Tuesday, June 30, 2015

Crotty: Keynes and Commons

We're up to pages 5 and 6 in James Crotty's paper on the stages of development of capitalism.
Keynes clearly distinguished two historical stages of capitalist development: pre-World War I or "nineteenth-century" capitalism (which I label Stage One), and post-World War I or modern or twentieth-century capitalism (which I label Stage Two). He argued that these stages had qualitatively different economic outcomes because they had qualitatively distinct institutions and agent practices.

In a number of writings, Keynes asserted that while freedom of trade and of capital flows brought peace and prosperity in the nineteenth century, the same international system produced imperialism, war, and depression in the twentieth century (a point to which I return). In a similar vein, Keynes often observed that Britain's domestic nineteenth-century capitalism was characterized by reasonably steady growth, price stability, adequate employment and rising living standards, all produced by a strong and relatively steady pace of capital accumulation. In The General Theory Keynes made the point as follows. "During the nineteenth century," there existed:

a schedule of the marginal efficiency of capital which allowed a reasonably satisfactory average level of employment to be compatible with a rate of interest high enough to be psychologically acceptable to wealth-owners. There is evidence that for a period of almost one hundred and fifty years ...rates of interest were modest enough to encourage a rate of investment consistent with a rate of employment which was not intolerably low [Keynes 1964, pp. 307-8].

Later in the book he commented on "the exuberance of the greatest age of the inducement to invest" in nineteenth-century England [Keynes 1964, p. 353]. And in the Economic Consequences of the Peace he argued that before World War I, "Europe was so organized socially and economically as to secure the maximum of capital accumulation [with] some continuous improvement in the daily conditions of life of the mass of the population" [Keynes 1920, p. 18].

Second, note Keynes's belief in the need for a theory that could explain the evolution of qualitatively distinct stages of economic development. He aligned himself with Commons's view that economic theory had to reflect the existence of "three epochs, three economic orders, upon the third of which we are entering." The first, according to Keynes, was a precapitalist "Era of Scarcity with a maximum of communistic, feudalistic or governmental coercion," which was dominant through the sixteenth century and survived to some degree into the eighteenth century. Then came the "Era of Abundance" with "the maximization of individual liberty, the minimum of coercive control through government, and individual bargaining. ...[In] the nineteenth century this epoch culminated gloriously in the victories of laissez-faire and historic liberalism" [Keynes 1963, p. 334].

But, Keynes continued, we are now passing through a period of turbulence into a new stage of capitalism, an "Era of Stabilization" in which societal or governmental controls will replace laissez-faire. The coming era will require a "transition from economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interests of social justice and social stability" [Keynes 1963, p. 335].

The Era of Scarcity, the Era of Abundance, and the Era of Stabilization: Three stages of capitalist development, proposed by Professor John Commons and (as Crotty says) developed by John Maynard Keynes.

Jim Crotty already made the point. We quoted it yesterday:

I argue that Keynes provided the outlines of a theory of the evolution of two distinct stages of capitalist development (and anticipated the transition toward a third) in which each stage is assumed to possess unique institutions and agent practices that differentiate its processes and outcomes from the other.

As for myself, I think it's optimistic to say "we are now passing through a period of turbulence into a new stage of capitalism, an 'Era of Stabilization'".

Why would the economy stabilize? Isn't "stable" the same as "in equilibrium"? It is convenient to think about the economy in equilibrium or approaching equilibrium, sure. But that doesn't mean we ever get there.

So if we have a time of "abundance" or let's say a time of generally improving conditions, and then the improvement tapers off... and if we don't achieve an era of stabilization, what happens?

It's easy. If the trend doesn't continue to climb, and it refuses to run flat, then the only direction left to go is down. So we would have rise to a peak: rise and decline. It would look like part of a business cycle.

It would look like only part of a business cycle because we're not looking at the whole picture. We're only looking at a few hundred years. A few hundred years near the peak. Keynes described the peak. He called it "the greatest age of the inducement to investment" and he said it lasted 150 years.

If the peak lasted 150 years, you're not going to see the whole cycle if you consider only 400 years or so. Don't think in terms of nations. Think in terms of civilizations and cycles of civilization. Thousands of years.

It's just a business cycle, really nothing out of the ordinary.

Out of the ordinary would be to achieve stabilization, an age of stabilization. That would be special. Something to shoot for, but not part of the natural course of events. We'll have to earn it.

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