Limiting the power of financial markets will improve their ability to help achieve the central goals of any civilised society, writes Robert Skidelsky, a member of the UK House of Lords and Professor Emeritus of Political Economy at Warwick University.
The following contribution was authored by Robert Skidelsky, a member of the British House of Lords and Professor Emeritus of Political Economy at Warwick University.
"For decades, Keynesianism was associated with social democratic big-government policies. But John Maynard Keynes’s relationship with social democracy is complex. Although he was an architect of core components of social democratic policy – particularly its emphasis on maintaining full employment – he did not subscribe to other key social democratic objectives, such as public ownership or massive expansion of the welfare state.
In The General Theory of Employment, Interest and Money, Keynes ends by summarizing the strengths and weaknesses of the capitalist system. On one hand, capitalism offers the best safeguard of individual freedom, choice, and entrepreneurial initiative. On the other hand, unregulated markets fail to achieve two central goals of any civilized society: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” This suggested an active role for government, which dovetailed with important strands of left-wing thought.
Until The General Theory was published in 1936, social democrats did not know how to go about achieving full employment. Their policies were directed at depriving capitalists of the ownership of the means of production. How this was to produce full employment was never worked out.
There was an idea, originally derived from Ricardo and Marx, that the capitalist class needed a 'reserve army of the unemployed' to maintain its profit share. If profits were eliminated, the need for that reserve army would disappear. Labor would be paid what it was worth, and everyone willing to work would be able to find a job.
But, apart from the political impossibility of nationalizing the whole economy peacefully, this approach suffered from the fatal flaw of ignoring the role of aggregate demand. It assumed that demand would always be sufficient if profits were eliminated.
Keynes demonstrated that the main cause of bouts of heavy and prolonged unemployment was not worker encroachment on profits, but the fluctuating prospects of private investment in an uncertain world. Nearly all unemployment in a cyclical downturn was the result of the failure of investment demand."
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(Published in partnership with Project Syndicate.)