Friday, December 28, 2012

What did Keynes mean by "socialization of investment"?

In replying to this post on some positive things that Keynes had to say about entrepeneurs in Chapter 12 of the General Theory, Steve Horwitz brings in a line from twelve chapters later on the "socialization of investment" to argue that Keynes's worldview was about giving the "right people" (whoever they are) the power to make investment decisions, and that these would be public functionaries making public policy.

Keynes obviously is more positively disposed toward public policy than Steve is. My initial point was just that he was not talking about policy at all in that passage from Chapter 12, he was talking about something entrepreneurs achieve for the public good (this private motives/public benefits has been a theme for economists running from Smith through Keynes and beyond), while also noting reasons to expect some financial "fragility", to use a phrase from Minsky.

But it's also worth exploring a little more what Keynes means when he talks about "socialization of investment". I discuss that in this old post:

"I thought I'd share some from one of my favorite books of Keynes - The End of Laissez Faire (1926).
"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.

I propose a return, it may be said, towards medieval conceptions of separate autonomies. But, in England at any rate, corporations are a mode of government which has never ceased to be important and is sympathetic to our institutions. It is easy to give examples, from what already exists, of separate autonomies which have attained or are approaching the mode I designate - the universities, the Bank of England, the Port of London Authority, even perhaps the railway companies. In Germany there are doubtless analogous instances.

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. its 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 the 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. The extreme instance, perhaps, of this tendency in the case of an institution, theoretically the unrestricted property of private persons, is the Bank of England. It is almost true to say that there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend, have already sunk to the neighbourhood of zero. But the same thing is partly true of many other big institutions. 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 reorganisation of the economic life of Great Britain, as the nationalisation of the railways."
I love that last sentence especially, and it's one of those cases where you wish Keynes had lived longer than he did. He simply had no use for the wave of nationalizations that washed over Britain in the mid-20th century - the nationalizations that disturbed Hayek so much. I wish more of this had made its way into the General Theory. The need for the socialization is clear in both. The doubts about central planning and the state are there in both. But people still think of state socialism when they read those passages of the General Theory because we've been hard-wired to associate "socialization" with "socialism". How depressing is that? Keynes can't talk about any sort of social action without people thinking of socialism - even when he denigrates state socialism in the very same passage. Anyway - in addition to denigrating state socialism I wish he talked more about joint stock companies in the General Theory as well. It would have helped to clear a lot of things up. Keynes also regularly notes that different solutions are appropriate to different societies - I imagine he would say that lot of the public corporations he personally found appropriate for Britain in the 1930s might not be appropriate for America or even for Britain in the 2010's. The point is clear on the socialization of investment, though - he is least enthusiastic about state ownership, most enthusiastic about complete private ownership by joint-stock companies, and willing to contemplate public corporations. Needless to say, that's not socialism and I personally think it's a stretch to call it corporatism (but perhaps that could apply).

I'll end with a passage a little further down that has some externality thinking to it:
"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."


  1. Skidelsky on what Keynes meant by ‘socialisation of investment’:

    "By ‘socialisation of investment’ Keynes did not mean nationalisation. Socialisation of investment need not exclude ‘all manner of compromise and devices by which public authority will co-operate with private initiative’ (Keynes, 1973A, p. 378). This single throw-away line in the General Theory reflects Keynes's thinking on ‘public-private partnerships’, which came out of his involvement in Liberal politics in the 1920s (Skidelsky, 1992, chs 7 and 8). In essence, he sought to expand the public-utility component of investment to give greater stability to the investment function. Today, he would have seen the big institutional investors like pension funds as a major support for stability. A guaranteed stream of investment would reduce fluctuations to modest dimensions, which could be readily controlled, if so wished, by speeding up or slowing down elements in the investment programme. Such investment would not necessarily be profit-maximising. But provided it yielded positive returns, there would be a gain. If markets had perfect information, public investment would be inefficient. But with uncertainty, there is a gain as against having no state investment at all, because of the losses due to uncertainty."

    1. As I read this, Keynes would have been supportive of the approach that the French government takes. It holds an important but minority portion of shares in all of France's natural monopolies -- Air France, the railroads, the energy company, &c. This has the function of ensuring the safety of the balance of shares in these companies, adding stability. It also ensures that unions have an influence on government. While it's common for people to bash "French socialism", I see no reason to be so dismissive.

  2. Also, it is worth looking at what Keynes himself said in the GT:

    "In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society."

    GT (1936), Book VI, Chapter 24

  3. daniel what reading (books, papers) would you recommend on the theory of value? (that is, where does value come from? where SHOULD it come from? what are its implications?)


    1. JCE,

      (I am, of course, not Daniel, so I apologize for the intrusion)
      That's the topic that thinkers tried to tackle since at least Aristotle. Needless to say, there is no consensus still. I found Roncaglia's work on the history of economical thought, "The Wealth of Ideas. History of Economic Thought" to be most illuminating on the quest for finding the meaning of value and the conflicting schools of economic thought that tried to answer the questions from your comment.

    2. I don't really know what to say, honestly. And that's really because everyone these days is on board with the subjective-value-with-decisions-made-at-the-margin approach. When I think of who has a different view my mind goes back to Aristotle, like Roman P. says. A lot of his writing on it is in Politics, if I recall. Any history of thought book that includes stuff that far back should have it.

      Thinking more broadly, Skidelsky has a new book out musing on "the good life", that in a sense goes back to Aristotle. But as far as value theory I'd just pick up a micro text.

      The recent Nobel laureate - Al Roth - discusses repugnant markets which I'd say offer an interesting twist on things that some people find value in, but not others:

      Stigler and Becker's De Gustibus is a novel take on values, I suppose:

    3. Well, some heterodox thinkers still continue to examine different approaches to the value, like the Labour Theory of Value (which goes back to at least Adam Smith). Subjective value is the founding block of the neoclassical theory though, which means, as Daniel noted, these heterodox economists are a scattered minority now.
      I do not think that the whole argument matters in the slightest. Value is just what you define it to be. The problem of the very concept 'value' is that it is almost metaphysical in its nature. "What are prices? How are they formed?" That you could easily (or not so) answer; but if you ask how a value of a good is formed, we leave the stable empirical reality and start to wander in the darkness. It embodies labour (Marx)? Is based on some future productive capability? On subjective valuation (marginalists)? On the social convention (Veblen)? Who knows, really.

    4. "everyone these days is on board with the subjective-value-with-decisions-made-at-the-margin approach."

      If you ask some of those Kaleckians in your department about this, I suspect you'll find that your usage of "everyone" relegates them to the status of non-people (or non-economists). And they're not alone, but dissenters are marginalized.

    5. Well, they'd wonder about the second clause. But then I'd make a very convincing argument that mark-ups are a profit-maximizing heuristic.

  4. can you do some other "block quote" display besides 'blue text' it's hard to read.

    1. I'll give it a shot. Formatting that used to be a real pain on blogger, but a lot has improved over time with blogger so perhaps the block quotes won't cause as much trouble.

    2. Now that's service. Thank you sir.


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