Thursday, March 30, 2023

Review of Crotty's "Keynes Against Capitalism" (forthcoming in ROKE)

It should not be a surprise that John Maynard Keynes is often seen as being relatively conservative by many progressively inclined or radical economists, that often tend to prefer the views of Michal Kalecki, or the more radical approach of Keynes’ favorite disciple, Joan Robinson. That is not the case in James Crotty’s book Keynes Against Capitalism, who takes a diametrically opposite view. He tells us that: “It is almost universally believed that Keynes wrote his magnum opus, The General Theory of Employment, Interest and Money [GT from now on], to save capitalism from the socialist, communist, and fascist forces that were rising up during the Great Depression era”, but in his view, that “was not the case with respect to socialism. The historical record shows that Keynes wanted to replace then-current capitalism in Britain with what he referred to as ‘Liberal Socialism’” (Crotty, 2019: 1-2). His Keynes was anti-capitalist and, in some sense, a socialist. The notion that Keynes was a socialist often encounters as much resistance as the notion that he was somewhat conservative, of course.

The book is divided in three parts. The first part of the book traces the development of Keynes’ ideas in the inter-war period starting with his significant role during the negotiations of the Treaty of Versailles, and the publication of his instant bestseller, The Economic Consequences of the Peace, that made him a worldwide celebrity, to development of the revolutionary ideas in the GT. The second part analyzes the theoretical ideas of the GT, and how they provide the foundations for a radical and socialist remaking of British capitalism. The third and last part discusses Keynes’ program in action, in the buildup to the war, and during World War-II, and its relevance for our days.

The first part of the book suggests that the Keynesian Revolution started in the 1920s with the slow evolution of Keynes’ thinking about the problems of the British economy, and his rethinking of neoclassical economics. Crotty uses the term classical, as did Keynes, creating unnecessary confusion, in particular because of his own sympathies with Marxist economics, that builds critically on the classical surplus approach. Crotty makes an important point, often neglected in the discussions of Keynesian economics. For Keynes the need for a new theory derived from an appreciation of the historical and institutional changes of British capitalism. Crotty argues: “Keynes’s core belief [was] that the West had entered a completely new historical era in which the institutions and policies currently used to regulate economic life were totally inappropriate. He associated himself with the American institutionalist economist John R. Commons’s view that Europe and America were currently in transition to a new historical epoch in which the main task was to create a new ‘regime which deliberately aims at controlling and directing economic forces’” (Ibid.: 81).

The doctrines of laissez-faire, that were well adapted to the Victorian Era, were not suited for the world that emerged from World War-I, in which mass production, mass consumption and the rise of organized labor required a certain degree of government intervention to manage the economy. This is the best and most original part of the book, in which Crotty reminds us that: “Keynes’s enthusiastic and consistent support for state control of most large-scale capital investment is not the only ‘radical’ policy position overlooked by mainstream ‘Keynesian’ economists; his support of detailed industrial and labor-market policy has escaped their attention as well” (Ibid.: 87). The emphasis on the importance of industrial and labor policies, in particular, their direct connection with Keynes’ opposition to the return to Gold Standard and his support of the coal miners’ strike of 1926, are central to understand his need to rethink his economic theory.

However, even in this part, there is a neglect of an important element of Keynes’ trajectory, and for the development of the ideas exposed in the GT. Crotty forgets to note that Cambridge monetary theory was quite underdeveloped in the 1920s, and was based mostly on an Appendix to Alfred Marshall’s Principles of Economics, and his evidence to some Royal Commission, and was in fact being developed by Keynes and his colleague Dennis Robertson during the 1920s. At that point it was unclear that this was a complete rupture with Marshallian economics on monetary affairs, as much as Piero Sraffa was starting to break with the marginalist theory of value and distribution with Keynes’ support. In fact, Keynes’ thought that his book A Treatise on Money was the culmination of the development of the alternative theory, which he defended as a member of the Macmillan Committee, and that argued that the Depression resulted from the high interest rates, that prevented investment from adjusting to full employment savings, as a result of the Gold Standard. This view was perfectly compatible with neoclassical economics, even if Keynes already advocated for public works, an unorthodox policy, as a solution for the crisis.

However, it was at this point, exactly as a result of the criticism of his book by the young economists of the Circus – a group that included besides Sraffa and Robinson, the latter’s husband, Austin, Richard Kahn, and James Meade – that Keynes finally developed in 1932, relatively late, his main theoretical contribution to economics, the Principle of Effective Demand. In other words, while the 1920s were formative, it was only with the Great Depression and his immersion in pure theory in the early 1930s that Keynes finally broke with orthodoxy in theory. The fact that he changed his diagnosis of the Depression, and adopted a whole new theory right after the publication of what should have been his major theoretical work to the date, led to the traditional complain that Keynes was inconsistent and held more than one view at the same time. Friedrich Hayek and Keynes’ opponents at the London School of Economics would make a of this inconsistency one of their main criticisms of Keynesianism.

This is also relevant because it shows that Peter Clarke is correct when he argues that: “The Suggestion that he [Keynes] wrote The General Theory because he had an axe to grind in immediate policy arguments is wide of the mark” (Clarke, 1991: 163). In other words, Keynes’ views on policy issues could be defended, and in fact he did defend them in the 1920s as noted by Crotty, even before he developed the notion that changes in the level of income were the mechanism by which savings adjusted to investment, and not the other way round. The fact that Crotty suggests that the GT was written: “to convince economists and members of Britain’s intellectual, business, and political elites that the theory that informed their economic worldview and provided essential support for the disastrous conservative economic policies of the era was fundamentally flawed” (Crotty, 2019: 161) seems incorrect.

This is compounded by the fact that Crotty accepts Keynes’ theory of interest and the notion of a marginal efficiency of capital in the second part of the book, and as such is forced, as Keynes was, in particular in the famous 1937 paper in the Quarterly Journal of Economics (QJE) amply cited by Crotty, to use the argument of fundamental uncertainty to preclude the possibility that a sufficiently low interest rate would equilibrate investment to full employment savings. Crotty centers his analytical interpretation of Keynes on chapter 12 of the GT, and his defense of the GT in the QJE paper. The argument is essentially one associated with uncertainty and financial instability. In his words: “The outbreak of pessimism and the loss of confidence in the conventions that underlie expectation formation will also cast a pall over the bond market, a point Keynes also stressed in his 1937 defense of The General Theory in the QJE” (Ibid.: 266). It is clear that the abandonment of the marginalist, or neoclassical, notion of a marginal efficiency of capital would actually strengthen Crotty’s point, but for some reason he neglects the important results that followed from the capital debates in the 1960s, which were central for the completion, on a theoretical level, of the Keynesian Revolution in theory.

On the issue of Keynes’ adherence to some form of socialism, Crotty also makes a valiant case for his position. He provides copious circumstantial evidence, and quotes the famous phrase by Keynes in which he says that: “I am sure that I am less conservative than the average Labour voter; I fancy that I have played in my mind with the possibilities of greater social changes than come within the present philosophies of Mr. Sidney Webb, Mr. Thomas, or Mr. Wheatley. The republic of my imagination lies to the extreme left of celestial space” (Keynes, 1926: 308-309). The part that Crotty forgets to cite is the subsequent phrase, in which he tells us: “Yet—all the same—I feel that my true home, so long as they offer a roof and a floor, is still with the Liberals” (Ibid.). Certainly, many of Keynes’ policy proposals were radical. They moved in the direction that was compatible with socialist or social democratic views. And he recognized he had many common goals with Labour and the Fabian Socialists. But he called his views liberal socialism, and remained an Asquith New Liberal all his life.

Liberalism also spoke to Keynes political and social outlook in ways that Labour or Socialism never did. He was an elitist, the product of Eton and King’s College, Cambridge, and a member of the Apostles and the Bloomsbury group. To some extent Labour reciprocated. Philp Snowden, Labour’s first chancellor of the exchequer, was a committed defender of the Treasury View, and an avowed anti-Keynesian. Hugh Dalton, Clement Atlee’s first chancellor of the exchequer, was averse to Keynesian policies, and for him Keynesianism: “was virtually a deathbed conversion, for only in his fourth, final, fatal Budget of November 1947 did he explicitly relate his measures, which stepped taxes across the board, to the problem of controlling inflation… The paradox is that a Keynesian approach was directed chiefly to the problem of keeping demand down, not up” (Clarke, 1991: 186-87). But if there is a future for socialism, Crotty’s view that Keynes’ ideas remain relevant is correct, and there could be no sensible socialism without a good dose of Keynesianism.


Clarke, P. 1991. A Question of Leadership: Gladstone to Thatcher, London: Hamish Hamilton.

Crotty, J. 2019. Keynes Against Capitalism: His Economic Case for Liberal Socialism, London: Routledge.

Keynes, J. M. 1926. “Liberalism and Labour,” in A. Robinson and D. Moggridge (eds.), The Collected Writings of John Maynard Keynes: Essays in Persuasion, Volume IX, Cambridge: Cambridge University Press, 1972.

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