The Crisis of Keynesian Economics by Geoffrey Pilling (1986)

1 Reactions to the Crisis of Keynesianism

There are still echoes of the debate, now well past its centenary, between Marxists and neoclassical economists, but not much of this is heard anywhere in professional circles, and there is certainly very little in it to exercise the general body of economic practitioners. Economics seems, miraculously, to have ceased to be the battleground of conflicting ideologies. As we shall see, there are many and sometimes very profound differences of view on particular issues, especially where specific points of economic policy are concerned. But, while it may be going too far (paraphrasing Sir William Harcourt) to say ‘we are all Keynesians now’, it seems that in our analytical moments most economists are prepared to take the innovations of Keynes and his disciples for granted. (Roll 1968: vi-vii)

Virtually everybody is prepared to agree that a deep malaise now afflicts the once seemingly omnipotent Keynesian political economy. Many are of the opinion that we have already seen the end of the Keynesian era. But there is little agreement amongst orthodox economists about the nature of this illness, its origin and the means to its cure, assuming that it is not in fact terminal. This book attempts, from a Marxist standpoint, to examine various facets of the crisis pervading Keynesianism and thereby provide a critique of Keynesian economics. This it does because, however severe their predicament, Keynesian ideas still retain an important influence, not least in the British labour movement. Thus in the so-called Alternative Economic Strategy – proposed by the Trades Union Congress and others in opposition to the economic policies pursued by the Thatcher governments since 1979 – a large element of Keynesianism is clearly visible. This opening chapter surveys this crisis, outlines several reactions to it from economists and others, and in so doing sketches out the major themes of the book.

It is almost universally accepted that the capitalist economic system is currently experiencing its most acute crisis since the 1930s. Following the end of the Second World War in 1945, a quarter century of boom, interrupted by relatively shallow and localised recessions in the major capitalist countries, suddenly erupted into the violent inflation of the early 1970s, subsequently to collapse into a global slump which, judged by the standards of the post-war years, remains unprecedented in its severity and duration. An important casualty of this crisis has been Keynesian political economy, the severe illness or even death of which has been either celebrated or lamented at various points of the political compass.

According to the conventional view of the history of economic theory, until the 1930s it had been confidently held by the majority of economists that the smooth expansion of capitalism’s productive forces would, on the whole, assure conditions of economic stability, growth and full employment. Unemployment was usually considered to be the responsibility of market ‘imperfections’, especially those connected with wage rigidities. Any persistent unemployment was held to be due to the unwillingness of workers to accept a wage level that would ‘clear the market’. It was the slump of the 1920s and 1930s which threw this economic theory (designated by Keynes as ‘classical’ economics) into a severe crisis. Keynes emerged as the principal figure who attempted to explain this economic crisis and tried to chart a course out of it. The result was Keynesian economics which emerged as the standard economic theory of the postwar world, exercising a powerful intellectual dominance until the very recent past. Thanks to this new economics, it was widely accepted that given an appropriate manipulation of the budgetary aggregates and suitable monetary policies, what Keynes was to term the level of effective demand could be raised to a point where all involuntary unemployment was more or less eliminated.

Writing of the decade following the end of the war, J.K. Galbraith said, ‘Within a decade [after 1945] the belief that the modern economy was subject to a deficiency in demand – and that offsetting government action would be required – was close to becoming the new orthodoxy’ (Galbraith 1973: 189).

Keynes and Radicalism

Now whether this Keynesian-type policy was ever in fact practised after 1945, and whether, if practised, it was responsible for the sustained period of expansion from the end of the war onwards are moot points. Many commentators are doubtful about both these propositions. But one fact is beyond dispute: if not as an economic policy certainly as an ideology, Keynesianism exercised a powerful influence after 1945. On the left especially it was generally assumed that, thanks to Keynes’ discoveries in economic theory, a social-political crisis of the sort which had broken out with such catastrophic consequences in the 1930s was now largely a thing of the past. In particular, Keynesianism had provided the answer to a Marxism which had made such ground amongst the younger intelligentsia in the ‘red decade’ of the 1930s. Calling The General Theory “the most influential book on economic and social policy this century” Galbraith was certainly not out on a limb when he declared that ‘By common, if not yet quite universal agreement, the Keynesian revolution was one of the great modern accomplishments in social design. It brought Marxism in the advanced countries to a total halt’ (Galbraith 1971: 43-4).

So confident was Galbraith in the victory of Keynesianism that he could bemoan the fact that the ‘old’ microeconomic problem in economics the allocation of scarce resources amongst competing ends – had been forced largely off the agenda with the consequence that key problems, notably the contradiction between public wants and private needs, was now seriously neglected.

Such ideas exercised a considerable influence in Britain in the 1950s and 1960s, not least in Labour Party circles where a wing of the party emerged declaring that Marxism was now discredited and out-of-date, and demanding that an even nominal commitment to socialist aims, embodied in clause 4 of the party constitution, be ditched. The impact of the prevailing Keynesian orthodoxy could be measured in a series of influential books by writers such as Anthony Crosland, by the former Marxist, John Strachey, and others extolling the virtues of the new post-war capitalism which, thanks to Keynes, had overcome its proneness to crises and thereby rendered Marxism obsolete. As Stuart Holland declared:

Keynes was not a socialist, and was almost wholly ignorant of the work of the founding-father of modern socialism – Marx. Yet he had more influence on post-war British socialists than any other theorist of our time. It is also arguable that, almost single-handed, he buried Marxism for a generation of the mainstream British left. (Skidelsky (ed.) 1977: 67)

It is easy to see what attracted radical thought towards Keynesianism. Keynes was in favour of limited measures of social reform. He doubted the efficacy of unaided monetary control. A trenchant defender of private property, he none the less held that the ‘socialisation of investment’ would serve to make capital abundant and thus force down the interest rate eventually to zero, perhaps within the space of 25 years. While private capital would continue, the claims of rentier capital would be destroyed. The resulting scene was a Fabian-type world in which the grosser inequalities of wealth were to be removed by fiscal means (Keynes supported a ‘moderately conservative’ degree of income redistribution as one way of boosting consumption) where no reward is extracted by ‘unproductive’ capital and where employment is preserved at or near its maximum by the manipulation of state investment. It is little wonder that with some justice Keynes could be hailed as the new post-war apostle of social democracy.

On the basis of this type of conception a general consensus emerged. Capital left unregulated might still prove crisis-prone, but given suitable social and economic state policies any instabilities could be kept within politically acceptable limits. Keynes, it seemed, had assured capitalism’s future, albeit a somewhat different capitalism from the laissez-faire type which had existed for much of the nineteenth century. Politics could now occupy the middle ground, concerning itself with the balance of measures to be followed to achieve generally accepted aims within the framework of a beneficent welfare capitalism.

Some, of course, went further, denying that in the age of Keynes any meaningful use could be made of the term capitalism. We now lived in the era of post-industrial society, to use the term favoured by the American sociologist, Daniel Bell. Others preferred the notion of industrial society, still others that of technocratic society. Whatever differences existed between such conceptions, they were united in declaring Marxism to be outmoded, a doctrine at best a reflection of those nineteenth-century conditions which had now thankfully disappeared.

While a minority of radical economists such as Galbraith resented the fact that economics appeared to have little room for judgements about economic choice – he pointed to the increasing public squalor which the growth of private wealth appeared to entail – others positively welcomed the fact that social problems, or rather problems which had hitherto been considered social, were now taking on a purely technical form, concerning, in essence, the matter of the most efficient ('economic') allocation of human and material resources to satisfy social and personal needs. Economics had at last come of age. Invested with considerable prestige because of its seeming ability after Keynes to resolve hitherto intractable problems, its procedures were becoming more and more rigorous, employing mathematical techniques, and aspiring to the precision and methods which were assumed to guide the physical sciences. Economics could look down with a certain disdain at the still-infant social sciences. Eric Roll summed up this comparatively new and happy state of affairs:

For some thirty years after the appearance of Keynes’ General Theory the status of economics, largely associated with his general approach, increased steadily until it reached a position of authority, both as a branch of social science and as a tool for the better solving of human affairs, unparalleled in its history and unequalled by any of the non-physical sciences. (Roll 1973: 548)

The leading, almost unchallenged, position occupied by Keynesianism undoubtedly left its imprint on Marxism. There were those Marxists who accepted the new economics of Keynes and believing that capitalism had indeed resolved its fundamental problems – at least in the economic sphere – turned their main attention elsewhere: to the residual cultural problems which were still held to afflict capitalism. Here was an international trend, finding a variety of expressions: the work of the Frankfurt school; in America that of Herbert Marcuse and in Britain in the New Left. One result of such tendencies was a turn away from a study of Marx’s work in economics as found in Capital in favour of Marx the ‘humanist’ and ‘philosopher’ as exemplified in the Paris Manuscripts of 1844, with their theme of alienation. Not only did this artificially divide Marx’s work along quite unwarranted lines but it also meant that Marxists tended in their work to reflect the increasing fragmentation of the social sciences, each engaged in their hermetically-sealed compartments.

On a narrower plane, those Marxists who did continue work in the sphere of political economy were also often influenced by the prevailing Keynesian conventional wisdom in that they were now inclined to believe that certain forms of state action could iron out the cyclical tendencies within capitalism. This in turn led some of them to read Marx’s Capital through the prism of one variant or other of underconsumptionism. By underconsumptionism is meant the view, shared by a variety of writers in the history of economics including Malthus and J.A. Hobson, that a state of stagnation is not simply a passing phase of the capitalist economic cycle, nor the result of a momentary and fortuitous conjuncture of forces, but is a condition towards which the economy spontaneously tends in the absence of counteracting forces, including (for some at any rate) appropriate state action. We leave aside for the moment the question whether Keynes’ General Theory can legitimately be considered to lie within the tradition of underconsumptionism. There is no doubt, however, that underconsumptionism was the basis for the stagnationist thesis popular immediately after the end of the war and advanced by a number of economists who, particularly in America, emerged as Keynes’ leading advocates and interpreters. (In Joseph Schumpeter’s opinion, ‘Keynes may be credited or debited, as the case may be, with the fatherhood of modern stagnationism’ (Schumpeter 1963: 1172).) Alvin Hansen was one of the leading proponents of the view that the major problem likely to face capitalism after 1945 was that of stagnation. But it was a view about the essential problem facing capitalism by no means confined to these Keynesian circles. To take but one example. A work such as Baran and Sweezy’s Monopoly Capital which appeared in the mid-1960s saw capitalism’s central problem as being associated not with its inability to extract surplus value but with the generation of a surfeit of surplus value. Thanks to the ability of the monopolises to manipulate their prices, more surplus value was created than could possibly be accumulated and this required ever greater and irrational expenditures on the part of the state which would ‘waste’ this excess surplus. A variant on this essentially underconsumptionist theme was the view which held that capitalism’s post-war stability rested on a rising arms budget which had provided an effective leak for a growing volume of surplus value and had allowed capitalism to escape the consequences of the law which Marx had regarded as the most fundamental of all: the law of the tendency of the rate of profit to fall. This position was the basis of those theories which went under the name of the ‘permanent arms economy’.

As is now obvious, the theory of a crisis-free ‘transformed’ capitalism proved, to say the least, to be somewhat optimistic. The once virtual unanimity amongst economists and politicians about the benign results to be obtained from the employment of Keynesian-type policies has now been shattered, many would hold irrevocably so. Near-rampant inflation in the early 1970s combined with a collapse of industrial production and employment in many ways surpassing the decline seen in the period after 1929 defy the central logic of Keynesianism where such things are not supposed to happen simultaneously.[1] In a recent lecture, Sir Charles Carter asked somewhat plaintively ‘What is Wrong with Keynes?’ (Carter 1981). He pointed out that in the 1960s, according to the precepts of Keynesianism, in a situation of slump the government would – within the constraints imposed by the balance of payments situation – have raised spending and cut taxes. Now precisely the opposite was happening. And Carter rightly drew attention to the fact that this was not a policy confined to the Thatcher government, the result of some aberrant ideology as it were, for in the face of rising unemployment and inflation similar policies were pursued by the Wilson-Callaghan governments of 1974-79. Indeed it was James Callaghan, then prime minister, who warned the Labour Party Conference of 1976 that it was no longer possible to spend one’s way out of a slump as far as he was concerned, pronouncing the death sentence on traditional Keynesianism:

We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government expenditure. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of employment as a next step.

Because of its chronic weakness, the British economy of the 1960s had already anticipated a crisis which was to assume international proportions in the following decade. The mid-1960s saw a series of savage deflationary measures carried out by a Labour government at the behest of the International Monetary Fund which had singularly failed to correct a long-standing balance of payments problem. The failure of these measures eventually forced the 1967 sterling devaluation, which in turn resulted in a series of severe disturbances in the world gold and currency markets. The end result was the decision taken by the American administration in August 1971 to remove gold backing from the dollar, a measure which had sustained the post-war Bretton Woods monetary arrangements for the previous 25 years or so. It is this economic crisis, with its attendant political and social implications, which has plunged both economic theory and the formulation of economic policy into a crisis. In its scope and depth, this crisis certainly promises to eclipse that of the 1930s. John Hicks, a leading interpreter of Keynes from the time of The General Theory (1936) onwards, holds that the current problems of Keynesianism present one of the gravest questions with which the world is now confronted (Hicks 1974).

Certainly not all share Hicks’ sombre attitude. Some hope that a new Keynes will somehow emerge to resolve our current theoretical and practical problems; meanwhile Micawber-like we should muddle along with whatever tools are to hand. Others have suggested that there is little fundamentally wrong with orthodox economic theory. Our malaise stems from the fact that there is a widespread over-concern with theory as such. What is required is not more theory but better, more reliable, data on which to base rational economic policies. Viewed from this angle, the problems we face turn on a faulty division of labour amongst economists between theoretical and applied work.

But for those who still attach central importance to matters of economic theory, and who are concerned with the Keynesian crisis, there is little agreement about (a) the real significance of Keynes’ contribution to economics, and (b) its contemporary relevance. Any Marxist view of Keynes must tackle both of these questions. Here, as an introduction, we summarise a range of answers to these questions from various non-Marxist standpoints.

The Monetarist Counter-Revolution

One group which in a certain sense stands outside the major disputes surrounding Keynesianism is the Austrian school of economics, deriving its inspiration from the work of Hayek and Ludwig von Mises. (Lineal Robbins’ work (1932) was an expression of its influence amongst certain English economists.) Hayek has of course been a life-long opponent of socialism and of any schemes consciously to manage society, and this he justifies through the view of the market as an information system making it possible to use the economic information scattered amongst an enormous number of production agents. Hayek was one of the most determined of Keynes’ opponents and for a short period his theory was regarded as a possible alternative to the new economics. According to Hayek, responsibility for the critical situation which the western economies currently face rests not with capitalism as such but with longstanding erroneous monetary and fiscal policies which stemmed from the influence of Keynesianism. Hayek and the Austrians generally regard as faulty the Keynesian explanation of involuntary unemployment as being due to a lack of effective demand. In reality it is caused by a series of imbalances between supply and demand in the labour markets of particular sectors of the economy. Full employment can be restored only on the basis of the adjustment of prices and wages in each individual sector of the economy, so that supply and demand are once again in equilibrium. In other words, Hayek is an advocate of the old idea of wage-cutting as a cure for unemployment, a policy which Keynes had supposedly laid to rest many years ago. For Hayek it is the Keynesian policy of stimulating demand to combat unemployment which has led to inflation. In his ideal economy prices are stable but wages flexible, the budget is in balance and the state has lost its monopoly right to issue money, with its role as provider of employment severely reduced. Austrian economics is a school based on extreme individualism and a pronounced anti-empiricism. This has led the Austrians to a deep suspicion not of Keynesian macroeconomics as such, but rather to the possibility of arriving at any macroeconomic aggregates such as consumption, investment, national income or a general index of prices. Because each individual agent in the economic process is unique, the attempt to sum the activities of such individuals is futile. In this respect Hayek and company attack the ‘neoclassical synthesis’ from a position diametrically opposed to that of the post-Keynesians. It is not Keynesianism which has made unwarranted concessions to the neoclassical orthodoxy but quite the reverse, the neoclassicists, by embracing the sort of macro-aggregates which Keynesianism implied, have seriously compromised their principles.

From the point of view of its ideological role and the sort of economic policy it proposes, monetarism – whose central figure is Milton Friedman – has however been a far more significant line of criticism of Keynesian orthodoxy than that provided by the Austrians. In essence, monetarism involves the call for a return to some version or other of a ‘sound’ pre-Keynesian economic theory. On the left especially it was widely expected that without radical government intervention in the economy the end of the Second World War would bring at best a period of chronic stagnation or at worst an outright collapse of the economy. For reasons to be discussed later (Chapter 4) this was not the case and inflation gradually emerged as a central economic and political problem. It was under the impact of such inflationary pressures, and especially as they began to mount dramatically in the 1970s, that monetarism emerged as the new and fashionable ‘counter-revolutionary’ doctrine.

Friedman was a prominent figure amongst the minority of post-war economists who refused to go along with the remedies for the ills of capitalism supported by Keynes and his followers. Not only was he an opponent of the sort of state intervention advocated by Keynes, but he advanced a quite different explanation for the slump of the 1930s which had led to the writing of The General Theory. On one not insignificant point Friedman did however agree with Keynes: the 1929 crash could have been avoided. But for Friedman the slump was generated not by an inadequate level of government spending or an unwillingness to borrow, but by the Fed’s failure to provide adequate liquidity for the banking system. When the downturn began, following the Wall Street collapse, the Fed should have allowed an increase in the money supply. Instead it did precisely the opposite and as a result bank failures multiplied and a general collapse ensued.[2]

According to Friedman the ‘real’ economy is fundamentally sound. Any malfunctioning it experiences is engendered by disturbances in the monetary sphere. (From an historical point of view, Friedman was here saying nothing essentially new in that there had long been a strain in orthodox economics which had invoked monetary disturbances as the basis for their theories of dislocations within the capitalist economy, hardly surprising in view of the fact that money is the connecting link in all economic transactions and that the state, through the Central Bank, can vary the supply of money and credit.) Friedman has attempted to show that changes in the monetary stock have preceded great turning-points in the cyclical movement of the economy and that the central condition for economic stability is a sound monetary policy which acts not upon interest rates but on the money supply. For Friedman monetary policy is the decisive instrument for the regulation of the exchange rate, the price level, the nominal level of national income and, through changes in the money supply, the rate of inflation and deflation.

The influence which the ideas of the monetarists have enjoyed in the recent past undoubtedly stems in part at least from their apparent simplicity: the control of one variable in the economic system (the money supply) offers the key to the regulation of all others. But whether Friedman’s ideas provide a key to understanding the crisis of contemporary capitalism is an entirely different matter, as we shall see.[3]

Even on the level of what monetarism takes to be its strongest point – its correspondence with ‘the facts’ – considerable doubt now surrounds Friedman’s work. Thus in a recent article published by the Bank of England, it has been suggested that Friedman has severely manipulated his data in order to establish the central proposition of monetarism, namely that changes in the money supply have a close and causal connection with the rate of price inflation. Monetarism is founded upon the well-known Fisher equation, MV = PT: the supply of money (M) multiplied by the velocity of its circulation (V) is equal to the price level (P), multiplied by the number of transactions in the given period (T). But monetarism goes on to claim that because V and T are relatively stable, the equation can be reduced to one where M = P. Now in this examination of Friedman’s major work by a noted econometrician (Hendry 1983) it has been discovered, for instance, that Friedman has reduced the money stock figures by 20 per cent for the years 1921-55 (which amounts to nearly one-third of the span of his studies) on the ground that war and depressions cause people to hold more money than in normal times. Similarly Friedman boosts the post-war price level to allow for price controls and rationing: he argues that the price level must have been higher than official statistics reveal since the money supply grew more rapidly than prices. Hendry then shows that the Nobel prizewinner uses his modified data to substantiate his central thesis: that the movement of prices depends on the movement of the money supply, the clearest case of circular reasoning. In short, Hendry suggests that Friedman’s propositions are assertions without empirical basis.

This book will not be centrally concerned with the claims of the monetarists.[4] But in any event Eric Roll’s sanguine view that there was near unanimity amongst economists on the fundamental problems of economic theory and that most accepted the tenets of Keynesianism no longer holds. For not only has Keynesianism come under fire from the Chicago school, it has also been attacked from a variety of different angles. For some, it seems, the Keynesianism which predominated after 1945 had little to do with the genuine article found in the writings of Keynes himself.

Bastard Keynesianism?

Professor Hutchison is amongst those who object that in the post-war world a pseudo-Keynesianism was practised which had little connection with the original teaching of Keynes. Keynesian doctrine became a dogma which was used to justify policies of expansion and growth, with little regard being paid for the cost of such measures. He sees four elements in this false Keynesianism. First, policies were pursued by governments which drove the level of unemployment below a figure considered by Keynes to be safe. Second, strategies of growth in accordance with maximum potential ('full growth') were followed and this became the overriding aim of economic policy. On the other hand, price stability was accorded little importance. Any tendency towards inflation was to be combated by wages policies. For each of these positions, Hutchison finds little support in Keynes’ writings. In support of this contention he has drawn attention to a series of articles written by Keynes in 1937 which opposed the idea that the threat of another slump could be averted by more government spending. Hutchison summarises his argument as follows:

It is the pressing claims of a wide range of policy objectives, or the fact that throughout much of the post-war period the British economy has been on, or pretty near, a kind of policy-making frontier ... which constitutes such a complete contrast with the policy situations which confronted Keynes in the inter-war years. Keynes made the point that when one moves from conditions of unemployment to those of full employment a number of theoretical and policy propositions which held in one case cease to hold in the other. . . . Policy problems certainly take on a very different and more complex form when one moves from an economy averaging 14 per cent unemployment . . . to one averaging 1.5 to 2.5 per cent. (Hutchison 1968)

One effect of Hutchison’s work is to devalue the whole concept of the Keynesian revolution, certainly as far as its implications for policy are concerned. He suggests that amongst professional economists at any rate there was a wide measure of agreement about economic policy in the late 1920s and early 1930s. With one or two notable exceptions (concentrated at the LSE) virtually all economists, whatever differences of a theoretical character separated them, and whatever their economic theory suggested, were opposed to wage-cutting as a means of reducing unemployment under the specific conditions then prevailing. This is true particularly of Professor Pigou who, argues Hutchison, must be exculpated from the widespread charge that he was an advocate of wage reductions to resolve the crisis of the 1930s. Hutchison is one economist who doubts whether any real significance can be given to the term ‘classical economics’, again as far as policy questions are concerned. Here are raised a series of problems about the place of Keynes in the history of economics and about the true character of the Keynesian revolution, matters to which we turn in the next chapter.

Hutchison’s ‘pseudo-Keynesians’ include the members of the Cambridge school, the leading figure amongst whom for many years was Joan Robinson. Now, ironically, Joan Robinson, like Hutchison, is of the opinion that the Keynesianism which emerged in the post-war world was not the genuine article: she has scathingly termed it ‘bastard’ Keynesianism. But her view as to what constituted genuine Keynesianism is far different from that proposed by Hutchison, itself an indication of the advanced state of disintegration prevailing in economics. Robinson’s complaint boils down to the fact that what were passed off as Keynesian techniques – techniques which she believes were used to keep the capitalist system going after the war – actually obscured the real revolutionary character of Keynes’ thought. Keynesianism was married to a discredited and ideologically bankrupt neoclassical economics and was thereby transformed into a new form of apologetics.

The version of Keynes reproduced in countless textbooks to which Robinson and others take such exception can be summarised as follows. It views the economy as rather like a machine; it consists of a series of flows, the relationship between which is highly stable, in principle knowable and therefore also in principle predictable from previous experience. Should one economy-wide flow fail to occur at an appropriate rate, the deficiency can be repaired by the government’s intervention and regulation of those flows over which it does have direct control – the levels of taxation and public spending. There are known, stable relationships between government spending and income (and by extension, employment): by appropriate manipulation of such flows the volume of employment may be adjusted in line with policy objectives. Thomas Balogh captures the flavour of the line of criticism emanating from the radical Keynesians when he says of what became known pejoratively as ‘hydraulic Keynesianism’,

... a new theoretical edifice was erected which would be reconnected to the neoclassical theory of harmony and just shares in the distribution of income. The old optimism about this being the best (and just) world was reasserted. The classical automatism of the market economy, maintaining full employment and ensuring optimal allocation of resources was just replaced by the deus ex machine consisting of the Treasury and the Central Bank. . . . The new self-consistent and determinate system was completed by the idea that politicians could choose at their discretion the level of unemployment – from a menu served up by econometricians – and that this level would be an expression of the will of the community and depend on how much inflation they were prepared to tolerate. (Balogh in Thirwall (ed.) 1974: 83-4)[5]


Balogh is here reflecting the views of a trend which became known as neo-Keynesianism or post-Keynesianism (in general the latter term will be employed in this book). It was a trend or school which objected to the standard income-expenditure model or orthodox textbook version of The General Theory, opposed, that is, to those who read that work through the eyes of general equilibrium theory. Now on this latter point, and despite the claims of the post-Keynesians, The General Theory certainly does contain many statements to the effect that with the establishment of full employment, the laws of general equilibrium come into operation and the economy then functions along lines suggested by neoclassical theory; furthermore such a position of general equilibrium could be re-established by means of fiscal and monetary policy. Here was the basis for the marriage of Keynesianism and the old neoclassical theory to produce the neoclassical synthesis which in turn provided the justification for the notion of the ‘mixed economy’ and government intervention. From the mid-1960s onwards, however, a new generation of Keynesians emerged critical of these traditional interpretations, among them Clower, Leijonhufvud, Paul Davidson and Sydney Weintraub. Their principal object of attack was the view of Keynes proposed by Hicks, Hansen, Samuelson and others. Clower, for instance, argued that Keynes’ theory was more than anything a theory of disequilibrium, a theory depicting an economy that did not seek to re-establish equilibrium but continually to upset it. According to Clower, such instabilities arise from imperfect information, from the difference in expected and realised magnitudes, factors which are potential sources of chain-reactions in the economy and which ceaselessly undermine its steady state. Leijonhufvud, like Clower, held that Keynes’ theory cannot be reduced to a particular case of equilibrium because there is, in point of fact, no equilibrium; disturbances to the economy are not accidental but organic, the results of uncertainty, imperfections in economic information and the inelastic economic responses to various changes. This stress on uncertainty and lack of information is connected with the critique of the notion of perfect competition, a critique with which the name of Sraffa was closely associated from the 1930s onwards.

Weintraub (1979) provides a list of the major objections which this school holds against orthodox Keynesianism. First, it oversimplifies the nature of the economy and suggests that it can experience either inflation or unemployment, but not both simultaneously. Second, it pays little attention to the importance of price changes in the functioning of the economy. Third, it largely ignored uncertainty and inadequate information as determinants of the level of investment. Fourth, orthodox Keynesianism abstracted from the problems of distribution and thus laid the basis for an unwarranted split between macro- and microeconomics. Fifth, it misinterpreted Keynes’ theory as being one concerned with the economy in a state of rest, whereas it was in essence dynamic.

Of all the writers who have stressed this question of the inherent unknowability of the future and the consequences of this fact for economic theory, G.L.S. Shackle has been the outstanding figure and described by one writer (Loadsby 19r76) as the only genuine Keynesian. This is how Shackle views the efforts of orthodox Keynesianism to wed the old equilibrium economics to The General Theory:

In the later 1920s and the 1930s a great spasm of creative effort in economic theory responded to the visible dissolution of the comparatively orderly Victorian world in which Marshall had been able to discern the gradual perfectibility of industrial and social organisation hinting at the perfectibility of human nature itself. The tranquillity had been shattered, and the theory of economic life which reflected it needed to be transcended and even wholly subverted. Not merely the detailed design of the economist’s account of things needed to be changed, but its fundamental assumptions, its purposes and ambitions, what it claimed to do had to be essentially reconsidered. Such a reorientation was hard to accept and is still mainly unaccented. (in Weintraub 1979: 37)

As we have noted, in stressing the role of disequilibrium and uncertainty, the critics of the orthodox reading of Keynes point to the financial instability of the capitalist economic system: uncertainty produces fluctuations in the economy precisely because of its elaborate system of monetary and financial institutions which are especially vulnerable to change under the impact of pessimistic or optimistic expectations.

This is the theme of a book published in the mid-1970s which provides a ‘left’ interpretation of Keynesianism by the American economist Professor Hyman Minsky (Minsky 19176). Like Balogh, Minsky deeply resents the fact that the Keynesian revolution was aborted in the period after the last war. He too holds that ‘the integrated Keynesian classical economic theory – what is labelled the neoclassical synthesis – does violence to both the spirit and substance of Keynes’ work’ (ix). He goes on in the following vein about The General Theory:

the work contains the seeds for a deep intellectual revolution in economics and in the economist’s view of society. However these seeds never reached their full fruition. The embryonic scientific revolution was aborted as the book’s ideas were interpreted and analysed by academics and then applied by these same academics as a guide to public policy. (Minsky 19176: 4)

Like some of the Cambridge school Keynesians, Minsky stresses the inherent instability of capitalism, the fact that decision-making necessarily takes place under conditions of uncertainty and that financial relations and institutions play a central role in its functioning. And it was because Keynes saw these issues as central that his book, far from being dead, has great relevance, provided that it is interpreted in the correct spirit. So

in the neglected facets of The General Theory there is a theory of the processes of a capitalist economy that is much more appropriate for problems of economic analysis and policy now confronting us than is contained in the standard economic theory. (ibid.)

Keynes and Classical Political Economy

Now the implications of Minsky’s approach to the general message of The General Theory and its continuing significance for the current problems of capitalist economy is important not merely for economic policy but for an assessment of Keynes’ real place in the development of economic theory. Joan Robinson has been in the vanguard of those insisting that Keynesian economics, properly interpreted, belongs not to the neoclassical but the to classical tradition represented by Adam Smith and above all by David Ricardo. This is so because Keynes, like Smith and Ricardo, was concerned with economic aggregates. The typical neoclassical problem as formulated in a long line of writings from Jevons onwards, was one concerned with the process whereby a given income was allocated in the most rational manner. By rejecting the proposition that one could start from a given, full-employment, level of national income, and by focusing on those forces which determined both the level and the fluctuations of national income, Keynes was, according to the Cambridge school, posing the type of question asked by the classical economists: Under what conditions can an abundance of commodities be assured? Thus, says Robinson,

By making it impossible to believe any longer in automatic reconciliation of conflicting interests into a harmonious whole, the General Theory brought out into the open the problem of choice and judgement that the neoclassicals had managed to smother. The ideology to end all ideologies broke down. Economics once more became political economy. (Robinson 1962: 76)

Eric Roll largely agrees with Robinson’s judgement:

The opinion may therefore be ventured that Keynes’ approach represents, above all, a return to the preoccupations of classical political economy, and to that extent a departure from that concentration upon the implications of individual choice which had so long been the distinguishing characteristic of the central part of modern economic theory. It is such a departure in economic methodology in general, rather than as merely a contribution to the study of economic fluctuations, that the Keynesian system acquires its greatest significance. (Roll 1973: 486)

Robinson is, if anything, prepared to go further. For Keynes’ overall approach constituted a return not merely to the traditions of the classical economists but at the same time to those of Marx:

Academic theory, by a path of its own, has arrived at a position which has considerable resemblance to Marx’s system. In both unemployment plays an essential part. In both capitalism is seen as carrying within itself the seed of its own decay. On the negative side, as opposed to the orthodox equilibrium theory, the systems of Keynes and Marx stand together, and there is now for the first time, enough common ground between Marx and Keynes to make discussion possible. (Robinson 1951: 137)

For Marxism these are obviously serious matters. They raise critical questions about Keynes’ place in the evolution of economic thought, in particular his relationship to the classical-Marxian tradition and about his methodological innovations in the subject. We shall examine each of these matters (Chapter 3) by means of a consideration of the methodological foundations of Keynes’ work.

Joan Robinson and other members of the Cambridge school have stressed an element which they see underpinning much of Keynes’ work, namely the emphasis which it gives to the inherent uncertainty implicit in all economic processes. This uncertainty arose from the fact that economic events occur through time, which means that it is in principle impossible to predict the future on the basis of past experience. This is how Robinson makes the point:

When Keynes was writing The General Theory his main difference from the school from which he was struggling to escape lay in the recognition of effective demand, which they ignored. It was for this reason that he put everyone from Ricardo to Pigou into one category, and for this reason that he overvalued Malthus. After the book was published, he drew the line differently. He saw that the main distinction was that he recognised, and they ignored, the obvious fact that expectations of the future are necessarily uncertain. It is from this point of view that post-Keynesian theory takes off. The recognition of uncertainty undermines the traditional notion of equilibrium. (preface to Eichner 1979)

Shackle also wishes to stress a similar point. Commenting on the 1937 paper written by Keynes for the Quarterly Journal of Economics to answer certain criticisms of The General Theory, Shackle says that this article ‘destroyed in one sentence the basic analysis of conventional economics, that business can and does proceed by reason and calculation based on sufficient data. That basis is absent he said in effect in the nature of things’ (Shackle 1974: preface). In a pure barter system, says Shackle, Say’s law of markets would hold – that is, supply would create its own demand in a semi-automatic manner and equilibrium, if by chance disturbed, would rapidly re-establish itself. The existence of money increases enormously the possibility that the level of effective demand will be insufficient to guarantee full employment, simply because money absolves those who seek to accumulate wealth out of current production from deciding what real forms this wealth should take, placing the burden of this decision and its consequences on a small number of businessmen. (Important issues about the nature of equilibrium and its place, if any, in the analysis of capitalist economy are raised here. They will be examined later in the work.)

One final matter must be dealt with in this introductory chapter. As we have already noted, for some economists at any rate, Keynes’ work marked a fundamental break with the neoclassical economics in the sense that it was concerned with the economy as a whole, and secondly because it rejected the notion of a static equilibrium which stood at the centre of much neoclassical theory. In the resultant attempt to found a new political economy on the basis of Keynes’ work, Joan Robinson and others wish to revive certain elements in the classical-Marxian tradition. In what was regarded in the 1960s as a rehabilitation of classical economics, the work of Piero Sraffa has in this regard been of critical significance.[6]

Sraffa has in fact played a seminal part not only in recent controversies surrounding value theory and the criticisms launched at neoclassical economics. In his survey of developments in economic theory during the inter-war period, G.L.S. Shackle (1967), dealing with what he calls the ‘age of turmoil’, starts his review of the period with the work of Sraffa. He dubs the famous Sraffa article in The Economic Journal ‘the Sraffa Manifesto of 1926’. This was the contribution in which Sraffa pointed to the fact that the assumption of large-scale production in individual firms (where increasing returns prevail) and the assumption of perfect competition are incompatible. Sraffa’s article centres on an examination of the implications of the theory of competition in the light of neoclassical theory, especially in its Marshallian form. By perfect competition, economists refer to that state of affairs where the individual firm is able to sell ‘as much as it likes’ at a price spontaneously arrived at by the market and independent of the firm’s output. But, argued Sraffa, this law stands in a contradictory relationship to the operation of another law which has been at the centre of economic theory from Adam Smith onwards – the law of increasing returns – which asserts that because of the possibility of greater specialisation available to the firm, costs will fall as the size of the firm increases. Thus the following question was posed: if, at each larger output, the firm’s unit cost of production is lowered, what is there to prevent the firm’s indefinite expansion? And should the firm so expand and swallow up the whole of the market, what is left of the theory of perfect competition?

By attacking the untenability of the notion of perfect competition in the face of the obvious realities of capitalist economy (increasing monopoly, etc.) Sraffa was hitting at what had been seen as one of the centrepieces of nineteenth-century liberal economics, just as Keynes, when he attacked as dogma Say’s law of markets, was also proposing to dispose of a law which had been accepted by virtually every orthodox economist for the previous century or so. The fact that in the space of a few years this two-pronged attack should be launched against the most cherished tenets of Manchester economics indicates that a fundamental crisis had been joined for both capitalist economy as well as for one of its ideological expressions, neoclassical economics, which had long taken as a truism the proposition that an unregulated capitalism maximised both the freedom of individual choice as well as the utilisation of existing resources. As is well known, Sraffa proposed that the theory of perfect competition be abandoned in favour of the study of oligopolistic market structures, a lead which Robinson, Edward Chamberlin, and others were to follow in the 1930s. Sraffa’s work went in a slightly different, though related direction: to an attempted critique of neoclassical economics which prima facie went back to certain themes in classical, especially Ricardian, economics and jettisoned the notion of marginalism (Sraffa 1960).

The Significance of Sraffa

It is on the basis of Sraffa’s work that a school of ‘neo-Ricardianism’ has developed which amongst other things proposes that it is possible to analyse capitalist economy without recourse to the now redundant notions of value and surplus value found in Marx. On the strength of Sraffa’s modified version of classical political economy, together with Keynes’ notion of effective demand, a new political economy can be established. At least this is the claim.

As we have already indicated, Joan Robinson has been a central figure in all these developments. Standing at the crossroads of various strands in modern economic theory, she is representative of those working for a reconstruction of political economy which will overcome what she and her fellow thinkers see as the bankruptcy of neoclassical economics. Such a political economy would embrace elements from the classical school, as revived in the work of Sraffa, a classical tradition which according to Robinson can be enriched with the contributions of Alfred Marshall, Keynes and Michal Kalecki. From the 1950s onwards she has been attempting

to trace the confusions and sophistries of current neoclassical doctrine to their origin in the rejection of historic time in the static equilibrium theory of the neoclassical economics and at the same time to find a more hopeful alternative in the classical tradition, revived by Sraffa, which flows from Ricardo through Marx, diluted by Marshall and enriched by the analysis of effective demand of Keynes and Kalecki.

Now there are clearly a series of by no means uncontentious statements here which we shall have to examine in more detail in later chapters. But a number of preliminary points can be made:

1. Robinson speaks of the classical school. But this is far from being an unambiguous theoretical category. Marx invented it, but Keynes used it in a radically different sense in The General Theory. As we shall see, this is an important issue which has a fundamental bearing on the nature of Keynes’ attempted revolution in economic theory. (When Keynes said he wanted to destroy the Ricardian foundations of Marxism he was in effect conflating their work and especially their theories of value.)

2. The widespread and fashionable use of the appellation neo-Ricardian to characterise the school founded on the basis of Sraffa’s work notwithstanding, it is by no means universally accepted, certainly not by Marxists, that his work does in fact represent a return to the classical tradition, at least not as that tradition was understood and criticised by Marx. In the view of the present writer, in essence Sraffa’s work involves a degeneration as compared with the high point reached by classical political economy, the work of David Ricardo.

3. A final matter of importance lies in Robinson’s assertion that the work of Keynes can be successfully married to that of the classical and/or the Marxist tradition. We shall attempt to demonstrate in Chapter 3 that this is not so and that the standpoint of Keynes was radically different from that of the classical economists and fundamentally different from that of Marx; in this sense the project that Robinson advocates is in the last resort meaningless and could at best only result in an eclectic mishmash.

It is of course true that from the 1930s onwards, members of the Cambridge school, with Robinson in the van, made a series of criticisms of aspects of neoclassical orthodox economics, and the ‘Keynesian revolution’ is best located within the context of this general development. Despite certain differences amongst members of this trend – some would want to draw a distinction between those who owe more to Sraffa than to Keynes, for instance – the substance of this criticism can be said to comprise two points:

1. It attacks the unreality of perfect competition which supposedly ensures, simultaneously, the efficient allocation of resources and consumer sovereignty (leading to the celebrated Pareto optimality).

2. The second issue concerns the question of capital. According to neoclassical theory, the volume of capital is normally determined as capitalised income, depending on the interest on a stock of capital assets (which, in conditions of equilibrium, is identified with the rate of profit). It therefore follows that if the value of capital assets is to be determined, the rate of interest must be known beforehand, but the neoclassical theory claims to explain the size of production-factor incomes, including the rate of interest. The Sraffians thus accuse the neoclassical theory of circularity (see Robinson 1971).

The arguments between the neo-Keynesians and the defenders of classical orthodoxy have certainly been heated, but the question none the less remains: do these two attacks together constitute a fundamental assault on the neoclassical tradition, as is widely believed? Our answer is in the negative, and for the following reasons. Neo-Keynesianism rejects one particular market structure, perfect competition, as no longer corresponding to the reality of modern capitalism. Marx, however, criticised vulgar economy from a quite different angle from that of the Sraffians; Marx rejected entirely the very idea of capital productivity (III: 814-43): living labour alone can create new value, but capital as a value magnitude does not and cannot create such new value: it is merely a condition for its appropriation. For Marx the spurious notion of the ‘productivity’ of capital arises from the confusion of the value and the physical aspects of capital. That is to say, while capital is a value it is one attached to various and changing things – machinery, raw materials, bank entries, impulses in electronic data banks, etc. And it was precisely this inability on the part of vulgar economy to distinguish critically between qualities of things arising from the social relations of which things were a part, as against the qualities which arose from the material properties of things, that Marx designates as fetishism. The radical Keynesians have made much of the fact that capital, far from being homogeneous, as neoclassical theory proposes, is in point of fact highly heterogeneous. Robinson and her followers have poured scorn on the assumption of orthodox neoclassicism to the effect that capital is like jelly, infinitely malleable; the Cambridge Keynesians wish to stress the fact that capital exists in time and is composed of a wide variety of things – steel, bricks, money, etc. As a survey of their controversies with the neoclassical school puts it:

Once heterogeneity of capital goods is introduced, the parables based on jelly no longer apply. In particular, it can no longer be argued that ‘capital’ is paid a marginal product which equals r (even in an equilibrium situation) ... the finding ... destroys the foundations of the traditional demand and supply approach to the theory of distribution. (Harcourt 1969: 394)

Now while much has been made of this issue, it really misses the point. The fact is of course that capital, as the post-Keynesians rightly point out, does indeed comprise many changing elements. But the basic matter which has divided economists is not this problem but a far more fundamental one: is capital a ‘thing’ or is it an expression of a definite social relation of production, albeit one attached to a thing? The Cambridge criticism has nothing of substance to say on this question. (We shall deal more fully with the nature of capital and the confusions surrounding this issue in Chapter 3.)

Just as fundamental a question for the Sraffa wing of the post-Keynesian school is the fact that they singularly fail to criticise the vulgar notion that price is equivalent to value, that the appearance of things is identical with their essence. Indeed, they explicitly reject the law of value as being sheer metaphysics (Joan Robinson), by which they mean that it cannot be empirically tested and, in line with Karl Popper, cannot therefore qualify as having scientific status. In this respect the term neo-Ricardian which has been applied to members of this school is quite inappropriate, for in their rejection of the notion of value and surplus value they take a step backwards from Ricardo, who started from the determination of value by labour time which he sought to make the foundation for his analysis of the inner workings of the capitalist economy.[7] Second, and connected to this point. Unless one accepts the determination of value by labour time one cannot logically demonstrate that the relations of distribution arise out of production relations. We shall not be concerned in this book with the distribution theories of the left-Keynesians such as Robinson, Kaldor, etc., but in general they rest upon the proposition that the distribution of wealth is determined by the operations of savings and investment outside the actual process of production. (Here the Cambridge school relies heavily on the work of Michal Kalecki.)

In this chapter we have aimed to sketch out the historical and theoretical background to the current crisis of Keynesian economics. It remains to outline the contents of each of the chapters which follows.

In Chapter 2 we shall assess the nature and significance of the Keynesian revolution from the point of view of its implications for economic policy as well as in the light of the fundamental change Keynes claimed to have made in the field of economic theory. If not amongst all academic economists, then certainly amongst the educated public it was believed that it was above all thanks to the success of the Keynesian revolution that capitalism enjoyed an unprecedented degree of success after 1945. This view is, to put it mildly, open to serious question. It will be suggested that the post-war boom had nothing centrally to do with the application of Keynesian policies and further, against the claims of many economists and economic historians, Keynesianism, it will be argued, offered no real solutions to the crisis of the 1930s. In short it will be proposed that the increasing intervention of the state in the post-war economy owed little, if anything, to a conversion to Keynesian ideas but was a reflection of the economic/political and social problems of capitalism at a definite historical point. Further, it will be suggested that the trend towards a growing intervention by the state in a wide range of economic and social matters is a development organic to the very nature of twentieth-century capitalism in all countries, is not fundamentally an ideological matter and as such was in no way inspired by Keynesian economic theory. Having said this, there is no doubt that, within the Anglo-Saxon world at least, Keynes’ name is the main one associated with the idea of growing state involvement in the economy. Keynes’ views of this question will be considered in the light of the history of economic thought in both Britain and more generally in Europe. As already noted, Keynesianism became the fundamental element in post-war social democratic ideology. But it will be argued that there is nothing necessarily liberal or progressive about Keynesian proposals and that they can be and indeed have been the vehicle for a variety of social and intellectual purposes.

This will lead (Chapter 3) to a detailed analysis of the theoretical foundations of Keynes’ General Theory. The basic categories of this work will be subject to critical scrutiny and it will be argued that they are of an essentially subjective character which not only renders them incapable of explaining the dynamics of bourgeois economy but also opens up the possibility that they could be filled with any social and political content, a fact which explains the wide use to which Keynesian ideas have in fact been put. Specific attention will be given to the concept of capital held by Keynes as well as by his most influential followers such as Robinson, on the grounds that this is the fundamental category of bourgeois economy and the treatment of it by any particular writer is in this sense a litmus test as to their position on every crucial economic question. Because Keynes has often been presented as above all an opponent of equilibrium economics, the notion of equilibrium and its place in an analysis of capitalist economy will be critically reviewed. It will be argued that the angle from which Marx and Keynes began their analyses of the capitalist economy were of a wholly different nature and it will be maintained that Keynes belongs not to the classical tradition in economics but to the vulgar school. It will be strongly argued that it is not possible to construct bridges between the political economy of Marx and that of Keynes, as envisaged by Robinson and others.

Chapter 4 will deal more directly with the nature of the post-war inflationary boom and its unfolding contradictions. Attention here will be given to the nature of state spending as it was understood by Keynesianism and the inadequacy of such understanding will be considered. The forces generating the increased state spending of the post-war period will be examined and it will be suggested that it arose not merely from a series of narrowly conceived ‘economic’ needs which capitalism experienced but also from a number of social and political pressures which in the concrete conditions emerging after the last world war capitalism found unable to resist. It is in this light that the thesis to the effect that a too large volume of state spending is the root cause of capitalism’s crisis (Bacon, Eltis et al.) will be considered: here it will be proposed that such state expenditure cannot be construed as the source of the crisis but rather as one of its principal effects. This chapter will seek to show that the claims of the Sraffa school notwithstanding, it is not possible to understand the developing contradictions of the post-war boom without recourse to the basic categories and laws of Marxist political economy, especially the law of value and the law of the tendency of the rate of profit to fall.

At the end of his life Keynes was centrally concerned with proposals for reshaping the nature of the international economy. The post-war economy developed within the framework of an international economic order which Keynes himself had helped to shape. Chapter 5 will therefore deal with the nature of the Bretton Woods arrangements and the seeds of their effective disintegration in the 1970s when the US removed gold backing for the dollar, the single event which more than any other unleashed severe inflationary pressures and threw Keynesianism into a fundamental crisis. This will enable us to locate the crisis of Keynesianism within its international context.

Finally, the several topics of the work will be drawn together, the continued central relevance of Marxism stressed, and some suggestions for further work on the themes dealt with in the book suggested. In particular those attempts to provide an alternative to the doctrines of monetarism on the basis of Keynesianism and along the lines of the Alternative Economic Strategy will be subjected to critical scrutiny, and it will be argued that there can be no prospect of a revival for Keynesian economics, for the good reason that this trend in economic theory and policy emerged as a dominant ideological force only under definite historical economic and political circumstances; circumstances which have now disappeared.


1. Referring to the phenomenon which became fashionably known as stagflation, Lord Kaldor said, ‘Nothing of this kind has ever occurred before in peace time – I mean an inflation of that magnitude encompassing not just one or two countries, but all the leading industrial countries of the world. The other unique feature of this inflation was that it was accompanied by a marked recession in industrial production. ... This combination of inflation and industrial recession is a new phenomenon, the explanation of which presents an intellectual challenge to economists’ (Kaldor 1978: 215). Other economists took an even more sombre view of the implications of world-wide inflation. Thus at the end of the 1970s two prominent economists could say, ‘In the past decade, the problem of inflation has escalated from a continuing irritant to a blight on the stability and efficient performance of the leading economies and to a potential threat to the preservation of democratic societies’ (Hirsch and Goldthorpe 1978: 1). One of the casualties of the explosion of inflation in the 1970s, occurring alongside rising unemployment, was the much vaunted Phillips curve which had postulated a trade-off between inflation and unemployment.

2. The subjectivity of such views is clear: they seek to explain fundamental crises in the system as the result of incorrect financial policies pursued by governments. Here monetarism attempts to explain capitalist crises as originating in the sphere of circulation rather than in the process of production. Further, for the monetarists, such crises are not economic but political, stemming as they do from unwise state policies. As with bourgeois economics as a whole, when the moment comes to explain an economic crisis, economic factors are abandoned in favour of non-economic phenomena.

3. Without anticipating too much of the later discussion it can be noted that amongst notions of the vulgar economists Marx considered one of the most vulgar, that which explained rising prices by resort to increases in the supply of money. ‘The idea that the banks had unduly expanded the currency, thus producing an inflation of prices violently to be readjusted by a final collapse, is too cheap a method for accounting for every crisis not to be eagerly caught at. ... The vulgar notion, therefore, which refers the recent crisis and crises generally to an over-issue of bank notes, must be discarded as altogether imaginary’ (MECW 16: 8).

4. In connection with the often acrimonious dispute between the monetarists and the Keynesians, one can truly say that, as far as economics is concerned, there is little new under the sun. For this controversy is essentially a re-run of the nineteenth-century one between those such as Ricardo defending the ‘currency principle’ and Tooke and others who adhered to the ‘banking principle’. The former school held that the price level depended on the amount of money in circulation and that, internationally, prices expressed the purchasing power of each national currency. Equilibrium between national economies was established by the transfer of coin and bullion. Excess of Bank of England notes was the cause of inflation and such notes should therefore be kept to the level of gold deposits in the Bank of England. Opposing this view, the banking school claimed that price movements rested on public confidence in the currency. The quantity of money in circulation depended on public demand, the quantity of bank notes being an effect and not a cause of the demand for them. In other words the Bank simply issued what was required of it. As Marx noted, ‘But continued investigation of the history of prices compelled Tooke to recognise ... that increases or decreases in the amount of currency when the value of the precious metals remains constant are always the consequence, never the cause of price variations, that altogether the circulation of money is merely a secondary movement’ (Marx 1971: 186).

5. In another place, Balogh declares: ‘The Keynesian revolution in economic thought has proved as broken a reed in helping to attain a steady dynamism in our economy as the elegant structure of thought it overcame. ... Liberal Keynesian growthmanship did achieve accelerated and sustained growth. But through the social tensions, which were caused by its failure to secure a sense of justice, it undermined its own success through escalating demands for higher money incomes’ (Balogh 1971).

6. In a perceptive review, Hutchison noted the change in Dobb’s position on the nature of the ‘marginalist revolution’. In his early work, Dobb had attached little significance to this event, seeing it as an extension of elements already present in the vulgar economy which emerged to a position of dominance from the 1830s onwards. In his later work he saw it as a decisive turning-point, and constituting a far more decisive revolution than that for which Keynes was responsible in the 1930s. This ‘conversion’ Hutchison explains in terms of Dobb’s aim to highlight the supposed revolutionary character of Sraffa’s work; he is building up what Sraffa (according to Dobb) has overthrown (Hutchison: 1978). Dobb claims that Sraffa (along with Robinson and other critics) are heirs to the Ricardian-Marxist tradition in analysing the problems of exchange and distribution (Dobb 1973: 11 1). Ronald Meek (1964) takes a similar position to Dobb. Amongst other things both tend to identify Ricardian political economy with Marx’s critique of it.

7. A good examination of the gulf dividing Sraffa from the classical tradition (let alone from the position of Marx) is provided by S. Himmelweit and S. Mohun, in Steedman et al. (1981).