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.