Monday, November 15, 2010

keynesian orchestration

[Technically a repost of an earlier article ("Keynes our lord and master"), it is considerably revised in particular regard to how detailed the story is as well as more quotes. Enjoy!]

As a PhD student in economic history, I am always trying to turn my teaching duties into opportunities for uncovering the historical background of concepts economists usually take for granted. Unemployment is a perfect example – it’s one of the most-watched statistics in the news, nearly every economist you talk to will have a different explanation for why we have it, and for a year and a half now the official unemployment rate has been over 9%. So, walking to my macroeconomics class one morning, I started to rethink the entire idea of unemployment through the lens of history. In particular, since his name has been thrown around quite a lot lately, I was interested in uncovering what was the particular historical circumstance of the Keynesian view of unemployment.

As most of us have read or heard about in the news, Keynesian policies revolve around the importance of government spending in stimulating a weak economy. For example, John Maynard Keynes saw the problem of chronic unemployment in the U.S. during the Great Depression as primarily a result of insufficient spending and investment in the economy. His prescription was a demand-centric view of economic stimulus: the government should invest more money in the economy, through either the creation of jobs or the spending of money on goods and services. In either case, government spending puts money directly into people’s pockets. Those people then go out and spend that money, fueling more job growth and funneling more money back into the system. And so on. The process has been termed a “multiplier” process because of its continuously compounding effects on economic activity.

Simply put, I wanted to know the historical circumstances of these views: how social perceptions of employment have changed over time and what it might all mean for understanding these basic Keynesian views of both the causes of unemployment and how we might get around to fixing the problem. I started thinking about how society has viewed and treated the unemployed, past and present. And when I started thinking about the history I realized a few things.

I realized that, at least since feudal times, society has always been concerned with the unemployed in some way or another. I also realized that when viewed in historical context, Keynes' views of how to alleviate unemployment have much stronger implications for the role of state policies than many people realize. This surprising finding is against the more conservative “New Keynesians” such as Greg Mankiw (who admit that there is a very limited set of problems which government spending can solve) as well as some of the more “extreme Keynesians” such as Paul Krugman (who generally have argued in our current downturn for a very large stimulus package, much larger than that which was actually passed in Congress, i.e., the ARRA, in 2009). The ultimate implications of this finding are huge. I will argue that Keynes' program for investment-led stabilization by the government, fueled by a desire to solve the "unemployment problem," are a modern example a feudal state in which the government itself controls investment. In this (twentieth century!) policy, the state becomes the director of investment (through the planned system) in order to maintain as close to full employment as possible.

This article is a sketch of the two-pronged argument made above. The end goal is to arrive at a synthesis of social understandings of unemployment with Keynes' policy proposals for investment-driven stimulus by constructing a powerful continuity between the two concepts.

Our story, interestingly enough, begins in fourteenth century England.

After the Black Death had run its course through England, the nobles passed a law titled “Statute of Laborers” (1351). Reacting to the drastic cut in labor supply and the economic consequences associated with it (e.g., a better position for laborers to bargain for higher wages), the statute intended to save and protect the economy from the destabilizing tendencies of the Plague. The statute required every able-bodied person to work – either for wages, serving under a lord, or serving as an apprentice in some trade. (It was considered a crime if one weren't working.) And since the shortage of laborers meant that the economy really depended on them, the statute did something to curtail the ability of these workers to bargain for ever-higher wages. The statute placed a ceiling on wages and regulated several other terms of the labor contract, regulations enforced by town governments who were allowed to determine "fair values" for wages. This was intended to maintain the viability of the local economy (these fair values were also imposed on bread and other goods at the local market where farmers could sell their surplus).

This statute represents the birth of the modern relationship between the state and unemployment. When the English landed on the shores of the New World, many of their institutions and social practices were carried over, including the Statute of Artificers (passed in 1583, it was the 16th century revision to the original Statute of Laborers, containing many of the basic features of the original statute). Towns in the middle colonies and New England regulated wages and enforced the assize on bread, people were coerced into work when needed, and town officials took care of their poor by feeding them temporarily and getting them jobs.

The American Revolution changed some of these feudal institutions, but not all of them. Surely a republican society was no place for shackled workers and regulated wages. And some of these institutions did slowly began to fade away, particularly unfree forms of labor in the North, as ideological contradictions developed between the North and South with the growth of slavery.

However, the simple fact that the North was using the South as a baseline for celebrating their free labor institutions should set off some bells and whistles. For example, controls on unemployment in many northeast states stuck pretty well. Overseers of the Poor in towns were still a prevalent part of the local political economy, housing the poor and distributing apprenticeships when needed (and, in some states such as Massachusetts, as compelled by statute). Workhouses, another British-inspired institution, were also quite prevalent in early America.

As we move further into the nineteenth century, and as capitalism develops as the dominant economic system in society, the unemployed take on a role in the ideology of this new system. The case for understanding this transition that I know best is the U.S.: previously, in colonial times and through the antebellum period, the poor were taken care of by the public because of traditional laws and institutions. But two trends in the evolution of capitalism roughly beginning sometime after the Civil War led to fundamental changes in how the unemployed were conceived: the privatization of welfare institutions such as the workhouses mentioned above, and the success and rapid development of industrialization.

Allow me to explain.

In this new world of industrialized capitalism, poor relief took on a new, private character as charity became increasingly supported by agents outside government. And the success of industrialization led to a new ideology of society where the unemployed are seen as “mistakes,” people who had failed to integrate themselves into the new system. (This is not an alien concept – Tea Party arguments against unemployment insurance assert that such policies foster laziness and ineptitude at finding a job, and should therefore be cut back significantly.) For this group of unemployed, the threat of poverty and of being an outcast from the new socioeconomic system was enough incentive to keep all employed – no public programs were needed to get people to work, and if people didn’t work, they were to be corrected for their mistakes. As Alex Keyssar argues in his history of unemployment in the U.S. titled Out of Work, a variety of forces acting on labor markets after the Civil War made unemployment a more acute problem, leading to crime and other social problems. In turn, unemployment itself was considered a crime just like it had been five hundred years ago in England: various tramping laws passed in the 1870s and 1880s saw the poor as having failed the system and who were therefore criminals. Such a contradictory state of policy indeed! The late 1800s and the onset of the “Progressive Era” saw the state having a hand in both punishing the unemployed and (marginally) helping workers out through factory inspections and reform!

Alex Keyssar documents how in the early twentieth century various pamphlets argued that American capitalism needs to be saved from the threats to social stability of joblessness. These pamphlets spelled out movements for an expansive program for state policy in addressing unemployment, including proposals for public employment programs. So there we are, early 20th century, still faced with the problem of trying to cure the issue of unemployment. In several ways, as I noted above, things sound quite familiar from previous eras. Social pressures to eliminate unemployed were bound up in state policies which are strikingly similar to the same regulatory controls placed on the unemployed over 500 years earlier in England. But as we turn to the last part of our story, enter John Maynard Keynes, we see that he added a remarkable twist.

Keynes took a long history of social concerns with the unemployed and coupled it with a precise answer for why unemployment fluctuates; thereby producing both a diagnosis and radical prescription for curing spells of protracted unemployment. The logic of his argument is straightforward and parts of it remind one of the events surrounding our latest financial crisis.

Keynes takes private investment as the primary variable in his story, focusing on how it determines cycles of growth and stagnation in an economy. The problem with investment behavior is that it is highly volatile in a capitalist economy with a developed financial sector. Essentially, the reason for the volatility is that stock markets in capitalist economies promote short-sightedness on the part of its investors: investor behavior on the stock market floor fails to reflect the “genuine expectations of the professional entrepreneur” (151). Instead, investors in the stock market focus on short-run expectations concerning the value of stock prices in a future world that is fundamentally uncertain. Thus, not only does short-run investment fail to meet the needs of a stable, growth-focused economy, but since investment affects cycles in the economy, it has perverse effects on employment. These cycles are certainly not natural. Indeed, Keynes noted in the General Theory that “[d]ay-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market” (154).

Thus the diagnosis; what about the prescription? Most Keynesians today, in one form or another, argue that government stimulus is necessary in times of economic distress. Governments should take over some of the responsibility of investment in times of high unemployment because private investors are unwilling to take risks necessary to boost job growth. In this way, governments can act to stabilize the system.

Keynes himself was more explicit: government investment should not be a temporary solution – it should actively control the investment of resources in an economy, because that is the only way we can wrestle investment out of the hands of hot-headed private investors in order to stabilize employment levels and eliminate unemployment. “Our final task,” he tells us in the General Theory, “might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live” (247). And in the final book (VI) of the General Theory titled “Short Notes Suggested by the General Theory” he discusses the variables influencing investment behavior and how they may be controlled in order to bring about full employment. He states his case simply, that investment should be directed by the state: “It is not the ownership of the instruments of production [i.e. tools and machines] which is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary” (378).

In conclusion, Keynes is part of a long tradition of those wishing to solve the “unemployment problem” in society. Many of the solutions involved major government policy at either the local, state, or federal level – this was as true in the 14th as in the 20th century. There’s nothing new in that. The novelty of Keynes’ approach was that by tying investment decisions to problems of unemployment, the natural response in terms of the historical circumstances was to make investment a crucial matter of state policy.

This is not Keynes as stimulus check-writer: this is Keynes as state conductor of the orchestra that is the economy. With diagnoses of a 9%+ unemployment rate, Depression-era symptoms, and no end in sight, isn’t it time for a new prescription?

John Maynard Keynes, The General Theory of Employment, Interest, and Money (Harcourt edition, 1964)

Alex Keyssar, Out of Work (Cambridge University Press, 1986)


  1. When taken at their word, Keynes' prescriptions seem pretty radical (state control over investment).

    I am curious if you read Tyler Cowen's recent post on Keynes' famous essay, and your thoughts on it? (found here: )

    I find it curious that Keynes totally skirts the idea of "Technical Unemployment" in GT. How does the view of the economy, as some exogenously technically determined institution that may, at points of capital deepening, not be able to supply sufficient employment for social stability, factor into your historical perspective?

    Hope all is well!

  2. Good question Peter...

    The key historical element of Keynes' ignorance of technical deepening is, in my view, that Keynes wanted to /save/ capitalism, not destroy it. He was a utopian, and that shows most clearly in "Economic Possibilities". In particular, note that in that paper he thinks that problems of technical employment are simply an "economic question", the "political question" (which Marxists would focus on) are left unaddressed.

    I think that once you admit of a political question, then you have to deal with radically changing the "technically determined institution" that is the capitalist economy.
    In short, I think the key historical difference here is between the policy conclusions of Keynes v. Marx, because the latter did see the LR implications of capital deepening for social stability and sought to change them dramatically.