John Maynard Keynes and his leading North American disciple John Kenneth Galbraith insisted that traditional free market capitalism and laissez faire economic thought of the 19th Century variety were no longer valid to the problems of modern industrial society. As Keynes wrote in his classic book The General Theory of Employment, Interest and Money (1936), laissez faire was inadequate to deal with the mass poverty and unemployment of the Great Depression. As he explained to Franklin Roosevelt, during a depression, the government had to direct the economy, using deficit spending to maintain full employment and consumption levels: it had to make the necessary investments that the private sector was no longer willing or able to make. In The Affluent Society (1958) he noted that Keynesian social democratic and welfare state policies had greatly reduced poverty and inequality in the U.S. And other Western countries, and was confident that governments would be able to eliminate it completely by the proper amount of investment in the public sector. Both economists would have been surprised at the revival of laissez faire capitalism under Margaret Thatcher and Ronald Reagan in the 1980s, along with their idea that government was the enemy and that capitalism should be left unregulated. They would have been even more amazed at the persistence of such ideas even in 2008-10 during the worst economic crash and depression since the 1930s.
Writing during the Great Depression of the 1930s, John Maynard Keynes was well aware of the boom and bust cycle of capitalism and envisaged a much-expanded role for the state in evening out these cycles. Capitalism had collapsed into severe depressions before, but never to the same degree as the 1929 Wall Street crash, and in this sense the period in which he was writing The General Theory was similar to the present day crisis. In the present day, as in 1936, "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" (Keynes 341). Above all other modern economists, Keynes would have recognized how history had repeated itself over the last thirty years and the chronic instability of capitalism had returned. His solution for this problem was to increase deficit spending to stimulate consumption and investment, and to maintain full employment during depressions. He also favored using the tax system and social welfare spending to redistribute wealth and incomes. Maintaining consumption and full employment would also increase the growth in capital rather than limit it as the classical laissez faire economists believed.
In the social democratic state advocated by gains, government would gradually assume the role of private capital. Keynes called for the "euthanasia of the rentier" class, regarding them as representatives of a type of primitive capitalism whose time was passed (Keynes 345). Although this theory turned out to be premature, Keynes called for a partial socialization of investment in which the state would take over the role of private investors -- a type of state capitalism. He was not prepared to go as far as complete state socialism with the government managing most of the economy directly, even though production, services and investment would have to be socialized to some degree. Keynes argued that individualism was still necessary in order to "safeguard personal liberty," but obviously liberty would be more constrained than under 19th Century-style free market capitalism (Keynes 348).
John Kenneth Galbraith was a Keynesian economist who had seen many of Keynes ideas fulfilled in the years after the Second World War, and he described this exceptional period of history in his book The Affluent Society. Such a society had never existed before in history, in which the majority of people had risen above subsistence level and the middle class was far larger than ever before. Poverty was the norm in history for almost everyone who had ever lived and it was still the norm for most people in the world at the time Galbraith wrote his book in 1958, apart from Western Europe and North America. For the majority of people in the world today, brutal poverty and a struggle for even the most basic necessities of life are still commonplace. So Galbraith was fully aware how unusual affluence was, but nevertheless wrote that in the case of the U.S. And a few other fortunate nations that their economic thought had to "escape from the obsolete and contrived preoccupations associated with the assumption of poverty" (Galbraith 3). When he revised his book in the 1990s, of course, Galbraith understood that far from eliminating poverty "the poor remain and command of income by those in the top brackets is increasing egregiously" (Galbraith viii). In the Affluent Society, however, Galbraith had thought that the return of poverty and inequality was not the greatest danger facing society but rather the inflationary wage-price spiral. In recent decades, the U.S. has moved away from Fordist mass production and manufacturing industries, while the unions associated with these industries have gone into decline, thus the economy was able to maintain low inflation and high employment, at least until the 2008-09 crash. At that point, of course, the main concern became the potential for deflation, which had not happened since the 1930s.
Galbraith had been aware of the problems with the free market capitalism of the 1980s and 1990s and the weakening of the welfare state, although he probably would have been shocked that mass poverty and scarcity on a scale not seen since the Great Depression had again become a real possibility in the Western world. In the 1950s, he expected private affluence to continue for the majority of people, and that the main problem with absolute poverty would remain confined to certain islands within affluence, such as blacks and other minorities in the South and inner cities or on Indian reservations. His book was critical of the Eisenhower administration for not following expansionary Keynesian policies, and that the U.S. had affluence in the private sector combined with public sector squalor. As he put it, "we had expensive radio and television and poor schools, clean houses and filthy streets, weak public services with deep concern for what the government spent" (Galbraith x). For a brief period in the 1960s the U.S. government did attempt to deal with the extreme poverty among minority groups, but then when the whole economy began to stagnate and decline in the 1970s and 1980s, these efforts were largely ended and even reversed.
From the 1970s to the early-2000s, free market and laissez fair capitalism revived as did increased inequality of wealth and incomes, although as in the past there were many warning signs of instability like the 1986 Wall Street crash and the Asian meltdown of 1997-98 before the major crash of 2008-09. In short, this state of affairs bore no resemblance to Galbraith's Affluent Society of 1945-70, in which problems of poverty, inequality and unemployment had been resolved. For from it, this period was another Gilded Age and had most in common with the older version of capitalism and its boom and bust cycles. Neither Galbraith nor Keynes would have approved of this free market revival, which was only possible when generations that no longer had personal memory of the Great Depression began to take power, such as the Baby Boomers and Generation X in the United States. As late as 1964, Barry Goldwater, the Republican presidential candidate who advocated a return to laissez faire economics, was defeated in a landslide. This was still the era of Keynesianism, social democracy and the Great Society. Only with the stagflation of the 1970s, caused in part by the oil shocks of 1973-74 and 1979-80 was the election of the free marketer Ronald Reagan possible. His policies, which…