James Crotty's Keynes

"Keynes on the Stages of Development of the Capitalist Economy: The Institutional Foundation of Keynes's Methodology" (1990) by James R. Crotty (PDF, 16 pages)

Professor Crotty writes:

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.

Wow, that's impressive. There are only two common views of Keynes: One, that he was wrong about everything. Two, that he was right about deficit spending. Then there are a handful of people who distinguish between Keynes and the "Keynesians", hollering Keynes didn't say that! (I'm with them.)

Crotty is different: He has an original thought. I like it already. He continues:

Specifically, Keynes argues that nineteenth-century capitalism differed in institutional and class structure as well as in agent behavior patterns from post World War I capitalism. Because of these institutional differences, nineteenth-century capitalism exhibited impressive economic growth and stability, whereas twentieth-century capitalism was prone to stagnation-depression as well as to bouts of extreme instability.

Can we see this on a graph?

Some of it, certainly:

Based on UK GDP, the Consistent Series from MeasuringWorth

The graph shows growth over 20-year periods. For example, the first data point (at 1720) shows GDP growth for 1720 relative to 1700.

At first glance, I see three different periods of growth. Ballpark numbers:

• around 5% growth over 20 year periods from 1720 to 1820
• around 20% from 1820 to 1920
• around 50% from 1920 to 2020

On closer look, however, there is a low that runs from 1920 to around 1940. This is the post World War I period that Crotty mentions. The low runs in the neighborhood of 5%, comparable to the 1700s on the graph. 

For context: The General Theory was written during that interwar low.

//

Crotty writes of the interwar period. But he also refers to "twentieth-century capitalism". He writes:

a brief review of Keynes's specification of the institutions and behaviors that molded the pattern of capital accumulation in the 1920s and 1930s will help clarify major differences between Keynes's theories of the macrodynamics of nineteenth- and twentieth-century capitalism.

He seems to suggest that "institutional differences" explain not only that interwar low but also the economy's later performance. But no: There is more to the story.

Keynes relied on two levels of analysis, Crotty says: The one, a general, abstract analysis of "the defining characteristics of the capitalist economy". The other, a more concrete, "institutionally and historically contingent" analysis that considers "the institutions, classes, and agent motivations peculiar to each particular stage of economic development". The differences between these "contingent" factors in different historical periods is central to Professor Crotty's evaluation of Keynes's work. 

The abstract ("Level I") analysis is the "general" part of the General Theory, Crotty says. But

[the] concrete object of investigation [in the General Theory] is the institutionally specific form of capitalism found in Britain (or the United States) in the interwar period

Crotty says the book's theoretical and policy conclusions are not "directly applicable" to later stages of economic development.

Going by Crotty's concept, then, if Keynes recommended deficit spending (for example), he didn't mean we should adopt it as standard practice for all time. He meant it was appropriate for the Great Depression of the interwar years. There are probably better examples, but you get the idea. Policies that are quote Keynesian unquote are not always policies that Keynes would have recommended. Not always, and not often.

Anyway, when Crotty starts presenting the differences in "institutions, classes, and agent motivations" for the different stages of capitalism, his paper gets downright fascinating.

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.729.5461&rep=rep1&type=pdf

//

Crotty talks about institutions. Quigley talks about institutionalization. I had to stop writing and spend a day on the meaning of the words "institution", "institutionalization", and every version between. In all its forms, the word "institution" has unsavory connotations. And the more syllables a variant has, the more unsavory the connotations. Google turned up related phrases like

• "institutionalized children"
  
• "psychiatric institutionalization" and
  
• "incarceration"

That's not what Crotty is talking about, of course. Nor Quigley, nor Keynes. But the unsavory meaning still gets in the way. Wikipedia offers something more appetizing:

In history, a distinction between eras or periods implies a major and fundamental change in the system of institutions governing a society. Political and military events are judged to be of historical significance to the extent that they are associated with changes in institutions.

The "distinction between eras or periods" is precisely what Crotty was talking about, and Crotty's Keynes. Wikipedia, offering an example, mentions the change from feudal to modern institutions in Europe -- something Quigley (e.g., page 145) focused on explicitly.

//

Crotty says the General Theory presents the 19th century and the 20th as separate stages of economic development. But Keynes also opened chapter 23 of that book with references to "the past one hundred years" (the 19th century, again) and "some two hundred years" before that. The 200 years encapsulate the Mercantile era; the 100 years, the "classical" economics that Keynes disputed.

These views together encompass three distinct stages: mercantile, classical, and whatever it is we have now, that developed out of the "interwar" years. These stages reach from the 2020s back to the 1600s.

But Keynes also considered in chapter 23 the economic views of the Medieval church. This takes us back to Thomas Aquinas and the 13th century, at least, and perhaps to the fall of Rome. From the 13th century to the 21st, inclusive, touches on nine centuries of economic development: almost a millennium. 

And by the way, this all comes out of the General Theory. We're looking at almost the whole growth phase of this cycle of civilization. Take it back to Rome, and we also bring in the parent-and-offspring relationship between civilizations, which Toynbee described.

Recall, then, that Keynes also called the 19th century "the greatest age of the inducement to investment". And recognize that this puts the peak of the cycle of civilization behind us.

//

Not to overstate the problem, but there may be some urgency here in regard to resuming the upward path. The first thing that must be done is to take the time to figure out what the problem really is. Because if we try to fix the wrong problem, our fix won't work. For example, restraining the growth of federal spending and balancing the budget. Fifty, sixty years now, this has not worked, because it is the wrong plan.

Here's my plan. Note that it starts with analysis of the problem. The analysis is unique and unfamiliar. That doesn't mean it's wrong.