The Economic Role in Looking Backward
The economic role for government offered by Keynes and the other New Economists was an up-dated version of the rational socialists described in the book Looking Backward by Edward Bellamy. In the book, which is set in America in the year 2000, "Rational Socialism" had been achieved in the past as a result of the natural evolution of capitalism. Publicly held and traded corporations had become larger and larger over time, growing monopolistic. However, instead of moving to break up these monopolies, the immense size of these corporations was seen as beneficial. They were run by professional managers and had become rather benign.
Due to their size and the centralization they offered, they were both more efficient and more productive. Even the fact that they were monopolies was seen as an advantage; instead of wasting energy trying to drive competition out of business they were able to focus their full attention on the goal of production.
Believing that centralization, professional management and the absence of competition aided the economy in its primary function, the production of goods to meet people's needs, the people in the book had realized they should take over management of these monopolies.
With the government managing business any remaining competitiveness had been eliminated. Each part of the economy worked in perfect integration with the other parts, each producing to its fullest, allowing the government managed economy to greatly increase productivity and satisfy the population's every want and need.
The ideals which are essential in Looking Backward, that competition was damaging to the economy and business, largeness was beneficial and that socialism would be achieved gradually became the beliefs of nationalism and the liberal Progressivism which eventually absorbed it. When FDR turned to the academicians in the thirties the advice they gave him was based upon these ideas. They counseled FDR not to break up monopolized business, but rather to take control of the economy to further limit competition and insure the integration of the different elements of the economy.
Keynes also felt that the government needed to limit competition and to insure the integration of the different elements of the economy. However, his proposals on how they could be accomplished were much more sophisticated than those of the academicians who first aided FDR. He did not feel that the government needed to exert direct control over the economy as they had suggested; instead he believed that government could achieve the same end by controlling demand.
Like the other New Economists, Keynes believed that because of the oversaving/underinvestment theory supply and demand would rarely tend to match up, and so the economy would be unstable and would tend not to reach equilibrium at full employment. However the government could protect against instability and maintain full employment using government deficit spending and by encouraging private spending through manipulation of the tax codes. The tax codes could be further used to insure stability by encouraging businesses to grow larger and by decreasing competition.
Deficit spending would serve as the catalyst for gradually increasing the governments control of the economy. To maintain full employment the government would be required to run a deficit every year. Eventually this money has to be repaid which forces an increase in government revenues. Keynes believed that a point would be reached at which the government controlled the bulk of the demand, being responsible for most of the money spent in the economy. At that point the government would have achieved the same degree of control possible through national regimentation. Because government controls what is bought, it also controls what is produced and is able to effectively end competition and insure the interaction of the various elements of the economy. The oversaving/underinvestment theory would no longer apply because government would insure that a sufficient amount of money is in circulation, bringing an end to swings of the business cycle and maintaining equilibrium at full employment.
When the employment bill was presented to the Congress it was not presented as a means of moving to a planned economy; although there were a number of liberal progressive Congressmen the majority still rejected any form of socialism. In order to insure acceptance, the bill was described by supporters as a tool to allow government to help maintain the current free enterprise system; the government would also decrease spending as a tool of control. However despite the assurances to the contrary, what government had passed was the heart of the "Rational Socialism" utopia. Government would use its power to control the economy and to insure everyone a job. By doing so it would protect people from the economic uncertainty which was the cause of so much strife and upheaval and would take a large step in the direction of universal satisfaction.
Assumptions of what would bring economic health were thereby completely reversed. Until the 1920's we had assumed that fiscal responsibility was the key; a government deficit was both irresponsible and damaging to the economy. With the passing of the Employment act it was the position of the U.S. government that a budget deficit was a necessary part of a healthy economy; fiscal irresponsibility was now good for us. Further, the Employment act had created a new expectation of government. When we were faced with economic difficulties the government would respond using fiscal policy. Government spending and manipulation of the tax codes were now a conscious tool in the government's efforts to regulate the economy.