Keynes is the problem, not the solution

Economist Harry Shutt argues that Keynes' economic theories have ultimately served to propel capitalism towards corrupt and terminal failure

August 21, 2012
9 min read

Illustration: Andrzej Krauze

As governments and leaders of opinion all over the world struggle to end continuing economic paralysis in the wake of the global financial crisis (GFC), they are unanimous on only one point: the need to revive economic growth. Up to now there have been two mainstream schools of economic opinion as to how this revival is to be achieved. These are identified as a) the ‘Austerians’, who assert that by returning policy to fiscal orthodoxy (moving towards a balanced budget) governments can restore market confidence to the point where businesses will start to expand their operations again, and b) Keynesian, according to which budget deficits, so far from being cut, should be expanded further (along with public debt) so as to boost demand and stimulate private sector activity. Both schools are seemingly agreed that there is no place in such a climate for any restraint on monetary expansion.

Unsurprisingly the Austerian view has rapidly been discredited for the logical nonsense that it is, most obviously by its tendency to exacerbate deficits in a climate of weak demand and thus have the opposite effect to what its advocates claim it should. This predictable failure has induced a kind of schizophrenia on the part of the Coalition in the UK and most other governments in Europe, as doubts about the political sustainability of continued budgetary austerity intensify – especially as voters have given it an emphatic thumbs down in France and Greece. But while most governments in Europe cling to the wreckage of this failed strategy, economists have largely abandoned it, perhaps fearing professional ridicule if they continue to try to defend the indefensible. Thus for example Martin Wolf, chief economics commentator of the Financial Times, who for decades has been a high-profile defender of the neo-liberal, free-market ideology of the ‘Washington consensus’, has felt compelled by the inescapable realities of the GFC to adopt an openly Keynesian position.

It would be wrong, however, to see this apparent shift of opinion as representing any kind of ideological watershed. For in reality the neo-liberal ‘revolution’ of the 1980s did not amount to a complete rejection of the Keynesian consensus that had dominated policy during the post-World War II era. Markets were indeed liberalised and globalised, giving the corporate sector (and finance in particular) much greater freedom to seek out profit-making opportunities. But what did not change was the official presumption that governments need to intervene in markets so as to support economic growth and financial markets. Indeed it is ironic that the ‘supply-side’ strategy – based on cutting direct taxes – which was the core of Reaganomics applied in the US in the 1980s, was essentially a form of Keynesian-style deficit financing designed to stimulate growth, although few noticed this at the time. What is undeniable is that it signally failed to bring about the sustained revival of growth anticipated by its advocates, although it did result in a doubling of US public debt and helped precipitate a financial and property market bubble and bust by 1990.

But arguably the most pernicious aspect of this global liberalisation and deregulation of markets was that it reinforced rather than reversed the culture of corporate dependence on state support which was the legacy of the post-war Keynesian era, when policy makers everywhere were driven by the idea that market intervention and support of the private sector by the state (of which the Marshall Plan of the 1940s is the classic example) was justified in order to sustain growth and employment. Although by the 1980s this view had been ostensibly abandoned – along with the restriction of cross-border capital transfers and regulation of such matters as employment and environmental standards – few were inclined to demand a corresponding withdrawal of state subsidies and protection for the private sector, least of all those corporate interests which benefited from this public largesse and which largely set the political agenda. Hardly anyone appeared to recognise that by retaining such interventionist practices while adopting a more laissez faire ideology, governments were creating a climate of ‘moral hazard’ – encouraging big corporations to take undue risks in full confidence that they could count on the state to help artificially boost their profitability or bail them out in the event of destabilising failure.

By thus acting to institutionalise this systemic conflict of interest Keynesian ideology can be said to have laid the foundation of the massive misallocation of resources which, progressively since the 1980s, has brought the global market economy to the brink of final collapse. Hence it can be concluded that Keynes’ economic theories, so far from saving capitalism – as he himself asserted they would – have ultimately served to propel it towards corrupt and terminal failure.

Yet aside from this moral deficiency, the Keynesian model suffers from a serious practical flaw, which was apparent at the time it was originally discredited following the stagflation of the mid-1970s but which its advocates have persistently refused to confront. This is the assumption that it is actually possible over time to manage demand through fiscal and monetary manipulation so as to assure a high enough utilisation of productive factors (capital as well as labour) to avert significant disruptive imbalances – in other words to abolish the business cycle. In truth there is no proof that the post-war boom up to 1973 was to any significant extent the result of the Keynesian-style stimulus techniques then in vogue, rather than being a largely spontaneous response to the massive pent-up consumer and reconstruction demand after the war, the impact of which had been largely exhausted by the early 1970s. A still more fundamental error – common to virtually all mainstream economists – was their refusal to grasp the impact of accelerating technological change on the demand for both labour and capital, resulting in the rising productivity of both. While this phenomenon is well understood by most people in respect of labour – through the highly visible downsizing of workforces in both manufacturing and service industries such as banking – it is less widely recognised that the capital-intensity of fixed investment is also in long-term decline, thus leading to a lower demand for investible funds (including recycled corporate profits – or ‘surplus value’) needed to generate each extra unit of output (GDP). This tendency has naturally compounded the imbalances created by the unavoidable cyclical downturn in the economy following the boom.

Notwithstanding these failures Keynesians stand by their commitment to sustaining the rate of economic (GDP) growth – or preferably raising it to the kind of levels achieved before 1973, the minimum needed to absorb the growing excess capacity. It is the desperate pursuit of this unattainable goal which has generated the present massive distortions and imbalances in the economy, particularly the unprecedented burden of unserviceable debt – private and public – now weighing down the global economy. Even now, amid the total paralysis induced by this debt, Keynesians insist that an essential prerequisite of any recovery strategy must be to increase public borrowing still further, thus digging us into an even deeper hole – a reality underlined by the abject failure of the Obama administration to stimulate any meaningful recovery despite successive trillion-dollar deficits. Their obduracy even extends to giving their blessing to the utterly reckless policy of Quantitative Easing (money printing by any other name) in the US and UK. Despite claims to the contrary the only real purpose of this mechanism is to enable the government to buy up its own increasingly worthless debt and thereby artificially hold down the effective market interest rate closer to 1 per cent than the 6-7 per cent currently being paid by equally bankrupt Eurozone states such as Spain which do not have the luxury of being able to print their own currency. The obvious danger is that this unsustainable strategy will end in currency collapse and hyperinflation.

Cynically, however, most Keynesian economists dismiss the threat of inflation or claim it is a price worth paying for recovery, even though they know it would hit the poorest hardest. If they were truly concerned to advance public welfare they would abandon the doomed struggle to ‘save capitalism’ and demand that the whole financial house of cards be allowed to collapse. Clearly such  a development, which is anyway ultimately inevitable, will be traumatic and fraught with peril. Only once this nettle is grasped, however, will it be possible for a more stable and sustainable economic order to emerge in which the toxic shibboleth of perpetual growth is abandoned and the security and aspirations of the vast majority of ordinary individuals are given priority over the pursuit of profit by a few.

Under such a sustainable new order resources would be allocated in line with more collectively determined priorities, with enterprise (private or public) being allowed to function only within parameters democratically established by the community – whether at national or local level. In order to minimise destructive and wasteful competition some degree of planning would be unavoidable. In place of the futile and damaging pursuit of maximum GDP growth and the increasingly meaningless goal of ‘full employment’ economic welfare would in future be measured in terms of social indicators such as those of public health (physical and mental) and levels of crime. In the absence of significant growth in GDP (value added) income would need to be equitably distributed on the basis of a) a flat rate basic income paid to all citizens as of right (guaranteeing minimum security for all) and b) limiting additional earning opportunities to individuals either through maximum hours / years of work and / or highly progressive taxation. The distribution of a greater share of national income to the masses – which should be seen as their  share of the value generated by the community’s ‘capital’ (social, physical and intellectual) accumulated over centuries rather than something to which they can only gain entitlement by doing paid work that is no longer either available or necessary – could be readily financed from the huge share that presently goes in returns to ever more redundant capital.

It is a measure of the backwardness of thinking and debate within the Labour movement that such alternatives can still hardly be discussed in what pass for the progressive media. Perhaps it is significant, therefore, that such an eminent Keynesian economist as Robert Skidelsky has recently concluded that endless growth is not sustainable and that new approaches to achieving equitable income distribution – including a universal basic income – must be considered. If the Left is to chart a way out of our present chaotic misery it must come into the 21st century and start debating such alternatives seriously as a matter of urgency.


✹ Try our new pay-as-you-feel subscription — you choose how much to pay.

Changing our attitude to Climate Change
Paul Allen of the Centre for Alternative Technology spells out what we need to do to break through the inaction over climate change

Introducing Trump’s Inner Circle
Donald Trump’s key allies are as alarming as the man himself

Secrets and spies of Scotland Yard
A new Espionage Act threatens whistleblowers and journalists, writes Sarah Kavanagh

#AndABlackWomanAtThat – part II: a discussion of power and privilege
In the second article of a three-part series, Sheri Carr reflects on the silencing of black women and the flaws in safe spaces

How progressive is the ‘progressive alliance’?
We need an anti-austerity alliance, not a vaguely progressive alliance, argues Michael Calderbank

The YPJ: Fighting Isis on the frontline
Rahila Gupta talks to Kimmie Taylor about life on the frontline in Rojava

Joint statement on George Osborne’s appointment to the Evening Standard
'We have come together to denounce this brazen conflict of interest and to champion the growing need for independent, truthful and representative media'

Confronting Brexit
Paul O’Connell and Michael Calderbank consider the conditions that led to the Brexit vote, and how the left in Britain should respond

On the right side of history: an interview with Mijente
Marienna Pope-Weidemann speaks to Reyna Wences, co-founder of Mijente, a radical Latinx and Chincanx organising network

Disrupting the City of London Corporation elections
The City of London Corporation is one of the most secretive and least understood institutions in the world, writes Luke Walter

#AndABlackWomanAtThat: a discussion of power and privilege
In the first article of a three-part series, Sheri Carr reflects on the oppression of her early life and how we must fight it, even in our own movement

Corbyn understands the needs of our communities
Ian Hodson reflects on the Copeland by-election and explains why Corbyn has the full support of The Bakers Food and Allied Workers Union

Red Pepper’s race section: open editorial meeting 15 March
On 15 March, we’ll be holding the first of Red Pepper’s Race Section open editorial meetings.

Social Workers Without Borders
Jenny Nelson speaks to Lauren Wroe about a group combining activism and social work with refugees

Growing up married
Laura Nicholson interviews Dr Eylem Atakav about her new film, Growing Up Married, which tells the stories of Turkey’s child brides

The Migrant Connections Festival: solidarity needs meaningful relationships
On March 4 & 5 Bethnal Green will host a migrant-led festival fostering community and solidarity for people of all backgrounds, writes Sohail Jannesari

Reclaiming Holloway Homes
The government is closing old, inner-city jails. Rebecca Roberts looks at what happens next

Intensification of state violence in the Kurdish provinces of Turkey
Oppression increases in the run up to Turkey’s constitutional referendum, writes Mehmet Ugur from Academics for Peace

Pass the domestic violence bill
Emma Snaith reports on the significance of the new anti-domestic violence bill

Report from the second Citizen’s Assembly of Podemos
Sol Trumbo Vila says the mandate from the Podemos Assembly is to go forwards in unity and with humility

Protect our public lands
Last summer Indigenous people travelled thousands of miles around the USA to tell their stories and build a movement. Julie Maldonado reports

From the frontlines
Red Pepper’s new race editor, Ashish Ghadiali, introduces a new space for black and minority progressive voices

How can we make the left sexy?
Jenny Nelson reports on a session at The World Transformed

In pictures: designing for change
Sana Iqbal, the designer behind the identity of The World Transformed festival and the accompanying cover of Red Pepper, talks about the importance of good design

Angry about the #MuslimBan? Here are 5 things to do
As well as protesting against Trump we have a lot of work to get on with here in the UK. Here's a list started by Platform

Who owns our land?
Guy Shrubsole gives some tips for finding out

Don’t delay – ditch coal
Take action this month with the Coal Action Network. By Anne Harris

Utopia: Work less play more
A shorter working week would benefit everyone, writes Madeleine Ellis-Petersen

Mum’s Colombian mine protest comes to London
Anne Harris reports on one woman’s fight against a multinational coal giant

Bike courier Maggie Dewhurst takes on the gig economy… and wins
We spoke to Mags about why she’s ‘biting the hand that feeds her’


48