Such might have remained the situation, with economic development relegated to the “underworld” of economic and social thought, were it not for historical processes that in the course of a few decades have drastically changed our entire social, political, and intellectual landscape. Indeed, while the neoclassical economists were, busy with further refinements of static equilibrium analysis and with the elaboration of additional arguments proving the viability and intrinsic harmony of the capitalist system, capitalism itself was going through far-reaching transformations.
Towards the end of the nineteenth century, the first phase of the industrialization of the Western world was nearing its completion. The economic consequence of the thorough exploitation of the then available technology—based primarily on coal and steam—was not merely a tremendous expansion of heavy industry, a vast increase of output, and a revolution in the means of transportation and communication; it was also a momentous change in the structure of the capitalist economies. Concentration and centralization of capital made giant strides, and large-scale enterprise moved into the center of the economic scene, displacing and absorbing the small firm. Shattering the competitive mechanism which regulated, for better or worse, the functioning of the economic system, large-scale enterprise became the basis of monopoly and oligopoly—the characteristic features of modern capitalism. The world of neoclassical economics was rapidly disintegrating. Neither the slow (but steady) growth, nor relatively painless continuous adjustments on the margin were to be expected under conditions of ubiquitous indivisibilities and discontinuities, of increasing returns to scale, and of narrowing investment opportunites. The harmonious movement of capital from the advanced to the less developed countries that was expected to be propelled by the profit motive assumed in reality the form of embittered struggles for investment outlets, markets, and sources of raw materials. Western penetration of backward and colonial areas, that was supposed to spread the blessings of Western civilization into every nook and corner of the globe, spelled in actual fact ruthless oppression and exploitation of the subjugated nations.
The powerful tendencies towards stagnation, imperialist conflagrations, and severe political crises discerned by Marx as early as the middle of the nineteenth century, and later observed and analyzed by Hobson, Lenin, Hilferding, Rosa Luxemburg, and others, expressed themselves so manifestly as to give cause for alarm to all but the most complacent. A frantic armaments race among the Great Powers began absorbing growing parts of their national outputs and became the most important single factor in determining the level of their economic activity. In quick succession the Sino-Japanese War, the Spanish-American War, the Boer War, the bloody suppression of the Boxer Rebellion, the Russo-Japanese War, the Russian Revolution in 1905, the Chinese Revolution in 1911-1912, and finally the First World War ushered in the present epoch in the development of capitalism—the epoch of imperialism, wars, national and social revolutions.4
The Marxian theoretic challenge has become eminently practical. The “Indian summer” of stability, prosperity, and confidence in the future of capitalism—following the First World War—lasted less than one decade. The dream of “organized capitalism,” of a “Ford-versus-Marx” solution of all economic and social ills, and of “economic democracy” assuring justice and welfare to all became the shortest-lived utopia on the historical record. The Great Depression with its manifold and protracted repercussions rendered the continuation of the “conspiracy of optimism” about economic growth and social progress under capitalism increasingly difficult to maintain. The time-honored “scientific” and “objective” finding of economics that socialism is impossible was dramatically refuted by the success of the industrialization effort in the USSR.
Tardily and reluctantly, economics began taking cognizance of the new situation. Although inspired by the immediate problem of counteracting depression and unemployment, and consequently addressing itself primarily to the issues of the short run, the “New Economics” of John Maynard Keynes carried implications that transcended by far its original scope. In an attempt at clarification of the determinants of short-run changes in the levels of output, employment, and income, Keynesian economics found itself face to face with the entire irrationality, the glaring discrepancy between the productive potentialities and the productive performance characteristic of the capitalist order. At the risk of grossly exaggerating the intellectual performance of Keynes, it might be said that what Hegel accomplished with respect to German classical philosophy, Keynes achieved with regard to neoclassical economics. Operating with the customary tools of conventional theory, remaining well within the confines of “pure economics,” faithfully refraining from considering the socioeconomic process as a whole, the Keynesian analysis advanced to the very limits of bourgeois economic theorizing, and exploded its entire structure. Indeed, it amounted to an “official” admission on the part of the “Holy See” of conventional economics that instability, a strong tendency towards stagnation, chronic underutilization of human and material resources, are inherent in the capitalist system. It implicitly repudiated the zealously guarded “purity” of academic economics by revealing the paramount importance for the comprehension of the economic process of the structure of society, the relations of classes, the distribution of income, the role of the state, and other “exogenous” factors.
Yet this unintentionally undertaken revival of the inquiry into the “nature and causes of the wealth of nations” had nothing in common with the youthful, revolutionary enthusiasm of the early crusade for laissez faire. Although contributing greatly to the understanding of the mechanics of the capitalist economy, the New Economics was unable to rise to a full theoretic grasp of the general crisis of capitalism, and remained merely a supreme effort on the part of bourgeois economic thought to discover a way of saving the capitalist system in spite of the manifest symptoms of its disintegration and decay. Thus the “Keynesian Revolution” has never become associated with a vigorous movement for the abolition of an outlived and destructive social order, for economic development and social progress. Again, not unlike the philosophy of Hegel, in its “Leftist” interpretation, it supplied intellectual ammunition to a reform movement which expected once more to solve the contradictions of capitalism by changing the prevailing distribution of income, and by having a benevolent state provide henceforth for steady economic expansion and increasing standards of living. But the logic of monopoly capitalism proved to be much stronger than ever realized by Keynes and his radical followers. It turned their theoretic accomplishments to purposes quite alien to their intentions. The “Welfare State,” guided by the canons of Keynesian economics and the precepts of “functional finance,” has remained essentially on paper. It was fascist Germany that thus far has made the most extensive use of Keynesian insights in building an economic machine that enabled it to unleash the Second World War.
The war and the years of the postwar boom suspended all Keynesian concern with the excess accumulation of capital, with the shortage of effective demand. The requirements for the reconstruction of war damage in some countries, the satisfaction of postponed demand on the part of businesses and consumers in others, the urge to turn to productive purposes the technological innovations developed during (and frequently in connection with) the war—all combined to create a huge market for the output of capitalist enterprise.
Economists who only unwillingly and only under irresistible pressure of incontrovertible facts had “swallowed” the anti-capitalist implications of the Keynesian doctrine returned with conspicuous alacrity to the customary panegyrics of capitalist harmony. Remaining “close to observable facts,” they cheerfully began to discuss inflation as the main threat to the continuous equilibrium of capitalist economies, and declared once more that oversaving, excess capacity, and depressions were relics of a remote and backward past. Extolling the virtues of the market mechanism, glorifying monopoly and “big business,” economics all but canceled whatever advance was reached as a result of the Keynesian Revolution, and returned to the complacency of the “merry twenties.”
To be sure,