Quote of the week: Keynes, capitalism and public purpose

“In their own way – and in the social, political, economic and institutional context of the early decades of the twentieth century – globalisation, free markets and light-touch regulation contributed to the devastating events that produced two world wars, with the Great Depression in between. Keynes recognised this, and he sought to reform capitalism so as to make it work both more efficiently and more fairly, such that people could live the good life, eventually free from the economic problem of material need.

Indeed, after World War II, the managed capitalism of the so-called ‘Keynesian’ revolution – in which domestic and international financial markets were tightly regulated – delivered three decades of unprecedented improvements in economic equality and living standards. However, since the 1970s and 1980s, across the industrial world, the return to laissez-faire and the unleashing of international corporations, markets and finance set into motion similar forces to those of Keynes’s time, and he would not have been surprised by the events that followed. From the arrival of the Great Depression, Keynes became a critic of both free trade and unrestricted international capital flows, and he ‘would not have been an enthusiastic globalizer’ (sic). But, as he did throughout his lifetime, were he alive today, Keynes would have developed pragmatic policy proposals appropriate to the social, political, economic and institutional circumstances of our times.”

S. J. Konzelmann, V. Chick and M. Fovargue-Davies (2021), Keynes, capitalism and public purpose, Cambridge Journal of Economics, vol. 45, no. 3, p.610.

Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’.

Quote of the week: Anwar Shaikh on opposing capitalism

This week’s quote comes from the New School’s Anwar Shaikh, whose work I have discussed on this blog a number of times. Working in what he has called the ‘Classical Keynesian’ tradition, his efforts to synthesise the work of Adam Smith, David Ricardo, Karl Marx and John Maynard Keynes culminated in his 2016 magnum opus Capitalism. Although he is both highly critical of and well outside the broadly neoclassical mainstream, he remains an independent spirit and has clearly forged his own path through his research and writing.

The extract below is taken from a volume of interviews with leading heterodox economists, and considers the importance of understanding the world as part of the basis for changing it in a progressive direction, with capitalism being the dominant economic system in the world today. Shaikh’s own book is proffered as a contribution towards that endeavour.

Although I have sympathies with Keynesian economists arguing for policies which achieve and sustain full employment, I can also see where Shaikh is coming from when he argues that the sustaining of it under capitalism has been historically problematic. Sooner or later, economic crises occur, either from within the system itself, or through policy responses to, say, high inflation, which undermine its achievement. However, in Capitalism Shaikh does argue that a social pact between government, business and trade unions can mitigate inflation even in the presence of a tight labour market and high employment rates. Historically, this has been achieved in certain countries at certain times, and for reasonably sustained periods. For me, this is worth shooting for as part of a progressive policy package for improved economic and social performance, and, yes, this would be taking place within capitalism.

At the same time, a combination of reforms to, and the evolution of, the capitalist system itself, may ultimately take it beyond its particular limits and towards something else. What exactly that might be, and what it might be called, may be beyond any one individual’s capacity to imagine. I prefer to leave this problem open for now.

“Many people change the world without understanding, but there are consequences of not understanding it, too. I have done my share of demonstrations and marches. I was a founding member of the Union for Radical Political Economics also. But it seemed to me that providing a space for people to oppose capitalism is not the same thing as providing a framework in which this opposition can be located and which the consequences of opposition can be located also. And some of those consequences are consequences people on the left don’t like to hear. They don’t like to hear that Keynesian policy cannot just provide full employment. Well, I happen to believe that capitalism will not sustain full employment and that’s an uncomfortable belief. But I can’t reject it merely because I don’t like that outcome, so I have to deal with the fact that if that’s the case then that’s the limits of capitalism. Where can you go within those limits? And then it also leads you naturally to ask where do you go beyond capitalism, even though my work is not about that. But it seems to me that understanding the limits helps you think about the fact that you can’t go beyond those limits without leaving the system because these are system limits, not human limits.”

‘Anwar Shaikh’, Ch.13 in A. Mearman, S. Berger and D. Guizzo (2019), What is Heterodox Economics? Conversations With Leading Economists, Abingdon: Routledge, p.219.

Different questions, different answers: seeking an alternative economics

“I was working in the desert myself alongside workers from all over the Middle East and India and Pakistan in searing brutal heat and they were paid minimally. And as an engineer you think: well, things could be done much better. So I thought that economics would have an answer as to why there was inequality and poverty and all that, answers to them. It seemed to me that that’s what I should study. When I got to graduate school I realised that economics doesn’t even have the question let alone the answer. That was a big shock.”

This quote from an interview with New School Professor Anwar Shaikh about his decision to study economics and his early experiences brings to the fore some of the concerns of today’s heterodox economists. I can certainly sympathise. My own experiences in studying economics at school and of beginning to read around the subject in books and newspaper commentary generated enthusiasm for a particular approach to the subject, which gives a primacy to the importance of economic policymaking designed to improve the workings of the economy and society and the well-being of its members. I was attracted by left-Keynesian ideas, what I now recognise as post-Keynesianism, which argued for a government commitment to full employment, secured by judicious macroeconomic management, with any resulting tendency towards rising inflation to be mitigated by incomes policies involving negotiated consensus between the state, employers and workers. Of course, such policies reflected the post-war consensus in many advanced economies, which by what was then the mid-1990s had long been abandoned by the Thatcher governments in favour of a focus on controlling inflation as the main target of macroeconomic policy, while the liberal economy in the form of deregulation and privatisation became the focus of microeconomic policy, ostensibly to improve economic performance and raise living standards.

Quote of the week: Thatcher, monetarism and Marx’s reserve army

Following the last two weeks’ quotes from an interesting chapter by Fabio Petri, this is the third and final extract in this ‘mini’ series. It includes a revealing statement by a top Treasury civil servant under Margaret Thatcher in the 1980s, which saw a severe recession and the return of mass unemployment, topping three million by the middle of the decade, justified by the need bring down inflation.

The use of incomes policies involving negotiations between government, employers and trade unions to limit wage rises and mitigate the wage-price spiral of the time had largely broken down and the new government declared that the monetarist policies championed by Milton Friedman were the only way to do it. But the quote below reveals that Thatcher, rather than strongly adhering to monetarism, saw mass unemployment as an effective way of weakening the power of organised labour and its wage demands.

Inflation did come down, not just due to the renewed weakness of the working class, but also due to the sharp fall in the price of oil and other commodities on global markets, caused by recession across many of the world’s advanced economies. These developments came at great cost, and one must still wonder whether there could have been an alternative to the economic and social brutalities they engendered. Thatcher had declared not, an attitude exemplified by her famous TINA (There Is No Alternative) slogan. The reappearance of what Marx called the ‘reserve army’ of the unemployed, and the end of the post war policy commitment to full employment had been predicted by Michal Kalecki back in 1943.

“The 1970s witnessed the end of the Golden Age. Palma (sic) reports a declaration by Sir Alan Budd (a top civil servant at the British Treasury under Thatcher, and later Provost of Queen’s College, Oxford) on the real reasonings behind the Thatcher government’s use of neoclassical monetarist arguments to justify its brutal restrictive monetary policy:

The Thatcher government never believed for a moment that [monetarism] was the correct way to bring down inflation. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes…What was engineered – in Marxist terms – was a crisis of capitalism which re-created the reserve army of labour, and has allowed the capitalists to make high profits ever since.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.58.

Mushtaq Khan: tackling corruption in developing countries

Mushtaq Khan is a professor of economics at SOAS, and has dedicated much of his career to researching ways of tackling corruption in developing countries as part of a successful long term development strategy. Corruption itself need not be a barrier to development. Historically, the effective checks and balances which counter it have tended to emerge with successful development rather than preceding the the process. Khan argues that, rather than corruption being necessarily ‘cultural’ or innate to individuals in a poor society, it is more often contextual, depending on economic structure and power relations. It can therefore be changed through policies which incentivise productivity growth and the expansion of the formal sector in developing countries, typically on a small scale which is more feasible to begin with, but ultimately on a larger scale by promoting broader socioeconomic development.

This video features Professor Khan talking about all of this. He covers some fascinating and important ideas. The first ten minutes cover the main points if that is what you’re after, but watching the whole video is more rewarding, particularly for those of you interested in this oft-neglected but vital area of development studies.

The productiveness of the welfare state

While the modern welfare state is generally supported by the political left, it is sometimes merely tolerated by the right. Simplistic critiques which decry “workshy” benefit recipients funded by the tax revenues drawn from “hard-working families” can be typical. A variety of schools of economic thought have historically deployed arguments that social spending is unproductive, a drain on the public purse, and a burden on the private, market-based sectors of the economy. But there are alternatives to this line of thinking, which argue that a well designed welfare state can not only reduce poverty, but also enhance the productivity of the economy and society as a whole. There is thus a potential win-win for progressive social policy and public spending more broadly. I consider these ideas below.

Quote of the week: why progressive and interventionist policies prospered following World War Two

Here is another extract from the same chapter as last week’s, by Fabio Petri. These weekly quotes are not necessarily meant to be ‘classic’, nor even penned by the greatest economists in the history of the subject, though sometimes this may be the case. Rather, they make a point that I could not put better myself, and are thus worth posting.

Here the author accounts for the rise of forms of Keynesian interventionism, an effective welfare state in Western Europe, and full employment policies in the US following World War Two.

“One must wait for the Great Depression of the 1930s coupled with the danger of communism to see the hold of marginal theory and policy partly shaken: Keynes candidly admitted he wanted to save capitalism from itself in order to save it from communism, and here we have a strong reason for the general acceptance of his theory in spite of the immediate wave of criticisms, not entirely unjustified, moved against it by Henderson, Hicks, Meade and others. And the beautiful book by Armstrong, Glyn and Harrison, Capitalism since 1945, convincingly shows how at the end of WW2 the fear that the working class would turn communist was the reason for the concession of the welfare state in Western Europe and for a general acceptance, in the USA too, of the interventionist Keynesian state with a duty to maintain unemployment low.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.57-8.

Quote of the week: why textbook economics has failed to advance

This week’s quote is taken from a chapter by Fabio Petri, which explores the social causes of the failure of mainstream economics and its place in political discourse to be radically reassessed in the light of recent crises, not least the Great Recession of 2008-9, and despite the ready availability of alternative theories. He argues that much of this is down to the weakness of the political left in many countries.

“It would seem therefore that the picture generally transmitted by textbooks, of a triumphant advance of economic science brought about by the new insights of marginalism, should be modified into that of a marginal theory aprioristically accepted because of the rosy picture of capitalism it supplied, in spite of its evident incompleteness and weaknesses, in particular in the treatment of capital, weaknesses which – it was fideistically believed – would be surmounted by further theoretical progress.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.57.

Taking the long view: could today’s multiple crises ultimately reduce inequality?

Amid today’s multiple and actually or potentially devastating crises, from the pandemic and war to the environment and the energy shock, and the economic, social and political responses, I have found it somewhat therapeutic to turn away, at least for a moment, from the increasingly depressing daily diet of multimedia news and towards a more historical perspective. Stanford Professor of Classics and History Walter Scheidel penned his 2017 book The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century (hereafter TGL) to make the argument that only major war, revolution, state collapse and pandemics have been able to substantially reduce inequality within countries. If he is right, this hardly seems to offer the prospect of a less worrying take on today’s events.

But maybe taking the long view and stepping out of the 24 hour news cycle provides cause for some optimism, even if the path is proving exceptionally difficult. This is not to ignore the essential need for action from policymakers and citizens. But Scheidel’s book suggests that, given we are living through at least two of his ‘Four Horsemen’ (of the apocalypse), major war and a pandemic, it is possible that we might see major reductions in inequality some way down the road. His work could be seen to be pessimistic in itself, in that historically this seems to often require violent change in society and the economy in order for it to occur, and one would not wish any of this on any society and its members. But perhaps it is also a realistic view: we are being hit to varying degrees by crises from all sides, and could eventually emerge from the other side with something positive.