Political leaders across the world are embracing Keynesian economic policies. But they are incapable of escaping capitalist crisis, writes Feiyi Zhang
“The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us,” stated Martin Wolf, economic commentator of the conservative Financial Times.
With the spread of the sub-prime financial crisis triggering a global economic crisis, there has been constant comment on the return of Keynes. Wolf, once a hired gun for neo-liberalism, now declares that, “Keynes offers us the best way to think about the financial crisis.”
From conservative US Treasury secretary Ben Bernanke, to Barack Obama and Kevin Rudd—many are championing Keynesian solutions to the current global economic turmoil. These policies have been based on the hope that massive state intervention—bailing out banks and failing companies and stimulus packages—can prevent even larger scale economic collapse. These hopes ignore the reality that historically Keynes and Keynesian policies neither prevented nor solved economic crisis.
Keynes asserted that an un-regulated capitalist economy tends towards crisis. He argued against two key propositions of conventional economists.
Firstly, he challenged the belief that supply always equals demand. Conventional economists argued that the total goods produced will always be sold, as supply creates its own demand. Keynes argued that rather than an equilibrium of supply and demand, there tended to be a gap between what is produced and what is consumed.
Keynes’s most well-known theoretical contribution The General Theory of Employment, Interest and Money focused on explaining the different factors that determine this imbalance and how this can be overcome.
However Keynes ignored the fact that Karl Marx had made this point over 60 years before. Marx understood that all goods produced in the capitalist market can only be sold if capitalists spend all their profits and workers all their wages. Keynes thought this problem could be solved within capitalism, while Marx saw that this underpinned capitalism’s tendency towards crisis.
Secondly, Keynes argued against wage cuts and mass unemployment. He argued that the cutting of wages would simply mean that consumers would spend less and sales would decline. Cutting wages would cut consumption and the economy would simply spiral further down.
While the majority of workers have to spend most of their wages just to survive, those with savings (in particular, this includes the personal wealth of capitalists as well as the profits accumulated by companies) can keep their money in the bank or spend it on themselves. Unless the rate of profit is high enough capitalists won’t re-invest.
Alongside maintaining consumer spending, Keynes argued that there was a need to stimulate business investment. This resulted in Keynes’s focus on the psychology of the business community, influencing his theoretical work and practical policy proposals. Robert Skidelsky, biographer of Keynes, notes how “every proposal Keynes made was tailored into taking into account the psychology of the business community”. In order to induce business investment and consumption, Keynes proposed two main mechanisms of state intervention.
First, governments should drive down the rate of interest to encourage investment rather than saving. Keynes argued that there is a psychological calculation by capitalists regarding whether it is more profitable to invest now or later. If governments drive interest rates down it appears attractive to immediately borrow money and invest. This prevents the stoppage of investment and a resulting slump in the economy.
For consumers, reducing the rate of interest will also encourage spending. For example, low interest rates increase the attractiveness of taking out mortgages. Driving down interest rates would induce spending and investment with flow-on effects creating more markets for output, thereby renewing a cycle of business investment. However, Keynes was sceptical of simply driving down rates of interest to end a deep slump like the 1930s.
Secondly, governments could increase their own spending using budget deficits, financed by borrowing. As extra workers got jobs and spent their wages, this would increase the demand for goods. This, in turn would provide the basis for employing other workers. As the economy expanded towards full employment, government debt could be paid off with increased government revenue from taxes.
At some points in the General Theory, Keynes appears to argue for more drastic state control of society to implement the measures outlined above, as “a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment”. However Keynes did not see this as a challenge to the system itself. For Keynes, “…this was to be alliance between the public and private sector and to be increased gradually and without a break in the general traditions of society”.
Keynes in Practice
Keynes is championed as a solution to the current crisis because the post-Second World War boom (1940s-1970s) is seen as an example of governments successfully putting Keynesian doctrines into practice. But in reality, Keynes’s proposals were never actually implemented.
The level of state control needed to implement state financing at a scale sufficient to influence the economy following the Great Depression would have required taking economic control out of the hands of the capitalist class – something that neither Keynes nor capitalist governments were willing to contemplate.
Glynn and Howell estimate that three million jobs would have been needed in Britain to restore full employment at the deepest point of the 1930s slump, requiring an increase in government spending of some 56 per cent. Carrying this through would have required the transformation of the British economy into a largely state controlled, if not planned, economic system.
Eichengreen estimates that when government expenditure did start to grow and reduce unemployment, it was “due more to Mr Hitler than Mr Keynes” with growth of 5 per cent in the proportion of GNP going into arms, creating some 1.5 million jobs by 1938. A successful post-war Keynes-type policy in the US, “…would have had to approach the size of government expenditures during the Second World War”.
When it came to putting ideas into practice Keynes was always limited by his focus on the business community and worries about upsetting the psychology of business investment. Throughout his life, Keynes believed in the regulation and maintenance of the system, working for compromise with the government and business leaders. In The End of Laissez Faire Keynes stated that “capitalism wisely managed, can probably be made more efficient for attaining economic ends that any alternative system yet in sight.” Despite his polemics against conventional economics, Keynes played a key public role in maintaining British capitalist interests and the capitalist system.
Marx versus Keynes
The recovery from the Great Depression cannot be ascribed to Keynes. In the post-Second World War boom, far from running a large Keynesian deficit to stimulate the economy, governments persistently ran large surpluses. In fact, the main form of government intervention until the 1970s was to slow down the economy with credit squeezes, rather than increasing government spending to speed up the economy.
It was when the boom ended with a recession in advanced countries in 1974-76 that governments looked to Keynesian prescriptions for stimulating demand. But Keynesian policies did not work. The increases in government spending could not be matched by expanding production. Capitalists still uncertain about their profit returns refused to invest. So, government debt simply drove up interest rates and fuelled inflation. Governments quickly abandoned Keynesian policies. Keynesian economists were left in disarray. The failure of Keynes paved the way for neo-liberalism and the onslaught of Thatcherite policies that sought to boost profitability by attacking working class living standards and unions’ right to organise.
Marxists from the International Socialist Tradition (of which Solidarity is a part) explain the recovery from the Great Depression as driven by imperialist competition between nation states that propelled state military spending in preparation for the Second World War.
The Falling Rate of Profit
The capitalist system is based on the drive to accumulate profit and government policy plays a crucial role in maintaining and cohering the system.
Marx outlined the way in which capitalism is based on competition between different capitalists for profit. It is this competition that ultimately produces the central element of crisis within the system—the tendency for the rate of profit to fall.
Profit, the dynamic driving capitalist competition, is created through the exploitation of workers. Marx’s labour theory of value demonstrates how profit is created through the surplus value that workers create in producing more value than they are paid in wages.
Yet competition pushes each individual capitalist to invest in capital intensive machinery and technology rather than labour, because it boosts their profitability in the short-term. In the long term this results in an increase in the proportion of investment in capital (machinery, etc), in comparison to a smaller proportion of investment into human labour (ie the capitalist employs fewer workers). As human labour is the source of surplus value this makes the general rate (not necessarily the absolute amounts) of profit lower. It is this declining profitability that leads to capitalists refusing to invest and thus to economic crisis.
The International Socialist Tradition outlines how Cold War arms spending acted as a counter-veiling factor to the tendency for the rate of profit to fall in the post-Second World War boom. Rather than re-investment into capital that would lead to the lowering of profit rates, the state and capital merged to invest vast quantities of surplus value into unproductive arms spending.
However because of the contradictions inherent in the system, the crisis could be postponed, but not prevented. The military and economic competition between rival nations eventually saw a fall in profit rates globally, plunging the world into crisis in the 1970s.
The historical use of Keynes to justify the capitalist system, and the failure of Keynes in practice, provides key lessons for understanding the economic and ideological flaws behind the recent enthusiasm for a return to Keynes.
Are we all Keynesians now?
The most dominant current face of Keynes is US President Barrack Obama. Recently, Obama presented a $787 billion stimulus package as the solution to the current global financial crisis. Similarly Kevin Rudd enacted a A$42 billion stimulus package.
Yet despite stimulus packages across the globe, the world’s major economies have slumped into recession, if not outright depression. The IMF predicts that the global economy will shrink for the first time in 60 years. The unemployment rate hit 5.4 per cent in May and most economists believe Australia is already in recession along with most other major world economies.
The stimulus packages are an attempt to maintain spending in the short-term, yet thousands of people are already losing their jobs, homes and livelihoods. The stimulus packages are, at best, the sugar on the bitter pill of crisis being forced onto the working class and poor.
For the past two decades the global capitalist class has been able to rebuild profit rates. But even with globalisation’s drastic neo-liberal attacks on working class living standards, profit levels were still only half the levels of the post-Second World War boom.
The difficulty of re-generating profit rates through productive investment fuelled financial speculation and housing bubbles, as money sloshed around the world looking to make a quick buck. When the crash came, the financial contagion produced global instability.
A Marxist understanding that crisis is an inevitable consequence of competition and the drive for profit, explains why, if we are going to end the tendency to crsis, the system will have to be overturned. Government intervention can, at best, tinker with the system but cannot solve the crisis tendencies embedded in the system.
The demand for government action to defend working class jobs and living standards in the face of the recession is nonetheless politically important. The working class people who paid for the neo-liberal boom are now being expected to pay for the crisis with job losses and more wage restraint.
A fight for socialism
Yet so-called Keynesian intervention such as that taken by the Rudd government neither reflects genuine government responsibility for the economic crisis nor any ability to prevent its snowballing impact. Rudd has given almost everyone a $900 cheque but far more is being taken away from the working class by raising the retirement age to 67. US President Obama is ready to spend more billions to save the bankrupt General Motors, but US auto workers are paying with savage cuts to their jobs and the conditions.
There is no Keynesian solution to the crisis in capitalism. Nor is it a crisis of regulation—the tendency to crisis cannot be regulated out of the system. It is Marx that explains that crisis is embedded in the system.
There will need to be a fight against every job cut and short time working. We will have to fight the government for action to defend workers rather than bail out big business. And we will need to fight for a socialist society. Only by over-turning capitalism can we build a society free from crisis, based on centralised rational planning and mass democratic workers’ control.