Now, the way forward is a modified version of Keynes’s post-Second World War proposal
In 1936 when the world was groaning under the disrupttion caused by the Great Depression the influential Cambridge University economist John Maynard Keynes published his General Twheory of Employment, Interest and Money. It was a challenge to the orthodox economics of the time that maintained that the capitalist system was based on the self-adjusting market mechanism and so all that was needed to recover from the depression, particularly its mass unemployment was to make wage rates flexible downwards.
Keynes, on the other hand, claimed that the adjustment mechanism in advanced capitalist economies was not wages or prices, but the level of aggregate income which, in turn, depended on investment. Investment by individuals and corporates in the capitalist system would often turn out to be inadequate to maintain incomes at full employment levels and that under such conditions the only way to augment investment, employment and incomes was for the state to boost employment by undertaking investment, particularly in public infrastructural projects.
Keynes further argued that interest rates and money supply which influenced investment thus became unavoidable policy variables in the system.
But even granting that Keynes’s arguments were valid in those days why bring them up today, close to a century later, when economic systems and economic theories have undergone major changes? That is the question that the contributors to this volume deal with. While the topic is of general interest, those who are not familiar with professional economics may find the papers in the collection not easy. Even students of economics, unless they have been keeping up with recent developments in global economic literature may not be familiar with the contributors or their arguments. Except for Sunanda Sen, formerly of Jawaharlal Nehru University, all the contributors are from foreign countries, not only the U.S., the U.K. and Australia, but Japan, Italy, Brazil, Mexico and Germany.
There is one thing that all of them agree on — that Keynes is relevant even today because of the global depression that started in the U.S. in 2007 and soon spread to the rest of the world, but also because there is a strong economic lobby, including influential international agencies, that have revived the old orthodoxy and insist that the market is the agency to deal with all matters economic and that therefore the state and its agencies should leave the economy to its devices. Our contributors are against this creed and try to show the contemporary relevance of the perspective initiated by Keynes and which has been taken forward by successive generations of scholars.
The fundamental difference between orthodoxy, old and new, and Keynes is that the former envisages the economy as a collection of rational individuals who exercise free choice via the market to maximise their satisfaction. Keynes, as the editors point out, was no less committed to personal choice, but insisted that money and social institutions like the state are integral parts of the economy. He pointed out too that since investment plays a crucial role in the economy and as it involves assessments about future prospects, uncertainty becomes an unavoidable element in the economy. Private investors may, therefore, turn out to be hesitant about investment, especially if consumers prefer to hold money for the uncertain future rather than spending it on current consumption. Situations of this kind tend to depress the economy and under such circumstances the state must step in with investment to save private investors from themselves. An active role for the state in capitalist economies is, thus, unavoidable.
Forms of finance
As economies grow over time, the state will come to have other roles too. It will have to step in to manage money and finance, for long considered to be the exclusive realm of banks, including Central Banks (the ‘Fed’ in U.S.). The growth of finance and the variety of forms it takes and the dominance it comes to have over the economy — described by one of the contributors as the ‘financialisation’ of the economy — is the contemporary rationale for increased state involvement in the economy. It must be noted too that while banks and corporations were the custodians of capital for long, in recent decades, especially after 1980, there has been a proliferation of funds and fund-managers each one generating paper (or not even paper) assets to make profit. It is now well-known that this chase for profit and more profit led to the crash of 2007 and the crisis that followed and still lingers on. The contributors to the volume justify their championing of a renewed Keynesian approach on this ground.
Keynes knew that capitalism is not, and cannot be, confined to national boundaries. The economic relationship between capitalist countries, those in Europe, particularly and the United States had engaged his attention after World War I and World War II. He had come to be considered as an “international systems planner”. Towards the end of World War II, when it was evident that the Allied powers would win the war, Keynes was specifically asked to make a proposal for post-War international transactions. Keynes had learned that the failure of the gold standard was mainly because national economies had to subordinate their domestic policies to the strict demands of the international system. To avoid that Keynes had proposed an international currency called ‘bancor’ and an International Clearing Union (ICU) which would deal exclusively with balance of payments problems of member countries. He was particular that the national currency of no country should emerge as the global reserve currency because that would give special privileges to that country. Keynes’s proposal was rejected. Instead, the International Monetary Fund was set up to deal with inter-country adjustments, and the American dollar (which up to 1971 was convertible to gold) became, almost by default, but certainly because of the economic and military might of the U.S., the global reserve currency and continues to be so. About half a dozen essays in the volume examine the features and consequences of the present-day global payments system (more accurately non-system) and show why a modified version of Keynes’s post-Second World War proposal is the only way to go forward.
This reviewer endorses the view expressed in the blurb of the volume that the essays in it “not only engage with Keynesian economics, but also adapt and go beyond it, keeping in mind the context of the global financial crisis”.
(C.T. Kurien is an economist and former Director of the Madras Institute of Development Studies)