The Limits of the Mixed Economy. Paul Mattick 1969



Keynesian interventions in the economy were at first rather ineffective. Keynes explained this by saying that “the medicine he recommended was too niggardly applied.” The unemployment problem remained unsolved until the approaching Second World War forced the various governments to do for the purpose of waging war what they had been unwilling or unable to do during the preceding depression. With the beginning of war production, how ever, Keynes was finally convinced that his theory would find confirmation, for now it would be seen “what level of consumption is needed to bring a free, modern community ... within the sight of the optimum employment of its resources.”[1]

War-policies, however, were quite independent of the developing Keynesian ideology. They did not differ from those employed in the First World War; nor did they differ between various nations, not all of which adhered to the “Keynesian revolution.” Already “in the first world war it proved possible to devote almost half of the total resources of the community to fighting;” and the “moulding of industry into the shape for war needs,” was “helped forward by direct government coercion of industry.”[2] All the innovations associated with the commandeered economy of the Second World War, such as forced savings, controls on money, credit, prices and labor, priorities, rationing, government-borrowings, and so forth, had been employed in the first conflict despite the “orthodox” approach to economics which prevailed at that time.

While rather unsuccessful in increasing the “propensity to consume” during the long depression, Keynesian theory was celebrated as a “brilliant success” in cutting it down during the war by way of compulsory savings. Though not able to increase investments toward full employment, it led to labor-shortages by the destruction of capital. To put a theory in reverse can only mean to put it out of commission; yet, strangely enough, the sacrifice of the theory was seen as a sign of the “flexibility and the fruitfulness for practical actions of the kind of thinking that went into the general theory of employment, interest and money. There is nothing in Keynes’ plan for preventing inflation in war,” it has been said, “that contradicts his explanation of unemployment in peace. The plan for war finance suggests the need for compulsory savings, whereas the emphasis in the General Theory is upon the social disadvantages of thrift. The reversal of circumstances from peace to war calls for a reversal of emphasis.”[3]

But this can hardly be considered a “reversal of emphasis.” After all, Keynesian theory was based on the concept of a “mature” capitalism unable on its own account to bring forth investments large enough to assure full employment. The purpose and meaning of Keynes’ theory was: to provide a way to have full employment in the absence of war or prosperity; and to overcome depression not in the orthodox fashions of waging war or passively awaiting the destructive results of the crisis, but through the new and “rational” method of government-induced demand. It is more accurate to say that Keynes suspended his theory “for the duration.” In fact, his celebrated “plan” for financing the war was merely a suggestion to do dictatorially what was done at first by persuasion.

Because of the “stickiness” of wages, Keynes at one time opposed deflationary policies; he now opposed price inflation for the same reason. In both cases he was not intent on changing an existing practice, but wanted only to make it more effective by making it more palatable. Just as he once thought that a decrease in real wages would be more acceptable when carried out under stationary or increasing money-wages, so he now thought that “it makes all the difference in the world to each individual personally whether the excess of his income over his consumption is taken from him by tax or loan. To him personally government stock is an addition to his wealth, to his security, and to his comfort in facing the future. It gives him a claim over the future resources of the community. Someone will have to meet his claim. But this someone is not necessarily himself, and, even if it were, it may suit him better and involve less sacrifice to part in installments with his personal resources and to possess meanwhile a title to wealth which he can realize in case of need”[4]

It is clear that “wealth” used up during the war cannot be drawn upon in the future. A “claim over future resources” merely means additional future work: enough work must be done in the future to produce the commodity-equivalent for the then-existing wage-rates plus the commodity-equivalent of war-savings. It is true, of course, that people only cash their war-bonds gradually, which spreads the surplus-labor necessary to redeem them over a longer time. But this does not alter the fact that any increased consumption stemming from the purchase of war-bonds can come only out of new production. The individual’s claim over future resources is an illusion he maintains by not looking at society as a whole. If “someone else will have to meet his claim” at some time, then, of course, at some other time, he will have to meet somebody else’s claim. Keynes was at one time convinced that the individual must be taught to see the problem of society as a whole. But for the sake of victory he suspended that conviction, and now hoped that the workers, at least, would retain all those illusions which helped reconcile them to the increased exploitation necessitated by war.

Keynes thought of the future in still another respect while making his proposals for financing the war. He feared that the post war situation would look much like the pre-war, with a lack of “effective demand” and its consequent unemployment. In distinction to the pre-war situation, however, there would be a backlog of postponed effective demand, which could serve to bolster industrial activity by increasing the “propensity to consume.” Though suspended during the war, his theory would hold good as soon as “normalcy” had been restored.

The war itself only proved to Keynes that any economic system could have full employment if it so wished; it did not occur to him that under present conditions war and preparation for war may be the only way to full employment. It occurred to others, however, and some of his disciples viewed war “as a great new industry whose colossal demands stimulate economic activity in every nook and cranny of the economic system,” even though “the expected yields which raise the marginal efficiency of government investments are mainly in terms of social and military advantages rather than pecuniary profits.”[5] Generally, however, the Keynesian “spirit” was better represented by those who emphasized the “socialistic” aspects of government control. Near the end of the Second World War, for instance, William Beveridge proposed a program of full employment based on the “socialization of demand without the socialization of production.”[6] Built on Keynesian principles and choosing fiscal means for its realization, such a program was to carry the full employment policy of war into the conditions of peace.

The fear that there might be a return of persistent widespread unemployment in the wake of the war proved to be exaggerated. In the defeated nations it once more became a problem for a time, but if a distinction is made between economics and politics, this was not a “strictly economic” problem. Unemployment here was clearly caused by the devastation and dislocations of war and was maintained for some time by occupation policies that restricted economic activities. For the victorious powers, however, large-scale unemployment did not recur in the immediate post-war era because of the need to consolidate national gains, to renew used-up means of production, to try to regain lost markets, and to prepare for the eventuality of a Third World War. These economies remained in part war-economies and thus retained a high level of employment. As the distinction between war-time production and peace-time production ceased to exist, there was no need to adapt the Beveridge or any other plan for the full utilization of national resources.

Whereas a decade of depression and government intervention had failed to create the conditions of a prosperous capital accumulation, the actual capital expansion after the war kept the “government in business.” Full use of productive resources, where and when it came about, was accomplished by extending government-induced “non-profitable” production. Part of this increase resulted from public welfare and foreign-aid measures; most of it was generated by military expenditures. At various times attempts were made to operate with balanced budgets and to gain surpluses for debt retirements. But ensuing business recessions reversed these policies quickly. It was by way of inflation, debt-accumulation, government-induced production, war preparation and actual warfare that the dominant capitalist nations reached an approximation of full employment. This experience strengthened Keynesianism and led to the wide-spread belief that a government-maintained “quasi-boom” could be indefinitely continued.

Keynes’ untimely death in 1946 deprived him of the opportunity to witness the “validation” of his theories in government-manipulated post-war economies. That this had been achieved largely by way of war and preparation for war was to be regretted; yet “logically” it should have been possible just as well under conditions of peace. Indeed, it had been Keynes’ interest in international peace and general social welfare which had led him to advocate a government-regulated investment policy in the first place. Such a policy, Keynes felt, would remove the pressing economic motives for war, since no country would need “to force its wares any longer on another, or to repulse the offering of its neighbors. International trade could cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbor which is worsted in the struggle.” Instead it would become a “willing and unimpeded exchange of goods and services in condition of mutual advantage.”[8]

While still adhering to neo-classical doctrine, Keynes had been undogmatic enough to advocate protectionism whenever British interests made this advisable. During the Great Depression he went beyond this to rediscover an “element of scientific truth in mercantilist doctrine,”[9] in the mercantilist’s disregard for the world at large. At that time, it was the gold standard which, in Keynes’ view, was largely responsible for the prevalence of unemployment; for under its rule, there was no “orthodox means open to the authorities for countering unemployment at home except by struggling for an export surplus and an import of the monetary metal at the expense of their neighbors.”[10]

Keynes favored economic policies “unimpeded by international preoccupations” and directed to attaining an optimum level of domestic employment. In his view, it was the “simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade.”[11] Recognizing the limitations and dangers of such a policy, Keynes tried to overcome them by taking part of the national economy out of the process of international competition. If all countries would do likewise, there could be full employment everywhere.

With or without the gold standard, a full-employment policy implies different things for different nations and for the different classes within these nations. Its success or failure depends on the nation’s relative strength in terms of natural resources, on its position within the given “international division of labor,” and on the degree to which it is dependent on a certain level of international trade. For some nations full employment is a lesser consideration than the extent and terms of international trade. They cannot exist, let alone achieve full employment, save by an extraordinary “preoccupation” with the international economy. However, Keynes regretted “international preoccupations” only insofar as they were based on the gold standard, which did not have the “equilibrating” power it was supposed to possess. He wanted to replace it with agreements reached by conscious considerations of international economic needs. Just as Keynes thought it possible to devise state interventions in the national economy which did not come in conflict with private enterprise, so he thought that international bodies could regulate the world economy without violating the special interests of any particular country. Additional data and instrumentalities of control would be required, of course; but Keynes saw no insurmountable difficulties in applying his suggestions for the domestic economy to the world.

In the midst of the Second World War, and in anticipation of the coming peace, Keynes proposed the establishment of an international currency and credit system designed to remove the reason for war by alleviating international depressions and guaranteeing the necessary international trade. An International Clearing Union and a new international form of money called “bancor” were to serve as instruments for the revival of a multilateral trade and payments system which would stress the positive and avoid the negative aspects of the defunct gold standard. In an emasculated form it became, in Bretton Woods, the International Bank for Reconstruction and Development and the International Monetary Fund.

Although the desirability of and the necessity for international economic cooperation have been generally recognized, little has actually been done in this respect. After World War II, Keynes himself began to realize the enormous difficulties in the way of making the capitalist system work more efficiently. “No one can be certain of anything in this age of flux and change,” he wrote now; “decaying standards of life at a time when our command over the production of material satisfaction is the greatest ever, and a diminishing scope for individual decisions at a time when more than before we should be able to afford these satisfactions, are sufficient to indicate an underlying contradiction in every department of our economy. No plan will work for certain in such an epoch.”[12] He hastened to add that “if all plans should fail, we and everyone else will try something different.” We should “act on the optimistic hypothesis until it has been proved wrong.” The optimism Keynes suggests was to nourish itself on no more than the “permanent truth of classical theory,” on the “undercurrent of a law of value,” which, like a “natural force” or Adam Smith’s “invisible hand,” will restore the disturbed economic order. But Keynes still held that there was no need to wait passively for the “natural forces” to take their course. The process could be eased and hastened along by rational implementations in support of the naturally-given equilibrium tendencies.

In view of the war’s vast devastation of both Europe and Asia, the revival of the disturbed world economy became, in the Keynesian view, America’s responsibility. The Americans would have “to discover ways of life, which, compared with the ways of life of the less fortunate regions of the world, must tend toward and not away from, external equilibrium.”[13] What this would imply in practical terms Keynes was spared the necessity of relating. His disciples, however, approached the problem either in strictly business terms or as a question of philanthropy. Because private foreign loans and investments were not sufficient to revive and develop extra-American economies, government loans and grants would have to fill the gap. If the United States “enters into international co-operation on international monetary and financial arrangements,” it was said, “and if the foreign loans are invested in productive and useful projects, then it is reasonable to suppose that over a long-run period the interests and amortization charges can be paid. They will be relatively small in proportion to total international transactions and can quite easily be managed in a reasonably stable and prosperous world.”[14] More radical Keynesians suggested some form of peace-time lend-lease, with a periodic cancellation of international credit balances; for “surplus output should never be considered a problem as long as people in any part of the world are underfed and living in subnormal conditions, until, as Keynes has been quoted as saying, ‘the last Hottentot owns a Rolls-Royce car.’ ”[14]

From a Keynesian point of view, foreign aid by way of grants, like public works and armaments, may be regarded an instrument for domestic full employment. At any rate, it is easier to get rid of surplus commodities than surplus populations. As wages are “costs of production,” the profitability of private enterprise would suffer if surplus products were distributed as higher wages. The wage-system itself precludes any significant “free distribution;” for under this system, people work only if they must. In any case, a large part of surplus production consists of products which cannot be directly consumed at all. Eliminating overproduction through foreign aid thus appears almost irresistible, for it seems to leave the socio-economic conditions at home undisturbed.

But “sharing the wealth” with other nations will not benefit domestic business. While it helps some enterprises which could not function properly without a steady demand, foreign aid has to be paid for out of the whole of domestic production. And the disposal of surpluses by way of foreign aid, like their distribution via the wage-system, is limited for both the giving and the receiving countries. Insofar as it involves free distribution, or disposal at unrealistic prices, it cuts down the “effective demand” still enjoyed by private producers, if not in the aid-dispensing country then in other nations. Though unavoidable, it thus does not always suit private interests in the aid-receiving nations. Shortages yield extra profits and the distribution of free, or low-priced, commodities does affect internal price relations to some extent. Trade instead of aid is then preferred by both aid-dispensing and aid receiving nations in which private property relations dominate. Aid, particularly in the form of loans, is regarded a necessary medium for the creation of future trade relations and future profitable capital investments. The “external equilibrium” to be achieved is thus still market equilibrium.

1. The New Republic, New York, July 29, 1940.

2. A. C. Pigou, The Political Economy of War, London, 1940, pp. 43, 71.

3. D. Dillard, The Economics of John Maynard Keynes, p. 242.

4. J. M. Keynes, “Paying for the War,” London Times, November 14, 1939.

5. D. Dillard, The Economics of John Maynard Keynes, p. 243.

6. W. H. Beveridge, Full Employment in a Free Society, New York, 1945, p. 29.

8. The General Theory, p. 383.

9. Ibid.

10. Ibid.

11. Ibid., p. 349.

12. J. M. Keynes, “The Balance of Payments of the United States,” The Economic Journal, June, 1946, p. 85.

13. Ibid.

14. A. H. Hansen, America’s Role in the World Economy, New York, 1945.p. 136

15. S. MacBride, The Statist, London, December 19, 1949.