i Keynes Against Capitalism Keynes is one of the most important and influential economists who ever lived. It is almost universally believed that Keynes wrote his magnum opus, The General Theory of Employment, Interest and Money, to save capit- alism from the socialist, communist, and fascist forces that were rising up during the Great Depression era. This book argues that this was not the case with respect to socialism. Tracing the evolution of Keynes’s views on policy from WWI until his death in 1946, Crotty argues that virtually all post-W WII “Keynesian” economists misinterpreted crucial parts of Keynes’s economic theory, misunderstood many of his policy views, and failed to realize that his overarching political objective was not to save British capitalism, but rather to replace it with Liberal Socialism. This book shows how Keynes’s Liberal Socialism began to take shape in his mind in the mid-1 920s, evolved into a more concrete institutional form over the next decade or so, and was laid out in detail in his work on postwar economic planning at Britain’s Treasury during WWII. Finally, it explains how The General Theory provided the rigorous economic theoretical foundation needed to support his case against capitalism in support of Liberal Socialism. Offering an original and highly informative exposition of Keynes’s work, this book should be of great interest to teachers and students of eco- nomics. It should also appeal to a general audience interested in the role the most important economist of the 20th century played in developing the case against capitalism and in support of Liberal Socialism. Keynes Against Capitalism is especially relevant in the context of today’s global economic and political crises. James Crotty is Emeritus Professor of Economics at the University of Massachusetts Amherst and Senior Research Associate at the Political Economy Research Institute. His research in theory and policy attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions. ii Economics as Social Theory Series edited by Tony Lawson University of Cambridge Social Theory is experiencing something of a revival within economics. Critical analyses of the particular nature of the subject matter of social studies and of the types of method, categories and modes of explanation that can legitimately be endorsed for the scientific study of social objects are re- emerging. Economists are again addressing such issues as the rela- tionship between agency and structure, between economy and the rest of society, and between the enquirer and the object of enquiry. There is a renewed interest in elaborating basic categories such as causation, com- petition, culture, discrimination, evolution, money, need, order, organ- ization, power probability, process, rationality, technology, time, truth, uncertainty, value etc. The objective for this series is to facilitate this revival further. In contem- porary economics the label “theory” has been appropriated by a group that confines itself to largely asocial, ahistorical, mathematical “mod- elling.” Economics as Social Theory thus reclaims the “Theory” label, offering a platform for alternative rigorous, but broader and more critical conceptions of theorizing. 46. Knowledge, Class and Economics Marxism without Guarantees Edited by Theodore Burczak, Robert Garnett and Richard McIntyre 47. Markets Perspectives from Economic and Social Theory William A. Jackson 48. Keynes Against Capitalism His Economic Case for Liberal Socialism James Crotty For more information about this series, please visit: www.routledge.com/ Economics- as- Social- Theory/ book- series/ EAST ii i “This book is a marvel of economic narrative, with Crotty’s clarity and Keynes’s elegance in stunning counterpoint, from Versailles through the Depression to the war and Bretton Woods, all bringing forth the great, neglected fact that Keynes’s Liberal Socialism was far more radical than modern memory would have us think.” James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/ Business Relations, University of Texas at Austin “James Crotty’s writings have always been marked by deep thought and analysis, independence of mind, a judicious amalgamation of theory and empirical evidence and humane and realistic policies. The present volume is characterised by all these traits, it is vintage Crotty. The author makes a convincing case that Keynes since The Economic Consequences of Peace (1919) has been developing his ideas on liberal socialism that high- light the centrality of planning and public investment in sustaining full employment, ideas that came to full maturity in The General Theory and Keynes’s writings and activities after its publication, in World War II and up to his death in April 1946. Crotty’s arguments undermine the conven- tional wisdom of Keynesians and non- Keynesians alike that Keynes’s aim was to save capitalism from itself and should be required reading for professional economists of all persuasions, policy makers, and concerned citizens appalled by the economic and political malaise we currently find ourselves in.” Geoffrey Harcourt, Emeritus Reader in The History of Economic Theory, Cambridge, Honorary Professor UNSW, Sydney “This bold and brilliant work revolutionizes our understanding of Keynes’ economics. Instead of reopening the often-d ebated topic of the essen- tial characteristics of ‘Keynesian economics,’ James Crotty puts Keynes’ lectures and writings into the context of both the economists and politicians with whom he interacted and of his political and policy engagements. Focusing on the moving pulse of Keynes’ ideas from 1919 through his death in 1946, the author traces the evolution of his profound and exten- sive vision: achieving a sustainable future for capitalism cannot be left to market forces, but must be managed through public investment and of socialist planning and coordination. This book’s provocative approach is perfectly timed for broad rethinking of macroeconomics that is now underway. In the density and originality of its themes, and in the integrity and depth of its scholarship, the reader is left in little doubt that this is the work of a master.” Gary A. Dymski, Professor of Applied Economics, Leeds University Business School, University of Leeds “Regardless of whether you share Crotty’s revisionist framing of Keynes’ overarching vision, this smart, erudite and illuminating book is steeped in the enduring wisdom of its subject, and shines a powerful light on the iv fundamental differences between the economics of Keynes and practice of postwar “Keynesianism” – a distinction of pressing relevance for today’s economic challenges.” Jonathan David Kirshner, Stephen and Barbara Friedman Professor of International Political Economy, Department of Government, Cornell University “James Crotty has written an outstanding description of the evolution of Keynes’s thought on the role of State involvement in a capitalism that promotes full employment and fairness. Characterisations of Keynesian economics by policy-m akers and academics runs far afield from the clarity of purpose that Keynes held when describing the working of a capitalist economy. Crotty, in this clear and well written book, has surely set the record straight.” Professor Roy Rotheim, Skidmore College, USA v Keynes Against Capitalism His Economic Case for Liberal Socialism James Crotty vi First published 2019 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2019 James Crotty The right of James Crotty to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing- in- Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging- in- Publication Data Names: Crotty, James, 1940– author. Title: Keynes against capitalism : his economic case for liberal socialism / James Crotty. Description: 1 Edition. | New York : Routledge, 2019. | Series: Economics as social theory | Includes bibliographical references and index. Identifiers: LCCN 2018059994 (print) | LCCN 2019001777 (ebook) | ISBN 9780429464911 (Ebook) | ISBN 9781138612839 (hardback : alk. paper) | ISBN 9781138612846 (pbk. : alk. paper) Subjects: LCSH: Keynesian economics. | Socialism. | Liberalism. Classification: LCC HB99.7.K38 (ebook) | LCC HB99.7.K38 C76 2019 (print) | DDC 330.15/6–dc23 LC record available at https://lccn.loc.gov/2018059994 ISBN: 978- 1- 138- 61283- 9 (hbk) ISBN: 978- 1- 138- 61284- 6 (pbk) ISBN: 978- 0- 429- 46491- 1 (ebk) Typeset in Palatino by Newgen Publishing UK vi i This book is dedicated to the hundreds of bright and highly motivated UMASS graduate students who took my course in macro theory over the four decades that I taught it. The lively discussions and debates that took place in the class- room helped me develop the interpretations of Keynes’s views on economic theory and economic policy that are the subject matter of this book. viii ix Contents Acknowledgments xii 1 Introduction: was Keynes trying to save capitalism or create “Liberal Socialism?” 1 PART I From The Economic Consequences of the Peace to The General Theory 23 2 The Economic Consequences of the Peace: 1919 25 3 Making sense of chaos: 1919– 1923 34 4 Public investment and state planning in 1924: the real Keynesian revolution begins 48 5 The return to gold in 1925: deflation, social justice, and class struggle 63 6 Three important “essays in persuasion” on the proper economic role of the state: 1925– 1926 70 7 Destructive competition, corporatism, industrial policy, and the new economic role of the state: 1927– 1928 84 8 Britain’s Industrial Future and the Board of National Investment: a detailed analysis of the institutions to be used by the state to regulate capital accumulation in pursuit of full employment under Liberal Socialism 95