Capitalist Revolutionary: John Maynard Keynes

Published by EH.NET (December 2011)

Roger E. Backhouse and Bradley W. Bateman, Capitalist Revolutionary: John Maynard Keynes. Cambridge, MA: Harvard University Press, 2011. 208 pp. $26 (hardcover), ISBN: 978-0-674-05775-3.

Reviewed for EH.Net by Steven Kates, School of Economics, Finance, and Marketing, RMIT University, Melbourne.

Two prominent economists, one English and one American, have written a book about how Keynes and Keynesian economics have shown their mettle over these troubled years since the Global Financial Crisis (GFC). Roger Backhouse and Brad Bateman have titled their work Capitalist Revolutionary: John Maynard Keynes. It is a work of counter-revisionist history even before we revisionists have had a chance to tell our own story first.

The book is about the non-war in economics that ought to be happening but isn?t. It is a defense of Keynes and Keynesian economics against post-stimulus attacks that, other than in a few instances, have not occurred at all. It sets Keynes up as a counter to an extreme libertarian laissez-faire strawman view of how economies ought to be left alone in all instances, first in their regulation and then in allowing recessions to burn themselves off when they come. They therefore conclude that given this is the choice, Keynes is the answer. Well, if that were the choice, Keynes would be the answer, but since it?s not the actual choice we have, they do not really satisfy the criticisms of anyone who holds neither Keynesian nor such extreme libertarian views.

I certainly agree with them that modern macroeconomic theory is a mess. But since I believe that a large reason for that mess is the economics bequeathed to us by John Maynard Keynes, the book does nothing in my view to set matters straight. But of this no one should be in any doubt: the book is about how Keynes saved capitalism ? and for the second time as well. To write (p. 139) about the stimulus in conjunction with lower interest rates that ?they worked? and that Keynes ?was vindicated? by how things have turned out, makes their views on Keynesian macro very clear. The main issue for them is how to separate the true message of Keynesian theory from other strands of economic thought or even from among the various contending schools of those who today call themselves Keynesians.

Backhouse and Bateman correctly observe that in reaching any conclusion about Keynesian economics we must first distinguish which Keynes we mean. This is an old story in the history of ideas. We live in the present and the writers we discuss all lived and wrote in the past. How do we find that historical genuine article and distinguish it from our own prejudices and present day beliefs? One must first sort through the astounding amount of material first written by Keynes himself and then afterwards by everyone else over the past seventy-five years to find just what it was he said and wrote that worked so well and vindicates his vision. One must also sort through the various fashions in economic theory that have existed over the past three quarters of a century that have further distorted the ability to see Keynes?s original message.

So let me say that I unreservedly agree with them about what they believe Keynes?s message in The General Theory to have been: ?His main insight was the idea that the level of economic activity was determined by what he called ?effective demand? for goods and services? (p. 6).

And I again agree with them completely where they remark that ?the central theoretical argument [is] about the possibility of insufficient aggregate demand, without which neither the book nor the policy would make sense at all? (p. 123).

Being Keynesian in theoretical terms means accepting the notion of aggregate demand as a force independent of aggregate supply acting on the level of economic activity. It is a theory that overwhelmingly places the emphasis on buying and not on producing. And in policy terms, being Keynesian reflects a belief that public sector spending during recessions creates a longer term net improvement in the level of economic activity ? or more importantly perhaps, in the rate of unemployment ? compared with what would have occurred had there been no increase in outlays by governments. I think they do a very valuable service in focusing on this since it clears away a good deal of the rhetoric around not just the nature of the stimulus, but also about whether the C+I+G version of textbook macro is Keynesian irrespective of whether or not it is labeled in that way. As is clear from what they write, it is all Keynesian to the very bones.

They unfortunately then weaken this insight by arguing that Keynes is just a name for the confluence of all of the ideas that were bubbling around during the 1930s, and lest there be any doubt about what they meant, the heading for this section is ?The Myth of the Keynesian Revolution? (p. 21). And as many others have done before them, much stress is placed on uncertainty being perhaps the most important factor of all, of which they state ?this uncertainty means that financial markets cannot be trusted to coordinate saving and investment decisions? (p. 7). A very big call indeed, especially since for many the existence of uncertainty is the very reason why financial decisions should be left to the market.

But in recognizing that what makes Keynes Keynes is that he brought aggregate demand into economic theory, Backhouse and Bateman recognize the significance of the disappearance of what had been a universally accepted principle among classical economists, a principle which now goes by the name Say?s Law which was defined in classical times as demand is constituted by supply, that is, that demand and supply at the aggregate level are one and the same. That Say?s Law is now rejected by all right thinking economists may be Keynes?s most enduring legacy as he was at pains to claim himself. But since Say?s Law specifically states you cannot make an economy grow by increasing demand without first increasing value adding supply, you can see how relevant it is to this entire debate. It was this principle that was at the center of the classical theory of the cycle which Keynesian theory so comprehensively caused to disappear.

Why does all this history matter? Because it is possible to have an alternative vision of Keynes and Keynesian economics that sees the Keynesian legacy as one of mass economic destruction without having to resort to some extreme laissez-faire view. As I look over the wreckage caused by the stimulus, it occurs to me that Keynesian theory ought now to be so discredited that there could be no possible recovery from a debacle as deep and widespread as this, that no one could possibly look at the events following the stimulus and see anything other than abject failure. Who would have thought that instead a book would be published arguing Keynes had been vindicated even as policy makers are struggling with the consequences of the Keynesian stimulus?

So let me point out that there were two aspects to the downturn in 2008-09. There was firstly the financial crisis which was caused by a series of misadventures whose causes do not concern me here. But the solution to the problems of financial meltdown has been known at least as far back as Walter Bagehot writing in the 1870s. Money markets were therefore stabilized, either at the end of 2008 but certainly by the start of 2009. This is the regulated form of capitalism that is near-on universally accepted and the underlying dynamics were entirely understood in classical terms. But none of this was even in the slightest a ?Keynesian? measure.

But then we came to dealing with the slowdown and the rise in unemployment that followed the GFC. For some reason the idea caught on that the world?s economies were about to repeat the Great Depression so that further emergency measures were needed. It was this belief that led to the introduction of stimulus packages around the world. The problems caused by the stimulus itself are the main problems we are dealing with today, not the original financial meltdown. This is a distinction that Backhouse and Bateman do not make which clouds rather than clarifies the issues now before us.

In much of their analysis Backhouse and Bateman continually focus on the failures of something they refer to as ?capitalism.? Their focus is not on the market economy or economies generally but on this much larger but entirely undefined entity. What, for example, does it even mean to be a ?capitalist revolutionary? as stated in the title of the book? What, for example, do they mean by ?the instability of capitalism? (p. 124) or when they state that World War I had ?shattered the illusion that capitalism was inherently stable? (p. 82)? Do they have in mind something more than a restatement of the obvious, quite clearly known to every classical economist ? that economies often run into rough seas? What are we to make of the statement that ?Keynes had developed the tools he needed to diagnose the ills of capitalism? (p. 99) rather than perhaps the ills of a market economy? They seem to have a caricature in mind of what defenders of the capitalist system believe and argue. They seem to see such people demanding absolutely no government regulation of any kind as the only acceptable policy. As they write:

?Advocates of capitalism seem to come only in variants of a similar argument: either you have laissez-faire or you have socialism. It seems almost impossible, in the polarized world in which we live at the beginning of the twenty-first century, for many people to imagine that one could favour capitalism but also believe that it doesn?t always function well. In fact, this type of belief is so prevalent that it is difficult to conjure a contemporary advocate of capitalism who is willing to admit that it may need to be regulated or that it could possibly fail to ?deliver the goods?? (p. 157-58).

Well, if they are looking for a ?contemporary advocate of capitalism,? they will not find anyone more that way inclined than I am. Let me therefore contrast their view with the opening four paragraphs of my Free Market Economics (2011), which? is about as contemporary as you can get.

?This is a book about the market economy.

?A market economy is one in which overwhelmingly the largest part of economic activity is organised by private individuals, entrepreneurs, for personal profit. Such entrepreneurs are private citizens not government employees. They make decisions for themselves on what to produce, who to hire, what inputs to buy, which machinery to install and what prices to charge.

?There are, of course, in every nation-state legislative barriers put in place by governments which limit every one of these decisions. No market is or ever has been even remotely laissez-faire. Entrepreneurial decisions are circumscribed by the laws, rules and regulations that surround each and every such decision.

?And in every economy there are various areas of production undertaken by governments to a greater or lesser degree. There is no economy without government production of various kinds? (p. 1).

Who would not agree? There is nothing whatsoever controversial about any of this. There may be disagreement about what to regulate and how to do it, but no disagreement exists about the absolute need for regulation of some kind or another. And a large part of the book deals with the classical theory of recession. Recessions may or may not be examples where the capitalist system ?doesn?t always function well? but you cannot conjure an economic system that creates growth, innovation and rising real incomes that does not also generate cyclical activity. People make mistakes, on the real side and on the monetary side, on the business side and on the policy side, with consequent recessions and unemployment.

In the final analysis, I agree with Backhouse and Bateman that there are enormous risks at the present time, but they are not risks due to flaws within the capitalist system itself, but from the means governments have chosen to regulate its operation. Books such as theirs, which argue that it is only through ever more detailed government regulations and high levels of public spending that capitalist economies are able to perform, are not just in my view wrong, but are themselves putting our economic system, and much else, at risk.

Books such as this also take us farther away from a proper understanding of how an economy works and what can and should be done to improve the operation of our economic system. In my view, based on the recent evidence of the stimulus, Keynes and Keynesian economics really do need to be abandoned. Who would any longer trust a policy based on an explicitly Keynesian model? We should therefore be looking at alternatives to this Keynesian vision, and in my view, the most useful place to look would be at the theories of the cycle developed by those long ignored classical economists who quite well understood that recessions were a periodic certainty, had explanations for the causes of such recessions and knew what to do when they inevitably occurred.

The book Bateman and Backhouse have written seems to be a call for complacency, which in my view is the last thing we economists are in need of today.

Steven Kates is a Senior Lecturer in economics in the School of Economics, Finance and Marketing at RMIT University in Melbourne, Australia.? He is the author of Free Market Economics: An Introduction for the General Reader, Edward Elgar, 2011.

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