” and “automatically” if the laws of economics are respected, in such a way that civil society, the Economy, can function entirely independently of the Political, of the State, where the State is a “negative State”, like the “economy” a mere “machine” or mechanism, confined to the protection of the self-regulating market and ensuring that “public opinion”, the moral and religious persuasions of “citizens”, do not interfere with the market and are confined to the “public sphere” of debate and deliberation. This homologation of the Political free-dom, which allows “citizens” to exist as moral members of a dialectical “public sphere”, and of the “scientific necessity” of the Economical where the “individual” attends to his “self-interest” according to his needs, as a “bourgeois” – this homologation of the conventional sphere of the Political and the hypothetical mechanism of the Economy is what unites both Classical Political Economy and Neoclassical Political Economy.

In this schema, universally accepted before the Great Depression, the State is seen as a “nightwatchman state” (in Lassalle’s phrase), as a “State of Law”, as the enforcer of laws that protect the homologation achieved by the Political Economy for the efficient operation of the economy in a free society. In this schema, the State plays absolutely no significant part, if it plays any part at all, in the substantive functioning of the economy except as a “guardian”, except as “police”, ensuring that the “self-interests” of the individual “bourgeois” are kept within the ambit of the laws of the market so as to preserve “life, liberty and estate”. But this is precisely where the homologation, the equi-valence of the Political sphere and the Economy breaks down. - Because the “self-interest” of the individual market participants may not necessarily “converge” or be consistent with the “self-interest” of other individuals. As Marshall had warned with regard to Jevons’s mathematical calculations of marginal utility, these assumed that the “utilities” of the “individual” were compatible with those of other “individuals” within the sphere of exchange defined and regulated by the market! Now, this assumption was mere “economic dogma” and could in no guise lead to the certainty of “concrete truth”. The “laws of economics” presuppose axiomatically the existence of a “common utility” between all market agents; they postulate the existence of a Smithian “enlightened self-interest” whereby the self-interest of the single bourgeois is somehow compatible with that of every other bourgeois at least in the sense that they can “co-exist”. Even assuming the existence of “economic laws”, it is evident that the “agreement” by all market participants to abide by them is dependent on the “scientific rationality” of individuals and on the existence of a “civil society” in which there is consensus to be governed by a State, by political institutions, that will enforce the undisturbed operation of the “self-regulating market”.

It is precisely the assumption in both Classical and Neoclassical economics of the axiomatic necessity of the existence and of the spontaneous automatic operation of these “institutions” that Keynes challenges from the very first sentences of the General Theory.

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical [1] theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that 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. (p3)

Rightaway, Keynes invites his readers to reverse the order of analysis of “classical” (orthodox bourgeois) economic science: the “laws” postulated by that “science” apply only as a “limiting point of the possible positions of equilibrium”; they represent only “a special case” whose characteristics “happen not to be those of the economic society in which we actually live”. Gone, therefore, are the “axioms” of “economic dogma”; gone are the postulates of economic science with its neat mathematical equations and its “certainties” of rigorous “existence” of “equilibrium”. The only “existence” that is relevant is not that of mathematical equilibria, but the ec-sistence of this society – “the economic society in which we actually live”! There is no “necessity” to these “characteristics”: they simply “happen” not to be those of the existential reality in which we “actually live”. Life is not mathematics; “concrete truths” are not “universal truth” (Marshall). Beneath the apparent “automatic” functioning of the market laws there lies a social reality that is as complex as human existence, as “meta-physical” as the very “metaphysics” that neoclassical economic science despises!

Just as Einstein had shattered the “uni-versality” of Newtonian physics, just as Nietzsche and Heidegger had “trans-valued” the old values of Western metaphysics – so now does Keynes turn upside down or “reverse” the perspective of Neo-Kantian and Machian economics. Nothing is absolute: everything is relative. To orient ourselves in this society we must ensure that the so-called “laws of economics” that supposedly maximize the “welfare” of the society do not destroy first in the process of their “theoretical” operation the very “society” on which they are founded: “with the result that its teaching [that of orthodox economics] is misleading and disastrous if we attempt to apply it to the facts of experience”.

And “the facts of experience” teach us instead that there are forms of behaviour or “institutions” that are peculiar to “the economic society in which we live”: not all or every (!) “economic society”, then; only the one “in which we live”. And this “economic society” happens to be a capitalist society. Society comes first; economics later. If we wish to preserve “this” (!) society – a “capitalist” one – we must then adapt existing institutions and adopt new ones that will ensure the survival and reproduction of a specifically “capitalist” society: we must prescribe the institutions that can make up a “society of capital”! To insist with abstract “economic laws”, to affirm their “eventual” triumph – “in the long run” – can lead only to the tearing of the fabric of this society on which this “economy” is founded. 

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a Society which was functioning after the [p.34] manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.


Therefore, “in the long run we are all dead” does not mean (as many superficially take it to mean) that “all things must pass”! Keynes is saying instead that if we choose to adopt “the long run” as an inflexible mode of conducting capitalist society – then, in that “long run”, “we as capitalists”, the economic, capitalist society “as we know it”, “in which we actually live”….will die (!), and “we, the capitalists, will die with it”. Keynes is not referring to “mankind” in general: he is addressing his own class and this society, which is the only form of civilized society that he knows, that he can conceive as worthy of inhabiting. That it is the survival of “bourgeois society” that Keynes had in mind, that this was the context in which his famous maxim was uttered, is illustrated clearly and dramatically by Hayek’s direct response to the Keynesian subversion of the nature and content of “economic analysis”, from “science” to virtual “policy”.

I cannot help regarding the increasing concentration on short-run effects—which in this context amounts to the same thing as a concentration on purely monetary factors— not  only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization….It used, however, to be regarded as the duty and the privilege of the economist to study and to stress the long-run effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man, who in any event would see only the latter and nothing else.3 (Hayek, The Pure Theory of Capital, p,409). (my emphases)

The polemic with Keynes is evident. “In the long run, we are all dead”, of course, but Hayek hankers by “spontaneous”, “long-term” processes (he would refrain from saying “natural”, as in the “natural prices” of long-term equilibrium) - processes that display the “underlying logic of human action”, - an “open-ended” notion, to be sure, but one from which a “pure logic of choice” may be distilled (the word used by Bohm-Bawerk in his tirade against the German Historical School) – a spontaneous order to be protected from the extrinsic “short-term policies” introduced by “interventionist” governments and the “disturbances” that they cause, as displayed by “the trade cycle”. To interfere with this “pure logic of choice” or “science of choice” is not only “an intellectual error”, but a “betrayal and a grave menace” to civilization itself!

“But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the short-sighted philosophy of the business man raised to the dignity of a science. Are we not even told that, "since in the long run we are all dead", policy should be guided entirely by short-run considerations? I fear that these believers in the principle of apres nous le deluge may get what they have bargained for sooner than they wish,” (p410, my emphases).

For Hayek, it is the Keynesian urge to interfere with the “spontaneous order” of social life as encapsulated in the tenets of economic “science” that represents a nihilistic betrayal both of science and of civilization. Keynes’s “General Theory” is the abandonment of reason for the very “short-run” preservation of capitalist society – an “interference” with “those forces which in the long run determine prices and production” done in the name of a “short-sighted philosophy” that can only compound and hasten (“sooner than they wish”) the decadence and decay and decline of “civilization”, that is to say, of bourgeois society and its “economy”.