What was novel about his call for public spending in The General Theory was the broad theoretical case that he advanced for it, with public spending used as an antidote to the failure of the marketplace and as a means to restimulate private economic activity. In effect, Keynes developed a technical or instrumental case for the expansion of state powers, rather than a political or ideological one. This was another way in which he saw the state as a potential partner with the business sector instead of a rival or competitor. Keynes envisioned a new order of capitalism in which the state would act to reduce the uncertainty that he felt was a source of instability in the marketplace.
The state could manage its spending and borrowing policies toward the goal of stabilizing consumer demand, which would reduce the uncertainty faced by investors and thereby smooth out the boom-and-bust cycle of the capitalist order. Keynes pointed out that when individuals hold back on consumption or cannot spend because they lose income during slumps, and when investors defer spending because they lose confidence, government can step in to borrow and spend as a means of maintaining demand and generating investment, instead of waiting for the market to make adjustments that may take a long time to occur. Every dollar or pound spent by governments in times of slack demand would be multiplied by some fraction as it is spent and passed through the economy by consumers. In Keynes’s simplified model, domestic output is determined by these three factors: consumption plus investment plus government spending (plus net exports).
While in recessions or depressions it would be preferable for governments to spend on useful and needed projects, Keynes said that any form of spending would be preferable to a policy of inaction. As recovery takes place, government budgets might be brought back into balance and debts incurred during slumps can be paid down. Keynes argued that his approach represented a middle path, or a third way, between the failures of laissez-faire and the excesses of socialism because it was a policy of gradualism that left intact the institutions of private property and representative government.
In terms of short-term policy, there were several attractive features to the approach he outlined. First, there was the proposal to balance public spending over the business cycle in order to bring public budgets into phase with the natural ups and downs of the market economy, which meant that Keynes was not departing all that far from the principles of fiscal rectitude. In addition, he called for public borrowing mainly when interest rates were at their lowest point during the business cycle. Second, he provided policymakers with new tools to deal with slumps as alternatives to beggar-thy-neighbor trade policies like tariffs and currency devaluations, and also as alternatives to central bank credit policies that he judged to be ineffective during slumps. Third, his recommendations involved (at least from his point of view) only limited interventions into the market system. He wrote, “Apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialize economic life than there was before. . . . It is in determining the volume, not the direction, of actual employment that the existing system has broken down.”9 Policymakers need not direct spending into this or that area of the marketplace, but simply control the general volume of spending to support consumer demand and maintain full employment. (What Keynes overlooked is that officials cannot help but direct money to particular areas of the economy when they allocate funds.)
* * *
So far, this is the “conservative” Keynes who called for modest government interventions into the economy in order to reverse slumps and to maintain full employment. He did not mount a moral attack on the market system but rather recommended adjustments to make it run more efficiently. He did not advocate nationalization of industry, the redistribution of incomes, or even the vast accumulation of government debt. He cautioned against government interventions that undermined investor confidence or interfered with investors’ willingness to put money to work. He criticized President Roosevelt’s National Industrial Recovery Act because he saw it as a bureaucratic interference into wage and price decisions that was likely to scare off investors. Keynes urged FDR instead to emphasize policies that stimulated consumer demand. When he was first presented with the Beveridge Report in 1942, Keynes worried about how the costly pension and welfare programs it advocated would be paid for. Surprisingly, Keynes was not a “big spender” or an advocate of expensive welfare programs. He did not immediately see that his calls for activist fiscal policy might be paired with calls coming from other directions for public spending on old-age pensions, relief for the poor, and more public services. He saw fiscal policy as an instrument to stabilize the economy and to promote full employment, but not much more.
On the other hand, The General Theory also contained a more radical message in regard to the relationship between the state and the private market. Keynes was already on record in earlier writings as criticizing the “moneymaking” preoccupations of investors and entrepreneurs and the moral values of thrift and work associated with market capitalism. In The General Theory, he might have stopped with his short-run prescriptions for dealing with business-cycle slumps. But he went from there to suggest that the state should maintain a continuously active fiscal policy to prevent slumps from happening in the first place. He went even further to argue that the state should take control of investment in order to rectify the shortage of capital that he identified as an endemic weakness of market capitalism. In his view, uncertainty would always be too great and likely returns too low to induce private investors to part with their funds at levels needed to sustain robust growth and full employment. Thus he believed that “a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.” Keynes looked forward to “the death of the rentier,” the private investor, and he saw the state, unlike individual investors or businessmen, as being in a position “to calculate the marginal efficiency of capital goods on long views and on general social advantage.”10 The state could act (he thought) as both the “saver” and the “investor” at one and the same time, much as the wealthy entrepreneurs acted in the prewar era, thereby eliminating the need for financial intermediaries and the intricate process of translating savings into investment.
These speculations were at odds with the overall tenor of his theory, which he tried to cast as a moderate approach for correcting endemic problems in the capitalist system. Some have suggested that Keynes viewed this as an end state that would gradually be reached through systematic efforts to apply his theory. That may have been true. In any case, his statement that the state can act on the basis of “long views and the general social advantage” revealed how little he understood about the operations of democratic governments and the short-term outlook of most popularly elected politicians.
By and large, in the United States at least, it was the “conservative” Keynes that carried the day in postwar economic policy and the practice of economics in colleges and universities. Robert Lekachman called it “commercial” Keynesianism because it emphasized growth over redistribution, and he distinguished it from “liberal” Keynesianism as advanced by economists like John Kenneth Galbraith who saw Keynes’s doctrine as an opportunity to expand the welfare state and tame the business sector. In the 1960s, Lekachman could write that, “In the calm which has followed a new national consensus, it is possible to see that Keynesian economics is not conservative, liberal, or radical. The techniques of economic stimulation and stabilization are simply neutral administrative tools. Keynes’s personal history and the early affiliation of liberals and radicals with Keynesian doctrine have obscured this vital point.”11 This was undoubtedly an overstatement and an oversimplification, particularly in view of what happened later, but it was a sound expression of the intellectual and political consensus of the time.
The postwar boom in the United States contributed immensely to the momentum behind the “Keynesian revolution” both in public