A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.
The macroeconomic reconceptualisation centred on two key variables: aggregate demand and the money-wage. The first is the most widely-acknowledged element of the ‘Keynesian revolution’ – the insight that unemployment of labour and other resources was not necessarily a matter of relative prices being either in disequilibrium – the problem therefore being temporary – or distorted by market power, especially that of labour organisation. Involuntary unemployment could be a result of insufficient aggregate demand, and wage adjustment might be counter-productive. A Say’s Law world in which monetary flows were a minor secondary phenomenon faded before a vision of monetary leakages and injections, a system which could be mapped with the host of new statistics collected for the purpose. One such map was Copeland’s  Study of Money-Flows in the USA:
In his model of the entire circuit, transactions are defined as transfers of rights agreed between two subjects representing units of account receiving and spending money. Each sector is located ‘between’ other sectors, so that none has an initial or final role. After this presentation of a homogeneous circuit, with no beginning or end, Copeland attempts to define the strategic sectors: those which have some power over their own monetary flows (like the government with a war time budget) or some power over the monetary flows of others (like the banks). The characterisation of public expenditure in terms of flows inserted into the circuit is an essential precondition for the presentation of state regulation as economic policy. [de Brunhoff, 1978: 76]
The reconceptualisation made new practices possible with existing institutions: the government budget, formerly considered simply in bookkeeping terms as the accounts for government operations, now became a lever. Likewise, central banking shifted towards macroeconomic responsibility from being a relatively passive clearing house and overseer of the banking system, with policy mainly a by-product of its own reserve management. Because their target was the same – aggregate demand – both institutions were unified, however imperfectly, in a collective enterprise in which they became two arms of a single ‘economic policy’.
The new theory prescribed a new role for these state institutions. But it took some time, and organisational restructuring, before the treasuries and central banks fitted the part. The ‘Keynesian revolution’ was an ideological child of the Depression, and the 1930s saw some experiments with stimulatory public works spending – contemporaneous with, but not inspired by, the General Theory. [Bleaney, 1985: 49-80] But the full development of ‘economic policy’ in de Brunhoff’s sense was really a postwar phenomenon. It took the mobilisation of war and reconstruction to overcome institutional inertia and reorganise the institutions, and it took a decade or two for the new sensibility in economic theory and policy to cohere into a fully-developed orthodoxy. Even in the 1950s, as we will see, the formation of an institutional ensemble capable of filling its prescribed role was still a project rather than a finished reality.
The transformation of the Australian Treasury is illustrated by Crisp . From a duty, in Gladstone’s words, “to save what are meant by candle-ends and cheese-parings in the cause of the country”, by 1954, Deputy-Secretary Randall was reporting that it was “mixed up in all manner of activities not dreamt of half a century ago”1. Crisp summarises:
What we may broadly call the Keynesian economics and public finance became available only in the late 1930s as a theoretical framework and justification for a whole set of new methods and policies. They emerged just in time to be matched with wartime exigencies and opportunities and, enriched by experience then gained, to form the foundations of thinking about post-war policy… The Budget’s ‘housekeeping’ purpose still retained its intrinsic importance sufficiently to determine, or at least powerfully to influence, many policy issues. But this role was not transcended by the new conscious and positive – and far from simple – instrumental use to be made of the Budget in the wider context of national economic policy. Its magnitude and detail were now designed to influence investment decisions, the general levels and pattern of investment and the demand for goods and services. Its extremely complex effects on incentives, cost structures, inventories, labour supply, the balance in the supply of basic necessities and ‘inessentials’ would be carefully watched, for they were shot through with political as well as with economic significance. [Crisp, 1961: 321, 323-24]
The map was not the territory, and the theoretical map was continually redrawn as policy practice met unforeseen resistance, unintended consequences, and new problems in the economic sphere. Note, for example, the list Crisp gives above of the “extremely complex” effects of fiscal policy on incentives, cost structures, etc. Things were not as simple as a model in which policymakers selected the appropriate level of aggregate demand. Most importantly, the policy apparatus forged intellectually in the battle against Depression was called upon for quite a different kind of war.
There was irony in the fact that their first applications occurred under conditions of full (even over-full) employment and vast unsatisfied demand, rather than of unemployment and underconsumption such as challenged the powers of constructive analysis of Keynes and his colleagues in the inter-war years. [Crisp, 1961: 321]
Keynes’s General Theory was motivated by, and organised around, a single problem: “the failure of the economy to generate enough aggregate income to keep its people employed… proximately due to firms’ unwillingness to operate at a sufficiently high level of production; that unwillingness in turn… due to their estimate, fulfilled in the case of unemployment equilibrium, of inadequate demand for their output.” [Chick, 1983: 47] However, addressing that problem involved a much wider vision of the economic system, a theoretical system which could deal with many other phenomena, and versions of this vision were developed by many others besides Keynes in many different directions. Likewise, the great problem of Depression unemployment motivated the reorganisation of the state’s economic apparatus into a coherent mechanism for acting strategically within the economic system – though of course, still exhibiting Poulantzas’s ‘fissiparous unity’. The third part of the story, and the part this thesis as a whole explores (focusing on the Australian case), is the subsequent development of this institutional ensemble and the strategy which motivated it against an entirely different phenomenon – inflation.
1Gladstone’s remark comes from a speech in Edinburgh, 1874, quoted by Crisp [1962: 316], and Randall, quoted [ibid: 319].
Michael Bleaney : The Rise and Fall of Keynesian Economics: an investigation of its contribution to capitalist development, Macmillan, Houndmills.
Suzanne de Brunhoff : The State, Capital, and Economic Policy, translated by M. Sonenscher, Pluto Press, London.
Victoria Chick : Macroeconomics After Keynes: a reconsideration of the General Theory, Phillip Allan, Oxford.
M. Copeland : A Study of Money Flows in the United States, National Bureau of Economic Research, New York.
L. F. Crisp : “The Commonwealth Treasury’s changed role and its organisational consequences”, Australian Journal of Public Administration, 20:4, pp. 315-30.