The Economist published a short piece by Joseph Stiglitz on Keynes. I would agree with Stiglitz's on the broad political point that Keynes was not a revolutionary socialist. He wanted to save capitalism from itself, as they say. Stiglitz puts this very directly: “Roosevelt’s pragmatism and Keynes’s ideas saved capitalism from the capitalists,” because unfettered capitalism in a prolonged depression might not have survived. He also says Keynes was “no left-wing radical,” believed in the market economy, and saw intervention as a “minor fix” rather than a revolution.
That overlaps with my view that Keynes remained a liberal, not a socialist, and that he was a moderate in politics even if he was willing to experiment pragmatically with policy. In my formulation, Keynes understood that laissez-faire capitalism had to be transformed or transcended, but he did not abandon bourgeois liberal society; he was “a revolutionary in economic theory, but a moderate in his politics.”
The key difference is theoretical. Stiglitz’s Keynes is still, to a significant extent, the Keynes of mainstream Keynesianism. Markets can fail badly, can remain in unemployment for long periods, and government spending is needed to stabilize demand. But he frames the issue partly as one of slow self-correction: even if there are forces bringing the economy back to full employment, “they worked too slowly” to avoid hardship. That leaves open a conventional reading in which Keynes is mainly an imperfectionist, for whom markets may eventually work, but sluggish wages, prices, interest rates, expectations, or financial frictions make the adjustment too slow.
The disagreement is not over Keynes’ politics, but over the depth of his theoretical break. Stiglitz emphasizes Keynes as the economist who showed that government could stabilize an inherently unstable capitalist economy. I would emphasize Keynes as the economist who broke with Say’s Law and developed the Principle of Effective Demand. That is why, in my interpretation, Keynes is not simply saying that markets adjust too slowly to full employment, rather he is saying there is no automatic tendency to full employment even with flexible wages and prices.
The point is not that Keynes thought capitalism was intrinsically chaotic in the sense of constantly tending toward breakdown. Rather, he thought it could be economically stable in a bad equilibrium, capable of persisting for long periods at sub-normal levels of output and employment. He said so in the General Theory, capitalism is “not violently unstable,” and may remain in “a chronic condition of sub-normal activity for a considerable period” without a strong tendency either toward recovery or collapse.
Stiglitz emphasizes instability in the more conventional policy sense. Capitalism produces deep fluctuations, depressions, recessions, and crises, and Keynes showed that government could counteract them. That is true, but it risks making Keynes look like someone whose main theoretical contribution was to show that capitalism is unstable and needs stabilization policy. In my view, Keynes’ more radical theoretical point was different, the system can be stable without being self-correcting to full employment.
Stiglitz stresses Keynes as the theorist of crisis prevention and macroeconomic stabilization, which is fair enough. I would stress Keynes as the theorist of stable underemployment capitalism. The danger, for Keynes, was not simply that capitalism would spiral mechanically into economic collapse. The danger was that a system capable of remaining stuck below full employment would generate social and political pressures that could undermine liberal capitalism itself. It was politically unstable, but not necessarily in economic terms.
Keynes wanted to save capitalism, but not because he thought markets were simply fragile and prone to immediate economic disintegration. He wanted to save capitalism because persistent unemployment and stagnation made the liberal order politically vulnerable, to Soviet communism and fascism, His policy prescriptions aimed at full employment domestically in the face of the rising tide of fascism and communism, both of which he abhorred, as I noted on the paper linked above.
This makes Keynes neither a simple imperfectionist nor a crude instability theorist that believed the system to be on a knife-edge. He was saying something subtler. Capitalist economies may be stable enough to survive economically at low levels of activity, but precisely that stability at underemployment makes them politically dangerous. The economic problem is not automatic collapse, but the absence of any reliable automatic mechanism restoring full employment.
In sum, Stiglitz is right that Keynes wanted to save capitalism and that government spending could prevent depressions from destroying the system, something that Keynes knew since the 1920s, before his theoretical revolution. However, Keynes’ theoretical argument was not merely that markets adjust too slowly aftershocks. Nor was it simply that capitalism is violently unstable. Keynes’ point was that capitalism may be quite stable around a suboptimal, below full-employment position. That economic stability at underemployment was politically destabilizing, because mass unemployment threatened the survival of liberal capitalism itself.
Today, at least in the United States and other advanced economies, the problem is less often mass unemployment in the Keynesian sense than the quality, security, remuneration, and social meaning of employment. Capitalism may deliver low measured unemployment while still producing precarious, poorly paid, or socially degrading jobs, thereby reproducing a different form of economic and political instability.
* Stiglitz's Godley-Tobin Lecture is free for download here.
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