economist is that he was a political economist. This was true in at least three senses: first, he understood that economic ideas had to be communicated to the public in a manner designed to persuade; second, he saw that the policies of the state had to be grounded in sound economics; third, he knew that the organization of the economy could not in the end be separated from the institutions of the state.
From this arises a central irony of the Keynesian revolution in economic policy: while Keynes was a political economist, assigning new responsibilities to the state to stabilize the economy, academic economists who followed his lead turned their discipline into a technical enterprise entirely separate from politics. The distinguished tradition of political economy largely faded away as Keynes’s revolution unfolded in the postwar era. This development has served to conceal an intriguing possibility—that Keynes’s enterprise is vulnerable not primarily because the economic theory is flawed, but because it cannot be made to work from a political point of view.
In The Economic Consequences of the Peace, Keynes declared that the old order of political economy in Europe had come to an end with the First World War. He took this theme further in The General Theory of Employment, Interest, and Money, where he argued, against the backdrop of the Great Depression, that the nineteenth-century theory of free markets and limited government was inadequate to modern conditions. His prescriptions for setting capitalism on a new foundation launched the “Keynesian revolution.” A key question today is whether evolving conditions in the political economy of capitalism are in the process of making the Keynesian synthesis ineffective and obsolete in its turn.
* * *
The Great Depression, more than any previous economic crisis, ignited a fundamental rethinking of the future of capitalism. What had gone wrong with the market system to cause such an unprecedented collapse? Was there a way to tame its “boom and bust” cycles? Could the capitalist system survive? Did it even deserve to survive; and if so, on what terms? The victories of communism in Russia and fascism in Germany suggested that capitalism would soon give way to one or the other of these extreme alternatives.
The Depression era produced three influential but widely diverging statements about the future of capitalism: Keynes’s General Theory (1936), Joseph Schumpeter’s Capitalism, Socialism, and Democracy (1942), and Friedrich Hayek’s The Road to Serfdom (1944). Each was a work of political economy in the broad sense, weaving together the interconnected subjects of politics, culture, institutions, and economic theory. Each had long been gestating in the mind of its author and expressed his considered reflections on the world crisis of the time. All three of these economists were well known in academic and policy circles long before these particular works appeared. To some extent, then, each developed his ideas in answer to theoretical challenges posed by the others.
Today, more than seventy years since they were first published, these three works continue to stand as seminal statements of influential public doctrines: Keynes’s General Theory for orthodox liberalism, The Road to Serfdom for market liberalism, and Capitalism, Socialism, and Democracy for conservatism and neoconservatism, or for the belief that culture is decisive for the survival of capitalism. For this reason, some have called their authors the “political philosophers” of the twentieth century. Among them, Keynes exercised by far the greatest influence in the post-Depression and postwar era. More than Hayek, Schumpeter, or any other economist of the time, Keynes went beyond diagnosis to offer practical remedies for the economic crisis of the 1930s. His General Theory did not arrive in time to be of much use during the Depression, but his insights revolutionized economic policymaking and the study of economics in the postwar era.
The evolution of “managed economies” in the postwar era owed a great deal to the writings of Keynes in which he assigned responsibility to governments for stabilizing economies. For Keynes, achieving full employment was the principal goal of economic policy, and he provided policymakers with a set of fiscal tools for smoothing out the booms and busts of the business cycle. This was the “middle way” that he tried to steer between the extremes of communism and fascism, and between state planning and free-market capitalism. From a political point of view, Keynes was among the liberal reformers of that time who sought to “tame” capitalism by giving new managerial duties to national governments.
Many attributed the rapid growth in America’s postwar economy to the application of Keynes’s theories. One economist called the postwar era “the age of Keynes.”1 Time magazine took note of his vast influence by publishing a cover story in 1965 under the title “We Are All Keynesians Now.” As the magazine acknowledged, “Keynes and his ideas, though they still make some people nervous, have been so widely accepted that they constitute both the new orthodoxy in the universities and the touchstone of economic management in Washington.” Though Keynes’s theories were temporarily in retreat in Washington and London during the 1980s and 1990s, they never really lost currency among academic economists, and the recent financial crisis provided a new occasion for their application. We have not yet evolved beyond “the age of Keynes.”
* * *
In The General Theory, Keynes worked out the premises for a conclusion he had already reached. This is evident in a series of essays that he wrote during the 1920s and into 1930, which are collected into a single volume under the title Essays in Persuasion (1931). Here he reflected on the evolution of the capitalist order from its origins in the eighteenth century and on the significant changes in the international system brought on by the war. He maintained that rapid changes in the economic order required parallel changes in political and economic institutions, and corresponding adjustments in political and economic theory.
“The End of Laissez-Faire” (1926) is an essay in which Keynes rejected the principles of natural liberty and enlightened self-interest that lay at the heart of Adam Smith’s economics of free markets. “The world is not so governed from above that private and social interest always coincide,” he wrote. “It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened.”2 This was rather a caricature of the foundational assumptions of market economics, which did not insist that enlightened self-interest always operates in the general interest, but that it will do so more reliably than other forms of economic organization. Nevertheless, Keynes rejected these principles for two reasons: first, he considered them to be far too abstract to offer solutions to practical problems; second, he judged them to be increasingly obsolete in the modern world of institutional capitalism shaped by large corporations, labor unions, and not-for-profit institutions. At this time he began to consider (as he wrote) “possible improvements in the technique of modern capitalism by means of collective action.”
In that essay, Keynes focused on the organizational evolution of capitalist economies as a factor that altered or undermined the operation of free and competitive markets. An important phenomenon of modern life, he wrote, is the tendency for large enterprises to socialize themselves—or, in other words, to pursue social as opposed to purely private objectives. He suggested that “A point arrives in the growth of a big institution—a big railway or public utility enterprise but also a bank or insurance company—at which the owners of capital are almost entirely dissociated from the management, with the result that the direct personal interest of the owners (the shareholders) becomes quite secondary.”3 As organizations reach a certain size, managers become interested in other goals besides profit, such as stability, security of employment, reputation, and independence. Keynes also welcomed the development of semiautonomous not-for-profit institutions such as universities and scientific societies that promote the general interest in different spheres of activity.
Keynes envisioned an emerging system of capitalism in which large business enterprises and not-for profit institutions operated alongside government in common efforts to promote the public interest. The friction between the public and private spheres, so much an aspect of the old order of liberalism,
