John Maynard Keynes with Kingsley Martin, editor of the New Statesman. Photo: Wikimedia Commons John Maynard Keynes with Kingsley Martin, editor of the New Statesman. Photo: Wikimedia Commons

In the second part of our series on Keynesianism, Dominic Alexander outlines the economic and philosophical underpinnings of Keynesian thought

The Limits of Keynesianism series:
Part One: John Maynard Keynes and Orthodox Economics
Part Two: The Assumptions Keynes Makes
Part Three: Marx, Keynes and the Analysis of the Trade Cycle
Part Four: The Keynesian Attack on the Labour Theory of Value
Part Five: can the working class advance within capitalism?

Keynes could be dismissive of the inheritance of classical political economy precisely because its concerns had been largely bypassed, and marvelled that Marxism should be ‘a portent to historians of opinion – how a doctrine so illogical and dull can have exercised so powerful and enduring an influence over the minds of men’.[1] This comment is from an essay of 1926, which might be considered a minor piece. Yet, sometimes theorists are most revealing about the basis of their thinking in occasional writing than in their major works.

Here, despite the Russian Revolution, Keynes was still seeing Marx and Marxism as something that clearly belonged to the past, to outdated thinking. That he grasped nothing of the challenge Marx’s analysis offered to economics is further made clear by his astonishing claim in another essay that the rejection of ‘the Benthamite calculus’, made by him and his contemporaries, protected them from ‘the final reductio ad absurdum of Benthamism known as Marxism’.[2]

The Benthamite calculus was that of the utilitarian philosopher, Jeremy Bentham (1748-1832). It was a kind of rationalism which attempted to apply the principle that everything can be reduced to a calculation of the relative pain or pleasure caused to a given number of people by a particular action. Everything should be judged according to that measure. Among the rational calculations to which this philosophy gave rise was the idea that if you deprived the poor and unemployed of any support except the most miserable possible conditions in a workhouse, then they would be inspired to find suitable work to support themselves. The rational application of pain thus would result in the greater happiness for the whole of society.

In order to draw a line between Bentham and Marx (he does not explain it any further in the passage quoted from above), Keynes must be reasoning from the assumption that Marxism takes economics, in a reductive way, as the foundation of society. Keynes is here revealing his own assumptions about economics, and not Marx’s. In Keynes’ reading, Marxism must assume that everyone is only motivated by immediate selfish individual interest. That would be true of Bentham and other bourgeois thinkers of his time, but is certainly not of Marx, whose analysis begins at the social level, not with the selfishness or otherwise of individual human actors. The comparison with Bentham reveals, therefore, that the only Marxism with which Keynes could have had any acquaintance, before the First World War, would have been particularly vulgar versions of Second International Marxism. It seems also that no events thereafter opened Keynes eyes to the real nature of Marxist theory.

The larger topic of this essay, in which he accuses Marx of Benthamism, was concerned with ethics and rational individualism, in a discussion that is more allusive than precise. Nonetheless, it is revealing as the older Keynes is reflecting on the assumptions with which his younger self embarked on his career. It reveals the underlying reasons for the limitations of Keynes’ economic theory. Although in insights like the ‘fallacy of composition’, he was able to challenge the conclusions of orthodox economics, he never fundamentally departed from the standard assumptions of methodological individualism at the heart of orthodox economic analysis.

Keynes’ aggregate fails to reach Marx’s totality

Keynes’ central concepts of aggregate and ‘effective’ demand, that is the quantity of demand in society as a whole, (combining investment and consumer demand) does start from a collective standpoint rather than the perspective of individual consumers or producers. As Michael Roberts says, this ‘meant that the fluctuations in a capitalist economy could be considered in their whole and not just ignored or dismissed.’[3] Robert Skidelsky, the economic historian and biographer of Keynes, agrees about the latter’s ‘rejection of methodological individualism as a generally valid method of analysis in economics’. He further claims that there was a vestige of Hegelianism in Keynes’ thinking, due to his acceptance of the idea of organic unity; that is to say, that with a whole consisting of interacting parts, ‘its value – as in a work of art – can be greater or smaller than the sum of those parts.’[4] This vestige seems to make little appearance in Keynes thinking, however, other than in this one essay on his early beliefs.

If Keynes had fully abandoned methodological individualism, he ought to have been in a much better position to understand the underpinnings of Marx’s thinking, and could not have seriously dismissed Marxism as ultra-Benthamism. Despite his grasp of the different dynamics at the levels of individual behaviour and the collective, Keynes never mounted a systematic critique of preceding political economy or his contemporary economics. Rather, he suggested limited revisions of it, leaving certain methodological assumptions in place, and so avoiding a confrontation with some of the difficult questions about the nature of the capitalist system.

This evasion seems to explain some of the philosophical meandering in which he engages in the ‘Early Beliefs’ essay. He avers that he and his contemporaries were more influenced by an ‘English puritan tradition’ concerned with ‘the intimate connection between “being good” and “doing good”’, which provided ‘a purer, sweeter air by far than Freud cum Marx.’[5] In essence, what Keynes was doing in this philosophical memoir was to outline an ethical idealism ‘joined with the unsurpassable individualism of our philosophy’ which lay in contrast with ‘the Benthamite calculus, based on an over-valuation of the economic criterion’.[6]

This individualism enabled Keynes’ circle to be the ‘last of the Utopians … who believe in a continuing moral progress by virtue of which the human race already consists of reliable, rational, decent people.’[7] Keynes goes on to criticise the over estimation of the rationality of human nature in his early thinking, but in doing so is not suggesting a change of perspective, from the individualist to the social, as an approach which would better take into account the complex reality of human social relations. Instead, he is simply adding a somewhat resigned complication to the assumption that a rational economic individual exists as the foundation stone of economic analysis.

This digression into philosophical issues reveals certain evasions in Keynes’ thinking which ultimately have important consequences for his economic models. The rejection of Marx and Freud, under the cover of criticism of Bentham, a figure of much less significance, amount to a disavowal of the attempt to understand the hidden structures of human social life. Where Marx argued that attempts to change the world need to be based on an analysis of the real tendencies and contradictions of society, Keynes is suggesting an ethical ‘utopianism’ divorced from an ‘overestimation of the economic’. Rather than address the failures of neoclassical economics to understand capitalism as it actually is, Keynes preferred to move the discussion over to a supposedly separate ethical sphere.

Again, the charge against Marxism, via Benthamism, is hidden away, but does concern this apparent distinction between ‘ethical’ and ‘economic’ behaviour. If behaviour is rationally economic in a restricted sense, then it is selfish rather than ethical. Marx argues that society is driven by class relations, therefore, according to Keynes, Marx must mean that individuals are only capable of class-based selfish behaviour. This is, of course, to understand class through a methodological individualism; as if class were a personal characteristic rather than a social structure in which individuals are embedded and constrained to act in certain ways in order to survive.

Keynes’ assumption that this entails a non-ethical standpoint certainly shows that he could not have read Marx at all seriously, given that his moral outrage in Capital is plain to see. However, it also highlights the strictly limited way in which Keynes transcended ‘methodological individualism’ in his theory of aggregate demand; the later concept does not in fact amount to an analysis starting from the point of view of society as a whole. Rather, ‘effective demand’ is simply the agglomeration, or summation, of individual consumers’ demand. Aggregate demand is, in fact, no more and no less than the sum of its parts, rather than opening up to view the hidden workings of a system conceived as a totality. Keynes could not grasp the importance of Marxist economic theory, because he could not, or would not, accept its social premise.

Keynes, Malthus and common sense

The limited rejection of methodological individualism seems to go hand in hand with Keynes preferences in the classical tradition. He rejects Ricardo in favour of Malthus. In Ricardo, bourgeois political economics accepted a labour theory of value, and was beginning to perceive intractable problems in the nature of capitalism, including the tendency for the rate of profit to fall. The analysis of these problems would be developed and corrected by Marx, which was reason enough for bourgeois economics to abandon classical political economy altogether. Keynes contrasts Ricardo’s systematic attempts to analyse production with Malthus’ ‘common-sense’ approach where:

prices and profits are primarily determined by something which he described, though none too clearly, as “effective demand”. Ricardo favoured a much more rigid approach, went behind “effective demand” to the underlying conditions of money on the one hand and real costs and the real division of the product on the other hand, conceived these fundamental factors as automatically working themselves out in a unique and unequivocal way, and looked on Malthus’s method as very superficial. But Ricardo, in the course of simplifying the many successive stages of his highly abstract argument, departed … away from the actual facts; whereas Malthus … had a firmer hold on what may be expected to happen in the real world. … When one has painfully escaped from the intellectual domination of [Ricardo’s] pseudo-arithmetical doctrines, one is able, perhaps for the first time for a hundred years, to comprehend the real significance of the vaguer intuitions of Malthus.[8]

This is a remarkable passage in the way it charts a path for Keynes away from the problems of classical political economy. It provides him with an intellectual tradition to justify a dogmatically superficial empiricism in which only the immediate appearances accessible to ‘common sense’ are worthy of attention. Ricardo’s attempts (Marx is probably the real intellectual target here) to access the hidden mechanisms of capitalist relations are dismissible as a wasted hundred years. As David Harvey comments on opponents of the labour theory of value:

Physical materialism, particularly in its empiricist garb, tends not to recognise things or processes that cannot be physically documented and directly measured.[9]

Keynes and his followers were dismissive of the concept of value in economic theory because it could not be perceived directly by empirical observation, and yet, as are many non-material phenomena, it is real. It is particularly in the study of human society that immaterial relations, such as value, class, status or solidarity, need to be grasped as real forces. The refusal to go beyond ‘common sense’ lies behind Keynes’ failure to overcome methodological individualism beyond a superficial level. He could not pursue an economic analysis that would lead into the intricacies of capitalism’s inner workings. This would lead beyond the concept of the aggregate of demand into a more dialectical understanding of the dynamic social relations which drive capitalism, and indeed any type of economy.

Keynes’ choice of Malthus as an intellectual progenitor is a curious one in some respects. Keynes evidently wished to escape the world of Ricardo and Marx, where the necessity of class antagonism could not be avoided. Yet, it is not immediately obvious how Keynes and Malthus can be reconciled. Malthus is, of course, famous for his doctrine of population, that human numbers will always increase at a faster pace than agriculture’s ability to produce food. Malthus’ most notorious passage is that concerning a man who is born without the means of subsistence;

and if society do not want his labour, has no claim of right to the smallest portion of food, and, in fact, has no business to be where he is. At nature’s mighty feast there is no vacant corner for him. She tells him to be gone, and will quickly execute her own orders, if he do not work upon the compassion of some of her guests. If these guests get up and make room for him, other intruders immediately appear demanding the same favour.[10]

All this, and more, Keynes quotes without apparent disquiet, as an anticipation of his own theory of effective demand. This is despite the fact that a century of unprecedented population growth had disproved Malthus’ central hypothesis. Instead, Keynes seeks to turn Malthus inside out; instead of demand exceeding supply, in Keynes’ theory of ‘effective demand’, it is the existence of consumer demand which drives investment into the expansion of production. It is true that in Malthus there is a defence of the existence of the rentier aristocracy, as their luxury consumption produces employment for those workers who would otherwise be banished from nature’s feast as excess population.[11]

Yet, Keynes was also famous for claiming that the rentier class either should or would be wholly extinguished by the development of capitalism.[12]Effective demand, in Keynes, comes more efficiently from the general population than from a small rentier class’ luxury consumption. Given all this, it is hard to see why Keynes would want to claim Malthus as an ancestor. The connection, however, is in the simplicity of Malthus’ approach to economics. Avoiding all discussion of the nature of production, of the origins of value and profit, Malthus boils it all down to a very basic theory of supply and demand. This suits Keynes very well as itshort-circuits the difficult problems of classical political economy.

Keynes against labour

There is another sting in the tail to this, which is that Malthus’ reasoning produces an argument to decry trade-union demands for higher wages: a rise in wages simply leads to higher prices.[13]In fact Keynesians often make the same argument; a sign that despite his reputation as a left-wing figure, Keynes and his theory are by no means always likely to fall on the side of labour against capital.[14]Indeed, even when discussing war profiteers in the famous essay, The Economic Consequences of the Peace, Keynes insisted that these were ‘the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society’.[15] Keynes rejected both David Ricardo’s and Marx’s labour theory of value, alongside the whole subject of value, so he inevitably saw capital as productive in itself. This presupposition would not dispose him to side with labour as such, even when he clearly moved to the left in the wake of the Great Depression.

If it is apparent that Keynes was temperamentally opposed to dialectical reasoning, it is nonetheless the case that his economic theory was born of a brilliant pragmatism in response to events. Hence his reaction to the Versailles treaty was clear sighted, where the politicians were apparently determined upon an economic revenge in order to justify their persistence in an unprecedentedly murderous war. The vast reparation payments imposed upon Germany were not payable except through an increase in German exports:

Germany can pay in the long run in goods, and in goods only, whether those goods are furnished direct to the Allies, or whether they are sold to neutrals and the neutral credits so arising are then made over to the Allies.[16]

It would also be necessary to factor in the necessary limitations to German imports, requiring ‘a regime in which for the future no German drank beer or coffee’.[17] Such austerity would, of course, have a depressing effect upon those economies that might export to Germany. Even if British and French export industries were not directly implicated in this, the knock-on effects would haunt them also. In the end, the full scale of reparations would have to be reduced, and American finances be used to stabilise the German economy after the hyperinflation episode of 1923.

There is, nonetheless, a degree of naivety in Keynes’ dissection of the problem; there is a sense that he is accusing the Allied governments of economic illiteracy in their policy. That much might well have been true, but there was a clear line of reasoning in play which Keynes ignored; the logic of power and imperialism. Britain and France decided upon a dangerous economic strategy, because it was thought that only the subjugation of Germany could restore the real standing of the former imperialist states. In the end, the plan did not work, at least entirely, and the consequence was the confirmation of the USA’s newly leading position as an imperialist power.

Keynes’ economic thinking therefore tended to assume an economic sphere that operated in a neutral fashion, free of the effects of social power relations internally, and externally in terms of imperialist competition. Keynes did not recognise class as a structuring force within the domestic economy. Neither did he factor imperial power relations into his consideration of the operation and tendencies of international trade. It needs, therefore, to be borne in mind that Keynesian economic theory, like orthodox economics, operates on a plane abstracted from the real relations of political economy.

Part one is available here


[1] Keynes, ‘The End of Laissez-faire’, in The Essential Keynes, p.53.

[2] Keynes, ‘My Early Beliefs’ (1938), in Essential Keynes, p.21.

[3] Michael Roberts, The Long Depression: How It Happened, Why It Happened and What Happens Next (Chicago 2016), p.277.

[4] Skidelsky, Essential Keynes, p.7.

[5] Keynes, ‘My Early Beliefs’, p.15 and p.19.

[6] Ibid. p.21.

[7] Ibid. p.22.

[8] Keynes, ‘Thomas Robert Malthus’ (1933), in Essential Keynes, p.494. Skidelsky quotes Keynes as saying that it would have been better if economics had proceeded from Malthus than Ricardo; ‘what a much wiser and richer place the world would be to-day!’, p.490.

[9] David Harvey, Marx, Capital and the Madness of Economic Reason (London 2017), p.5. To see Keynes as this kind of empiricist is not to contradict his depiction as an ethical idealist above; it is in fact characteristic of liberal empiricism to be reductively materialist at one level of analysis, only to lurch into abstract idealism at another.

[10] Keynes, ‘Malthus’, p.495.

[11] Ibid. p.502.

[12] Keynes, ‘The General Theory of Employment, Interest and Money’ in Essential Keynes, p.256.

[13] Keynes, ‘Malthus’, pp.494-5.

[14] In ‘Paying for the War’, in Essential Keynes, pp.408, 412, Keynes argues that the ‘increased earnings of the working class will not have benefited them one penny, but will have escaped through higher prices and higher profits’. Wage restraint is the answer in this situation. Keynes may be technically correct in this, taken over the long term, but people’s lives happen in the immediate term also, and a rise in wages now, will at least temporarily improve workers’ standard of living. If in the longer term, such gains tend to be eroded, this points to the fundamental injustices of the system, but also to the unrelenting nature of the class struggle within capitalism.

[15] Keynes, ‘The Economic Consequences of the Peace’, p.33.

[16] Ibid. p.99.

[17] Ibid. p.100.

Dominic Alexander

Dominic Alexander is a member of Counterfire, for which he is the book review editor. He is a longstanding activist in north London. He is a historian whose work includes the book Saints and Animals in the Middle Ages (2008), a social history of medieval wonder tales, and articles on London’s first revolutionary, William Longbeard, and the revolt of 1196, in Viator 48:3 (2017), and Science and Society 84:3 (July 2020). He is also the author of the Counterfire books, The Limits of Keynesianism (2018) and Trotsky in the Bronze Age (2020).

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