It seems that we owe the actual term ‘macroeconomic’ to P. De Wolff, in an article published in 1941 in the Economic Journal (of which Keynes was still editor). De Wolff built upon an earlier differentiation between micro-dynamic and macro-dynamic analysis and, according to the New Palgrave, was ‘quite clear about the distinction between micro- and macroeconomics’, one being valid ‘for a single person or family’, the other ‘for a large group of persons or families’.2 But while this is pointing in the right direction, it fails to capture the essential definition of macroeconomics as the study of the system as a whole, not simply of one sector, however great in magnitude, nor of any sub-set of economic agents, however numerous.
This distinction is in fact made much more clearly by Keynes himself, who inescapably bulks large in any discussion of macroeconomic policy. So far as I am aware, he never used the expression macroeconomics (or microeconomics) in any of his writings, though he must surely have become aware of its growing usage in the five years before his death. Look in the index of his collected writings and there is only a hop, skip and a jump from Macmillan Committee (‘see Finance and Industry’) to Magicians (‘Newton, the last of the’). Yet, like M. Jourdain, Keynes’s prose was unimpaired by his lack of the right word. Book Two of the General Theory, concerned with ‘Definitions and Ideas’, leads up to a clinching assertion, in its final sentence, of ‘the vital difference between the theory of the economic behaviour of the aggregate and the theory of the behaviour of the individual unit.’3
Indeed in the preface to the French edition, Keynes tried to pretend that this was why he had termed it ‘a general theory. I mean by this that I am chiefly concerned with the behaviour of the economic system as a whole – with aggregate incomes, aggregate profits, aggregate output, aggregate employment, aggregate investment, aggregate saving – rather than with the incomes, profits, output, employment, investment and saving of particular industries, firms or individuals.’4 It was this determination to seize on the aggregate dimension – not just as an analytical issue but also as a policy tool – which makes the early history of macroeconomic policy in Britain so largely synonymous with the history of Keynesianism.
Keynesian macroeconomic theory may have been devised at the bottom of a slump, but it was symmetrical in its policy implications, as its author explicitly affirmed. ‘The best we can hope to achieve is to use those kinds of investment which it is relatively easy to plan as a make-weight, bringing them in so as to preserve as much stability of aggregate investment as we can manage at the right and appropriate level,’ he wrote in 1937, at the peak of British economic recovery. ‘Just as it was advisable for the Government to incur debt during the slump,’ he argued, ‘so for the same reasons it is now advisable that they should incline to the opposite policy.’5 The irony in the administrative reception of Keynesianism is that it was ‘the opposite policy’ which prevailed during the 1940s. For it is now clear that the concepts of the General Theory were first operationalised within the administrative community in a way which spoke to the macroeconomic issue raised by the Second World War: how to control inflation.
For present purposes, it is not the administrative but the ideological impact of Keynesianism which is the focus – by ideological, I mean the social or political purchase of Keynes’s ideas, or ideas attributed to him, in a particular historical argument. Since we are concerned with ‘actually existing Keynesianism’, it should come as no surprise to discover that ideological distortions of Keynes’s original intentions were a price that had to be paid for the influence of the doctrine.6 What I have to say here bears less upon the policy-making process, on which there is now a fine scholarly literature, than upon the justifying rhetoric in which the central ideas were couched.
I shall take a number of representative texts in the political discussion of Keynesianism and macroeconomic policy over a period of forty years, and quote them, sometimes extensively, in order to capture and illustrate strategies of argument, rather than to assess their objective validity. It will become clear that this discourse cannot simply be characterised as a conflict between progressive and conservative positions. Indeed, if the rhetoric which helped justify the post-war consensus arguably held its own nemesis, through being pitched in an over-confident and triumphalist register, such characteristics were often echoed, or even amplified, in the anti-Keynesian rhetoric which ultimately displaced it. Progressive illusions, imputing boundless competence to projects for reform, may have a timeless element, as may a conservative wisdom, tempering enthusiasm with wholesome pragmatism. The story of the rise and fall of Keynesianism in post-war Britain however, hardly suggests that one side had a monopoly on illusions and the other on wisdom.
The ideological impact of Keynesianism makes a more straightforward, less ironical story than that of its administrative reception. The enemy here was clearly unemployment rather than inflation. It was unemployment, rhetorically termed ‘Idleness’, which had a star billing in the Beveridge Report as one of ‘five giants on the road of reconstruction’, along with ‘Want, Disease, Ignorance and Squalor’.7 Beveridge reached for no elevated soubriquet to characterise inflation, which retained its lower-case pygmy status throughout his Report. Conversely, ‘Want’ could not be slain without first dealing with ‘Idleness’. Progressive reforms marched together in a happy example of mutual support – what Hirschman identifies as ‘synergy’.8 Beveridge needed to banish mass unemployment in order to make his grand vision of social insurance viable. Hence the third assumption of the Beveridge Plan, that full employment would be maintained. True, the actuarial premise here was for an overall level of unemployment up to 8.5 per cent, which was soon to seem an unacceptably high, rather than a desirably low figure. What was required, the Report explained, was ‘not the abolition of all unemployment, but the abolition of mass unemployment and of unemployment prolonged year after year for the same individual.’9
Beveridge adduced five reasons for this contention. One was that cash payments, while suitable for tiding workers over, would, in the longer term, have a demoralising effect. Another was that it became impossible to test unemployment by an offer of work if there were no work to offer. The availability of work, moreover, actively drew in people who would otherwise lapse into debility. These three reasons were concerned with the working of a social insurance scheme, showing its administrative inter-dependence with a buoyant labour market. ‘Fourth, and most important,’ Beveridge continued, ‘income security which is all that can be given by social insurance is so inadequate a provision for human happiness that to put it forward by itself as a sole or principal measure of reconstruction hardly seems worth doing.’ Participation in productive employment, he suggested, was a great end in itself; the ethic of work thus provided a higher symbiosis between reforms which tackled the linked evils of unemployment and poverty. Finally, Beveridge pointed to the heavy cost of his Plan, warning that ‘if to the necessary cost waste is added, it may become insupportable.’ For unemployment simultaneously increased claims while depleting available resources10
Beveridge himself soon became converted to the practicability of reducing unemployment below 3 per cent. It was this more ambitious target which defined ‘full employment’ in the debates of 1944, as against ‘the maintenance of a high and stable level of employment after the war’ which was what the Coalition Government’s White Paper more prudently promised.11 Either way, it was unemployment which was at the centre of the arguments.
The White Paper began by clearly identifying mass unemployment as a macroeconomic problem, for which the Government now accepted responsibility. True, many caveats followed. Nigel Lawson, as Chancellor of the Exchequer more than forty years on, mischievously strung some of them together in an address to economists. Not only (so he found in paragraph 56) would it be ‘a disaster if the intention of the Government to maintain total expenditure were interpreted as exonerating the citizen from the duty of fending for himself’, but he was able to seize upon the remarkable comment in paragraph 74