It is a characteristic property of what I here call cyclical Keynesianism that it by-passes the question of the consequences of money-wage and price adjustments with an answer that is evasive and yet not meaningless. The answer is that when we are faced with the problems of business cycle policy we frequently wish to proceed as if a self-adjustment mechanism via significant changes in the general wage and price level did not exist. We wish to do this because even if in a free market economy such an adjustment mechanism should exist, it is likely to be a very sluggish mechanism, operating with lags and detours and impeded by institutional obstacles the existence of which, even in a reasonably free market economy, we should not overlook. Therefore, when a discrepancy develops between full employment savings and planned capital formation, cyclical Keynesianism favors policies that work toward restoration of the balance without reliance on significant changes in the general level of money wages and prices. These policies include countercyclical regulation of the relationship between fiscal revenues and fiscal expenditures as well as central bank techniques.
This brief account has moved on thoroughly familiar ground; it raises the question whether cyclical Keynesianism should be called Keynesianism at all. At least in some countries compensatory central bank action has a history that is more than a century old, and the objecfives of compensatory central bank policy have been those of cyclical Keynesianism. Toward the end of the nineteenth century and in the beg inning of the present, Wicksell's work convinced many economists that in business cycle analysis it is fruitful to attribute an important role to saving-investment discrepancies. From the twenties on, Robertson in England and a prominent group of economists in Sweden have been using brands of their own of the saving-investment analysis. Their conclusions fall under the heading of cyclical Keynesianism, to some extent even with respect to countercyclical fiscal policy. In connection with these contributions it is anachronistic to speak of Keynesianism. The General Theory was published in 1936; even the Treatise on Money was published after the decade of the twenties (1930). The truth of the matter is that the Keynesian contribution came after a long sequence of important antecedents and that any intelligent presentation of so-called "Keynesian" views requires integrating the Keynesian formal apparatus with analytical elements to be found in the writings of the preceding period. Yet Keynes's contribution to the problem now considered was very significant, and in doctrinal history it is by no means uncommon to associate approaches primarily with the names of writers who toward the end of a historical sequence gave a doctrine a particularly effective formulation. This is why
cyclical Keynesianism may after all not be a misleading term, although it is a term which does not do justice to the contributions of the pioneers.
I think it is exceedingly likely that the world would have been spared many tragic events if around 1930 cyclical Keynesianism had been generally accepted doctrine. The German case provides perhaps the most convincing argument in support of this thesis, particularly in view of the fact that world politics has become so lastingly and decisively influenced by what happened in Germany during the thirties. Extended mass unemployment was unquestionably the most powerful among the factors responsible for Hitler's rise to power in January, 1933, and therefore for World War II and for its aftermath. It is impossible to match the German illustration with equally strong ones from other countries, but given the general characteristics of contemporary Western social systems, failure to engage in compensatory fiscal as well as monetary policy during periods of severe depression would have exceedingly grave consequences everywhere. Nor can a single country succeed in its compensatory policies all by itself; that is to say, without some degree of international co-operation in these matters.
One's enthusiasm for cyclical Keynesianism may well become tempered by a tendency on the part of governments to adopt compensatory policies in an asymmetrical fashion, with the result that at the end chronic inflationary pressure is produced. This is an acute danger particularly in an environment where money wage increases, such as exceed the rate of increase in productivity whenever full employment exists, may force a choice between inflation and some amount of unemployment. In such an environment the pressures of the social system might very well tip the efforts of compensatory policy in the inflationary direction.
In their advising capacity economic experts should not overlook this danger. Still, it seems to me very much preferable to try to cope with this danger by urging a less-than-perfectionist attitude to the problem of full employment than to refrain from using strong policies when we become faced with strong cyclical swings. Indeed, it seems inconceivable that any responsible government should revert to the prewar policies in this regard.