Dawn of the dead economists – Keynes, Marx and the search for alternatives

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John Maynard Keynes once remarked that “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist”. Are we approaching a time when practical men (and women) will have to make a conscious choice between the philosophies of two long-dead economists: Keynes himself and Karl Marx?

Of course, it would be complacent to assume that the great financial disaster will inevitably produce a shift to the Left in economic policy. Just consider the attempt by Dan O’Brien of the bizarrely-named Economist Intelligence Unit to use the Irish recession as the pretext for an assault on democracy:

“The answer is to depoliticise aspects of fiscal policy in much the same way as has been done with monetary policy across the world. This would allow qualified people to have a far greater input into the management of the public finances and curb the sort of “If I have it, I’ll spend it” insanity that has led to the current predicament. It seems hard to believe now that elected representatives in many countries once controlled interest rates …today, independent but accountable central banks manage monetary policy. They do not always get it right, but nobody argues for a return to old ways. This must now be the direction for fiscal policy.”

Presumably these would be the same “qualified people” who have done such an excellent job of managing the financial sector.

O’Brien did not take the trouble to explain why the independent central banks which control monetary policy in the US and the UK were unable to prevent the financial melt-down – as he knows very well, the Federal Reserve and the Bank of England played a key role in nurturing the speculative bubble which has burst with such disastrous results. His willingness to put forward such an argument, at this of all times, could be seen as proof of madness, but there is certainly method in it – O’Brien knows that his zany ideas serve the agenda of the business elite, as part of a propaganda campaign to hold public spending responsible for Ireland’s economic trouble. As long as he continues to promote that agenda, O’Brien can expect to find a platform for the most ludicrous and discredited notions.

Looking beyond the parochial and retrograde orthodoxy that currently dominates the Irish media, the financial crisis has opened up a little more space for discussion of alternatives to neo-liberalism. So far the dominant view has been the one expressed by neo-Keynesian pundits – the likes of Will Hutton and Polly Toynbee in Britain, or Paul Krugman and Joseph Stiglitz on the other side of the Atlantic. If you could sum up their out-look in a single phrase, it would be that “another capitalism is possible” – a new structure of regulation and state intervention can prevent future crises and spread the benefits of economic growth far more widely, while preserving the capitalist system. As Hutton put it recently:

“It is not capitalism that is now being judged: rather it is unfair capitalism organised only to benefit the City that is in the dock. We need to recast our capitalism so that it is fairer, more balanced and more sustainable. And we should start by the way we respond to recession.”

It’s not hard to figure out why Keynes should be more attractive than Marx for columnists in the liberal press – after all, there has been no campaign to demonise the British economist and hold him responsible for show trials, labour camps and mass murder. Aligning yourself with the Keynesian tradition of economics makes it possible to criticise the greed and irresponsibility of financial markets without being marked out as a loopy extremist who wants to confiscate all wealth and make a mess of the global economy.

The neo-Keynesians can point to the last time when their ideas held sway, during the three decades which followed the Second World War. This was certainly the most prosperous time that western capitalism has ever known, and the benefits did not merely accrue to wealthy elites. In France, for example, wages grew by an average 4.5% every year between 1946 and 1976. In the following two decades, wage growth fell to 1.5% per annum. More than half of all wage growth in the French economy between 1896 and 1996 took place during the “thirty glorious years” of the Keynesian era.

You can hardly blame people for asking if it would be possible to restore some modernised version of the post-war settlement between labour and capital in the developed world. But it’s no simple matter, and not merely because you can never cross the same river twice. The Keynesian settlement was undermined and eventually dismantled because of powerful social forces: neo-liberalism was not just a free-floating ideology but the expression of material interests. In order to judge the prospects for a neo-Keynesian revival, we have to look back at the previous experience. This article won’t attempt to give a comprehensive account of the rise and fall of Keynesianism. Instead it will concentrate on a few central questions.

The profit squeeze

In 1943, as the post-war social order was beginning to take shape, the Polish economist Michal Kalecki argued that it should be possible for governments to achieve full employment through careful intervention in economic life. However, he warned that success in this field would have unwelcome consequences for capital:

“Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tensions … ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of a ‘normal’ capitalist system.”

To a large extent, the demise of the Keynesian consensus in the 1970s was a confirmation of Kalecki’s view. The memory of the Great Depression helped limit wage demands for a long time after 1945, but eventually a new generation of workers who had never experienced mass unemployment took their place at the head of distributional conflicts between labour and management. The political radicalisation which developed after 1968 encouraged the more aggressive pursuit of wage claims by the working classes of Western Europe and North America. There were 150 million strike days in France during the protests of May-June 1968, and 60 million in Italy the following year. Britain saw 25 million strike days in 1970-71, while the USA topped the OECD table for days on strike in 1970.

The effect of this working-class militancy was to greatly improve the bargaining power of labour, as Table 1 shows.

Source – Andrew Glyn, Capitalism Unleashed (Oxford, 2007) p.4

The increase in the share of national income going to wages and social benefits put a squeeze on the profit rate, which began to decline. In turn this discouraged investment in new capital stock, leading to a fall in productivity growth. But it was not simply the economic consequences of militant working-class action that concerned employers: as Michal Kalecki had noted three decades earlier, capitalists value the existence of a stable hierarchy of command in the work-place even more highly than a good rate of profit. The growing power of union organisers on the factory floor was itself a cause of great worry among business folk.

That fear was reinforced by the trends emerging within the labour movements of capitalist Europe. In France, the Socialist Party formed an alliance with the Communists and negotiated a programme that called for sweeping nationalisation. Tony Benn and his allies in the British Labour Party were advocating experiments in workers’ control and economic planning. The Swedish trade union movement urged the ruling Social Democrats to adopt its policy of “wage earners’ funds” that would gradually transfer the ownership of major companies to their employees. In Italy, the Communist Party surged to its highest-ever share of the vote in 1976, while the other countries of Southern Europe looked set to move drastically to the left as they emerged from long periods of authoritarian rule.

On every side, the security of capital appeared to be under threat. For business leaders, the Keynesian settlement had promised to banish the threat of revolutionary change which would deprive them of their property. Now it did not appear so comforting. Economists Andrew Glyn and Bob Sutcliffe made a prediction about the future of Britain in 1971 that could be applied more broadly:

“For British capitalism it looks as if this time the wolf is really at the door … from 1964 to 1969 there was a huge increase in the share of the national income taken by the working class … while economic measures and structural changes could bring some relief to capital they are unlikely to offer more than a partial way out … capital’s necessary counter-attack demands that the struggle assume a more political character.”

The policies which were embraced and promoted by the governments of Thatcher and Reagan had one crucial motivation: the desire to undermine the power of organised labour at all costs. Their direct political assault on trade unions would not have succeeded as well as it did if it had not been matched by an economic paradigm that turned the logic of Keynesianism on its head: instead of using fiscal policy to encourage full employment, the Reagan and Thatcher governments used monetary policy to generate mass unemployment and plunge their countries into recession. There was nothing irrational about this policy, once its logic as a tool of class struggle from above is understood. The drastic fall in strikes and union membership in the US and the UK since the 1970s – with a corresponding fall in labour’s share of national income – was the natural and intended result of Thatcherite economics.

Globalisation and the nation-state

While the importance of class conflict in undermining Keynesianism is generally taboo for mainstream commentators, the role of globalisation is a different story. Globalisation and neo-liberalism are often said to have advanced hand-in-hand, one bringing the other in its wake as a cloud brings rain. This line of thought is especially attractive for people with a social-democratic background who need to rationalise their own embrace of neo-liberalism (the rhetoric of ANC cabinet ministers in the South African government being a classic example). Thomas Friedman’s “golden strait-jacket” is perhaps the most famous metaphor for globalisation: the New York Times columnist meant to suggest that globalisation will only permit one set of economic policies taken straight from the drawer of “Reaganomics”. Anything else will bring disaster and impoverishment.

The fact that the “golden strait-jacket” itself has often brought disaster and impoverishment to the Majority World is one reason why left-wingers of a more determined bent have examined the conventional wisdom and found it wanting (US labour activist Kim Moody aptly dubbed the work of Thomas Friedman and his ilk “globaloney”). There is a vast literature on globalisation from the Left, which I will not attempt at any length to summarise here.

Much of that literature has studied the extent of the new constraints imposed on national governments by changes in the global economy, and explained that the globalisation of capital is an uneven process: some industries are more exposed to international competition than others, some jobs are more vulnerable to “out-sourcing”, some forms of capital are easier to shift across national borders (currency speculation can be executed at the press of a button, but a manufacturing plant cannot be transferred from one country to another so readily). The uneven character of the process leaves more room for governments to maneuver than the hype would suggest.

In general, studies of the relationship between globalisation and the nation-state have tended to concentrate on one side of the equation. But it’s equally important to look at the nation-state itself and ask a few questions. What is a nation-state? Is it just a given territory and the people enclosed by its borders? Or is it a political system that rules over that territory? There can be different types of state with very different relationships to the people they govern. The contrast between authoritarian and democratic states is obvious, and it is no accident that the most radical free-market experiments have been launched by regimes that crushed domestic opposition with ferocious brutality. But we also have to look at the nature of the system commonly known as “democracy”, which is more accurately described as capitalist democracy – a system where elected parliaments and civic rights are combined with private control over the commanding heights of the economy.

Left-wing critics of capitalist democracy have long argued that even when free elections are held, governments tend to be far more responsive to the demands of big business than they are to the needs of the general population. This class bias is produced by a number of factors: the close and often corrupt relationship between political and economic elites; the dominance of private capital over the mass media; the social networks which connect top civil servants, judges and army officers to the captains of industry; and the threat of capital flight and investment strikes when governments are not doing enough to secure “business confidence”. This was the case well before “globalisation” became a widely-used term. It was bound to affect the way governments responded to the transformation of the global economy over the past few decades.

Russian socialist Boris Kagarlitsky had this back-drop in mind when he made the following point:

“The new situation demands the radical transformation of the state, of its institutions and of its social nature. Traditional bourgeois democracy has shown that it cannot act as a serious counterweight to trans-national capital, and it is therefore essential to step outside these bounds … the democratisation of power and the participation of the masses in decision-making cannot in themselves guarantee that social reforms will be successful. But if progressive social forces, on coming to power, do not begin promptly to democratise the institutions of the state, this can only end in the degeneration and ignominious collapse of left governments.”

Spectres of Marx

This raises some awkward questions for the neo-Keynesian tendency. They generally imagine it will be necessary to win over the existing centre-left parties to their position, then to secure election victories with programmes of social reform. Once those two goals are achieved, the door to a new social model will be wide open. The view of capitalist democracy outlined above suggests instead that the real challenges would only begin once neo-Keynesian parties took office. The power of business elites to undermine elected governments would certainly be mobilised to oppose any social reforms that the capitalist class found intolerable – and that power has been strongly reinforced by neo-liberal globalisation. Experience tells us that capitalists usually find every major reform which encroaches on their profits and freedom of action too much to stomach, unless they have a powerful reason to back down.

When the original Keynesian settlement was established after 1945, there were strong incentives for business leaders to show more flexibility than they had ever shown before. Europe had been devastated by the Second World War, at enormous cost to its economic health. If there was a repeat of the Great Depression, the conditions which spawned Hitler might lead to another war between capitalist states. In any case, it was unlikely that the ruling classes of Western Europe would be allowed to restore the status quo ante – the Communist movement had emerged from the war greatly strengthened and was breathing down the neck of French and Italian capitalism. There was good reason to believe that European workers would rather embrace Communism than permit a return of the bread queues. Capitalism had to reform itself if it was going to survive.

The balance of forces today is very different. There is no radical threat to the capitalist system in Europe or North America. Big business has no reason at present to echo the words of a British Tory politician in the 1940s, who warned that “we must give them reform, or they will give us revolution”. A return to conditions of full employment in the developed world would raise all the political problems mentioned already, and undermine the competitive edge of Northern-based corporations as they face the new economic powers of the East. There would have to be a much stronger motivation for them to swallow that bitter pill than there is today.

This is not to deny that governments are likely to intervene in economic life far more than has been the norm in the last couple of decades – indeed, this has already started to happen, with the massive bank nationalisations of recent months. The call for a new system of international regulation which has been taken up by Nicolas Sarkozy and Gordon Brown may well bear fruit. But government intervention in the economy is one thing: government intervention on behalf of the working class, with the goal of redistributing wealth and eliminating poverty, is quite another. No matter how colossal the failings of big capital may be, its agents will still resist any sweeping programme of reform that would oblige them to reign in their consumption levels (just look at the chutzpah of bankers who expect to receive generous bonuses after demanding a multi-billion pound bail-out from the British people).

This suggests an irony that we can only relish: the viability of neo-Keynesianism will be closely linked to the health of more radical forces that take their view of capitalism from a tradition founded by Karl Marx. A return to Marx is a crucial starting-point for those who reject the limits imposed on social reform by the capitalist system. That doesn’t mean we can find all the answers to modern problems in the pages of the Communist Manifesto. Recently, Eric Hobsbawm suggested what we should take from the German philosopher:

“Any ‘return to Marx’ will be essentially a return to Marx’s analysis of capitalism and its place in the historical evolution of humanity – including, above all, his analysis of the central instability of capitalist development, which proceeds through self-generated periodic economic crises, with political and social dimensions …his actual prediction that capitalism would be replaced by a socially managed or planned system still seems reasonable, though he certainly underestimated the market elements which would survive in any post-capitalist system(s) …Marx will not return as a political inspiration to the Left until it is understood that his writings should not be treated as political programmes, authoritative or otherwise, nor as descriptions of the actual situation of world capitalism today, but rather as guides to his way of understanding the nature of capitalist development.”

The roads to socialism

If the obstacles that stand in the way of neo-Keynesian advance are formidable, it may be said, they pale in comparison with the problems raised by a “socially managed or planned system” – even one that allows greater scope for market elements than Karl Marx envisaged. What is being proposed, however, is not some awkward merger between democratic political structures and a Soviet-style centrally planned economy. The combination of political democracy and social control over the key sectors of economic life would allow much greater scope for de-centralisation and autonomy than was ever conceivable in one-party states.

Ralph Miliband, having insisted on the need to bring the commanding heights of industry and finance into social ownership, argued that this would not require a hyper-centralised, bureaucratic system:

“State ownership is only one form of social ownership, suitable for some major industries and services, but to be complemented wherever possible by local and regional enterprises and partnerships, owned and run by municipal or regional authorities, and by various organisations and collectivities in society. All such bodies would enjoy a very considerable autonomy; and they would, in many instances, be competing with a private sector, located at the lower heights of the economy or at its grassroots, and providing a wide range of goods, services and amenities. This is the kind of economic pluralism which is truly congruent with political pluralism, all the more so because state ownership need not be thought of in terms of single, monopolistic corporations, but rather as areas of economic activity ruled wherever possible on the principle that more-than-one is better than one.”

Nor would it be a question of handing control over the economy to the existing state: new political structures that allow much broader opportunities for citizens to influence and participate in decision-making are needed. We can no longer continue with a model of “democracy” that merely allows people to cast a vote for one set of politicians every four or five years before sending them back to private life.

That’s the “vision thing” – getting there is another matter. There’s plenty of room for debate about the political strategies needed, and the pace of change that can be expected. Radical movements can’t just hold out the prospect of a non-capitalist system and wait for the majority of people to support them. Francisco Louca is an MP for the Left Bloc in Portugal, one of the most successful radical-left projects launched in Europe since the demise of the Soviet Union – and also a professional economist. In an interview published last year, Louca explained that “we do not share a left Keynesian perspective, because it is a perspective that is based on the market, a perspective which had a material base in the capitalist systems after the Second World War, but which is no longer possible today”, and suggested where the radical left can find the link between current struggles and future visions:

“The idea that the only practical alternative is socialism, which cannot be an immediate objective, leads to a perturbation of the thinking of the Left. In order to fight, you have to demand everything, and yet… everything is not possible. We have to break this crazy mirror! If the central objective of the European bourgeoisies, at least of the Portuguese bourgeoisie, is to suppress part of the indirect wages of workers and to take for itself revenue from taxation, from the socialised part of the state, that forces to us to defend public services as a democratic gain for which we are collectively responsible, and to win the majority of the population to such an objective. This battle is not defensive! It is the most offensive battle that you can think of.”

Irish left-wingers will have no trouble recognising the importance of campaigns in defence of public services and the social wage. Such battles can certainly involve tactical alliances with those who believe a different form of capitalism is what society needs. But radicals will put forward demands that go beyond that. John McAllion of the Scottish Socialist Party has called for

“a transitional programme that actually appeals to workers in the here and now, while it builds their confidence in a possible and better socialist future. In addition to populist measures, that transitional programme will need to embrace an alternative economic strategy around key issues such as workers’ control, participatory budgets and popular control of public services.”

The goal must always be to promote democratic control over economic life – including services now provided by the state. If the radical left is seen to be pushing for the expansion of democracy in every area of society, that will go a long way towards undermining the claim that any alternative to free-market capitalism will inevitably lead to the Gulag.

For the time being we should expect Keynes to find more adherents than Marx. But the mere fact that we can imagine such a choice, after a generation when the gospel of Milton Friedman held sway, is proof that old certainties can wither away in a matter of weeks. Who knows where things may stand in a decade’s time?