A Solution to Keynes´ Problem

08.08.2020 - Limache, Chile - Howard Richards

A Solution to Keynes´ Problem
(Image by Bo Lind Knudsen)

´Keynes´ Problem´ is the lack of sufficient business activity in a modern market society. It is an economic problem that morphs into any number of crucial political and social problems. People depend on business activity to provide essential goods, and to avoid catastrophic bads. The catastrophic bad that weighed most heavily on Keynes´ mind was the mass unemployment of the 1930s. Today´s mass unemployment makes now an appropriate time to reconsider his failure.

Keynes´ problem can be defined more precisely, using his own words, as consisting of two complementary parts: (1) ´…the drag on prosperity that can be exercised by an insufficiency of effective demand´(i); and (2) ´…there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. This weakness of the inducement to invest has been at all times the key to the economic problem. ´(ii)

(Lack of sales) (1) leads to (lack of investment) (2) which leads to (no end of troubles) (3). Investment will often be insufficient because it will often be rational to doubt that there would be sufficient sales of the goods or services whose production the proposed investment would finance. To be sufficient to induce a rational investment, sales would have to produce revenues returning the original investment itself, plus cover wage costs and all other costs of production, plus provide an attractive return to the investor combined with a minimal risk of loss. The attractive return would have to exceed the return the investor could earn by simply leaving the same money in a bank gathering interest.

Two bottom lines: A modern market economy has more people than slots. The investors call the shots.

In most cases the investors or their agents determine what employment there will be and who will be employed; on Keynes’ view they make these determinations after estimating the size of the market for their products. The size of any market is always limited by what he called liquidity preference. For various reasons individuals, businesses, and public institutions prefer to take money out of circulation, keeping it instead of spending it. We take it to be true that not all money is spent and consequently not everybody is employed, even though liberals have scored some points in their unending efforts to discredit Keynes’ theory.

No end of troubles stems partly from the suffering and from the frequently anti-social and/or self-destructive behaviour of people whose work finds no buyers willing to pay a decent price for it. They stem from the violence of the gangs and the violence of the police; from the violence of Pol Pot avenging injustice and from the violence of General Suharto imposing law and order. Troubles stem from the subordination of all government policies –and indeed to everything about our way of life in or out of government– to the overriding imperative to please investors.(iii)

Keynes found no acceptable solution to Keynes´ problem. He did not claim to have found one.(iv) He was of course aware of about a dozen countries that, in his time, did achieve full employment in centrally planned command economies –but he did not consider that route acceptable.

If Keynes’ problem could be acceptably solved, there would be a future role in society, one with dignity and security, offering opportunities to satisfy each and every item in Abraham Maslow´s catalogue of human needs, waiting for every new-born pushing its head through its mother´s birth canal. The message communicated by the satisfaction of the new-born’s first desire, to suck milk from its mother´s breast, ´This is a secure world, you are welcome and safe here, ´ would be a true message for more people more of the time.

A Solution to Keynes’ Problem

First we will outline a solution in general terms, beginning with some remarks on the philosophy of science that will permit us to avoid traps that thousands of brilliant people who have been working on the problem –but failing to solve it—have fallen into. Our view is that the problem is inevitable given the individualistic social structure of western modernity, which has morphed into the legal structure of the global economy. Its solution requires a synthesis of the best of western modernity with the best of non-western and non-modern traditions. Culture shifts.

Concerning the philosophy of science, I suggest –tentatively in the Socratic spirit of philosophy— accepting Roy Bhaskar´s proposal to reframe economics, including Keynes, in terms of the causal powers of social structures. They are the social science analogues of the causal powers of natural structures (such as those of molecules or cells). Natural structures ground explanation in the natural sciences. Social structures unlike natural structures have been created by humans –among others the structures that cause mass unemployment. Nevertheless, the social sciences are also similar to the natural sciences: The structures retain their identities and causal powers; while diverse scholars such as Marx, von Hayek, Walras, Marshall, Orléan and Keynes among economists; as well as diverse anthropologists, lawyers, ethicists, theologians and so on, like diverse natural scientists, talk Reality is what it is. But decisions about how to talk about it can facilitate constructing new understandings and beliefs, hence new practices, hence new cultural rules, new social structures, and new realities.

Now we can say: Keynes glimpsed but did not grasp, that his most important discoveries (1 and 2, insufficiency of demand, and weakness of the inducement to invest) and hence his explanation of the excess of people over slots, were about consequences of social structures that have been constituted over the course of history by cultural rules.

André Orléan has phrased in especially insightful contemporary terms the central consequence of the currently dominant structure: Indeed, the commercial society does not know these bonds of solidarity existing between parents, neighbours or close relations, thanks to which, in traditional societies, each one can directly mobilize the assistance of the others to carry out his projects. To obtain something from others, in the commercial order, there are no other means than to arouse the others´ desire.(v) Thus in 2011, Orléan updates Adam Smith´s famous words of 1776 asserting that to obtain our daily bread we never appeal to our needs or to our baker´s humanity, but always to his desires. Orléan continues: Our starting point –we insert: i.e. our way of talking about today´s dominant social structure – is market separation, that is, a world in which each individual is cut off from their means of existence. Only the power of value, invested in the monetary object, allows the existence of a social life under such auspices. It reunites separated individuals by building for them a common horizon, the desire for money, and a common language, that of accounts.(vi)

And how will amended social structures rehumanize the dehumanized world Orléan concisely describes? We begin to answer this question by endorsing Guy Standing´s proposal for a universal basic income (UBI), noting that Standing advocates transferring economic rents to fund meeting social needs.(vii) The general solution extends the idea of UBI. Wherever labour markets throw people out, good non-market livelihoods welcome them in. In many ways.(viii)

To go beyond UBI into the higher realms of human motivation and satisfaction charted by Abraham Maslow, Riane Eisler, Martha Nussbaum and others –and even to achieve a political climate where enacting and funding UBI can happen–we need culture shifts.

Culture Shifts

I have been suggesting that the reason why neither Keynes nor any economist has been able to solve Keynes´ problem is that it is not an economic problem. The problem is the social structure that economics presupposes. A recent work of Tony Lawson provides a useful account of what a social structure is: a social structure consists of related (i.e. you can´t be a landlord without a tenant etc.) material (i.e. the position of landlord is about a material house, etc.) positions, where each position is defined by the rights and duties of the person who holds the position.(ix) This viewpoint makes it easy to see that social structures, because they are about rights and duties, are about ethics and law. It is reminiscent of Gillian Rose´s observation that when sociology was founded, the sociologists took over and renamed concepts that already had prior histories in jurisprudence.

But there is another level deeper than social structure. Today´s dysfunctional structures cannot be transformed into life-affirming win-win structures without transforming basic cultural structures. To repeat: the excess of people over slots is a consequence of social structures that have been constituted over the course of history by cultural rules.

Culture is what makes humans human. It is the matrix of ethics and law, and therefore of structure. Culture is the capacity to adapt and pass on adaptations to new generations that gave our species an evolutionary advantage. To understand where I am coming from I recommend Nancy Tanner (On Becoming Human), James Boggs (The Culture Concept as Theory, in Contest, an article in Current Anthropology), and Douglas Porpora (Cultural Rules and Material Relations, an article in Social Theory). I will limit myself here to some unbounded suggestions for cultural action (complementary to those of Paulo Freire) to solve Keynes´ problem.

One of many (indeed innumerable) approaches might be described as selectively unwalking trails that led to modernity. Walk from contract to status; selectively reversing aspects of the processes that according to Sir Henry Maine´s famous history of law first published in 1861 made us modern.

Status. Every victory for the human social rights is a victory for status. To claim a human right, you do not need to buy or sell anything. You do not need a willing seller or a willing seller to contract with. Selectively unwalking Maine´s path to modernity, social human rights affirm that just because you have the status of being human, you have a right to education, housing, health care, and employment. This was the argument Jean Drèze and his fellow activists in India used to win parliamentary approval of the world´s largest public employment program, the Mahatma Gandhi Rural Employment Guarantee.

Property. Unwalk part of another trail, back to Saint Thomas Aquinas: Whatever you own is not yours alone; it also belongs to those in need whom you are able to aid with your surplus.(x) This is the argument Pope Francis uses every day to reframe ´gifts´ from the haves to the have-nots. They are not gifting but acts of stewardship. According to traditional church teachings, Christian and non-Christian, private ownership is a practical necessity, but so is charity. Property is to be administered for the common good.

Service. Walk back another 1200 years to Paul the Apostle, a tentmaker by trade. After making enough tents to meet his own expenses, he deliberately made more tents for the purpose of creating a surplus to share with the weak. (Acts 20: 30-35) Today many business leaders are following Paul. They understand that catastrophe has arrived. At this point in history many realize that it is to their interest to contribute to creating innovative solutions to the endless troubles. It is ´in´ to be mission-driven and to listen to TED talks. Even small family owned and operated enterprises run charitable foundations that their businesses fund. It would only take scaling up what is already happening to solve component (2) of Keynes´ problem: what to do about the perennial tendency of savings to exceed investment. Recycle the surplus. Dedicate the savings that do not find rational uses in the real economy to meeting unmet social and ecological needs.(xi) Would you agree that the more the voluntary culture shift now happening flourishes, the more it will pave the way for transferring wealth involuntarily through tax reforms like those advocated by Thomas Piketty and Joseph Stiglitz? Whatever may be the methods employed to move today´s surpluses out of unproductive speculation, and into the meeting of unmet needs, success in doing so will keep money circulating. It will solve component (1) of Keynes’ problem. There will be more sales because people on UBI and in non-market employment will spend too. There will be no shortage of business activity: The shrinking of employment in the traditional sectors will not leave anybody high and dry, bored, and hungry, tempted to join a gang and have fun being bad. Humans will be transitioning to the day when more and more will devote themselves to intrinsically worthwhile activities –sports, music, science, philosophy, dance, religion, scholarship, gardening, yoga and so on—while advanced technology will deliver more and better goods and services, and create more surplus to transfer, with less and smarter human help. The number of slots will equal the number of people.



i John Maynard Keynes, General Theory (London and New York: Macmillan, 1936), p. 33.
ii Ibid. Pp. 347-48.
iii See Jeffrey Winters, Power in Motion: Capital Mobility and the Indonesian State.
iv Keynes´ views are distinguished from others that later were called ´Keynesian´ in Hyman Minsky, John Maynard Keynes.
v André Orléan. L´Empire de la Valeur. Paris: Seuil, 2011. p. 158. Our translation
vi Id, p.227
vii Guy Standing, Basic Income and How We Can Make It Happen. London: Penguin, 2017.
viii See https://transformadora.org/en/inici
ix Tony Lawson, The Nature of Social Reality. London: Routledge, 2019. Pp. 31-73, especially p. 61.
x Summa Theologica, Second Part of the Second Part, Question 66, Article Two, reply to objection two. Translations differ but all agree that stewardship is part of ownership.
xi https://www.weforum.org/agenda/2019/12/davos-manifesto-2020-the-universal-purpose-of-a-company-in-the-fourth-industrial-revolution/

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