Keynes pronounced his famous discourse on the End of Laissez-faire in 1926. It has been a long time a-dying. To ‘clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded’, Keynes declared: ‘It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.’ But the Principles of Economics were still being taught (though with many cautious reservations and exceptions) in such a way that the students were left with the impression that those deductions were not far wrong.

Even in the depth of the slump in 1932, Professor (now Lord) Robbins produced an Essay on the Nature and Significance of Economic Science, widely acclaimed, defining economics as ‘The science which studies human behaviour as a relation between ends and scarce means which have alternative uses’. As the depression dragged on, the failure of the system to employ a large part of its means for any end at all became more and more painfully obvious. Keynes rebelling against orthodoxy, the Swedish economists following up the tentative insights of Wicksell, and Kalecki working with Marx’s schema of reproduction, were converging upon the theory of effective demand. The failure of laissez-faire theory to allow for the spectacular breakdown of the system that had occurred in reality was traced to a logical flaw in the ‘science’. It merely assumed the full utilization of the scarce means, because (without realizing what it was doing) it was arguing from the model of a non-monetary economy, where each producer owned his own means of production and worked as much or as little as he found it worthwhile to do, in the light of the real return he could get for his labour. In adapting this model to the interpretation of contemporary capitalism, the orthodox economists had failed to notice that, under laissez-faire, there is no mechanism to ensure that the employment offered by profit-seeking enterprise will match the available labour force.

Keynes worked back to a new theory from practical proposals—since millions of men were out of work and plants standing idle, let the government step in and employ them on something or other. The new theory provided a systematic justification for the ad hoc policy. It was expressed in terms of the relation between investment and saving. If an economy were to be using its resources at full capacity, with the level of wages and distribution of income that that would entail, there would be a volume of expenditure for current consumption less than the full-capacity income, leaving a margin of saving. There is no mechanism in the system to ensure that firms and public authorities should have arranged to carry out schemes of investment just sufficient to absorb that amount of saving. If their schemes were to absorb more, there would be inflationary pressure, but normally they absorb less, and at that moment were absorbing very much less. Consequently income and consumption failed to attain to full capacity and savings were equated to investment at a low level. The main cause of the deficiency of investment was rooted in the very nature of unplanned private enterprise—if all firms increased their outlay, each would find his market growing; while for any one individual the prospects of profit were too uncertain to induce expansion. A subsidiary defect lay in wrong monetary policy, which kept the rate of interest that had to be paid for finance high in relation to the sagging level of the prospective rate of profit on new investment.

The new doctrine was stoutly resisted; controversy was still turbulent in 1939. War-time experience of full employment provided a crude illustration of Keynes’ thesis, and when post-war reconstruction was being discussed his theory was enthroned as the new orthodoxy. The White Paper of 1944 on Employment Policy (Cmd. 6527) announced that the Government accepted ‘as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war’.

By a mixture of good luck and not too bad management, unemployment was kept very low (by pre-war standards) in North-West Europe for fifteen years after the war. Each recession in the United States raised alarms which passed again. The economic miracles in Germany, France, Italy and Japan disconcerted the critics and astonished even the supporters of private enterprise. A new ideology has vaguely emerged, with very little positive intellectual content, beyond: Capitalism works, doesn’t it? and a strong negative content of anti-socialism, nourished by the Cold War.