My economics reading, aside from keeping up with the latest current affairs in economics, continues to be dominated by a mixture of Keynesian/post-Keynesian and Marxist ideas. I still find myself torn between the two in terms of which provides a more useful analysis of the capitalist economy and the government policies which are implied to improve economic performance while creating some measure of social justice.
The broadly Keynesian approach places an emphasis on unemployment and inequality as major flaws in a capitalist economy which can be put right by the right combination of government policies. Keynes himself wanted to save capitalism from itself, not replace it, and he lived through the instability of two world wars and the intervening Great Depression of the 1930s, and wanted governments enlightened by his ideas to try to prevent such calamities from happening again. For 25 years after WWII the (capitalist) world economy experienced something of a Golden Age as output and productivity grew faster over a sustained period than ever before, unemployment rates were exceptionally low and recessions were mild if not non-existent. Inflation was positive but moderate, although it did creep up towards the end of the period. Inequality was far less extreme than today or in the early part of the 20th Century, and prosperity was more widely shared. The optimism among policy-makers that this historical episode produced came to an end in the 1970s with inflation on the rise alongside slowing growth (the two together were termed stagflation), increased industrial unrest and rising unemployment, albeit from those exceptionally low levels. In the UK, the Keynesian-social democratic consensus was undermined as demand management to maintain full employment appeared to be no longer possible and incomes policies (a consensus between government, business and trade unions on wage increases) to keep inflation down failed repeatedly. In 1979, with the election of Margaret Thatcher’s Conservative government, this consensus was ripped up in favour of monetarism (control of the money supply to keep inflation low) and supply side economics (deregulation, privatisation, and tax cuts to improve the incentives to work and invest, which would purportedly encourage economic growth).
On its own terms, monetarism failed, as with moves to remove capital flows and deregulate finance, the government found that it could not control the money supply. Inflation did fall, but this was largely due to a deep recession and mass unemployment reaching three million by the mid-80s that weakened the power of organised labour to secure wage increases. Industrial output fell by over 20% as high interest rates and a boom in North Sea Oil production caused the pound exchange rate to soar, rendering UK exporters uncompetitive internationally. One positive outcome of this economic shock is that it did restore the profitability of the firms that survived, laying the foundations for a recovery, albeit an uneven one (is there any other kind?). For the many that lost their jobs and never found another, it was a disaster.
This macroeconomic performance was partly a consequence of a faulty analysis of the economy and poor policy decisions. It masked subsequent improvements at a microeconomic or supply side level that many on the left cannot bring themselves to admit to, as their traditional concerns of sustained high employment and relative equality were abandoned by the right as policy objectives.
But this is all water under the bridge in terms of economic history. It is not the purpose of this post to explain these events in terms of various economic theories, only to briefly recount how Keynesian economics fell from grace. The latter was partially resuscitated in the wake of the 2008 crisis as governments sought to counter recession with dramatic cuts in interest rates and fiscal stimuli in the form of increased budget deficits, but quickly lost favour with the turn to austerity, which became a drag on growth, especially in the Eurozone and the UK.
Keynesians and especially post-Keynesians place an emphasis on improving economic performance by the management of aggregate demand through monetary and fiscal policies. They tend to be optimistic that economies can achieve and sustain full employment through government intervention, including demand management and sometimes incomes policies to reduce unemployment and inflation respectively. I find this an attractive set of ideas, as it implies that hugely positive social goals can be attained through state policy. The goal of Keynesians is generally the same as that of Keynes: to save capitalism from populist revolutionary overthrow by removing its worst aspects and ensuring that prosperity is widely shared. Our brief piece of economic history showed, however, that all this became much more difficult and was not achieved from the 1970s onwards. Perhaps full employment with low inflation, and relative equality, are a utopia. I would like to believe that they are still possible, even if they require a heroic effort and an unlikely degree of cooperation among governments across the world, whose attention only ever seems to become focussed during a crisis.
Most Marxists, on the other hand, see capitalism as irredeemably flawed, and wish to replace it with socialism. This is their utopia, although Marx was critical of the so-called ‘utopian socialists’ in the France of his time, and worked hard to make his theory ‘scientific’, the science of Marxist political economy. I find it hard to believe that socialism is the answer to society’s ills, given the events of the 20th Century. But I do find the Marxist analysis of capitalism useful, rich and rewarding. This may sound strange, given the supposedly inevitable social revolution that leads to socialism.
Some Marxists place a great stress on the rate of profit as a key determinant of economic performance. The private sector, or ‘private capital’ needs to realise a sufficient amount and rate of profit to continue to expand and become more productive over time, using the funds generated as profit to invest in new capacity and employment. If the rate of profit falls far enough, investment and growth will follow, and an economic crisis or recession will result. This can stimulate the private sector to reorganise or restructure to restore the rate of profit. Weaker firms will go bankrupt or be taken over by stronger ones, and ultimately a new round of investment will begin, and the economy will come out of recession. This is something of an evolutionary analysis of economic progress, and employs concepts from the supply and production-side as well as the demand-side. Thus Keynesian theories are correct, but incomplete, as they tend to ignore the rate of profit restored during a slump by industrial restructuring.
The Marxist emphasis on the cycle of production and the rate of profit seems to me to be realistic, but it unfortunately suggests that recession and unemployment are inevitable for continued capitalist accumulation or growth. In this case, it is not so much demand management which will ensure continued growth, but policies such as the welfare state and industrial policy which can support people in the bad times, and encourage structural change and technological progress respectively. Industrial or technology policy is a supply side policy more favoured by the left, but has been carried out historically by governments of all persuasions. Right-wing policies such as tax cuts and deregulation could help boost the rate of profit and therefore encourage growth, even from a Marxist point of view.
The Keynesian and Marxist theories do not necessarily have to be kept separate analytically and in terms of policy implications. Keynesians emphasise boosting aggregate demand to stimulate growth and employment. This may well be practically true, but Marxists might emphasise that a sustained growth in demand is only possible through rising investment, which comes about through a sufficient rate of profit. The latter could be the result of industrial restructuring brought about by deregulation or industrial policy, or carefully targeted public investment in necessary infrastructure, which could also temporarily boost spending and demand. Thus in some ways the Marxist viewpoint could lead to a more optimistic view of economic performance which does not require a constant boost in aggregate demand from the government, although it admits to periodic unemployment and poverty. The business cycle remains however, and even the best policies cannot tame it, and may not wish to in the long-run. This may be difficult to swallow in a modern democracy, but if sufficiently strong and intelligently designed welfare policies are put in place, some of the worst outcomes of recessions and private sector restructuring could be mitigated.
Thus I still do not come down on the Keynesian or Marxist side of economic debate in toto, but draw on ideas from both traditions to support a variety of government policies to promote as generalised prosperity as possible. Both sets of theories offer something of a potential utopia: sustained full employment under capitalism for the Keynesians and socialism for the Marxists. Either may be possible for a while, but personally I would not favour a socialist society in the ways it has been attempted around the world to date. Full employment is a worthy goal, but may be only periodically achieved under capitalism due to the business cycle and its necessary fluctuations in output and employment which appear to continually renew the prospects for long-term growth. The socialist goals of social justice, high employment and improved material prosperity as widely shared as possible may seem far-off in today’s capitalist economy, but they are important as goals for policy even in the absence of socialist revolution. Can they be achieved in a capitalist society? The experience of the 1950s and 60s shows that they can, and can be so again. This is an optimistic conclusion, although the policy implications may prove difficult to carry out in practice.