Keynes's use of the MEC fitted in with his emphasis on indirectly manipulating the level of investment. In Cairncross' words:
Even when Keynes felt that market forces were not working satisfactorily and would work better with government intervention, he thought instinctively of redirecting these forces rather than superceding them. For example, he was much impressed by the instability of the commodity markets and with the wild swings in the world price of the primary commodities within extremely short periods. All this seemed to him highly inefficient and quite unnecessary. But his proposed remedy lay in a scheme for buffer stocks which would leave the commodity market discharging their normal function and allow the buffer stock manager to intervene freely and profitably ...
He was particularly insistent on the need to control investment, domestic and foreign ... I doubt whether he would have ever favoured control of private industrial investment, but several times he urged the setting up of a National Investment Board to coordinate the larger schemes of capital development. (Cairncross, 1978. p. 42) Keynes' advocacy of government policies to stimulate the economy was closely related to his social and political preferences. He was contemptuous of a purely capitalist economy and too hostile towards the alternatives to make a complete break with the market, complaining:
The decadent international but individualistic capitalism, in the hands of which we found ourselves after the war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous -- and it doesn't deliver the goods. In short, we dislike it and are beginning to despise it. But when we wonder what to put in its place, we are perplexed. (Keynes, 1933b, p. 239) Keynes argued in favour of letting 'private self-interest determine what in particular is produced' so long as public agencies took on the responsibility of keeping aggregate production strong enough to maintain full employment (Keynes, 1936, p. 379). He thought that this policy promised to forestall the dreaded possibility of 'far reaching socialism' (Keynes, 1930c, VI, p. 346), but he acknowledged: 'In matters of economic detail, as distinct from the central controls, I am in favour of retaining as much private judgement and initiative and enterprise as possible' (Keynes, 1933b, p. 240). He warned:
We must aim at separating those services which are technically social from those which are technically individual. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for government is not to do things which individuals are already doing, and to do them a little better or a little worse; but to do those things which at present are not done at all. (Keynes, 1926a, p. 291)
Keynes included tax incentives, exchange control, regulation of transportation and town planning as technically social policies (Keynes, 1932b, 88-9). In the world that Keynes envisagned, educated people such as himself would devise a 'comprehensive socialisation of investment' without socialism (Keynes, 1936, p. 378), thereby removing the 'objectionable features of capitalism' (Keynes, 1936, p. 221). In the Treatise, he concluded: 'The remedy should come, I suggest, from a general recogni-tion that the rate of investment need not be beyond our control, if we are prepared to use our banking system to effect a proper adjustment in the market rate of interest (Keynes, 1930c, VI, p. 346).
By the time the General Theory appeared, Keynes had experienced gnawing doubts about the possibility of controlling investment merely by manipulating the rate of interest and taxation (Keynes, 1936, p. 378; see Moore, 1986; Dimand, 1986), or even by government policies designed to improve the investment climate, but the emphasis on government stimulation was undiminished. As Keynes explained:
It is not quite correct that I attach primary importance to the rate of interest. What I attach primary importance to is the scale of investment and am interested in the low rate of interest as one of the elements furthering this. But I should regard state intervention to encourage investment as a more important factor than low rates of interest taken in isolation.
The question then arises why I should prefer rather a heavy scale of investment to increasing consumption. My main reason for this is that I do not think that we have yet reached anything like the point of capital saturation. It would be in the interests of the standards of life in the long run if we increased our capital quite materially. After twenty years of large-scale investment I should expect to have to change my mind ...
There is also a subsidiary point that, at the present stage of things, it is much easier socially and politically to influence the rate of investment than to influence the rate of consumption. (Keynes to Wedgwood, 7 July 1943, CW XXVII, p. 350)
Keynes believed that 'Much the greater part -- probably not less than three-quarters of the Fixed Capital of the modern world consists of Land, Buildings, Roads and Railways' (Keynes, 1930c, VI, p. 88; see also p. 326). Since such goods seem to be appropriate for public investment, the investment rate should not be difficult to control. He noted:
It is quite true that a fluctuating volume of public works at short notice is a clumsy form of cure and not likely to be completely successful. On the other hand, if the bulk of investment is under public or semi-public control and we go in for a stable long-term programme, serious fluctuations are enormously less likely to occur. (Keynes to Meade, 27 May 1943, CW XXVII, p. 326)
Thus a public authority must assume responsibility for maintaining a high level of investment. In the Treatise, he wrote:
Perhaps the ultimate solution lies in the rate of capital development becoming more largely an affair of state, determined by the collective wisdom and long views. If the task of accumulation comes to depend less on individual caprice, so as to be no longer at the mercy of calculations partly based on the expectation of life of the particular mortal men who are alive today, the dilemma between thrif and profit as the means of securing the most desirable rate of growth ... will cease to present itself. (Keynes, 1930c, VI, p. 145; see also Keynes, 1937a, pp. 394-5) Keynes did not necessarily intend that this 'affair of state' be synonymous with state ownership. One of his private memoranda read:
If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control. (Keynes, 1943b, p. 322)
Keynes had hinted at a similar solution some 20 years earlier in his essay, The End of Laissez-Faire, speculating:
[I]n many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that the progress lies in the growth and the recognition of semi-autonomous bodies within the State -- bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded. (Keynes, 1931e, p. 288) Public investment could also serve as a pattern for private investors to emulate (Keynes, 1927, p. 646). Keynes wrote, 'the State [functioning through this group] would fill the vacant post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather doing so on the merits of the case and not at the behest of dogma' (Keynes, 1943b, p. 324).
Over and above his unsystematic remarks and his political activities, Keynes never clearly defined his 'comprehensive socialisation of investment'. Perhaps the closest realization to what Keynes had in mind was Sweden during the Social Democratic era. Like Keynes, the Swedish leaders combined largely private ownership and a strong reliance on certain market forces with selective, but energetic economic intervention (Lundberg, 1985; Jonung, 1981). He was irritated during a lecture in Sweden when the audience failed to appreciate the novelty of his work (Jonung, 1987). Despite his lack of specificity about his meaning, he was consistent in recognizing the need for some sort of 'socialist action by which some official body steps into the shoes which the feet of the entrepreneur are too cold to occupy' (Keynes, 1930c, VI, p. 335). He declared: 'Perhaps the ultimate solution lies in the rate of capital development becoming more largely an affair of state, determined by collective wisdom and long views' (Keynes, 1930c, VI, p. 145). Later, he returned to the subject:
I believe that some co-ordinated act of intelligent judgement is required as to the scale on which it is desirable that the community as a whole should save, the scale on which these savings should go abroad in the form of foreign investments, and whether the present organization of the investment market distributes savings along the most nationally productive channels. (Keynes, 1931e, p. 292) Keynes was so confident about the ability of the government to stimulate investment, that he fretted that such a policy could prove to be self-defeating in the long run as the MEC fell to zero 'comparatively soon -- say within twenty-five years or less' (Keynes, 1936, p. 220; see also pp. 230 and 275; 1933b, p. 324; and 106; 1943b, p. 350; and Chernomas, 1984). He wrote:
Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce ...
[O]nly experience can show how far the common will, embodied in the policy of the State, ought to be directed to increasing and supplementing the inducement to invest; and how far it is safe to stimulate the average propensity to consume, without forgetting our aim of depriving capital of its scarcity-value within one or two generations. (Keynes, 1936, p. 376-77) The speed with which the MEC falls is related to Keynes' presumption that fixed capital represented a 'trifling' portion of the aggregate stock relative to liquid and circulating capital (Keynes, 1930c, VI, p. 326; see also p. 88; and 1943b, p. 322). In other words, a small absolute addition of fixed capital represents a relatively large proportion of the stock of fixed capital, thus driving down the MEC.
Unfortunately, beyond a few vague remarks, Keynes did little to enlighten his readers on the institutional framework of the capitalist society, which would emerge after the MEC became zero, except to throw out a flippant remark about the 'euthanasia of the rentier' (Keynes, 1936, p. 376; see also p. 221) or to allude to a story about Alexander Pope's father (Keynes, 1936, p. 221). Keynes was honest about his lack of specificity, confessing: 'We have no clear idea laid up in our minds beforehand of exactly what we want. We shall discover it as we move along' (Keynes, 1933b, p. 758).
Similarly, according to his own evaluation of the General Theory: 'I consider that my suggestions for a cure, which, avowedly, are not worked out completely, are on a different plane from the diagnosis. They are not meant to be definitive' (Keynes, 1937b, p. 221). Moreover, Keynes understood the need to do something, anything, rather than sink into a passive acceptance of the horrors of the Great Depression. He wrote: 'Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits -- of a spontaneous urge to action rather than inaction' (Keynes, 1936, p. 161).
Keynes' Project and the Monetary Theory of Production Some unique innovation had to justify the great pride that Keynes took in distancing himself from 'orthodox theory', which he wrote off as 'wholly inapplicable to such problems as those of unemployment and the trade cycle, or, indeed, to any of the day-to-day problems of ordinary life' (Keynes, 1937d, p. 423; see also 1936, p. 3). Probably the specific innovation that Keynes had in mind was his monetary theory of production, especially with regard to the effect of the monetary system on investment. Once he embarked on this analysis, he no longer sounded as pessimistic as he did in his Chicago address. His old confidence resonated in his reply to Shaw, published in The Nation and New Statesman in November 1934: 'The economic problem is not too difficult to solve. If you leave it to me, I will look after it' (Keynes, 1934b, p. 34).
In his open letter to President Roosevelt, published in the New York Times of 31 December 1933 and in a very similar piece in The Listener, Keynes acknowledged that neither private business investment nor consumer demand could lift the economy out of the doldrums. Business would be loath to move without the public agencies taking the lead. So 'the initial major impulse' had to come from 'the public authority [being] called in aid to create additional current incomes through the expenditures of public authority' (Keynes, 1933e, p. 291, and 1934a, p. 308). He concluded:
I lay overwhelming emphasis as the prime mover in the first stage of the technique of recovery on the great increase of national purchasing power resulting from governmental expenditure financed by loans. Nothing else will count in comparison with this. The position six months hence will mainly depend on whether the foundations have been laid for larger loan expenditures in the future. (Keynes, 1933c, p. 300; see also 1934a, p. 308) He recommended raising asset values through open market operations, but offered little more to clarify his proposals.
Obviously the Times provided a poor vehicle for Keynes' sophisticated monetary theories, especially when attempting to communicate with an administration, which he felt had been seduced by foolish notions about manipulating prices through devaluing gold or via Roosevelt's National Recovery Administration. Although Keynes went out of his way to attack those policies, his overture seemed to succeed. Walter Lippman informed him:
I don't know whether you realize how great an effect that letter had, but I am told that it was chiefly responsible for the policy which the Treasury is now quietly but effectively pursuing of purchasing long-term Government bonds with a view to making a strong bond market and to reducing the long-term rate of interest. (W. Lippman, 1934)
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Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901