Very well argued piece. It is clear that Keynes shied away from considering income distribution as a possible remedy for the lack of sufficient aggregate demand. But he was aware of it as indicated in the great passage from his The Economic Consequences of The Piece (quoted by Branko here). In my article (Capitalism, Socialism, and Growth - A Post-Keynesian Perspective, Politics, Culture, and Society, Vol. 2, no. 4, 1989), I suggested that replacing Keynes' words "capitalist classes" (in the extended passage above), with the words "socialist elite" would render a very good explanation of the law of "primitive socialist accumulation" (Preobrazhensky's term) and a pretty accurate description of the early Soviet Union realities. In both cases, "... this remarkable system depended for its growth on a double bluff or deception... of laboring classes... accepting a situation in which they could call their own very little of the cake that they and Nature and capitalist classes were cooperating to produce" (Keynes' words).
Fascinating and insightful. It's interesting to me how much of economics is based on psychological assumptions of how people will react to certain situations, and is itself part of the framework of maintaining and legitimating social compacts like the one Keynes described.
In the real world, keynesian economics did a lot to even out wealth distribution. More public investment led to more employment, led to higher wages. Which I suppose is the most cost-efficient way to reduce inequality, .
Or which are the other ways? One very efficient would be to expropriate the capitalists and give the enterprises to their employees – but that would lead to an unholy row and would probably be impossible without an extreme crisis "where the upper class realises that it cannot rule". And there wasn't. So poor Maynard had no choice.
How can you not be aware of Keynes's belief in the superiority of an elite, well educated, civil servant class like the one he belonged to? this fact alone explains quite well his disinterest in income distribution (common people are dumb) and his enthusiasm about government spending and investment (which would be handled by enlightened people like himself).
Keynes was a bourgeois elitist trying to save capitalism with all its injustice and inequalities between classes to preseve bourgeois priviliges. Given that fact discussing his stance on inequalities is quite a moot point. His entire theory is empirically rendered meaningless and disastrous - considering how basically limitless government spending has turned out - Neo-Keynesianism leading to financialization, asset inflation, bubbles and crisis ridden western societies. His much touted recipe of increased government spending to boost the economy never led to a widespread increase in wealth distribution among the population but just higher income inequalities. It is the bourgeois ploy of trickle-down-economics
This is just wrong, as Brad DeLong promptly points out; see below.
I have read on into Keynes Ch. 24, where he makes his quite well-known argument for the ."euthanasia of the rentier," i.e. driving down the capitalist who makes a large return from passive investing. Keynes concomitantly argues for UK inheritance taxation to be so high as to end the accumulation of family dynastic wealth. He is thoroughly against a gross inequality in income and wealth distribution. He does think that it can be decreased substantially without a sharp revolutionary moment; instead a proper management of public investment, and interest rates, will inevitably bring it about. (Such a proper governance regime in the liberal west has never been consistently achieved, but that isn't because Keynes is silent about it, nor because he didn't advocate for it.)
[DeLong] Economics: This from the extremely sharp Branko is just wrong:
Branko Milanovic: Why not Keynes?: ‘Keynes’ uneasy relationship with income distribution: I was asked several times, and most recently only a couple days ago, why in Visions of Inequality I do not discuss Keynes. He doesn't have a chapter like the other six authors and when I mention Keynes it is only in passing and simply in relationship to the marginal propensity to consume. My answer is twofold. First, I think that Keynes was not interested in income distribution. And, more importantly, at one point where he clearly could have, or even should have, brought income distribution into discussion he declined to do so and decided to ignore it… <branko2f7.substack.com/p/why-not-keynes>
Cf.: The very beginning of Chapter 24 of Keynes’s General Theory:
John Maynard Keynes (1936: The General Theory of Employment, Interest & Money: Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead: ‘THE outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious. But there are also two important respects in which it is relevant to the second
It is just *not* wrong. As I already mentioned, it is impossible to explain cogently what K's view of income distribution was. To give you an example. Smith thought real wage and land rents will go up with development, profit (& interest) down. It is explained why. Distributional issues are discussed in pages & pages. Idem obviously for Pareto, Kuznets etc.; for everyone in my book. For Keynes, one is desperately reduced to a few obiter dicra in the last chapters of the GT or very general, rather commonsensical observations elsewhere. There is NO clear analytic or even empirical discussion of income distribution, be it functional or personal. Why? Was Keynes unable to do it? No, it just was not within his sphere of interest plus, as I mentioned, there were other reasons (not to be confused with underconsumptionists)
What I argue is that it is impossible to write a twenty-page reasonable essay on K's view on income distribution under capitalism: what affects it, and how it may change. This is why he is not in my book. It is not sufficient to say "euthanasia of the rentier" etc. To write an essay (and to argue he had a thought-out view), you need much more than broken sentences here & there.
Perhaps; had he been specifically asked, he would have said more. But he did not do it in his writings. (Also, this does not apply to the Keynesian, eg Kaldor) who later used different MPCs with factoral income distribution. But these were extensions of Keynes, not Keynes himself.
It may have been due to him being wealthy. Or even more likely he didn't want to talk distribution because it sounded too left-wing or socialist/communist. What do you think about his debates with Trotsky? I believe they were by letter but curious on your thoughts on this...
Yes. Thank you! Keynes ignored the obvious stimulus effects of more broadly distributed income and wealth. And the whole economics discipline continues to ignore the latter. (A long-standing and ubiquitous "that's just distribution" bias.)
There have been efforts to find correlations between inequality and ensuing economic activity,* but efforts to model the economic *mechanisms* of wealth concentration->spending are almost non-existent, and just deeply inadequate in multiple ways where they do exist (HANK).
But the much deeper problem with Keynes:
Wikipedia: "effective demand (ED) in a market is the demand for a product or service … when purchasers are constrained in a different market. ... In the aggregated market …[effective] demand … is … aggregate demand."
Problem: in the latter case there is no other, "different market."
One unit's spending is another unit's income. (This ignoring for the moment new asset creation from government deficit spending, bank lending, and holding gains.) The aggregate propensity to spend (save) is always one (zero).
Would it be fair to speculate that the resilience of US consumption over the past year or so may be in part due to the fact that highest relative wage gains have been concentrated in the bottom / middle of the income distribution (i.e. a relative income shift towards those with higher marginal propensity to consume)?
Looking at the issue that Keynes was focusing on from a standard economics viewpoint, if the problem is ‘secular stagnation’, then public spending financed by public debt seems a more appropriate solution that redistribution policies. Under secular stagnation there would be no fiscal cost of debt (because of r < g) and the crowding out of private investment is likely to be low as well (as the economy is persistently below potential). Therefore public debt is a ‘free lunch’, while taxation will always have costs.
This could be the basis of an additional chapter in "Visions." Much of US economic policy and econ education is still premised on Keynesian thinking. Including analysis of consumption at differing income levels in forecasting the impact of Covid stimulus dollars might have helped Congress and the White House better target the money to stimulate demand with less inflationary effects.
I am confused. Keynes you believe was not interested in income distribution. Your argument is to some degree persuasive. However, as evidence you cite Keynes lists of a number forces that influence "propensity to consume" of which "change in wage units (i.e., change in real income)" is one. Is not a change in real wages, other things being equal, not also a change in income distribution, even if only implicitly? Or have I misunderstood?
Yes, that's the only one that comes close. But, as you can see from the ambiguity of wording, it is not very close, nor is anyone done with it in the rest of the book.
A probably more sound reading of the issue of ‘Income distribution’ would rather be the aspect of the share of profits and wages on an aggregate level. So if - with rising productivity - the growth of the share of labor were bigger than that of profits, a redistribution from the capitalist class to labor would take place, which of course says nothing about changes in distribution of wealth within labor
Odd that Keynes was reluctant to address this issue. He would have been aware of the work of J.A. Hobson, who explicitly addressed the issue of inequality, linking it clearly to under-consumption. Very surprising that Keynes never referenced this.
Likewise that "that's just distribution" thinking held such ubiquitous sway in the economics discipline for so long (and even to this day). A jaundiced eye might suggest that economists' positions in the income/wealth distribution provide some explanation.
He wanted to escape from Hobson as much as possible b/c he did not want (this is very clear) to be associated with the"underworld of economics". This is what I meant by his "political" considerations. He knew that if he goes the Hobson way, he would not be academically respectable.
You have always been worth reading and you still are. Thank you for the above.
Very well argued piece. It is clear that Keynes shied away from considering income distribution as a possible remedy for the lack of sufficient aggregate demand. But he was aware of it as indicated in the great passage from his The Economic Consequences of The Piece (quoted by Branko here). In my article (Capitalism, Socialism, and Growth - A Post-Keynesian Perspective, Politics, Culture, and Society, Vol. 2, no. 4, 1989), I suggested that replacing Keynes' words "capitalist classes" (in the extended passage above), with the words "socialist elite" would render a very good explanation of the law of "primitive socialist accumulation" (Preobrazhensky's term) and a pretty accurate description of the early Soviet Union realities. In both cases, "... this remarkable system depended for its growth on a double bluff or deception... of laboring classes... accepting a situation in which they could call their own very little of the cake that they and Nature and capitalist classes were cooperating to produce" (Keynes' words).
Thank you. I agree.
Thank you very much. Pierluigi, It
Fascinating and insightful. It's interesting to me how much of economics is based on psychological assumptions of how people will react to certain situations, and is itself part of the framework of maintaining and legitimating social compacts like the one Keynes described.
Fascinating. What's equally fascinating is that propensity to consume is not cited more today as a reason to reduce inequality.
In the real world, keynesian economics did a lot to even out wealth distribution. More public investment led to more employment, led to higher wages. Which I suppose is the most cost-efficient way to reduce inequality, .
Or which are the other ways? One very efficient would be to expropriate the capitalists and give the enterprises to their employees – but that would lead to an unholy row and would probably be impossible without an extreme crisis "where the upper class realises that it cannot rule". And there wasn't. So poor Maynard had no choice.
How can you not be aware of Keynes's belief in the superiority of an elite, well educated, civil servant class like the one he belonged to? this fact alone explains quite well his disinterest in income distribution (common people are dumb) and his enthusiasm about government spending and investment (which would be handled by enlightened people like himself).
Overall, a terrible post.
Keynes was a bourgeois elitist trying to save capitalism with all its injustice and inequalities between classes to preseve bourgeois priviliges. Given that fact discussing his stance on inequalities is quite a moot point. His entire theory is empirically rendered meaningless and disastrous - considering how basically limitless government spending has turned out - Neo-Keynesianism leading to financialization, asset inflation, bubbles and crisis ridden western societies. His much touted recipe of increased government spending to boost the economy never led to a widespread increase in wealth distribution among the population but just higher income inequalities. It is the bourgeois ploy of trickle-down-economics
This is just wrong, as Brad DeLong promptly points out; see below.
I have read on into Keynes Ch. 24, where he makes his quite well-known argument for the ."euthanasia of the rentier," i.e. driving down the capitalist who makes a large return from passive investing. Keynes concomitantly argues for UK inheritance taxation to be so high as to end the accumulation of family dynastic wealth. He is thoroughly against a gross inequality in income and wealth distribution. He does think that it can be decreased substantially without a sharp revolutionary moment; instead a proper management of public investment, and interest rates, will inevitably bring it about. (Such a proper governance regime in the liberal west has never been consistently achieved, but that isn't because Keynes is silent about it, nor because he didn't advocate for it.)
[DeLong] Economics: This from the extremely sharp Branko is just wrong:
Branko Milanovic: Why not Keynes?: ‘Keynes’ uneasy relationship with income distribution: I was asked several times, and most recently only a couple days ago, why in Visions of Inequality I do not discuss Keynes. He doesn't have a chapter like the other six authors and when I mention Keynes it is only in passing and simply in relationship to the marginal propensity to consume. My answer is twofold. First, I think that Keynes was not interested in income distribution. And, more importantly, at one point where he clearly could have, or even should have, brought income distribution into discussion he declined to do so and decided to ignore it… <branko2f7.substack.com/p/why-not-keynes>
Cf.: The very beginning of Chapter 24 of Keynes’s General Theory:
John Maynard Keynes (1936: The General Theory of Employment, Interest & Money: Chapter 24. Concluding Notes on the Social Philosophy towards which the General Theory might Lead: ‘THE outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious. But there are also two important respects in which it is relevant to the second
It is just *not* wrong. As I already mentioned, it is impossible to explain cogently what K's view of income distribution was. To give you an example. Smith thought real wage and land rents will go up with development, profit (& interest) down. It is explained why. Distributional issues are discussed in pages & pages. Idem obviously for Pareto, Kuznets etc.; for everyone in my book. For Keynes, one is desperately reduced to a few obiter dicra in the last chapters of the GT or very general, rather commonsensical observations elsewhere. There is NO clear analytic or even empirical discussion of income distribution, be it functional or personal. Why? Was Keynes unable to do it? No, it just was not within his sphere of interest plus, as I mentioned, there were other reasons (not to be confused with underconsumptionists)
What I argue is that it is impossible to write a twenty-page reasonable essay on K's view on income distribution under capitalism: what affects it, and how it may change. This is why he is not in my book. It is not sufficient to say "euthanasia of the rentier" etc. To write an essay (and to argue he had a thought-out view), you need much more than broken sentences here & there.
Thanks for responding. I understand your points, and thus why he is not included in your new book.
I do think, though, that Keynes's views on income distribution amount to more than "broken sentences here & there."
Perhaps; had he been specifically asked, he would have said more. But he did not do it in his writings. (Also, this does not apply to the Keynesian, eg Kaldor) who later used different MPCs with factoral income distribution. But these were extensions of Keynes, not Keynes himself.
It may have been due to him being wealthy. Or even more likely he didn't want to talk distribution because it sounded too left-wing or socialist/communist. What do you think about his debates with Trotsky? I believe they were by letter but curious on your thoughts on this...
Yes. Thank you! Keynes ignored the obvious stimulus effects of more broadly distributed income and wealth. And the whole economics discipline continues to ignore the latter. (A long-standing and ubiquitous "that's just distribution" bias.)
There have been efforts to find correlations between inequality and ensuing economic activity,* but efforts to model the economic *mechanisms* of wealth concentration->spending are almost non-existent, and just deeply inadequate in multiple ways where they do exist (HANK).
But the much deeper problem with Keynes:
Wikipedia: "effective demand (ED) in a market is the demand for a product or service … when purchasers are constrained in a different market. ... In the aggregated market …[effective] demand … is … aggregate demand."
Problem: in the latter case there is no other, "different market."
One unit's spending is another unit's income. (This ignoring for the moment new asset creation from government deficit spending, bank lending, and holding gains.) The aggregate propensity to spend (save) is always one (zero).
Propensity to spend out of wealth/assets, OTOH, makes all kinds of sense. https://wealtheconomics.substack.com/p/how-redistribution-makes-us-all-richer
* Impressive new effort here: https://twitter.com/asymptosis/status/1781318112958447631
Would it be fair to speculate that the resilience of US consumption over the past year or so may be in part due to the fact that highest relative wage gains have been concentrated in the bottom / middle of the income distribution (i.e. a relative income shift towards those with higher marginal propensity to consume)?
Looking at the issue that Keynes was focusing on from a standard economics viewpoint, if the problem is ‘secular stagnation’, then public spending financed by public debt seems a more appropriate solution that redistribution policies. Under secular stagnation there would be no fiscal cost of debt (because of r < g) and the crowding out of private investment is likely to be low as well (as the economy is persistently below potential). Therefore public debt is a ‘free lunch’, while taxation will always have costs.
This could be the basis of an additional chapter in "Visions." Much of US economic policy and econ education is still premised on Keynesian thinking. Including analysis of consumption at differing income levels in forecasting the impact of Covid stimulus dollars might have helped Congress and the White House better target the money to stimulate demand with less inflationary effects.
I am confused. Keynes you believe was not interested in income distribution. Your argument is to some degree persuasive. However, as evidence you cite Keynes lists of a number forces that influence "propensity to consume" of which "change in wage units (i.e., change in real income)" is one. Is not a change in real wages, other things being equal, not also a change in income distribution, even if only implicitly? Or have I misunderstood?
Yes, that's the only one that comes close. But, as you can see from the ambiguity of wording, it is not very close, nor is anyone done with it in the rest of the book.
A probably more sound reading of the issue of ‘Income distribution’ would rather be the aspect of the share of profits and wages on an aggregate level. So if - with rising productivity - the growth of the share of labor were bigger than that of profits, a redistribution from the capitalist class to labor would take place, which of course says nothing about changes in distribution of wealth within labor
On the earned/unearned income split, you might find this interesting (especially 2019 and ensuing. !!!). https://tinyurl.com/39e58c9p
Odd that Keynes was reluctant to address this issue. He would have been aware of the work of J.A. Hobson, who explicitly addressed the issue of inequality, linking it clearly to under-consumption. Very surprising that Keynes never referenced this.
Likewise that "that's just distribution" thinking held such ubiquitous sway in the economics discipline for so long (and even to this day). A jaundiced eye might suggest that economists' positions in the income/wealth distribution provide some explanation.
He wanted to escape from Hobson as much as possible b/c he did not want (this is very clear) to be associated with the"underworld of economics". This is what I meant by his "political" considerations. He knew that if he goes the Hobson way, he would not be academically respectable.