by Mario Rizzo
I was recently accused in a private email by a very smart economic journalist of not knowing the difference between macro and microeconomics. At first, this got me quite annoyed. But then I thought more calmly about why Keynes rarely talked about issues relating to the efficient allocation of scarce resources. This is not simply a doctrine-historical matter. It is intimately connected to his views of macroeconomic policy. It might also be informative to those modern-day “Keynesians” who retain his policy vision but do not know how, at least, he grounded it.
First, Keynes believed that with proper government (or “quasi-government”) long-run management of investment, the long-run expectations of agents could be stabilized. Thus the marginal efficiency of capital (that is, investors’ expectations of the return to capital) would not jump around all over the place. It would also ensure lower long-term interest rates by reducing needless uncertainty. Keynes was convinced that by the day of “our grandchildren” (today?) this kind of low interest policy would ensure that the marginal efficiency of capital would be driven down to zero. Capital would no longer be scarce. But even in Keynes’s day, as he insisted to Hayek, Keynes believed that scarcity mattered much less than ever before.
Second, and related to the first point, Keynes believed that the money measure of value (that is, willingness to pay) had become inappropriate in a modern advanced economy. As he put it on the BBC in April, 1942:
Where we are using up resources [as in public building programs], do not let us submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds, shillings and pence of cash income, with no other denominator of value but this. I should like to see that war memorials of this tragic struggle take the shape of an enrichment of the civic life of every great centre of population. Why should we not set aside, let us say, £ 50 millions a year for the next twenty years…above all perhaps, to provide a local centre of refreshment and entertainment with an ample theatre, a concert hall, a dance hall, a gallery, a British restaurant, canteens, cafes, and so forth. Assuredly we can afford this and much more. Anything we can actually do we can afford. Once it is done, it is there. Nothing can take it from us. We are immeasurably richer than our predecessors. It is not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life? (Keynes, Collected Works, vol. XXVII, p. 270)
Re: “Anything we can actually do we can afford.” The rationale here is that anything we actually do will be done only with resources that have a very low opportunity cost because of the idleness of resources. Of course, there are many conceivable alternative uses that are superior to idleness. So there is a possibly large opportunity cost to the decisionmaker after all. What means does Keynes have to determine that building State-sponsored theaters and such exceeds the true opportunity cost? In the absence of market employment of these specific resources, he obviously thinks anything is better than idleness – so why not? So much for serious economic calculation.
Re: “…do not let us submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds…” Before the reader thinks that Keynes is simply thinking of public goods and such, I should point out that Keynes held a normative theory of value derived from the philosopher G.E. Moore called “ideal utilitarianism.” This is the view that there are certain mental states of intrinsic value such as the appreciation of beauty. So the “vile doctrine of the nineteenth century” is to be viewed in this light. Intrinsic values, like local centers of refreshment and entertainment, trump pounds and shillings. Taken seriously, the notion of intrinsic value makes economic calculation unnecessary.