Mr Keynes and the “Liberals”

In the General Theory (1936; henceforth GT), Keynes conflated the long and variegated tradition of mainstream economists since Adam Smith into a single category: the “classics”.1 This extreme simplification has never been accepted by Keynes’s critics or most of his followers, as this wide and apparently indiscriminate category blurs fundamental distinctions between different pre-Keynesian schools of thought. In particular it even blurs the basic and widely held distinction between the classical economists, in the usual meaning of proponents of a labour theory of value (such as Smith, Ricardo and Mill), and the neoclassical economists who supported the marginal utility theory of value (as Marshall, Walras and Pareto). Keynes was of course fully aware of this and other crucial distinctions and his decision to ignore them in the GT was inspired by the desire to stress something crucial that he believed was shared by mainstream economists since Adam Smith. The common thread emphasised by Keynes in the “classical” tradition may be summarised by the following propositions: i) In a perfect-competition market equilibrium, the allocation of resources is optimal and social welfare is maximised (the so-called invisible hand argument); ii) A capitalist market economy is able to self-regulate itself in the sense that it recovers promptly equilibrium whenever it is displaced from it; iii) In principle, the state should therefore avoid interfering with the spontaneous operation of the market; iv) There are limits to markets that may distort the allocation of resources and require motivated and circumscribed public intervention to allow them to do their job; v) In a competitive market economy the possibility of macroeconomic disequilibrium between aggregate demand and supply is excluded by the principle that James Mill and David Ricardo called “Say’s law”.