WHALEN - John R. Commons and John Maynard Keynes On Economic History and Policy

John R.
Commons and John Maynard Keynes on Economic History and Policy: The 1920s and
Today
Author(s): Charles J. Whalen
Source: Journal of Economic Issues, Vol. 42, No. 1 (Mar., 2008), pp. 225-242
Published by: Association for Evolutionary Economics
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JOURNAL OF ECONOMICISSUES
IPJ Vol. XLII No. 1 March 2008
Jul
JohnR. Commons and JohnMaynard Keynes on

Economic History and Policy: The 1920s and Today
Chariest. Whalen
ABSTRACT: In a pair of 1925 lectures, John Maynard Keynes described world

economic history with reference to a classification of stages developed by John R.
Commons. This article examines Keynes's two 1925 lectures in the context of
Commons's writings. It spotlights lesser-known aspects of Commons's
scholarship and helps clarify ambiguities in Keynes's two addresses. It also

identifies a key document, written by Commons, upon which Keynes relied
when developing his presentations. In addition, the article explains how the
work of Commons and Keynes in the 1920s has relevance for the contemporary
development of evolutionary Keynesianism (which can also be called Post
Keynesian Institutionalism).
Keywords: John R. Commons, John Maynard Keynes, evolutionary

Keynesianism, Post-Keynesian Institutionalism, reasonable value
JELClassification Codes: B31, B52, N10, Pll
InAugust 1925, JohnMaynard Keynes addressed the Liberal Party's Summer School.
?
His presentation divided the pressing questions of the day into five categories peace,
?
government, sex, drugs, and economics and each was discussed in turn. When
Keynes reached the last category, containing the questions "on which I am most
qualified to speak," he probably surprised those assembled by structuring the

commentary around an analysis he attributed to John R. Commons (Keynes 1972,
303-306).1
Keynes presented a lecture the followingmonth inMoscow on "The Economic
Transition in England," and again the core of the talk came from Commons's analysis
(Keynes 1981, 438442). What did Commons offer that Keynes found of vital
importance to the major economic questions of the day? How can a with
familiarity
The author is a Professorof Economics and Director of theDepartment of Business and Economics at Utica College.
He is also a Visiting Fellow at theSchool of Industrial and Labor Relations, Cornell University, and Editor of Perspec
tivesonWork, published trytheLabor and EmploymentRelations Association.
225
?2008, Journal ofEconomic Issues
226Charles J.Whalen
Commons's writings help inform readers of Keynes's two lectures?And, how did
Keynes learn of Commons's analysis? Exploring the firstquestion spotlights lesser
known aspects of Commons's scholarship and has relevance for the contemporary
development of "evolutionary Keynesianism;" addressing the second clarifies
ambiguities in Keynes's lectures; and an answer to the third resolves an

providing
intriguingpuzzle in the history of economic thought.
Scarcity, Abundance and Stabilization
Keynes's August 1925 address ? entitled "Am I a Liberal?" ? identifiedCommons as

"an eminent American economist" and among the first to recognize "we are now
in the days of a worldwide transition in economic eras. In particular,

living" early
Keynes reported thatCommons divides economic history into three epochs (Keynes
1972, 303-306).
The era of scarcityextended from the earliest days of human civilization until
about the late eighteenth century. Its phases included tribal communalism, feudalism,
and mercantilism. The was characterized of the material means of
period by shortages
? or to violence, or ?
life "whether due to inefficiency war, custom, superstition" and
minimal individual liberty(Keynes 1972, 304).

The era of abundance followed and lasted until the late nineteenth century. Its
abundance was the product of the industrial revolution and the emergence of factory
The was also characterized by the rise of individualism and laissez

production. period
faire.
The era of stabilization, the latest epoch, because individual was

emerged liberty
now constrained collective action, initiated either the public or private
through by
sectors. Such constraints as a way to control economic booms and busts at
emerged
the national level and to address labor-management disputes and other conflicts at the
and levels. Stabilization took various forms across the globe,

enterprise industry
including Italian fascism and Russian communism; in theUnited States and England,
it appeared via business combinations, industry-wide collective bargaining, and
government regulation.
The shift to an era of stabilization in the Anglo-American world was far from a
settled matter, stressed. "The transition from economic anarchy to a regime

Keynes
which deliberately aims at controlling and directing economic forces in the interests
of social justice and social stability,will present enormous difficulties both technical
and he warned. such was Keynes's preoccupation,
political," Addressing challenges
and he told his audience that this should also be the aim of the Liberal Party: "We
have to inventnew wisdom for a new age" (Keynes 1972, 305-306).
Saving Capitalism by Making It Good
In John R. Commons's he writes that his was to "save

autobiography, goal capitalism
by making it good" (Commons 1934a, 143); a similar sentiment runs through

Keynes's "Am I a Liberal?" and "The Economic Transition in England." While
Maynard Keynes on EconomicHistoryand Policy
]ohn R. Commons and John 227
?
Keynes's two essays ? which are devoid of endnotes and bibliographical references
are critical of "individualistic capitalism," they also contain his belief that socialism
offers no constructive alternative to reformed capitalism. The problem with socialism,
however, is never In both essays, Keynes writes only that socialism "is
explained.
from the presuppositions of the era of Abundance, just as much as laissez-faire
sprung
individualism and the freeplay of economic forces" (Keynes 1972, 304; 1981, 439).
statement some
Keynes's brief about socialism acquires clarity when considered
in conjunction with an article by Commons that appeared inThe AtlanticMonthly late

in 1925 under the title "Marx Today: Capitalism and Socialism." In the article,
Commons maintains that followers ofAdam Smith and Karl Marx were united by an
interest in liberating individuals, a faith in the productive power of industrial
machinery, and the belief that all economic instability and conflict could be
permanently eradicated with the right social system?a capitalism of perfectly free
competition in the case of the former and an untainted socialism in the case of the
latter (Commons 1925a, 690-693). It seems a good bet that the common ground
Commons attributes to economic orthodoxy and Marx represents what Keynes had in
mind with the phrase "the presuppositions of the era of Abundance." Commons's
article fills the gaps in Keynes's argument, while the latter's lectures make it clear that
was familiar with at least some of what Commons was writing on the subject.
Keynes
Commons's article also helps explain what Keynes would find troubling about
the presuppositions underlying socialism. The solution to human conflict in Smith
and Marx is what Commons calls achievement of an "automatic of
harmony
interests." It is a notion Commons rejects: "This entire idealism of harmony of
interests, whether under capitalism or under socialism, falls to the ground ifwe once
recognize that social conflict has always been and always will be a fundamental fact in
the progress ofmankind" (Commons 1925a, 692)

Commons adds: "There has not been and never will be an automatic harmony
of interests." There always will be new wants, a scarcity
of premium-quality resources,
and differences of opinion over social As a result, "[i]f harmony of
provisioning.2
interests is actually attained, it can be accomplished only as we go along, from day to
day, dealing with each conflict as it arises, and settling it the best we know
how" (Commons 1925a, 692).^
While Commons provides arguments that support Keynes's rejection of
socialism, there is also evidence Keynes accepted this line of thinking. In a 1935
article for The New Republic, for example, Keynes divides economists into two camps.
One includes those who believe that "the existing economic system is in the run
long
self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags,
outside interferences and mistakes." The other group rejects the idea that the system
is "in any significant sense, self-adjusting." Keynes places Marxists in the self-adjusting
camp (because treat socialism as inevitable and believe "can not

they capitalism
possibly work in practice") and aligns himself with those rejecting self-adjustment
(Keynes 1935, 35-36). In short, the notion of an automatic of interests is
harmony
rejected.4
228Charles ].Whalen
Business Cycles and Monetary Policy
Given attention to a wide range of economic and social issues, it is

Keynes's
understandable that he would find interest in Commons's analysis of the path of
economic history. Still, he was, of course, a monetary economist. Commons,
chiefly
meanwhile, claimed no special expertise in banking, and told a committee of theU.S.
Congress, "[m]y interest ismainly in labor" (Commons 1927a, 1075). This is indeed
the way Commons is usually remembered, but there ismore to the story.
A look at Commons's writings in the mid-1920s reveals that attention to labor
problems led him to studybusiness cycles,which eventually prompted explorations of

macroeconomic questions relating to money and credit (see, for example, Commons
1925b). Thus, it is not surprising that Commons's "Marx Today" offers more than a
? to monetary to the
broad discussion of economics it also draws attention policy and
role such policy played in establishment of the stabilization era.

In fact, Commons writes that "the most fundamental stabilization" in the
United States has been credit and price-level stabilization achieved by the Federal
Reserve. The system was not perfect, he admitted. Nevertheless, he
banking
considered "stabilization of credit, business and prices" vastly superior to leaving the
system "to the accidents of demand and supply of gold" (Commons 1925a, 690).5
As Christopher J. Niggle has discussed in this journal, much of Keynes's
attention in the early and mid-1920s focused on the need for price stability. In place
of reliance upon the gold standard, which he considered a "barbarous relic," Keynes
believed monetary authorities should act to stabilize "trade, prices and
employment" (Keynes, quoted in Niggle 1993, 1265). This position is hinted at in

both "The Economic Transition in England" and "Am I a Liberal?" In fact, in the
latter, Keynes states that monetary is at the center of the struggle to fashion the
policy
stabilization era, and he adds, "[t]he most violent interferences with stability and with
justice, to which the nineteenth century submitted in due satisfaction of the
philosophy ofAbundance, were precisely those which were brought about by changes
in the price level" (Keynes 1972, 306). The similarities on monetary policy suggest
matters
that Keynes was drawn to Commons's ideas by an interest in economic that
extended beyond stages of history.6
Reasonable Value
While Commons would probably have been flatteredby the attention Keynes gave to
his ideas on two continents, there is no mention of it in Commons's autobiography.
Historians of economic thought,meanwhile, have been faced with a more intriguing
question: How did Keynes learn of Commons's analysis?
A first guess would be that Commons sent Keynes a draft or pre-publication
copy of "Marx Today." Although the article did not run in The Atlantic until
? ?
November 1925 after Keynes delivered his lectures there is a paper trail that
indicates Commons did share at least some of his writings with Keynes. On April 7,
1927, for example, Commons sent Keynes an article just published in The Annalist,
JohnR. Commons and John 229
entitled "Price Stabilization and the Federal Reserve System" (Commons 1927b;
Commons 1927c). Keynes responded on April 26 with a warm letterof gratitude:
thanks for me article. ... I am in

Many sending your entirely
with it. ... I with
sympathy quite agree your practical proposals
and price stabilization]. ... I should
[regarding monetary policy very
much like to have some conversations with you on this and other
matters. Judging from limited evidence and at great distance, there
seems to me to be no other economist with whose way of
general
thinking I feelmyself in such genuine accord. (Keynes 1927a)7
To be sure, the historical periods of scarcity, abundance and stabilization each
get some attention in "Marx The article also contains the aforementioned
Today."
discussion of Smith and Marx, which supports and clarifies Keynes's dismissal of
socialism as a path to economic progress. Yet "Am I a Liberal?"
leading Keynes's
presents four quotes (describing aspects of the three epochs) that he attributes to
Commons, and none appear in "Marx The differences do not appear to be

Today."
minor matters of editing and revision: Keynes may have had an look at "Marx
early
Today," but it seems he also had access to something else written by Commons.
Where else does Commons discuss these three periods? His autobiography
indicatesCommons developed this interpretationof history in the fall of 1923 ? for a
?
legal brief that was never used and incorporated it into Institutional Economics,
published in 1934 (Commons 1934a, 197). There is, indeed, an extended discussion
of these stages (and much more) in a very long chapter, called "Reasonable Value,"
within that book. Nevertheless, the quotes still do not quite match those used by
Keynes, and, of course, the publication date puts the book on the market about a
decade after Keynes's presentations. Institutional Economics does contain a clue,
however. In the opening paragraph of the first chapter, Commons indicates that he
shared "various mimeographed copies and revisions" with students and other readers
prior to publication (Commons 1934b, 1).

A few years ago, while in the stacks of the agriculture
browsing college library at
Cornell University, this author stumbled upon a softbound volume, entitled
Reasonable Value. a title page identifies as
Inside, John R. Commons the author and
bears the date April 1925; a typeset,parenthetical note reads "To Be Revised." The
publisher is Edwards Brothers, Ann Arbor, Michigan (Commons 1925c). A
handwritten librarynotation on the Table of Contents page reads "Author gift. July
15, 1925." According to an attached card, the book had been checked out twice? in
1961 and 1973.8
Reasonable Value is not Institutional Economics before minor revisions. The latter
runs over 900 pages, while ReasonableValue consists of 125 pages that appear to be
typewritten and mimeographed (Commons 1925c). In addition to a brief
introduction, the book contains the following sections:
230Charles J.Whalen
1. ?
Physical Theories Efficiency (Commodities)
2. ?
Biological Theories Scarcity (Feelings)
3. InstitutionalTheories ? Custom (Transactions)
4. InstitutionalTheories ? Sovereignty
5. Futurity
6. Method of Inquiry
7. Scarcity,Abundance, Stabilization
8. Outline of Reasonableness in Economic and JuristicTheory
Part seven of Reasonable Value contains a 25-page discussion that closely

what appears in a section of Institutional Economics called "Scarcity,
parallels
Abundance, Stabilization ? The Economic Stages." In addition, pages 97 and 98 of
section seven include the four excerpts on economic that Keynes borrows
epochs
?
from Commons in the 1925 essays each passage quoted by Keynes matches the
Reasonable Value text word-for-word (Commons 1925c, 95-120).9

Was this indeed what Keynes cited in his presentation to the Liberal Party and
inMoscow? At first,all thatwas certain to this author is that the timing seemed right:
Itmakes sense thatKeynes would have been preparing his Liberal Party and Moscow
lectures a few months after Reasonable Value was and began circulating.
only published
Moreover, like "Marx Today," the "Scarcity,Abundance, Stabilization" section in
Reasonable Value identifies price stabilization as an important part of the movement
toward the stabilization epoch, and the Reasonable Value discussion of money and
credit lists Keynes as one of the leading economists associated with the price
stabilization movement (Commons 1925c, 107). Thus, itwould not be unreasonable
to think that Commons shared a copy of Reasonable Value with Keynes.10
According to the official indexes of theCommons and Keynes papers (at the
Wisconsin Historical Society and Kings College Archive Centre, respectively), no
correspondence between Commons and Keynes is recorded prior to 1927 (McGuire
2006; Miller 2006).u In fact,however, a July7, 1925, letterfromKeynes toCommons
can be found in the Commons collection amid un-catalogued correspondence
between Commons and a number of economists in themid-1920s. The topic of that
letter and many of the others sent and received around the same time: Reasonable
Value (Keynes 1925).

letter is a reply to Commons. the Commons papers do not
Keynes's Although
contain a copy of Commons's initial letter, itwas similar to one he sent to
probably
Louis Slichter of Madison, Wisconsin, on May 30, 1925. Like many of those
Commons sent around this time, the letter to Slichter states that Commons is
on
sending "a mimeographed introductory chapter I am preparing for a book
Reasonable Value as a sequel to my Legal Foundations ofCapitalism. If you can find time
to read and critique it or make suggestions I shall greatly appreciate the
In Keynes's thanks for sending me
same" (Commons 1925e). reply, he writes, "Many
the introductorychapter of your forthcoming book on Reasonable Value. I have read
itwith interest. . . .But my own are engaged in another economic
very great thoughts
fieldwith the result thatwhile I enjoyed your chapter I am not competent to send you
any useful criticism" (Keynes 1925).
Further evidence thatKeynes derived his Liberal Party and Moscow discussions
of economic history from Reasonable Value can also be found in the Commons
collection. Sam Snow of the Ashington Industrial Co-operative Society sent
Commons a letter dated August 31, 1925. Snow mentions lecture

attending Keynes's
at the Liberal Summer School and becoming interested in the reference to
Commons's eras of scarcity, abundance and stabilization. "Mr. Keynes commended
me to write directly to yourself, hence this letter," Snow writes (Snow 1925). In
response, Commons wrote to Snow on 22, 1925: "I am you with
September sending
my a copy of my on Reasonable
compliments mimeographed preliminary chapter
Value, which contains on pages 95- my discussion of Scarcity, Abundance and
Stabilization as important features in economic history" (Commons 1925f).12

Commons's reference to 95-" points Snow to the section
"pages directly
(Scarcity,Abundance, Stabilization) that contains the quotes found in "Am I a

Liberal?" but there is even more in Commons's letter. It also calls Snow's attention to
"a forthcoming article in The AtlanticMonthly, probably forNovember, on Capitalism

and Socialism, in which I make use of this same classification of periods" (Commons
19250- This, of course, is the "Marx Today" article that helps contextualize some of
Keynes's 1925 comments. Finally, Commons asks for suggestions and criticisms "as I
intend after a couple of years to bring this chapter out in book form with the
discussion of various economic theories and practical applications of the
same" (Commons 1925f).
Of course, Commons did eventually bring Reasonable Value out in finished
form. Over the course of many mimeographed copies and revisions, much changed,
including the title. In 1934, Commons released his discussion of economic theories
and their applications as Institutional Economics: Its Place in Political Economy
(Commons 1934b).13
Institutionalism and the Economics of Keynes
The foregoing discussion addresses most of the matters raised in the introduction
above. While Commons is primarily known as a labor scholar, aspects of
examining
his work that interestedKeynes draws attention to important and often overlooked
parts of Commons's research. These include an of economic and
analysis history
investigations of business cycles and monetary policy. At the same time, familiarity
with Commons's writings from the mid-1920s helps clarifyundeveloped aspects of
Keynes's 1925 lectures, "Am I a Liberal?" and "The Economic Transition in England"
?
namely, the suggestion that socialism and individualistic capitalism sprang from the
same presuppositions and that the former system does not offer a viable alternative to
managed capitalism. Moreover, a bit of detective work has revealed that Keynes
learned of Commons's analysis by having access to Reasonable Value and perhaps
similar documents thathad not yetbeen published in their final form.
232 Charles]. Whalen
A final matter remains to be considered: the contemporary significance of
Keynes's interest in Commons's ideas. To set the stage, however, some points of
intersection in the history of institutionalism and the economics of Keynes must be
identified.
Since at least the mid-1970s, when to seriously erode the
stagflation began
dominant position of neoclassical Keynesianism (what Keynes's colleague Joan
Robinson called Bastard Keynesianism) an increasing number of scholars have
expressed interest in the compatibility and complementarity of institutionalism and
the economics of Keynes. In 1976, for example, Wallace C. Peterson used his
presidential address before theAnnual Meeting of the institutionalists'Association
for Evolutionary Economics to discuss how institutionalism and Keynes overlap "on a
number of bedrock, seminal ideas" (Peterson 1977, 202).H

In the early 1980s, with neoclassical Keynesians under heavy assault from both
"conservative economic individualists" such as Milton Friedman and Marxists such as
Ernest Mandel, economists Charles K. Wilber and Kenneth P. Jameson sought to
offer an alternative brand of economics. Their focus was on providing practical

solutions to real-world and their was rooted in Keynes and the
problems, approach
American institutionalists. Under the banner of "Post-Keynesian
Institutionalism" (PKI), Wilber and Jameson solidly analyzed the structure and
operation of the U.S. economy in an effort to move the nation constructively beyond
Reaganomics (Wilber and Jameson 1983).15

Today, however, the economy and economics are not the same as in the 1980s.
Inflation is a less serious threat (though the prospect of a ripple effect from rising oil
is, as of this writing, a cause for concern); trade union power has diminished
prices
the unemployment rate is lower, but job and retirement insecurity have
considerably;
increased; technological change fuels rapid and economy-wide "creative destruction;"
work is "outsourced" to contractors around the globe; enterprise career ladders have
been dismantled; and inequalities of income and wealth have reached staggering
Economics, meanwhile, is emergence of what some

proportions. experiencing
consider a new macroeconomic consensus based on New Keynesian and Endogenous
Growth Theory (NK/EG) models.
A recent article byNiggle includes a catalogue of theways thatNK/EG analyses
are improvements over the neoclassical Keynesianism of the early post-World War II
Yet, as Niggle also shows with a comparison, these economists

period. point-by-point
remain very much in the realm of conventional economics when evaluated against the
core notions of institutionalism and the economics of Keynes (Niggle 2006).

Reviewing that comparison brings to mind JohnT. Dunlop's assessment of theNew
Institutional Economics and its contributions to the study of employment; it is "a
on neoclassical microeconomics, he observed, one that does not advance our

patch"
understanding of reality "no matter what it does for the competitive model of the
labor market" (Dunlop 1984, 17). NK/EG is similarly a patch on mainstream
macroeconomics.
In attempting to to recent economic and academic developments,
respond
many heterodox economists are again to construct an alternative that draws
seeking
on the of institutionalism and economics of Keynes. This time, however,

insights
instead of calling itPKI, some are calling it "evolutionaryKeynesianism," a label that
makes use of institutionalism's commonly used synonym economics)
(evolutionary
and reclaims the "Keynesian" name for contemporary students of Keynes who have
long had to settle for the "post-Keynesian" tag (see for example, Niggle 2006;
Cornwall and Cornwall 2001). While Peterson's 1976 address and Wilber and
Jameson's 1983 book show the longstanding relevance of overlaps in the thinking of
Commons and Keynes, it is at the present juncture that Keynes's 1925 interest in
Commons takes on special significance.
Evolutionary Keynesianism
Revisiting the 1925 writings of Keynes and Commons puts institutionalists and post
Keynesians in touch with their common origins and offers clear insights on the
construction of an evolutionary Keynesian (EK) alternative toNK/EG theories. In the
mid-1920s, economists acknowledged that business cycles were an observed feature of
industrial capitalism. Indeed, there were many competing cycle theories, including
those emphasizing underconsumption, overinvestment, monetary disturbances, and
innovation.16 Nevertheless, such work "existed side-by-side with a continuing
fundamental belief that the long-run equilibrium position of the economy would
provide full employment" (Landreth 1976, 442). As Keynes mentions in his two 1925
essays, the economic mainstream believed the best way to deal with business cycles
was to trust that "economic can and to be about the
adjustments ought brought by
free play of the forces of supply and demand" (Keynes 1972, 305; Keynes 1981, 439;
see also Lekachman 1959, 355).
In understanding business cycles,NK/EG economists have not advanced far
beyond the economic mainstream of the 1920s. In fact, one could argue the field has
taken a step backward in that economists look at
regarding cycles today's generally
economic downturns as isolated events, which means corrective measures are treated
as one-time actions. to NK/EG recessions and deviations from
According models,
trend growth are products of external shocks or market such as
imperfections
inflexiblewages and prices (Niggle 2006, 406-410; Setterfield 2001, 94; Cornwall and
Cornwall 2001, 21-22).17
The mid-1920s writings of Commons and Keynes offer EKs a very different
to Commons and ?
starting point. According Keynes, business cycles fluctuations
booms and downturns characterized ?
involving by involuntary unemployment have
been an inherent part of capitalism since the industrial revolution. This the
provides
point of departure for construction of EK theories and for development of a more
activist policy agenda than that supported by NK/EG. Moreover, Commons and
Keynes make it clear that while are not there are dead
policy options severely limited,
ends not worth pursuing. They include: relying entirely on market forces (which is
likely to cause considerable social and lead to a business-driven form
pain eventually
of managed capitalism); treating downturns and booms as events;
exceptional
depending on the gold standard; and hoping for (or working toward) the demise of
capitalism and the emergence of socialism.
234Charles J.Whalen
In addition to insistingupon a business-cycle perspective, the 1925 writings of

Commons and Keynes draw attention to the importance of crafting economic theory
and with an eye to the existence of structural economic Part of what
policy change.
Keynes found attractive about Commons's analysis is that it stressed that theory and
policy can and should evolve with in economic may move
changes reality. Capitalism
along a of recurrent booms and downturns, but are not
path cycles simply
a fixed
fluctuations within economic structure: they are also a cause and consequence
of changes to that structure. Today, with the winds of creative destruction at
blowing
force, no to economics can be useful unless it and
gale approach recognizes
accommodates structural economic evolution.
Building theories that highlight structural change is uncommon in economics,

but Commons began to clear a path with his mid-1920s work on economic epochs.
The path is completed in Institutional Economics, where he offers an tracing
analysis
three historic stages in the development of American capitalism: merchant capitalism,
employer capitalism, and banker capitalism. Merchant capitalism is the final period of
the era of scarcity; coincides with the era of abundance; and
employer capitalism
banker is the first stage in the era of stabilization. the
capitalism Emphasizing
underlying message, Commons writes, "Capitalism is not a single or static
concept" (Commons 1934b, 763-805, 876-903).18

While Commons did not extend his analysis after 1934, Hyman P. Minsky
a of the U.S. economy in recent decades. At the
developed complementary study
heart ofMinsky's economics was a belief that "the basic path of a capitalist economy is
cyclical" (Minsky 1975, 9; Minsky 1986a, 223). A close observation of Minsky's
writings reveals that he also believed economic systems are constantly evolving. In the
Maynard Keynes, for example, Minsky writes that a

final pages of his 1975 book, John
succession of policy strategies are likely to be over time: "It will remain true
required
that we live out our lives in transition; there is no final solution to the problems of
organizing economic life" (Minsky 1975, 168). The same perspective can be found in
his 1986 book, Stabilizingan Unstable Economy (SUE), in which Minsky writes that
economies change not only through legislation but also "by an evolutionary process of
invention and innovation" (Minsky 1986a, 7).

As has been demonstrated elsewhere, Minsky's recognition of the "ever
nature of capitalism plays its most prominent role in his post-SUE writings
evolving"
(Whalen 2001; Minsky 1990, 70). The result is an analysis that emphasizes the co
evolution of finance and and that treats structural economic as both
industry change
a cause and a consequence of cyclical fluctuations. It is also
contributing
Keynesian" and "institutionalist." His approach is post
simultaneously "post
Keynesian, Minsky argued, in that it rejects the conventional separation of real and
monetary sectors in favor of an integrated view of money, finance and capitalist

accumulation, and it is institutionalist, he added, in that the nature and evolution of
institutional arrangements are crucial determinants of economic behavior (Whalen
1997, Thus, while Minsky

3). sometimes called himself a "financial
Keynesian" (Papadimitriou 1992, 24), it is clear that his work represents a model of
evolutionary Keynesianism.
Minsky traces U.S. five stages, which can be

capitalist development through
labeled as follows: merchant capitalism (1607-1813), industrial capitalism (1813
1890), banker capitalism (1890-1933), managerial capitalism (1933-1982), and money
manager capitalism (1982-?). Key questions to be asked at each stage include:What
activity is financed?What is the pivotal source of financing?And what is the locus of
economic power within theworld of business and banking?19While it is not certain
thatCommons would have extended his own analysis in thismanner, it is likelyhe
would have approved ofMinsky's emphasis on the interplayof finance and industry.
Indeed, in Institutional Economics, Commons stressed "the prevalence of the credit
system" in the economy of his day (Commons 1934b, 766).

According to Minsky's theory, the evolution from the merchant era to the
saw a number of transitions. Finance a focus on
managerial period began with the
production of goods and then moved, in succession, to an emphasis on industrial
expansion, industry consolidation, and stable macroeconomic growth. The crucial

source of financing initially came from commercial banking, but then shifted to
investment banks and the central bank (Federal Reserve). The center of economic
power, meanwhile, swung from commercial proprietors to investment bankers and
then to the executives of corporate conglomerates.
Finance in the era of banker capitalism was
largely free of government regulation.
At the start of the period, the financial community relied on self-policing, and key
investment bankers such as J. P. Morgan in as needed to stabilize industries
stepped
and contain financial panics. However, the relative stability and prosperity achieved
early in that era attracted not only new investors, but also new investment bankers;
the industry's speculative fringe soon overshadowed what had been a
long relatively
conservative financial mainstream (Pontecorvo 1958). In classic "Minskian" fashion,
success bred and when the bubble burst not even the nation's
daring, speculative
most prestigious firms could contain the collapse.
investment-banking
President Franklin D. Roosevelt's New Deal reforms signaled the start of
managerial capitalism. The period began with bold government action in the area of
monetary policy and banking. While the Federal Reserve took an accommodative
policy stance, institutional reforms included the introduction of deposit insurance,

securities regulation, and compartmentalization of financial institutions. Combined
with complementary fiscal policy, agricultural controls, labor-market and
regulations,
social insurance for unemployment and retirement (and later healthcare), these
financial policies helped set the stage for an unprecedented period of prosperity and
stabilityafter
World War II.
Oligopolistic markets, insignificant foreign competition, minimal private-sector
debt, and federal macroeconomic management (geared toward high employment)
characterized the postwar economic environment. As a result, most corporate
executives in the 1950s did not feel intense pressure from bankers and stockholders.
an on rather than innovation or to
Placing emphasis stability adaptation change,
many enterprise leaders focused on The
achieving bigness through conglomeration.
result was complacency that led to considerable economic when inflation
upheaval
and intense foreign competition appeared on the scene in the 1970s.
236Charles J.Whalen
Another feature of the post-World War II era was the secular evolution of a
more fragile financial system. With the Federal Reserve working to keep
low and engaging in lenderof-last resort interventions to prevent
unemployment
financial crises, corporate borrowers and lenders reduced the margins of safetybuilt
into their deals and turned increasingly toward short-term and debt financing. As
and others have shown, the last dozen or so years of the managerial
Minsky, Niggle,
period saw explosive growth in the activity of "borrowing to lend" by non-bank

financial institutions such as finance companies and real estate investment trusts.
Corporations issuing "junk bonds" to finance acquisitions, and many industrial

began
enterprises shifted their focus: from producing and selling tangible products, and
towardgenerating interestand capital gains (via lending and speculation, respectively).
Banks, meanwhile, in creative use of off-balance sheet commitments, such as
engaged
lines of credit, and introduced a stream of innovations, including the
steady
securitization of loans (Minsky 1986a; 1986b; Niggle 1988; 1986).
The innovation in the postwar was the rise of
major financial-system period
? of this growth
managed-money funds including pension and mutual funds.Much
was the of private pensions as a feature of the U.S. labor market.
spurred by spread
Inflation's effect upon bank also contributed to the increase in
negative deposits
funds. As the postwar era "individual wealth holdings
managed progressed,
increasingly took the form of ownership of the liabilities of managed funds rather
than the holdings of a portfolio of the liabilities of individual businesses" (Minsky
1993, 110-111).
capitalism in the 1980s as institutional investors,
Money-manager emerged early
holders of the largest share of corporate stocks and bonds by the end of that decade,
to exert their influence on financial markets and business enterprises. The aim
began
of money managers, and the sole criterion by which they are judged, is maximization
of the value of investments made by fund holders. Business leaders, therefore, became
sensitive to short-term profits and the stock-market valuation of their

increasingly
firms. In the era of managerial capitalism, corporate managers were "the masters of
the but the that began in 1982 it became

private economy," during expansion
clear that money managers had subsequently become the masters (Minsky
increasingly
1993,110).
The rise of institutional investors affected the U.S. economy. It
profoundly
a ready pool of buyers for
spurred further financial-system evolution by providing
securitized loans, the commercial paper of finance companies, and other
innovations.20 It fueled the trend toward mergers, acquisitions, corporate breakups,

were motivated to
leveraged buyouts, and stock buybacks (since fund managers
whatever initiatives to boost near-term portfolio value and their
support promised
funds the resources raiders needed to secure corporate control).
provided
emergence of money-manager capitalism also signaled the end of
Unfortunately,
broadly shared prosperity and the rise of widespread workforce insecurity (Minsky
1996).
While effort to track the U.S. economy was cut short by illness and
Minsky's
his untimely death in themid-1990s, his analysis can be extended into the present.
Maynard Keynes on EconomicHistory and Policy
Among those contributing to this effort areWilliam Van Lear (2002), L. Randall
Wray (2007), and this author (Whalen 2007; 2008). Moreover, much of Minsky's
policy agenda remains relevant today, his emphasis on the need for
especially
macroeconomic policies that promote tight labor markets and for universal healthcare
and other institutional arrangements that simultaneously foster worker security and
economic progress (Minsky 1996).21
Conclusion: Reaching Back toMove Forward
More than a decade ago, in the second volume of his biography of Keynes, Robert
Skidelsy wrote that Commons "was an important, ifunacknowledged, influence on
Keynes" (Skidelsky 1994, 229).22 Nevertheless, scant attention has been given to the
nature and source of their intellectual association in the mid-1920s. Indeed, although
Skidelsky mentions Keynes's 1925 reliance on Commons's stages of development and
the April 1927 letter to Commons, not even his biography probes further.23
This
oversight by students of Commons and Keynes is unfortunate because an
examination of the mid-1920s connection spotlights important aspects of Commons's

and enables a of Keynes's views. Moreover,
scholarship deeper understanding despite
the passage of many decades, a reexamination of that brief intersection of the
Commons and Keynes research can aid heterodox economists in
agendas today's
constructing a coherent and useful It is not too late to
evolutionary Keynesianism.
rediscover that 1925 connection'and the path toward which it points. In fact,with
institutionalists and post-Keynesians more open to a than ever
forging synthesis
before, now may be just the right time.
Notes
1. According to the editor of Keynes's collected writings, "Am I a Liberal?" was delivered at the Liberal
Summer School in Cambridge (United Kingdom) and published (in two parts) in Nation and
Athenaeum on August 8 and 15, 1925 (Keynes 1972, 295).
2. Two notes are warranted. First, Commons does not jettison the notion of abundance. Rather, he
writes that the modern world is a mix of scarcity and abundance: "There is abundance in some
directions, scarcity in others" (Commons 1925a, 692). Second, in another article in which
Commons rejects the notion of an automatic harmony of interests, he stresses that permanent
industrial peace requires elimination of private property and liberty: "As long as there is liberty there
will be strikes, for a strike is nothing more nor less than liberty to stop work and wait for a
bargain" (Commons 1921, 1). Commons was willing to put constraints on liberty,but not willing to
eliminate it.
3. In InstitutionalEconomics, Commons expresses a belief in "pragmatic idealism" and writes, "[OJnly
the unattainable idealism is rejected. . . . [T]o be excluded from consideration is only the
unattainable, such as, . . .heaven, communism, anarchism, universal brotherly love, universal virtue,
universal happiness" (Commons 1934b, 741-742).
4. Keynes also hints at rejection of the "automatic harmony of interests" notion in "Am I a Liberal?"
Early in his address, he asks whether he ought to join the Labor Party. He concludes, "It is a class
party, and the class is not my class" (Keynes 1972, 297). This suggests a concern that he would not be
content in a socialist world, a concern incompatible with adherence to the notion of a
harmony of
self-interest.
5. For more on Commons's investigations of macroeconomics and monetary policy, see Commons
(1934a, 189-195) andWhalen (1993). Commons's interestmay indeed have been "mainly in labor,"
238 Charles J.Whalen
but that interest led to extensive work on banking and monetary policy. In fact, he was president of
the National Monetary Association (successor to Irving Fisher's Stable Money League) in 1922,
testified before the House Committee on Banking and Currency in support of a price-level
stabilization bill in 1927, and worked on price-stabilization legislation for nearly six months with
U.S. Representative James G. Strong (Kansas) in 1928. Moreover, Commons and Keynes
corresponded on these matters in 1927 (see, for example, Keynes 1927a). Readers may also wish to
consult Tymoigne (2003) for an excellent comparison of the views of Keynes and Commons on
money.
6. Of course, price stabilization was not the only item on Keynes's economic agenda. In fact, his
Moscow lecture anticipated The General Theory's call for a "somewhat comprehensive socialization of
investment" (Keynes 1964, 378). In particular, Keynes wrote of the need to make "the magnitude
and direction of employment of new national savings year by year" the subject of "deliberate state
policy and centralized control" (Keynes 1981, 441). Similarly, in a 1925 book co-authored with two
businessmen and a University ofWisconsin colleague (Don D. Lescohier), Commons wrote of the
need for public works and public spending "to balance the fluctuations of private business and
stabilize business and employment" (Lewisohn et al. 1925, 121-127).
7. For Commons's letter to Keynes in April of 1927, see Commons (1927c). Other archived and
indexed exchanges between Commons and Keynes include Commons (1931) and Keynes (1927b;
1931).
8. It is unclear whether this is the original "due date" card.
9. Although the section of Commons's InstitutionalEconomics bearing the title "Scarcity, Abundance,
Stabilization ? The Economic Stages" happens to fallwithin a chapter entitled "Reasonable Value,"
that chapter does not otherwise resemble the 1925 Reasonable Value.
10. While analyzing and assessing Reasonable Value and its place in the development of Commons's
thought is a task beyond the scope of the present article, a few observations can be offered here.
First, in a footnote, Commons describes the volume as an elaboration of ideas contained in The
Legal Foundations of Capitalism and "Law and Economics," an article prepared for The Yale Law
Journal (Commons 1925d, 4). There is also new material, however, including the discussion of
economic epochs. Second, various sections in Reasonable Value resemble aspects of his trilogy: Legal
Foundations, InstitutionalEconomics, and The Economics ofCollective Action (Commons 1924; 1934b;
1950). For example, sections on Efficiency, Scarcity and Custom, which each run about 20 pages,
trace these concepts ? called "dimensions of human activity" (Commons ?
1925c, 3) through the
history of legal and economic thought. This is reminiscent of Legal Foundations (which focuses on
legal thought) and Institutional Economics (which focuses on economic thought). Sections on
Sovereignty and Futurity, meanwhile, are much shorter and, like The Economics ofCollective Action,
present their key ideas more directly. Finally, it should be noted that although Reasonable Value
receives no mention inMalcolm Rutherford's introduction to the Transaction Publishers edition of
Commons's InstitutionalEconomics (Rutherford 1990), a recent paper by Rutherford mentions that
"a printed draft of Commons's manuscript Reasonable Value, later to become part of Institutional
Economics, was produced in 1925 and used in his teaching and widely circulated" (Rutherford 2005).
11. Archivists at the institutions that house the Commons and Keynes collections indicate that, for
various reasons, the archives fall far short of completely documenting these careers. In e-mail
exchanges with this author, each archivist cautioned that the absence of archived correspondence
prior to 1927 does not mean there was no Commons-Keynes contact during the period in question
(McGuire 2006; Miller 2006).
12. This author is indebted to a tremendously helpful referee for directing him to the part of the
Commons papers that contains these important letters from 1925 (involving Keynes, Commons and
Snow). The referee also notes, on the basis of archival research involving correspondence between
Commons and Wesley C. Mitchell (archived in the Mitchell Papers at Columbia University), that
the original draft of Legal Foundations (published in its final form in 1924) was also called Reasonable
Value.
13; In 2008, the April 1925 version of Commons's Reasonable Value will be reproduced, with an
introduction co-authored byMalcolm Rutherford, Warren J.Samuels and this author, in Research in
theHistory ofEconomic Thought and Methodology (Volume 26b), published by Elsevier.
14. Nearly all the themes highlighted by Peterson make some appearance in the mid-1920s writings of
]ohn R. Commons and John 239
Commons and Keynes. In particular, he maintains that the economics of institutionalism and
Keynes are rooted in the following shared beliefs: a) economic life is an ongoing cultural and
historical process; b) the future is uncertain and the economy has no inherent tendency toward
equilibrium; c) economic activity is shaped by social conventions and rationality does not always
?
prevail; d) conflict holds a central place in economic life; e) the state can be used for good or for ill
and is needed to curb concentrations and abuses of power; f) distribution questions are important
and must be understood in the context of underlying social debates regarding equity and justice; and
g) economic analyses must examine the actual nature and role of money and other social institutions
(Peterson 1977).
15. A revised version of Wilber and Jameson's book was published in 1990 with the title Beyond
Reaganomics: A Further Inquiry into thePovertyofEconomics (Wilber and Jameson 1990).

16. For an overview of cycle theories that competed for attention in economics prior to the Keynesian
revolution, see Lekachman (1959, 355-369).
17. Of course, NK/EG economists should be credited with at least recognizing the possibility that
involuntary unemployment may exist as a temporary phenomenon. New Classical economists such
as Robert E. Lucas dismiss involuntary unemployment in favor of an account of cycles that treats
joblessness as a matter of worker choice (Blinder 1987; Lucas 1980).

18. Despite the U.S. economy's shortcomings in the era of banker capitalism, Commons clearly
preferred the American system to Russian communism and European fascism (Commons 1934b,
876-903). However, for a less optimistic view of banker capitalism, see Perlman (1949, 207-219).
19. For Minsky's discussion of U.S. capitalist development, see, for example, Minsky (1993; 1990).
20. Minsky saw "a symbiotic relation between the growth of securitization and of managed
money" (Minsky 1990, 71; see also Minsky 1992a, 32). in addition, he recognized the emergence,
?
shortcomings and dangers of securitization as early as 1986, and was concerned that securitization
? could
occurring "in the absence of supervision and disclosure" yield increased financial fragility.
Indeed, his discussion of the possibility that securitization can eventually lead to an asset sell-off,
falling asset prices, and "contagion reactions" sounds eerily prophetic when read in themidst of the
current international credit crunch, which can be traced to the securitization of "subprime"
mortgages in the United States (Minsky 1986c, 12-14; see also Minsky 1990, 64-65). Moreover,
Minsky expressed particular concern about securitization of home mortgages, which he saw as
producing "an easier filter for financing." Minsky observed thatmortgage securitization allows banks
originating home loans and investment-banking firms packaging and underwriting the associated
securities to profit regardless of whether mortgages prove viable in the long term. In early 1992,
looking back on the mortgage securitization that had already occurred, he wrote, "All that was
required for the originators to earn their stipend was skill avoiding obvious fraud and in structuring
the package" (Minsky 1992b, 22-23).
21. For more on elements of an EK policy agenda, see Minsky and Whalen (1996-1997) and Whalen
(2007).
22. While the present article focuses on how familiarity with Commons's scholarship sheds light on
Keynes's writings in 1925, Skidelsky's biography notes that Keynes also drew, implicitly, on
Commons's notion of stages of development in two later essays ? "Economic Possibilities forOur
Grandchildren (1930) and "Some Economic Consequences of a Declining Population" (1937)
(Skidelsky 1994, 236 and 608-609).
23. Notable works that do mention the Commons-Keynes link on the subject of economic epochs are
Crotty (1990) and Atkinson and Oleson (1998), but neither accounts for this connection.
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John R.

JohnR. Commons and JohnMaynard Keynes on

ABSTRACT: In a pair of 1925 lectures, John Maynard Keynes described world

scholarship and helps clarify ambiguities in Keynes's two addresses. It also

development of evolutionary Keynesianism (which can also be called Post

Keywords: John R. Commons, John Maynard Keynes, evolutionary

JELClassification Codes: B31, B52, N10, Pll

qualified to speak," he probably surprised those assembled by structuring the

development of "evolutionary Keynesianism;" addressing the second clarifies

ambiguities in Keynes's lectures; and an answer to the third resolves an

Scarcity, Abundance and Stabilization

Keynes's August 1925 address ? entitled "Am I a Liberal?" ? identifiedCommons as

in the days of a worldwide transition in economic eras. In particular,

minimal individual liberty(Keynes 1972, 304).

The was also characterized by the rise of individualism and laissez

The era of stabilization, the latest epoch, because individual was

and levels. Stabilization took various forms across the globe,

settled matter, stressed. "The transition from economic anarchy to a regime

Saving Capitalism by Making It Good

In John R. Commons's he writes that his was to "save

by making it good" (Commons 1934a, 143); a similar sentiment runs through

offers no constructive alternative to reformed capitalism. The problem with socialism,

in conjunction with an article by Commons that appeared inThe AtlanticMonthly late

the progress ofmankind" (Commons 1925a, 692)

camp (because treat socialism as inevitable and believe "can not

Business Cycles and Monetary Policy

Given attention to a wide range of economic and social issues, it is

A look at Commons's writings in the mid-1920s reveals that attention to labor

problems led him to studybusiness cycles,which eventually prompted explorations of

role such policy played in establishment of the stabilization era.

employment" (Keynes, quoted in Niggle 1993, 1265). This position is hinted at in

justice, to which the nineteenth century submitted in due satisfaction of the

extended beyond stages of history.6

thanks for me article. ... I am in

thinking I feelmyself in such genuine accord. (Keynes 1927a)7

To be sure, the historical periods of scarcity, abundance and stabilization each

Commons, and none appear in "Marx The differences do not appear to be

prior to publication (Commons 1934b, 1).

Part seven of Reasonable Value contains a 25-page discussion that closely

Reasonable Value text word-for-word (Commons 1925c, 95-120).9

to think that Commons shared a copy of Reasonable Value with Keynes.10

Value (Keynes 1925).

collection. Sam Snow of the Ashington Industrial Co-operative Society sent

Commons a letter dated August 31, 1925. Snow mentions lecture

Stabilization as important features in economic history" (Commons 1925f).12

(Scarcity,Abundance, Stabilization) that contains the quotes found in "Am I a

"a forthcoming article in The AtlanticMonthly, probably forNovember, on Capitalism

Institutionalism and the Economics of Keynes

A final matter remains to be considered: the contemporary significance of

number of bedrock, seminal ideas" (Peterson 1977, 202).H

Ernest Mandel, economists Charles K. Wilber and Kenneth P. Jameson sought to

offer an alternative brand of economics. Their focus was on providing practical

Reaganomics (Wilber and Jameson 1983).15

Economics, meanwhile, is emergence of what some

Yet, as Niggle also shows with a comparison, these economists

core notions of institutionalism and the economics of Keynes (Niggle 2006).

on neoclassical microeconomics, he observed, one that does not advance our

on the of institutionalism and economics of Keynes. This time, however,

In addition to insistingupon a business-cycle perspective, the 1925 writings of

Building theories that highlight structural change is uncommon in economics,

concept" (Commons 1934b, 763-805, 876-903).18

Maynard Keynes, for example, Minsky writes that a

invention and innovation" (Minsky 1986a, 7).