Keynes On Markets.: A Survey of Heretical Views

I Keynes and Free Markets In a 1925 essay Keynes quotes with approval Professor John R. Commons' sweeping view of the evolution of economic systems. The American institutionalist saw mankind as passing through three epochs. The first is "the era of scarcity" which ended in the 16th century. The second is the "era of abundance" which culminated in the liberalism and laissez faire of the 19th century. The third is "the era of stabilization" that arose in the 20th century from the ashes of the previous period. In this period . . . there is a diminution of individual liberty, enforced in part by governmental sanctions, but mainly by economic sanctions through concerted action, whether secret or semi-open, open, or arbitrational, of associations, corporations, union, and other collective movements of manufacturing, merchants, labourers, farmers and bankers. The passage from the second to the third epoch is that "from economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interest of social justice and social stability.(1) Keynes' approval of this vision raises many questions. To what extent was it inspired by the comparative economic success of communist Russia? By what extent was it strengthened by the fact that Nazi Germany was the only major country to cope with the Depression successfully? We know that in the preface to the German translation of The General Theory (1936) Keynes went so far as to note that his theory of output "is more easily adapted to the conditions of a totalitarian state" than to a state characterized by a large measure of laissez faire. And why so? Because in a totalitarian state, "national leadership is more pronounced," so that the free play of market forces can more easily be interfered with.(2) We do not wish to pursue here the question of Keynes' political ideas, except to note in passing that, perhaps, when older, Keynes outgrew the youthful "Burke essays" just as he outgrew A Treatise on Probability. We rather wish to address a narrower, more technical question: what was Keynes' attitude toward the free market as a key capitalist institution? Are there specific cases of criticism of free markets? And if such cases exist, on what grounds did he criticize them? In what follows it is shown that Keynes' attitude toward markets was very pragmatic and, hence, often negative. The first instance of what may be called a realistic and critical attitude toward free markets came in March 1907. When Keynes was attached to the India Office it came to his attention that India's near monopoly in the production of jute (from which sacks are made) was threatened by a widespread adulteration, as merchants sold wet jute "unfit for use, or at any rate inferior, even after it had been cleaned and dried."(3) Now, a dogmatic believer in free markets and in the "Invisible Hand" would argue that "the consumer is king" and that the market itself would solve the problem: the inferior jute would not be bought, so that the dishonest merchants would have to mend their ways or go bankrupt. Keynes' argument is precisely the reverse: adulteration, if unchecked, will "naturally become universal." In time, "the general level of excellence which is expected will steadily sink until dishonesty is so well known that it becomes honesty again." Also, the dishonest merchants, with their lower costs, can lower the price and drive the honest producers out of business. In an early statement of what was to become the fallacy of composition, Keynes concludes that "while adulteration is plainly opposed to the interests of the trade as a whole, it is nevertheless to the interest of every individual to practice it," since his profits then rise. Thus it is not surprising that he advises the Indian government to pass legislation to protect the buyers of jute. The "Invisible Hand" is also absent in the financial markets. During the war Keynes began to trade in stocks and foreign currencies, an activity that continued throughout his life and was, in fact, his major source of income. …