What is plainly disclosed, of course, as these spiralling counter-effects progressively cancel the early gains, is an economic situation worse than the problems which these naive expedients were designed to remedy in the first place:
There will always be a possible maximum of employment in the short run which can be achieved by giving all people employment where they happen to be and which can be achieved by monetary expansion. But not only can this maximum be maintained solely by progressive inflationary expansion and with the effect of holding up those redistributions of labour between industries made necessary by the changed circumstances, and which so long as workmen are free to choose their jobs will always come about only with some delays and thereby cause some unemployment: to aim always at the maximum of employment achievable by monetary means is a policy which is certain in the end to defeat its own purpose. It tends to lower the productivity of labour and thereby constantly increases the proportion of the working population which can be kept employed at present wages only by artificial means.33
Here is a different case from the political argument with which the polemical author of The Road to Serfdom is generally identified: a case, however, which is easily assimilated with the rest of the oeuvre of the great apostle of economic liberalism. Hayek’s distinctive doctrinaire approach has often been contrasted with the abhorrence of rationalism which is to be found in writers like Oakeshott. Yet there is another face to Hayek’s argument which is far more conservative than liberal in its justification of ‘men’s submission to the impersonal forces of the market’ – the more so when this was justified by an appeal to such forces as superstition. Such a commendation of conservative instincts appealed to a deeper rationale than vulgar rationalism. ‘It may indeed be the case that infinitely more intelligence on the part of everybody would be needed than anybody now possesses, if we were even merely to maintain our present complex civilisation without anybody having to do things of which he does not comprehend the necessity’, Hayek enjoined. ‘The refusal to yield to forces which we neither understand nor can recognise as the conscious decisions of an intelligent being is the product of an incomplete and therefore erroneous rationalism.’34
It was Keynes, not Hayek, who captured the ear of the opinion-forming elite in post-war Britain. In particular, the canonical status of the General Theory was now assured, as much by vague invocation as by specific citation. The White Paper went as far as was decent in making this plain:
the Government recognise that they are entering a field where theory can be applied to practical issues with confidence and certainty only as experience accumulates and experiment extends over untried ground. Not long ago, the ideas embodied in the present proposals were unfamiliar to the general public and the subject of controversy among economists. To-day, the conception of an expansionist economy and the broad principles governing its growth are widely accepted by men of affairs as well as by technical experts in all the great industrial countries.35
In the two post-war books commissioned by Penguin from Labour and Conservative spokesmen, giving their cases access to a mass paperback market, there are differences of emphaisis, as one would expect. Thus Quintin Hogg’s account is imbued with caution:
Unemployment can temporarily be mitigated, and perhaps eliminated in a country, notwithstanding its international character, by government action which artificially increases demand in any way. This, however, means to some extent adopting a closed economy which, internationally speaking, is anti-social, and may involve the assumption of dictatorial powers. Moreover, unless the demand is carefully selected this palliative cannot last long. It cannot in any event last indefinitely unless ultimately world conditions improve.36
Conversely, in John Parker’s account there was a residual flavour of socialist scepticism about relying on market mechanisms – ‘since it must be remembered that in one sense labour is always being “directed” by the demands of consumers’ – to achieve what Cripps was now terming ‘democratic’ planning, as distinct from the ‘totalitarian’ kind.37
Yet Hogg’s and Parker’s accounts of the 1930s are on broadly similar lines. A wrong-headed approach, it was held, had been adopted in meeting the 1931 crisis; but this could be extenuated and excused in the absence of a fully articulated Keynesian agenda. According to Quintin Hogg, it was not really a partisan matter – ‘The Labour Government are not to be blamed for not following this course’ – and instead he cited the Keynesian claim, ‘with which I, as a Conservative, agree, that given low rates of interest, high wages, and adequate social security (for this is what redistribution means) this terrible scourge can again be relegated to the category of minor nuisances and we shall be free to face the real problem of civilisation – the lifting of humanity out of the primeval slime’.38
Writing in the New Fabian Essays, five years later, John Strachey appealed to the post-war experience of both Britain and the USA to show how a democratic government could raise the standard of life – provided it had not only the will but also the expertise. ‘The government of the left when installed must know how to give effect to the push of the democratic forces,’ he wrote, mindful of the historical contrast with Leon Blum in France and Ramsay MacDonald in Britain. ‘The techniques for making an economic system work at full power – granted one has the will to do so – were in fact only worked out in the nineteen-thirties. The elucidations of the late Lord Keynes have in this respect played a genuine historical role.’39
What were these much-lauded techniques? Keynes himself had a long-standing record of wishing to regulate investment so as to make full use of resources, and in the General Theory he accordingly suggested ‘a somewhat comprehensive socialisation of investment’. The post-war nationalisation measures in Britain, however, hardly fulfilled his criteria of controlling the overall volume of investment, whether public or private – ‘it is not the ownership of the instruments of production which it is important for the State to assume’.40 Nonetheless, Labour appealed to a synergy between its nationalisation programme and a full-employment policy, under the elastic rubric of planning. They had seen the future – and it worked. Thus, looking back on the record of the Attlee Government in 1952, Austen Albu could claim that, insofar as the rationale for the nationalisation programme had lain here, it had achieved its objective: ‘The dominating motive in 1945 of planning for full employment has been satisfied with only one-fifth of industry nationalised, and there is a growing view that, in so far as internal conditions are concerned, this can be continued.’41
In regulating the level of effective demand Keynes’s instincts were always to concentrate on investment. Practically all that the General Theory said about consumption was: ‘The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways.’42 Under the Labour Government, there was a commitment to macroeconomic management of the level of demand through fiscal policy, supplemented by the use of direct controls to keep inflationary pressure in check. This is how Sir Stafford Cripps explained the matter in his Budget speech of 1950: ‘Excessive demand produces inflation and inadequate demand results in deflation. The fiscal policy of the Government is the most important single instrument for maintaining that balance.’43
By contrast, the use of monetary policy as an economic regulator smacked of the bad old deflationary days of the Gold Standard, and was abjured by Labour. In taking this line Dalton could initially claim both theoretical and practical endorsement from Keynes. Keynes repeatedly stressed the desirability of bringing down the rate to a low and stable level (in this sense ‘fixing’