coloured not only th e Anglo-American post-w ar reco n stru ctio n t r e a t ie s but a lso the B r itis h (and to some exten t in tern a tio n a l) a ttitu d e
2 3
towards economic development. For ’we are a l l Keynesians now’ .
By t h is p oin t the major economic to p ic s o f concern were the Keynesian movement from c la s s ic a l economics to preoccupation w ith pro p en sity to consume, m arginal e ffic ie n c y and the r a te o f in te r e s t. Die to Keynes ’ in flu en ce th e balanced budget was no longer regarded as n e c e ssa r ily the correct accounting p r a c tic e fo r the Government, Yet Keynes d id consider the budget to be a key featu re fo r Government stra tegy, and in th is sense looked upon the Government as the great compen sa tin g fa c to r fo r p riv a te cap italism . Keynes sought a sy n th esis b e t ween so cia lism and ca p ita lism by in s is t in g th at f u l l employment could be a tta in e d by means of production of c a p ita l goods, the adoption o f a
’cheap-money’ p o lic y and a programme o f p u b lic in vestm en t.^
The orthodox economic theory in which Keynes was train ed h eld th at the Sm ithian ’in v is ib le hand' produced a u to m atica lly a s ta te o f f u l l employment, u n le ss th e workers in s is te d on an o v erly high le v e l o f wages. T his c la s s ic a l theory could not b eg in to exp lain th e m assive unemployment o f the inter-w ar years, which seldom f e l l below 10 per cent
1, John Maynard Keynes, The Economic Consequences of the P eace,
(London, Macmillan, I919) i John Maynard Keynes. T rea tise on Money.
(London, Macmillan, I930); John Maynard Keynes, General Theory of
Employment. In te r e st and Money. (London, Macmillan, I936); and
John Maynard Keynes, How to Pay for the War? A R adical P lan fo r -i-l
th e C hancellor o f th e Exchequer. (London, Macmillan, 1940). 2, Harrod, p p .595-596.
3. A. J . Youngson, The B r itis h Economy 1920-1957. (Cambridge,
M assachus., Harvard U n iv ersity P ress, I96O), p .261.
and at i t s worst reached 20 per cent o f th e t o ta l labour fo rce . C la ssic a l econom ists blamed th e fa ilu r e o f the economy to expand on the i n f l e x i b i l i t y o f wages, arguing that the trade unions should
accept wage cu ts. On the oth er hand, Keynes argued th at although th is p o lic y might make sense fo r a p a rticu la r in d u stry (such as co a l mining) a gen eral cut would lower consumption, income and aggregate demand, and th is would o f fs e t th e encouragement to employment by low ering o f the
’price* o f labour r e la t iv e to th e p rice o f c a p ita l, e .g . p lan t and machinery.^ Keynes produced an a lte r n a tiv e theory which showed that the le v e ls of production and demand depended on th e le v e l o f aggregate demand (th e sum of aggregate consumption) and aggregate investm ent^
(which was in flu en ced by b u sin ess ex p ectatio n s and the r a te o f in t e r e s t) , w ith investm ent determ ining the aggregate demand by means of i t s ’m u lti p lie r e ffe c t ’ on consumption. ^ The Keynesian m u ltip lie r was d efin ed by Sarauelson as ’th e numerical c o e ffic ie n t showing how great an in cr ea se in income r e s u lt s from each in crea se in such investm ent spending ’. ^ According to Keynes the le v e l o f aggregate demand was ab le to produce
1. Graham Bannock, R. E. B axter and Ray R ees, D iction ary o f Economics. (M iddlesex, England, Penguin, 1972), p p .264-265.
2. In th e c la s s ic a l system th e n ation al product was determined by th e le v e l o f investm ent, and th e n ation al income by the le v e l o f r e a l wages. I t was then th e q u an tity of money th at determined the p r ic e s. Investm ent and savin gs were brought in to balance by means o f th e r a te o f in te r e s t. In th e Keynesian system the e q u a lity o f savings and investm ent was achieved by adjustm ents in the le v e l o f n a tio n a l income or output working through the m u ltip lie r . Thus, in the Keynesian model, i f one increased th e propensity to in v e st or consume, one did not sim ply r a is e the r a te o f in te r e s t, one ra ised input and employment. Samuelson, p . 232.
3. Harry G. Johnson, ’Keynes and B r itish Econom ics’, in Milo Keynes, p p .108-109.