With the sovereign debt contagion spreading, the euro facing existential crisis, the possibility of a US default and gold prices hitting record highs there is a real possibility that capitalism is heading for a further sharp downturn. But, asks Jack Conrad, does Keynesianism offer a way out?
John Maynard Keynes: the "great saviour" of capitalism
Before he carried the heavy responsibility of serving as shadow chancellor, Ed Balls “cast himself as a latter-day John Maynard Keynes”. The TUC’s industrial investment, job creation and VAT cutting alternative budget proposals are quintessentially Keynesian. The same goes for the demands of the People’s Charter promoted by the Morning Star and supported by Aslef, RMT, FBU, GMB, Unite, PCS, NUR and a range of other trade unions. The assumptions, proposals and expectations of many other organisations, campaigns and individuals on the left are either explicitly or implicitly Keynesian too: Labour Representation Committee, Left Economics Advisory Panel, Respect, Caroline Lucas, Gregor Gall, Andrew Fisher, Green New Deal, etc. All call for deficit financing as a means of slashing unemployment and putting the country back onto the high road to economic growth, as mapped out by the “great saviour” (Robert Skidelsky).
So let us consider Keynes, the man, and the ‘ism’ linked to his name.
Born into a well-read middle class family, he went from Eton to Cambridge, and then, after a short stint at the India office, he pursued a brilliant career: sometime academic, sometime government advisor, sometime sage. Cultured, bisexual, confident, intellectually gifted, he mixed easily with the high bourgeoisie. Soon he was part of the inner circle of the British ruling class. Always an elitist, he spoke strongly in favour of eugenics. Against the “boorish proletariat” he upheld the white “educated bourgeoisie”. And Keynes did great things for his adopted class. He was one of the leading architects of the Bretton Woods international monetary system: in many ways it embodied his political economy. Ennobled, in reward for services rendered, Keynes joined the Liberal benches in the House of Lords. When he died in 1946, he was mourned by the entire political, business and academic establishment.
Needless to say, Keynes was no socialist. He upheld a boundless optimism about technology, capital accumulation and expert knowledge. With the right men at the helm, all problems could be solved within capitalism. He contemptuously dismissed the writings of Karl Marx. Eg, Capital was an “obsolete economic textbook”. The “decent, educated, intelligent son of western Europe” will reject it out of hand unless “he has first suffered some strange and horrid process of conversion which has changed his values”.
Keynes produced a string of influential studies: The economic consequences of the peace (1919), A tract on monetary reform (1923), The end of laissez-faire (1926), Treatise on money (1930). But the most important by far was The general theory of employment, interest and money (1936). This book, his magnus opus, was published during the tail end of the great depression. Because of it he has been credited with ushering in a “revolution” in economic thought.
Keynes, and a growing band of co-thinkers, challenged so-called “classical economics”: eg, Say’s law and the notion that markets are self-adjusting and supply will create its own demand. Unemployment had one cause - wages were too high. The remedy was obvious: take a pay cut. Such laissez-faire doctrines suited capitalism well in its heyday. While capitalism expanded, it needed nothing more than crude apologetics.
However, subsequent events tore to shreds all notions of the self-regulating market. World War I necessitated massive state intervention. Government dictats substituted for market-determined allocation - and not only in war industries. Each belligerent country ran up enormous debts in order to sustain its killing machine. In the 1920s the orthodox economic mantra was paying off accumulated debts and balancing budgets. The intention was to return the system to the halcyon days of the 19th century. However, the result was abject failure. The victory of Henry Ford over Karl Marx proved to be the “shortest-lived utopia on the historical record”.
The 1929 crash was a defining moment in world history. Shares suddenly became worthless. Unemployment soared. Prices sunk. Fortunes vanished. The great depression that followed widely discredited Say’s law, along with the fallacious theory of ‘marginal utility’ (ignoring social and historical factors, marginal utility insists on taking individuals and their atomised decisions as its starting point). With millions joining the dole queues, the assumption that unemployment could only be “voluntary” or “frictional” stood exposed for what it was - the ideological outlook of the complacent bourgeois. Keynes readily acknowledged the existence of “involuntary” unemployment.
Meanwhile, with much fanfare, Stalin and the Soviet Union launched the first five-year plan. Almost overnight unemployment was abolished and, despite the widely acknowledged brutality involved, the USSR appeared to be on the high road to industrialisation, prosperity and perhaps provided the paradigm for a “new civilisation”.
While mainstream opinion in Britain, including big business and the treasury, initially derided Keynesianism as the “raving of wild and irresponsible extremists”, a rather strange mix of political forces found “scientific” vindication. Eg, both fascists in Nazi Germany and Fabian socialists in Britain enthusiastically embraced Keynesianism, because it purported to offer a cure for all the failings of capitalism while leaving wage-slavery intact (in fact it is probably the case that Keynes developed his theory ex post facto - the Stalinite counterrevolutionary revolution doubtless provided him with an example of what could be done through the concentrated application of state power).
So how did Keynes propose to lift capitalism out of crisis? Crudely put, to save the system governments ought to greatly extend their remit and purchase extra goods and services (paid for by printing money or issuing bonds and other forms of borrowing). Eg, arms spending, which soaks up unemployment, puts to use otherwise idle plant and thereby boosts aggregate demand. According to Keynes, that would produce a “multiplier effect” (the ratio between extra government spending and the expansion of GNP - the concept was introduced into bourgeois economics by Richard F Kuhn in 1931).
Higher levels of employment mean more in the way of private income within the system in the form of wages. That in turn augments tax returns for the government and simultaneously expands the “effective demand” for the means of consumption. Profits are revived and that too generates augmented tax returns. Flush with its additional taxes, the government can then pay off debts. Deficit financing therefore seemingly constitutes a virtuous circle, which, if dutifully followed, supposedly eliminates, or at least substantially ameliorates, the negative effects of capitalism’s periodic economic downturns.
Keynesianism became the orthodox theory within the core capitalist countries from the 1940s till the mid-1970s. Not surprisingly Keynesianism was closely associated with the post-World War II social democratic settlement, economic growth and the expansion of the welfare state. Almost without exception the contending fractions of the ruling class accepted that capitalism boomed more or less uninterruptedly following World War II because of the innovative managerial tools provided by Keynes. The status of economists rose and rose accordingly. With their mathematical models, impressively long formulas, graphs and number-crunching, they were lauded as the equivalents of nuclear physicists. The economy was seen as a machine - typically a car. It did not matter whether the government was Labour or Tory. As long as ministers listened to the experts, and therefore pressed on the appropriate fiscal accelerator, or touched the right monetary brake, the economy would be kept on a steady path and full employment could be guaranteed.
Whether Keynesianism was responsible for the long boom is doubtful, to say the least. Nowadays, of course, bourgeois politicians, economists and historians alike have considerable reservations about Keynesianism. Marxists - authentic Marxists, that is - would first and foremost look to the horrendous destruction of capital in Europe and Japan during World War II and after that the replacement of British by American hegemony. That surely explains the 25 years of economic growth, not the “technical tricks” of Keynes.
Anyhow, one thing is sure: after 1945 Keynesianism triumphed as an ideology. It became common sense that the misery of unemployment, chronic economic depression, grinding poverty and violent class conflict of the 1930s had been banished forever. Hence it was claimed with supreme self-confidence - and it was widely believed - that Marxism had lost all relevance. All very well for the last half of the 19th century; utterly irrelevant for the second half of the 20th. To suggest otherwise was to guarantee condescending laughter (I well remember). Indeed capitalism was either deemed to be crisis-free or it was no longer capitalism. Amongst the bourgeois intelligentsia the talk was of the universalisation of modern, industrial or technocratic society: according to the wishful thinking of John Kenneth Galbraith, a disciple of Keynes, the “ostensibly” different systems of the Soviet Union and the United States were converging. And, with uninterrupted economic growth, material shortages, gross income inequality and the conflict between labour and capital would soon be consigned to the pages of history. Despite the imminent future being repeatedly delayed, the promise remained. The world was about to enter the realms of unheard of abundance; from then on, thanks to Keynesian economics, the only remaining problem would be what to do with our ever-growing leisure time. Or so we were told.
Such technocratic ideas were enthusiastically adopted by rightwing Labourism. Thirty-five years before Tony Blair and New Labour, Hugh Gaitskell - leader of the Labour Party from 1955 to 1963 - attempted to rid himself of the old clause four in the name of “classless” common sense, modernism and political wisdom. Though he humiliatingly failed, in 1960 the Labour Party conference agreed to support the so-called “mixed economy” - albeit through a procedural trick.
The dominance of Keynesianism impacted on the left too. For the gullable advocates of peaceful coexistence, for the programmatically impatient, for those spellbound by technology, the ongoing economic boom seemed to confound the predictions of Marx and the pre-World War II Marxists that capitalism was undergoing its “death agony” (as Leon Trotsky confidently wrote in 1938). Through state intervention capitalism had apparently overcome all its main economic contradictions. Dogmatists preserved what they saw as the revolutionary faith by the simple device of closing their eyes to the inconvenient truth. The ‘boom’ was put in quote marks or, if admitted at all, was dismissed as fleeting. That was the position maintained by Earnest Mandel in 1947. Needless to say, he was not alone.
However, others - the overtly opportunist, the revisionists - slowly or quickly, reluctantly or eagerly, were drawn to Keynesian ideas. Keynes had shown how, left to its own devices, capitalism produced a recurring tendency towards chronic instability and devastating crises. But, if Keynes had provided the tools needed to stabilise capitalism, could not those same tools be used to go beyond capitalism? For this reason, if no other, the economics of Keynes have been flatteringly compared with the objective-idealist philosophy of Georg Hegel. Keynes was a thorough-going bourgeois and a loyal servant of British imperialism. But through a leftist “interpretation” Keynesianism could perhaps realise anti-capitalist goals. The pro-Stalinist economist, Joan Robinson (1903-83), was the outstanding theorist of leftwing Keynesianism.
Suffice to say, Keynesianism hit the buffers in the late 1960s. One of the unintended consequences of Keynesianism was a decline in the role of money (fundamental to capitalism). Furthermore, because of full employment, social security benefits, council housing, the national health service, etc, the system’s ability to discipline the working class through what Marx called “commodity fetishism” was reduced. Hence, we can say that Keynesianism is a means whereby capitalism manages its own long-term decline through increasing the role of organisation, as against the role of the market. Markets, including the market in labour-power, are retained, but are thoroughly bureaucratised.
Under such circumstances, internal contradictions mount up. Economics is politicised and objectively the power of the working class grows at the expense of capital. Profit and growth rates begin to fall (in no small part because of the organisation and militancy of trade union power). Certainly in the 1970s, faced with a loss of control, the bourgeoisie pulled the plug on full employment in order to restore discipline over the working class. With the system visibly malfunctioning, the ruling class, crucially in the Anglo-Saxon world, broke with Keynesianism, downgraded productive capital and sought salvation in financialisation. Inflation was allowed to run hand in hand with the return of mass unemployment (an impossible combination, according to Keynesian theory).
A new bourgeois orthodoxy was put in place. Out went Keynesianism and the social democratic settlement. In came monetarism, neoliberalism, Milton Friedman, the Chicago school and Thatcherism. Paradoxically, however, it was sections of the left, including those who called themselves Marxists, who doggedly clung onto Keynesianism.
Almost by sleight of hand, ‘official communism’ went over to Keynesianism in the 1970s. As the long boom of the 1950 and 60s retreated into memory, Keynesianism became the model for the future. In close collaboration with left Labourite allies the old CPGB conceived, developed and finally gave birth to the Alternative Economic Strategy. The AES was a classic example of Keynesian-inspired nationalist reformism, which, given the needs of the times, had on occasion to be dressed up as a “revolutionary strategy”. Eg, the Eurocommunist, Sam Aaronovitch (1919-98), excused the AES because he claimed it was designed to “advance towards fundamental change in the class and property relationships in society”.
In fact what the AES proposed was the election of a reformist left government committed to the democratisation of industrial relations, widespread nationalisation and a large-scale investment programme. Such measures, its advocates promised, would “regenerate Britain” - crucially by stimulating aggregate demand.
In the real world, the AES would necessitate, of course, imposing draconian protectionist measures, such as import controls, and “leaving” what was then the European Economic Community. In other words, the AES was a reformist utopia, which, if put into practice, could only but end in banal disappointment - that or social disaster: ie, the flight of capital, national isolation, population exodus and social regression.
Showing how far they have lost their bearings, we now hear similar left Keynesian nonsense spouted by individuals and organisations who call themselves revolutionary Marxists. Hence we have Alex Callinicos, abusing his considerable talents in order to fend off criticisms of the Socialist Workers Party in Ireland (amongst others). Its People Before Profit Alliance electoral front proudly issued an “Alternative Economic Agenda” in April 2009. While some of its demands are eminently supportable, democracy, state power and the aim of socialism are noticeably absent.
Nevertheless, the AEA considerably overlaps with the old AES. Callinicos is honest enough to admit as much. However, he says, those who want to “dismiss” it on such grounds “ignore the radically different context from that of the 1970s” - the comrade cites “deregulation” and the “devastating economic slump”. Which is just to say the 2010s are not the 1970s. Recognising the banality of that non-argument, Callinicos latches onto the claims of his youth: the old AES was “a reformist attempt to rescue capitalism”. True - not that the ‘official communists’ ever openly admitted any such thing.
The last resort of the renegade is to invoke “transitional demands”, as “understood by the early Communist International and by Trotsky”. Then, almost by magic, “everything changes”: and that, of course, is exactly what Callinicos does. Yet Keynesianism remains Keynesianism, whether advocated by the Nazis, Fabians or fake Marxists.
Surely letting the cat out of the bag, Callinicos’s Irish comrades write that they wish to “prevent the bulk of the pain of the economic crisis falling onto the shoulders of the working class”. Moreover, their AEA enviously looks to the “stimulus packages” in “the US and some EU countries”, which are designed to “revive their economy”. Ireland, they argued, should follow suit.
True, in 2008 and 2009 the financial system was bailed out in Keynesian fashion. George W Bush twinned himself with Gordon Brown. The US congress agreed a $700 billion package to purchase bad debts and recapitalise the financial sector. Britain too poured in government money. Banks and insurance companies were nationalised or part-nationalised one after the other (eg, the Royal Bank of Scotland and Lloyds TSB, and in America Goldman Sachs and Citigroup). Chrysler and General Motors were also rescued from bankruptcy.
The mainstream media, not least the conservative right, was full of laughable accusations that Bush had gone over to “socialism”. Thoroughly enjoying the humiliating ideological U-turn, Hugo Chávez ironically called him “comrade”. The Venezuelan president mockingly announced that “Bush is to the left of me now”.
However, there was a grain of truth in the media accusations. Across the world, but especially in North American and Europe, the huge losses suffered in 2008-09 - at least for those concerns deemed ‘too big to fail’ - were socialised. The total sums involved head into the $trillions. Hence the subprime, banking and insurance crisis metamorphosed into the sovereign debt crisis.
Though borrowing, as a proportion of GDP, is perfectly manageable, at least for the core capitalist countries, and far from being unprecedented historically - eg, the 1940s and 50s saw comparable debt levels - a suffocating consensus has emerged. There is no alternative. Debts must be reduced as soon as possible through deep cuts in government spending programmes. So it is back to the future.
George Osborne’s ‘age of austerity’ involves a savage package of cuts. Benefits, higher education, local government, etc are being butchered. Simultaneously, taxation levels, retirement ages and pension contributions are being ratcheted up. There has been nothing comparable since the ‘Geddes axe’ of the early 1920s. The then coalition government of prime minister David Lloyd George was determined to drive down the debt inherited from World War I. Eric Geddes and his committee duly obliged by recommending cuts totalling £87 million - about 10% of the country’s entire GDP at the time. That translated into a 35% reduction in the number of civil servants and the abolition of entire government departments, including “labour, mines and transport”. As we now know, the result could only but be a negative ‘multiplier effect’. The early 1920s produced not a ‘land fit for heroes’, but wage cuts, bitter class struggles and economic failure.
Revealingly Osborne’s Con-Lib Dem austerity programme is welcomed by the Confederation of British Industry, International Monetary Fund, Bank of England, etc. Not that Labour is much different. While Ed Miliband made much of the pain and how it is not working, he too is committed to austerity. Labour cuts would supposedly be slower and less deep. But pain, it is agreed, cannot be avoided.
And this austerity consensus now includes everywhere in the EU. Take France - which for a while appeared determined to resist German demands for savage cuts throughout the euro zone. Christine Lagarde, France’s finance minister, agreed deficit reduction plans “worth €40 billion” in September 2010. A package that will see the loss of 97,000 civil service jobs. And, of course, Germany’s chancellor, Angela Merkel, is insisting that Portugal, Ireland, Greece and Spain - “peripheral” members of the euro zone - impose ever harsher austerity measures. What goes for the ‘pigs’ now, of course, goes for Italy. In order to “balance its budget” by 2014 the Italian parliament voted for Giulio Tremonti’s €45 billion cuts package at “record speed”. The pain will doubtless fall “onto the shoulders of the working class”.
What of the US? Barack Obama’s administration is now committed to $4,000 billion of cuts over the next 10 years. Inevitably Medicare, Medicaid and social security will be butchered. In other words Obama’s soft Keynesianism, inherited from Bush - and so admired by the Irish SWP - has been ditched. True, the Republicans, especially the Tea Party faction, are demanding more cuts … and faster. Showing whose interests they serve, this goes hand in hand with a refusal to countenance any tax rises, including closing tax loopholes: eg, Amazon’s tax-free business operations in the US.
How to explain the austerity consensus? There are two main factors at play.
Firstly, the financial crisis of 2008-09 was, of course, bad news for the entire capitalist class. It was not only a blow to profits. Neoliberalism became a busted flush. As an ideology it no longer works. However, the crisis, especially the debt crisis, was greeted in certain quarters as a golden opportunity to further roll back the post-World War II social settlement. Once the madcap dream was of restoring a pristine capitalism. Nevertheless, working class living standards, the share labour takes from the social product, can be screwed down. Not only wages paid by employers, but the social wage too. Necessarily that means constant, unremitting attacks on negotiated terms and conditions and ever more authoritarian measures. In short, the rate of exploitation is to be ratcheted up under the patriotic rubric of balancing the nation’s books.
Secondly, the capitalist class is increasingly irrational. Its leading sections are acting in a way that not only hurts the majority of the population, but runs counter to their own interests. Galbraith once made the correct point that, “whether a government [faced with the reality of a depression] shall be Keynesian or not … comes to nothing more or less than the choice of whether or not to commit political suicide”. A worry clearly shared by the noted Financial Times columnist, Martin Wolf. He darkly warns of the “risk” of the “mother of all meltdowns”. In the determination to exploit the debt crisis there is not only the danger of the cuts triggering a double-dip recession. There is also the danger of a social explosion. Greece, Spain and France have already seen protest general strikes. Clearly only a hint of things to come.
The bourgeoisie has abandoned its old Keynesian methods of managing capitalism’s decline in a relatively civilised manner. As a class it remembers the 1940s-70s and is agreed - never again. However, the austerity consensus objectively puts revolution and the necessity of socialism back on to the agenda. Does the bourgeoisie really want to “commit political suicide”?
- Financial Times January 22 2011.
- JM Keynes, ‘A short view of Russia’ (1925) in Essays in persuasion New York 1963, p324.
- Ibid p300.
- PA Baran The political economy of growth Harmondsworth 1973, p114.
- JM Keynes The general theory of employment, interest and money New Delhi 2008, pxxi.
- See S Webb and B Webb Soviet communism: a new civilisation? London 1935. In subsequent editions the question mark was removed.
- A Bullock The life and times of Ernest Bevin Vol 1, London 1960, p437.
- JM Keynes The general theory of employment, interest and money New Delhi 2008, p102.
- Of course, attempts to balance the budget through cuts in spending reverses the multiplier effect.
- WW Rostow The stages of economic growth Cambridge 1960, p155.
- JK Galbraith The new industrial state New York 1971, p376.
- R Miliband Parliamentary socialism London 1973, p348.
- L Minkin The Labour Party conference Manchester 1980, p151.
- L Trotsky The transitional program for socialist revolution New York 1977, p111.
- PA Baran The political economy of growth Harmondsworth 1973, p115.
- See A Glyn and R Sutcliffe British capitalism, workers and the profit squeeze Harmondsworth 1972.
- S Aaronovitch The road from Thatcherism London 1981, p115.
- International Socialism No129.
- The Daily Telegraph October 16 2008.
- K Grieves Sir Eric Geddes Manchester 1989, p104.
- Financial Times September 14 2010.
- Financial Times March 12-13 2011.
- Financial Times July 16-17 2011.
- JK Galbraith Economics and the art of controversy New York 1955, p103.
- Financial Times February 19 2008.