The Liberal Tradition

1. THE END OF LAISSEZ-FAIRE

123. J. M. KEYNES: The End of Laissez-Faire (1926)

Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘national liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. 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. We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ‘one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion.’ We have to distinguish between what Bentham, in his forgotten but useful nomenclature, used to term Agenda and Non-Agenda,, and to do this without Bentham’s prior assumption that interference is, at the same time, ‘generally needless’ and ‘generally pernicious.’ Perhaps the chief task of Economists at this hour is to distinguish afresh the Agenda of Government from the Non-Agenda; and the companion task of Politics is to devise forms of Government within a Democracy which shall be capable of accomplishing the Agenda. I will illustrate what I have in mind by two examples.

1. I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State—bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded, though some place it may still be necessary to leave, until the ambit of men’s altruism grows wider, to the separate advantage of particular groups, classes, or faculties—bodies which in the ordinary course of affairs are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy expressed through Parliament. . . . But more interesting than these is the trend of Joint Stock Institutions, when they have reached a certain age and size, to approximate to the status of public corporations rather than that of individualistic private enterprise. One of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialise itself. A point arrives in the growth of a big institution—particularly a big railway or big public utility enterprise, but also a big bank or a big insurance company—at which the owners of the capital, i.e. the shareholders, are almost entirely dissociated from the management with the result that the direct personal interest of the latter in the making of great profit becomes quite secondary. When this stage is reached, the general stability and reputation of the institution are more considered by the management than the maximum of profit for the shareholders. The shareholders must be satisfied by conventionally adequate dividends; but once this is secured, the direct interest of the management often consists in avoiding criticism from the public and from the customers of the concern. This is particularly the case if their great size or semi-monopolistic position renders them conspicuous in the public eye and vulnerable to public attack. . . . They are, as time goes on, socialising themselves. Not that this is unmixed gain. The same causes promote conservatism and a waning of enterprise. In fact, we already have in these cases many of the faults as well as the advantages of State Socialism. Nevertheless we see here, I think, a natural line of evolution. The battle of Socialism against unlimited private profit is being won in detail hour by hour. In these particular fields—it remains acute elsewhere—this is no longer the pressing problem. There is, for instance, no so-called important political question, so really unimportant, so irrelevant to the re-organisation of the economic life of Great Britain, as the Nationalisation of the Railways. It is true that many big undertakings, particularly Public Utility enterprises and other business requiring a large fixed capital, still need to be semi-socialised. But we must keep our minds flexible regarding the forms of this semi-socialism. We must take full advantage of the tendencies of the day, and we must probably prefer semi-autonomous corporations to organs of the Central Government for which Ministers of State are directly responsible.

I criticise doctrinaire State Socialism, not because it seeks to engage men’s altruistic impulses in the service of Society, or because it departs from laissez-faire, or because it takes away from man’s natural liberty to make a million, or because it has courage for bold experiments. All these things I applaud. I criticise it because it misses the significance of what is actually happening; because it is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago. Nineteenth-century State Socialism sprang from Bentham, free competition, etc., and is in some respects a clearer, in some respects a more muddled version of just the same philosophy as underlies nineteenth-century individualism. Both equally laid all their stress on freedom, the one negatively to avoid limitations on existing freedom, the other positively to destroy natural or acquired monopolies; they are different reactions to the same intellectual atmosphere.

2. I come next to a criterion of Agenda which is particularly relevant to what it is urgent and desirable to do in the near future. We must aim at separating those services which are technically social from those which are technically individual. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for Government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all. . . . Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance. . . . Yet the cure lies outside the operations of individuals; it may even be to the interest of individuals to aggravate the disease. I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve Society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered. Even if these measures prove insufficient, nevertheless they will furnish us with better knowledge than we have now for taking the next step.

My second example relates to Savings and Investment. I believe that some co-ordinated act of intelligent judgment is required as to the scale on which it is desirable that the community as a whole should save, the scale on which these savings should go abroad in the form of foreign investments, and whether the present organisation of the investment market distributes savings along the most nationally productive channels. I do not think that these matters should be left entirely to the chances of private judgment and private profits, as they are at present.

My third example concerns Population. The time has already come when each country needs a considered national policy about what size of Population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members!

J. M. Keynes, The End of Laissez-Faire (1926).

124. Britain’s Industrial Future, the Report of the Liberal Industrial Inquiry (The Liberal Yellow Book) (1928)

The economic order in which the doctrine of laissez-faire had its origin has already in large measure passed away. The typical unit of production used to be the small firm, built up within a generation or two by its owner, and financed by his savings or those of his immediate connections. Very many such businesses, of course, still remain. But the industrial unit which is now predominant is different. The ownership of businesses has passed, and is passing in ever-increasing degree, into the hands of scattered multitudes of shareholders, who have no real opportunity of forming any judgment as to the problems or prospects of the undertakings, and no effective method of making their opinions felt were they able to form any. Management is in the hands of salaried persons; decisions of policy are left to men who are not staking their fortunes on being right, as did the founder of a one-man business. One consequence of these changes is that the inefficient producer is no longer speedily eliminated. . . .

And the increase in the scale of the producing unit has of late been very rapid. In some industries, amalgamations and absorptions have created businesses ten, twenty, or fifty times as vast, in their capital resources, in their labour force, in the dimensions of their trade, as any that would have been thought possible half a century ago.

Whole tracts of industrial enterprise, again, have already passed, by common consent, out of the sphere of purely private enterprise. We shall analyse the many intermediate forms of management which have sprung up, almost unnoticed, between the business under purely private control and the business under direct State or municipal control. . . .

A further great change, that goes far to decide the character of the modern world, is the establishment of political democracy. . . . There is now felt to be something inconsistent between the industrial status of the worker as a factory ‘hand,’ subject to strict discipline and holding his employment on the most precarious of tenures, and his political status as a free and equal citizen and a maker and unmaker of governments. To a certain extent this inconsistency is inherent in the necessities of industrial organisation. No good can come, as even the controllers of Soviet Russia have had to recognise, of blurring the distinction between those whose function is to conceive and to plan and those whose function is to execute their plans. Nor is there anything to be gained by applying blindly the political devices of the public meeting and the ballot box to the quite different problems of industrial life. It would, we think, be wrong and dishonest to hold out hopes to the ordinary man that he will ever be in a position to choose at each moment of the day whether he will do this thing or that, or even to take a direct part in the election or dismissal of those from whom he receives his immediate instructions. But it is not unreasonable to hope and to plan both that he shall take a direct part in framing and administering the code of discipline under which his daily work must be done and also that, through the organisation which he has built and the leaders in whom he has confidence, he shall come to exercise an increasing influence on the wider government both of the business unit and of the whole industry of which he forms part.

The State here, from the very nature of the case, can do little; but it can do something, and the nation should resolve that something shall be done. . . .

Our conclusion then is not the rough-and-ready rule that, since so much already has been done in the direction of State action, the simplest course is to do the rest and to nationalise everything. Individual management and the competition on which it is based still work reasonably well within a wide range of miscellaneous industries. They are an unrivalled method for ensuring the decentralisation of management—that is, for ensuring that power and responsibility should be exercised as near as possible to the act to be performed, and not through a long line of intermediaries. They are an excellent means for securing a variety of experiment, and for trying out the comparative efficiency both of methods and of men. They provide, though with some friction and inequality, the only practicable method which has yet been suggested of evaluating the various goods and services which it is the function of industry to supply. We regard, therefore, the direct management of industries by Departments of State, or agencies analogous to them, as prima facie undesirable and likely to remain the exception rather than the rule.

Faced by these conditions in modern industry, convinced that our present social order denies a real liberty to a great proportion of the population, anxious to effect the reforms that are necessary without at the same time injuring the springs of such efficiency (and it is not small) as that order retains, we have framed the constructive proposals, touching the many parts of the one great problem, which this book contains. Financial and industrial reforms, international trade and national development, the juster distribution of wealth, the worker’s right to be a citizen, and not merely a subject, in the world of production—the measures we advocate in relation to all these things spring from one clear purpose. We believe with a passionate faith that the end of all political and economic action is not the perfecting or the perpetuation of this or that piece of mechanism or organisation, but that individual men and women may have life, and that they may have it more abundantly.

Britain’s Industrial Future (1928), Introduction.

125. J. M. KEYNES AND H. D. HENDERSON: Can Lloyd George Do It? (1929)

[‘Can Lloyd George Do It?’ referred to a pledge which Lloyd George had given that if the Liberal Party formed the Government after the general election of 1929 it would be ready with plans which would reduce the number of unemployed to normal proportions within a year. Detailed plans had been put forward in the ‘Orange Book,’ We Can Conquer Unemployment, published in March 1929.]

The Census of Production of 1924 calculated that the average value of the net annual output of a British workingman when employed is about £220. On this basis the waste through unemployment since 1921 has mounted up to approximately £2,000,000,000, a sum which would be nearly sufficient to build all the railways in the country twice over. It would pay off our debt to America twice over. It is more than the total sum that the Allies are asking from Germany for Reparations.

It is important to know and appreciate these figures, because they put the possible cost of Mr. Lloyd George’s schemes into its true perspective. He calculates that a development programme of £100,000,000 a year will bring back 500,000 men into employment. This expenditure is not large in proportion to the waste and loss accruing year by year through unemployment, as can be seen by comparing it with the figures quoted above. It only represents 5 per cent of the loss already accumulated on account of unemployment since 1921. It is equal to about 2½ per cent of the national income. If the experiment were to be continued at the rate of £100,000,000 per annum for three years, and if the whole of it were to be entirely wasted, the annual interest payable on it hereafter would increase the Budget by less than 2 per cent. In short, it is a very modest programme. The idea that it represents a desperate risk to cure a moderate evil is the reverse of the truth. It is a negligible risk to cure a monstrous anomaly.

Nothing has been included in the programme which cannot be justified as worth doing for its own sake. Yet even if half of it were to be wasted, we should still be better off. Was there ever a stronger case for a little boldness, for taking a risk if there be one?

It may seem very wise to sit back and wag the head. But while we wait, the unused labour of the workless is not piling up to our credit in a bank, ready to be used at some later date. It is running irrevocably to waste; it is irretrievably lost. Every puff of Mr. Baldwin’s pipe costs us thousands of pounds. . . .

So in the end we have the worst of all worlds. The country is backward in its equipment, instead of being thoroughly up to date. Business profits are poor, with the result that the yield of the income tax disappoints the Chancellor of the Exchequer, and he is unable either to relieve the taxpayer or to push forward with schemes of social reform. Unemployment is rampant. This want of prosperity actually diminishes the rate of saving and thus defeats even the original object of a lower rate of interest. So rates of interest are, after all, high.

It is not an accident that the Conservative Government have landed us in the mess where we find ourselves. It is the natural outcome of their philosophy:

‘You must not press on with telephones or electricity, because this will raise the rate of interest.’

‘You must not hasten with roads or housing, because this will use up opportunities for employment which we may need in later years.’

‘You must not try to employ every one, because this will cause inflation.’

‘You must not invest, because how can you know that it will pay?’

‘You must not do anything, because this will only mean that you can’t do something else.’

‘Safety First! The policy of maintaining a million unemployed has now been pursued for eight years without disaster. Why risk a change?’

‘We will not promise more than we can perform. We, therefore, promise nothing.’

This is what we are being fed with.

They are slogans of depression and decay—the timidities and obstructions and stupidities of a sinking administrative vitality.

Negation, Restriction, Inactivity—these are the Government’s watchwords. Under their leadership we have been forced to button up our waistcoats and compress our lungs. Fears and doubts and hypochondriac precautions are keeping us muffled up indoors. But we are not tottering to our graves. We are healthy children. We need the breath of life. There is nothing to be afraid of. On the contrary. The future holds in store for us far more wealth and economic freedom and possibilities of personal life than the past has ever offered.

There is no reason why we should not feel ourselves free to be bold, to be open, to experiment, to take action, to try the possibilities of things. And over against us, standing in the path there is nothing but a few old gentlemen tightly buttoned-up in their frock coats, who only need to be treated with a little friendly disrespect and bowled over like ninepins.

Quite likely they will enjoy it themselves, when once they have got over the shock.

J. M. Keynes, Essays in Persuasion (1931), pp. 119-34.

126. SIR WILLIAM BEVERIDGE: Full Employment in a Free Society (1944)

In the war against unemployment, controlled location of industry and organised mobility of labour are minor measures. The main measure is the ensuring of adequate total outlay at all times. The first condition of full employment is that total outlay should always be high enough to set up a demand for products of industry which cannot be satisfied without using the whole man-power of the country; only so can the number of vacant jobs be always as high as or higher than the number of men looking for jobs. . . .

Who is to secure that the first condition, of adequate total outlay at all times, is satisfied? The answer is that this must be made a responsibility of the State. No one else has the requisite powers; the condition will not get satisfied automatically. It must be a function of the State in future to ensure adequate total outlay and by consequence to protect its citizens against mass-unemployment, as definitely as it is now the function of the State to defend the citizens against attack from abroad and against robbery and violence at home. . . .

Acceptance of this responsibility by the State does not mean that all outlay is made by the State or controlled by it. In a free society the greater part of the total outlay on which employment depends will be the spending of their personal income by private citizens. In a society which preserves a large measure of private enterprise in industry, a substantial part of the total outlay will take the form of private business investment. Acceptance by the State of responsibility for adequacy of total outlay does not settle what steps shall be taken to fulfil that responsibility. For full employment the total outlay must be equal to the output capacity of the nation, but the total can be built up in many different ways out of the different kinds of outlay. The State may seek to increase total outlay by encouraging private consumption or private investment, by undertaking additional public spending out of revenue or from loans, by developing exports, or by a combination of any or all of these methods. There are several alternative routes to full employment. The best route depends on the circumstances of the time and country in question. . . .

Attack on Want means doing not less than is proposed in my Report on Social Insurance and Allied Services to guarantee to everyone, on condition of working and contributing while he can work, an income sufficient for his subsistence and that of his family when for any reason, of sickness, accident, old age, or unemployment, he cannot work; with social insurance against interruption of earnings there is needed a system of children’s allowances, paid both when the parent is earning and when he is not earning, to ensure that, however large the family, no child need ever go hungry or cold. By destroying Want we shall also strike a blow at unemployment. Social security means a redistribution of income, as between times of earning and not earning, and as between richer and poorer. It means more spending and steadier spending.

Attack on Disease requires both cure and prevention. For cure there is needed a National Health Service ensuring adequate treatment of all kinds for everybody without a charge on treatment, as proposed in my Report on Social Insurance and in the Government White Paper. But removal of economic barriers between the patient and treatment is only a minor step, even for cure of disease. The real task lies in the organisation of the health service; the building and equipping of many more and better hospitals and clinics, the recruitment and training of doctors, dentists and all their assistants. And before cure of disease comes prevention. This goes far beyond the development of what is ordinarily known as public health service, important as that is. It means taking steps to make good housing, good food and other necessary conditions of health available for all. . . . In regard to food, war experience has shown the advantage of a nutrition policy based on science. There are many converging reasons—of desire to improve the feeding of our people, of desire to make a prosperous agriculture in Britain, of desire to stabilise the cost of living—for continuing after the war, not the rationing and restrictive side of the Ministry of Food, but the bulk purchasing of supplies and their distribution at controlled prices . . . which, if necessary, may be lowered by a subsidy. The same method can be applied to coal and to other necessaries. . . .

The greatest opportunity open in this country for raising the general standard of living lies in better housing, for it is in their homes and in the surroundings of their homes that the greatest disparities between different sections of the community persist to-day. Better housing means not merely better houses, but housing in the right environment, in the right relation to places of work and recreation and communal activity. That depends in turn upon the location of industry; population goes where industry calls it. And industry depends, among other things, on transport and power. Housing, Town and Country Planning, Transport and Power all hang together in a complex of related problems which should come under the general supervision of a Minister of National Development. . . .

The policy of full employment proposed here is a policy of socialising demand rather than production. It attacks directly the central weakness of the unplanned market economy of the past—failure to generate steady effective demand for its own products. It makes possible the retention of competition in meeting social demand. It makes possible the retention of private enterprise to discover and develop the best technical methods of production, so long as private enterprise appears to be the most efficient agency for that purpose. At the same time, it does not block the way to socialisation of production in general or in any particular industry. It is a policy of doing what must be done under any economic system which aims at full employment, namely the adjustment of total outlay to the datum of man-power.. . . Nationalisation of the means of production in every industry would not be an alternative to the policy of ensuring outlay for full employment; it would only change the conditions under which that policy had to be pursued. Nationalisation of particular industries may be useful as part of this policy to help in stabilising investment, but is even less of an alternative to it; the adjustment of total outlay to total manpower is meaningless, except as a global policy, covering the whole of industry.

The policy proposed here, while suggested by economic analysis, is direct and practical and in accord with the lessons of experience. It is direct and practical, because giving employment to building operatives, coal miners, agriculturists, or any other class of persons depends on directing outlay to their products; ensuring employment up to any given amount depends on guaranteeing a market and price. It is in accord with the lesson of repeated experience of war that full employment is achieved not by socialisation of production, which even in war is still left largely in private hands, but by socialisation of effective demand, determined by a scale of priorities. That, with a different scale of priorities, to suit peace rather than war, with no limitless demand for war material requiring rationing and restrictions elsewhere, with a restoration of all essential citizen liberties, including free spending of personal incomes, is the essence of what is proposed here.

Sir William Beveridge, Full Employment in a Free Society, A Summary (1944), passim.