Econ-Atrocity {special History of Thought series} Resurrecting the Radical Keynes

By Jim Crotty, CPE Staff Economist

The Keynesian economics that Paul Samuelson popularized in the United States after World War II was a sanitized version of the radical critique of capitalism offered by Keynes himself. John Maynard Keynes’s deep-seated attack on free-market economics led him to call for direct government control of the lion’s share of investment spending, industrial policy, a confiscatory wealth tax, strict control over cross-border financial flows and managed trade. But US “Keynesians” defanged his attack, arguing that if the government regulated interest rates and budget deficits, all other decisions could be left to market forces.

In the aftermath of World War I, the British economy experienced sluggish growth and high unemployment until war preparations began in the late 1930s. The conventional analysis of the time was that high unemployment was caused by high wages that priced British products out of the global markets they traditionally dominated. The conventional solution was to smash the
strong unions in these industries.

Keynes argued that the correct policy was for the government to initiate a large long-term program of government infrastructural investment. This would reduce unemployment not only through government employment, but also by the spending of the newly employed – the famous Keynesian “multiplier” effect that has puzzled generations of students. Focus on large-scale government investment was not just a post-war expedient for Keynes. He supported this policy until his death in 1946.

Keynes believed that free-market capitalism was subject to extreme instability primarily because business investment spending was inherently volatile. To build a factory, a firm must gamble that the future profits from the factory will more than compensate for its cost. But firms cannot know what future profits will be. As Keynes put it, “About such matters, we simply do not know.” Therefore, investment can only be based on hunches or guesses about the future, and these are profoundly influenced by waves of optimism and pessimism in market psychology. Boom euphoria leads to over-investment and excess capacity, while fear of loss in the downswing causes investment to plummet. Keynes considered stock markets to be “gambling casinos” whose instability only made investment more volatile.

Keynes thought that there were almost unlimited opportunities for productive state investment – in education, housing, transportation, utilities, health, culture and so forth. He believed that if the government could keep public investment on a steady growth path, this would provide a center of gravity for private profit expectations that would drastically lower private investment instability. In 1928, he proposed a “National Investment Board” to plan and control a massive investment program, arguing that “an era of rapid progress in equipping the country with all the
material adjuncts of modern civilization might be inaugurated which would rival the great Railway Age of the nineteenth century.”

In 1935 in The General Theory he said: “I expect to see the state … taking an ever greater responsibility for directly organizing investment.” In 1943 he argued that “if the bulk of investment is under public or semi-public control and we go in for a stable long-term programme, serious fluctuations are less likely to occur.” Keynes specifically rejected the idea that government should rely on changing interest rates and budget deficits to control instability, the macro policy attributed to him by Samuelson.

Keynes understood that capitalists and renters would be likely to ‘run away’ from Britain in reaction against his program, causing skyrocketing interest rates and plummeting investment. To prevent this, he called for an ironclad regime of government control of financial flows into and out of Britain, and saw to it that every country was given the right to control capital movements by the Bretton Woods Agreement that created the International Monetary Fund in 1944.

The economic prospects of the majority of people would be greatly improved if government policy followed Keynes’ more radical vision, rather than the timid version promoted in nearly all college textbooks.


Jim Crotty. “Was Keynes a Corporatist: Keynes’s Radical Views on Industrial Policy and Macro Policy in the 1920s,” Journal of Economic Issues, September 1999. [pdf]

Keynes’ most famous book, The General Theory of Employment, Interest, and Money, is available online.

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.