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Keynesianism: A Bridge to Neoliberalism

Ted Reese

September 23rd, 2022

As capitalism sinks into its deepest crisis for a century – probably one far deeper – calls from the left grow louder for a return to the ‘Keynesian’ principles that apparently underpinned the postwar productivity boom: a minimal nationalization program of key industries and utilities combined with well-funded public services and a ‘welfare state’. Such an approach, the logic goes, redirects money away from greedy shareholders and into the pockets of underpaid or underemployed workers, boosting demand for consumer goods and, therefore profits and economic growth.

Such policies, moderate social democrats claim, were previously implemented because of the persuasiveness and correctness of the arguments of John Maynard Keynes, along with the militancy of organized labor.

Communists would agree with the latter part of the statement, but often claim that it was the ideological pull of the Soviet Union, with its uniquely fast rate of industrialization and low living costs, that compelled the ruling class to make such concessions.

While both arguments contain an element of truth, they are ultimately inadequate. In reality, the turn to Keynesianism after WWII and before that in the US during the Great Depression expressed the needs of capital accumulation at a particular point in time; ultimately serving to restructure the economy in a way that made possible the ensuing turn to ‘neoliberalism’ – reprivatization, rollbacks of union rights and welfare, and the centralization of political power – itself made necessary by the changing or rather ever-rising demands of capital accumulation.

The inherent logic of capitalism simply makes the ‘mixed economy’ championed by social democrats unsustainable. Today, this is truer than ever.

Keynes and Keynesianism

A Cambridge academic, Keynes was no social democrat or trade union man. A member of the British Liberal Party, he distanced himself from the labor movement. He made clear that “The class war will find me on the side of the educated bourgeoisie.”

He called Marxism “obsolete” and “scientifically erroneous.” Against Marx’s now empirically testable[1] theory of value – i.e. that it comprises socially necessary labor time – Keynes accepted the vulgar political economy of marginal utility theory, that value and price are determined wholly through the subjectivity of demand and the limit of supply on the market. (Vulgar in the sense that capitalism’s earlier theorists, Adam Smith, and David Ricardo, had recognized labor as the source of value.) Stealing a living, Keynes accepted that this theory was unfalsifiable since “two incommensurable collections of miscellaneous objects cannot in themselves provide the material for a quantitative analysis”, but claimed this reality “need not prevent us from making approximate statistical comparisons”.[2]

Similarly, he could not deny that rising accumulation and the inversely falling rate of profit played some role in the ‘lack of effective demand’ from investors that he saw as the cause of recessions, but, wholly unscientifically, placed more emphasis on the mood swings of capitalists, since the “basis of the expectations of future yields were very precarious”.

The reality is that capitalists will tend to invest where profitability is high and disinvest where it is low. The latter happens as accumulation rises to a certain point – precisely because capital displaces labor or reduces labor time per commodity, resulting in an underproduction of surplus value (labor time appropriated from the working class) relative to the capital value in the means of production; also an overaccumulation or surplus of capital that is unprofitable to (re)invest. The fall in demand, relative to supply, however, induces a fall in prices that, once sufficiently low, makes reinvestment in expansion and innovation affordable and profitable again. Far from being the cause of the crisis, ‘lack of effective demand’ is – along with, for example, monopolization and efficiency drives – part of the solution to the crisis.

Keynes’s position, however, made him a critic of the ‘free market’ and competition. State intervention could overcome the whims of self-interested capitalists and stimulate growth via taxation, partial wealth redistribution, and deficit spending (borrowing) to increase consumer demand and, therefore, profits, reviving economic growth. (Such ideas were older than capitalism and had always been used in wartime.) In practice, this did not make him ‘left wing’ but a quintessential monopoly capitalist prepared to sacrifice the individual to save the species via a concentration of private ownership – which is exactly what happened. Keynes was a liberal and, as we shall see, neoliberalism was Keynesiansm’s necessary outcome.

The New Deal myth

The 1929 Wall Street Crash in the US entailed a massive process of devaluation since disused capital underwent rapid depreciation. Industrial production between 1929 and 1933 plummeted by nearly 47%. Once prices, including the price of labor power, had fallen sufficiently, the demand for investment and labor started to crawl back upwards, boosting the tax base. This reality, combined with the militancy of workers desperate to take advantage of any opening, compelled capitalists to tolerate the Keynesian policies pursued by Democratic president Franklin D. Roosevelt.

In fact, the ‘Keynesian turn’ began under the Republican president Herbert Hoover. Some aid was dispensed via the creation of the Reconstruction Finance Corporation in 1931, which was authorized to lend money to banks, businesses, and farms. Public works were set up to help both private business and the unemployed, creating large deficits. Roosevelt merely ‘expanded the program’, under the regulatory promise of the ‘New Deal', to a level that no Republican could be seen to condone. Roosevelt, too, however, writes the German-American council communist Paul Mattick,

was for a balanced budget… Aware of the fact that only inflationary methods could block a further decline of the economy, Roosevelt still searched for a type of inflation that would not unduly enlarge the national debt. He tried, on the one hand, to reduce the costs of government and, on the other, to increase the money supply through the issuing of unsecured currency and through the devaluation of the dollar. The devaluation raised prices to some extent and provided the monetary means to finance the recovery programme.[3]

New regulations incentivized farmers to reduce crops – while swathes of the country went hungry – “although this was of benefit only to the larger agricultural enterprises.... [allowing] landlords to drive their tenant farmers from the land and at the same time to pocket their share of government subsidies.”

Men aged 18-25 were paid “pocket money” in what were effectively labor camps. They planted trees, built minor roads, tracks, and dams, and fought soil erosion. The costs of work relief were, however, “far higher than those of direct relief,” and so “more than four million people returned to regular benefits, cutting government expenses by more than half”.

The Democratic right had complained about high public spending. “To keep the party intact and to retain its leadership, Roosevelt tried to balance the contrary interests by means of compromises.” The National Industrial Recovery Act (NRA), the cornerstone of the New Deal, “was thus destined to fall apart without, and independently of the fact that the Supreme Court declared it in violation of the Constitution”. The NRA was designed to curb competition that brought prices and wages down. It consisted, however,

“exactly of those measures that had hitherto been the results of unconscious market forces, that is, the increasing concentration of capital and its acceleration in times of crisis and depression. To facilitate this process, antitrust laws had to be set aside to allow trade associations to fix their own prices and profit margins through a ‘fair’ distribution of market shares in all industries.”

Growing union activity partly reflected “a slightly improving global economic outlook” and the fact that the government had promised not to send in the army. But “rank-and-file initiative again subsided to make room for the ordinary bargaining procedures of the labor market, thus revealing the hollowness of labor’s victories, which had only served to integrate the unions more thoroughly into the capitalist system”.

To keep labor on side, the NRA guaranteed the right to the independent formation of trade unions and collective bargaining, which “led to a further deterioration of the economy”.

“It was all so simple; it only ignored the fact that wages are costs of production, so that the higher they are, the lower will be profits,” says Mattick. In practice, “things worked out… in the only way they could within the confines of capitalism… namely, the increasing monopolization of capital”.

By 1937 overaccumulation again strangled investment, and so government income and spending fell. For the neo-Keynesians and Modern Monetary Theorists, Roosevelt was ‘not Keynesian enough. “Concerns about the budget deficit sabotaged the New Deal from ending the depression,” writes Kimberly Amadeo.[4] But if you do not disempower and expropriate the capitalist class, then sooner or later, you have to reckon with its demands.

She points to strong economic growth during the mere four years of the New Deal, not accounting for the fact that it depended on the devaluation brought about by the crash, debt, and capital concentration. She even claims that had the US spent on the New Deal what it spent on WWII – the former added $3bn to the debt and the latter $64bn – the “depression would have ended,” and the US economy would have been healthy enough to offer aid to Germany and prevent the rise of Naziism. But war is the ultimate means of devaluation.

As Mattick writes, it was the need to restore profitability “which motivated the increasingly negative attitude with respect to the New Deal.” GDP in the recession of 1937-8 fell by 18.2%. Steel production declined from 80% of capacity to 19%.

The truth is that although state spending on wages may subsidize capital, it also comes out of profits, a circular relation that does nothing to create new value, since production carried out by the state is not commodified. As Mattick says, “[B]ehind the desire for a balanced budget lies the instinctive recognition that a continuous expansion of production by way of government deficit financing must finally destroy the capitalist system.”

The depression was finally ended, “not by new prosperity but through WWII, that is, through the colossal destruction of capital on a worldwide scale and a restructuring of the world economy…. Death, the greatest of all the Keynesians, now ruled the world once more.”

The failure of postwar social democracy

The destruction of capital and, therefore capital value in WWII essentially rebalanced the shortage of surplus value relative to capital value. Combined with the acceleration of innovation that went with the arms race, largely undertaken or funded by the state – thus enabling the commodification of wartime products via their reapplication for the civilian economy; i.e. socializing the costs and privatizing the profits – this laid the basis for the postwar productivity boom. While the influence and threat of the Soviet Union surely helped, the demand for labor, given that entire countries and continents needed to be rebuilt, was extremely high, making social democracy strong, confident, and militant. Nor could capital afford much of the massive upfront costs of such a rebuild. The strength of growth enabled a high level of state welfare. Keynesianism finally enjoyed some limited historical success, but capital itself needed the nationalization program, which also engineered new efficiencies and cheapened products that capitalists bought for productive expansion.

This was especially true in Britain, where the US deliberately under-financed in order to finish off the pound sterling’s reign as the global reserve currency. Britain embarked on nationalizing key or poorly-performing industries and utilities.

The US, led by Roosevelt, effectively attempted a ‘global New Deal’ through the 1944 Bretton Woods Agreement. The monetary system was redesigned by locking every currency to the US dollar, which was pegged to gold at the fixed exchange rate of $35 per ounce, guaranteeing full gold convertibility to any country that wanted to swap their dollars for gold. The International Monetary Fund (IMF) was set up to hand out loans to nation-states, but on strict conditions that would ensure any balance of payments deficits would be fixed and the loans repaid. For a while, this ‘worked’ and the US built up a massive trade surplus (exporting more goods and services in dollar value than imported).

The Greek social democrat Yanis Varoufakis claims the “flaw” in this plan was the US’s rejection of Keynes’s proposal for a mechanism to redistribute trade surpluses to countries with trade deficits since falling demand from the latter would otherwise lead to crisis in the former.[5] The proposal was rejected, though, since it would have accelerated an overaccumulation of capital in the US; and because capitalism cannot eliminate capitalist competition. Such a policy would have undermined the point of effectively making the dollar the global reserve currency. The real flaw was the objective tendencies of capitalist production. Redistribution, in a sense, did take place as the US was motivated to export huge amounts of loan capital and means of production to revive the economies and currencies of West Germany and Japan, in order not only to exploit foreign labor and so that these countries would be able to buy US goods; but also as part of the ‘containment’ strategy against the socialist bloc, which now included East Germany. The US’s share of global GDP shrank by 19.3% from 1950 to 1972, leading to a trade deficit.

US growth slumped from 6.5% in 1966 to –0.25% in 1970, well before the neoliberal onslaught led by Ronald Reagan. Combined with the deficit spending and inflationary effects of the escalating war on Vietnam, Laos, and Cambodia (1955-75), the dollar became overvalued, forcing European governments to increase the volume of their currencies to keep their exchange rates constant against the dollar, since Bretton Woods limited exchange rate movements against the dollar to 1%.

Europe and Japan feared the build-up of dollars, against a constant US gold stock, would lead to a run on (sell-off of) the dollar and force the US to abandon the gold standard, in which case their stored dollars would lose value. On 29 November 1967, Britain devalued the pound sterling by 14% against the dollar, well beyond the 1% limit, forcing the US to use up to 20% of its gold reserves to defend the $35 peg.

US Republican president Richard Nixon, also facing rising unemployment domestically ahead of the 1972 election, began to consider severing the dollar’s link to gold. Devaluing would help to resolve the crisis. The gold standard had become a fetter on growth since the amount of gold foreign banks could convert their dollars into was finite. It needed to be done away with to tackle the structural limitations that inflation imposed on state deficit spending. The alternative was to raise rates and spark a depression.

On 15 August 1973, Nixon effectively ended Bretton Woods by announcing that the US would no longer convert dollars to gold at a fixed value and no longer pay debt in gold, only dollars. The ceiling on both the number of dollars the Federal Reserve (the US central bank) could print and the debt it could issue was removed. The US dollar and reserve currency was now no longer backed by a hard asset as a storehouse of value. Debt became the main tool for supporting increased investment and consumption.

The end of the gold standard triggered a stampede for the dollar, which started to devalue as inflation surged. From the end of WWII through to 1971, it took between 10 and 15 barrels of oil to purchase one ounce of gold; rising to 34 by mid-1973.[6]

As the value of oil fell, members of the Organisation of Petroleum Exporting Countries (OPEC) cut output in order to raise prices. The US encouraged the hikes as petrodollars flowed into Wall Street, financing US deficits. At the time of Nixon’s gold standard announcement, the price of oil stood at less than $3 per barrel, continually rising to $30 long into the 1980s. While the price of oil stayed within its historical range relative to gold, it was a massive shock to the global economy. By the end of 1974, the main stock indexes of the G7 countries fell in real terms by 43%. The US market did not recover its losses until 1993.

Nixon was replaced by the Democrat Jimmy Carter, whose administration went on the offensive against inflation, making borrowing more expensive by hiking interest rates to 11 and then 21.5%. This brutal monetary policy – also partially a reflection of a fall in the demand for debt amid rising bankruptcies – pushed inflation down from 13.5% in 1981 to 3.2% two years later. Unemployment shot up.

In Britain, where the aggregate rate of profit fell by 3% between 1960 and 1970,[7] inflation hit 25% in 1975. A large-scale sell-off of the overvalued pound began as investors anticipated another devaluation. Britain was forced to take on a record-breaking loan from the IMF,[8] which

demanded heavy cuts in public expenditure and the budget deficit to keep inflation down as a precondition. The Labour government’s relatively strong left-wing eventually acceded to a 20% cut to the deficit, as refusing the loan would have been followed by a further disastrous run on the pound. The Keynesian cadaver only needed finishing off. The Labour Party began a war on benefits, wages, and unions, to be finished by Margaret Thatcher’s Tories through a combination of police brutality and bribes (shares in reprivatized assets and below-market prices for the purchase of social housing).[9]

In the US, there were 39 work stoppages by government employees between 1962 and 1981, but none after Ronald Reagan fired 13,000 striking air traffic controllers.

When Thatcher won the 1979 general election, nationalized industries represented 10% of the economy and 14% of capital investment. By 1990, when she was ousted from office, the former figure had fallen to under 2%.[10] Riding a relatively strong period of accumulation, the Labour government of 1997-2010 continued the privatization drive but did increase public spending somewhat, only to start reversing such measures as the global financial crisis struck in 2008.


Everything that unfolded tallies with Marxist theory. In the long run, even the mild temporary redistribution in wealth through taxation served to centralize property into fewer hands, since such expense helped to bankrupt poorer capitalists. At a certain point, the threat of bankruptcy hit a critical mass, and the remaining capitalists collectively had no option but to push taxes and borrowing back down.

The public infrastructure built or restructured by the state did not create new value until it was later privatized. It also removed the burden of putting such costs on the capitalist class at a time when the latter could not afford the such investment. Through innovation, efficiency drives, and decommodified production, state enterprise cheapened means of production bought by the remaining capitalists, who still made up the vast majority of all ownership. The key industries were more productive by the time capital was compelled by overaccumulation to reprivatize them in order to expand commodity production.

Keynesianism did exactly what Keynes set out to achieve: to save capitalism from itself via a restructure so that it was able to embark on the next, evermore demanding round of accumulation.

Today, the capitalist state is already drowning in record levels of debt and running out of social assets to privatize and commodify. It increasingly drives down the last remnants of social spending so that it can be redirected to shareholders desperately trying to stave off insolvency. Quantitative leaps in computing and automated production are bringing about profound qualitative leaps, rapidly driving down the costs of production and the outlay on wages but accelerating the concentration of monopoly ownership and overaccumulation as human labor becomes a relatively vanishingly small part of the productive process. Capitalists offset this problem by cutting production to raise prices, redistributing value upwards and thus making life increasingly unaffordable as the labor participation rate tends to trend downwards to new lows.

The pursuit of a Keynesian alternative is even more of a dead end than in the past, for there can be no ‘reindustrialization’ of the workforce. Keynesian nationalization, in any conditions, would accelerate the automation revolution. The reality is that accumulation itself – the accumulation of production – increasingly demands no ‘mixed economy’ but the public ownership of all production. That is what the working class must be convinced to turn to this time. It is Keynes who is obsolete.


[1] See “Marx’s Capital – ‘scientifically erroneous and without application to the modern world’?” by Michael Roberts.

[2] Ibid.

[3] Paul Mattick, Economics, Politics and the Age of Inflation, “Chapter Six: The Great Depression and the New Deal”,, 1977. All further Mattick quotes from the same source.

[4] Kimberly Amadeo, “New Deal summary, programs, policies, and its success”,, 25 February 2015.

[5] Varoufakis, The Global Minotaur, p. 90.

[6] Ibid, p. 90.

[7] David Yaffe and Paul Bullock, “Inflation, the Crisis and the Post-war Boom”, Revolutionary Communist No 3/4 (November 1979), 12.

[8] “Sterling devalued and the IMF loan”,

[9] The number of shareholders ballooned from three million to between 12 million and 15 million. In the privatisation of BT in 1984, up to 10% of shares were reserved for employees and 96% of employees bought shares. “Privatising the UK’s nationalised industries in the1980s”, Centre for Public Impact [online], 11 April 2016. [10] Ibid.

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