John Maynard Keynes

John Maynard Keynes, The Economic Consequence of the Peace, Amherst, N.Y., Prometheus Books, 2004 [1919].

Where we spent millions before the war, we have now learnt that we can spend hundreds of millions and apparently not suffer for it. Evidently we did not exploit to the utmost the possibilities of our economic life. We look, therefore, not only to a return to the comforts of 1914, but to an immense broadening and intensification of them. All classes alike thus build their plans, the rich to spend more and save less, the poor to spend more and work less. [54]

The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a regime intolerable. [67]

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the labouring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custome, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake, that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very litte of it in practice.[68]

I seek only point out that the principle of accumulation based on inequality was a vital part of the pre-war order of Society and of progress as we then understood it and to emphasise that this principle depended on unstable psychological conditions, which it may be impossible to re-create. It was not natural for a population, of whome so few enjoyed the comfortes of life, to accumulate so hugely. [69]

We cannot expect to legislate for a generation or more. The secular changes in man's economic condition and the liability of human forecast to error are as likely to lead to mistake in one direction as in another. We cannot as reasonable men do better than base our policy on the evidence we have and adapt it to the five or ten years over which we may suppose ourselves to have some measure of prevision; and we are not at fault if we leave on one side the extreme chances of human existence and of revolutionary changes in the order of Nature or of man's relations to her. [222]

It is, however, generally supposed that if the whole of a man's surplus production is taken from him, his efficiency and his industry are diminished. The entrepreneur and the inventor will not contrive, the trader and the shopkeeper will not save, the labourer will not toil, if the fruits of their industry are set aside, not for the benefit of their children, their old age, their pride, or their position, but for the enjoyment of a foreign conqueror. [224]

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes man, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whome the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. [247]

A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money might have stood for, has been dissipated once and for all. This sentiment is supported by the various legal regulations with which the Governments endeavour to control internal prices, and so to preserve some purchasing power for their legal tender. Thus the force of law preserves a measure of immediate purchasing power over some commodities and the force of sentiment and custom maintains, especially amongst the peasants, a willingness to hoard paper which is really worthless.
The preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labours for paper which, as experience soon teaches him, he cannot use to purchases what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbours as a favour, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficieny of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer. [251]

The question of Inter-Allied indebtedness is closely bound up with the intense popular feeling amongst the European Allies on the question of indemnities - a feeling which is based, not on any reasonable calculation of what Germany can, in fact, pay, but on a well-founded appreciation of the unbearable financial situation in which these countries will find themselves unless she pays. [281]


John Maynard Keynes

John Maynard Keynes, The End of Laissez-Faire, Amherst, N.Y., Prometheus Books, 2004 [1926].

Above all, the ineptitude of public administrators strongly prejudiced the practical man in favour of laissez-faire - a sentiment which has by no means disappeared. Almost everything which the State did in the eighteenth century in excess of its minimum functions was, or seemed, injurious or unsuccessful. [19]

Cairnes, in the Introductory Lecture on 'Political Economy and Laissez-Fair,' which he delivered at University College, London, in 1870, was perhaps the first orthodox economist to deliver a frontal attack upon laissez-faire in general. 'The maxim of laissez-faire,' he declared, 'has no scientific basis whatever, but is at best a mere handy rule of practice.' This, for fifty years past, has been the view of all leading economists. Some of the most important work of Alfred Marshall - to take on instance - was directed to the elucidation of the leading cases in which private interest and social interest are not harmonious. [28]

In the first place, each individual will discover what amongst the possible objects of consumption he wants most by the method of trial and error 'at the margin,' and in this way not only will each consumer come to distribute his consumption most advantageously, but each object of consumption will find its way into the mouth of the consumer whose relish for it is greatest compared with that of the others, because that consumer will outbid the rest. Thus, if only we leave the giraffes to themselves, (1) the maximum quantity of leaves will be cropped because the giraffes with the longest necks will, by dint of starving out the others, get nearest to the trees; (2) each giraffe will make for the leaves which he finds most succulent amongst those in reach; and (3) the giraffes whose relish for a given leaf is greatest will crane most to reach it. In this way, more and juicier leaves will be swallowed, and each individual leaf will reach the throat which thinks it deserves most effort.
This assumption, however, of conditions where unhindered natural selection leads to progress, is only one of the two provisional assumptions which, taken as literal truth, have become the the twin buttresses of laissez-faire. The other one is the efficacy, and, indeed the necessity, of the opportunity for unlimited private money-making as an incentive to maximum effort. [30]

[unfettered free markets, assumption 1: efficient allocation through competition; assumption 2: maximum productivity from maximum reward]

There are other considerations, familiar enough, which rightly bring into the calculation the cost and character of the competitive struggle itself, and the tendency for wealth to be distributed where it is not appreciated most. If we have the welfare of the giraffes at heart, we must not overlook the sufferings of the shorter necks who are starved out, or the sweet leaves which fall to the ground and are trampled underfoot in the struggle, or the overfeeding of the long-necked ones, or the evil look of anxiety or struggling greediness which overcasts the mild faces of the herd. [32]

Individualism and laissez-faire could not, in spite of their deep roots in the political and moral philosophies of the late eighteenth and early nineteenth centuries, have secured their lasting hold over the conduct of public affairs, if it had not been for their conformity with the needs and wishes of the business world of the day. [34]

Laissez-faire has ruled over us rather by hereditary right than by personal merit. [35]

The important thin for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all. [40]