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.

Avoiding a recession: the Fed conundrum

LevyInstituteThe Levy Economics Institute has published their annual Strategic Analysis paper on the current state of, and prospects for, the US economy, which is always an interesting read. The Institute is non-partisan, but much of its research and output takes its inspiration from two great post-Keynesian economists of the past: Hyman Minsky and Wynne Godley, who both emphasised the importance of aggregate demand to the state of the economy, in the short run and the long run, and the interaction of real and financial factors.

A summary of this short paper can be found here, and the pdf can be downloaded here.

As the paper notes, the US recovery from the pandemic-triggered recession has been swift, with GDP now above its pre-pandemic level, and the employment rate almost there, thanks in large part to the extraordinary scale of the fiscal stimulus enacted by the government. However, it has also been associated with a deteriorating current account deficit and a rise in inflation. Continue reading

Inflation, the supply-demand debate and the policy response

BankofEnglandAs central banks around the world tighten monetary policy by raising interest rates in order to restrict demand, there remains an ongoing debate about whether this is the right response to the current inflation.

A large share of the inflation in many countries has been caused by supply shocks, as much of the world went through and then emerged from pandemic lockdowns, and as a consequence of the war in Ukraine. Taken together, these two have restricted the supply and thus increased the cost of food and energy on global markets. But there have also been impacts from the demand side, as many governments supported their economies with major fiscal stimuli during and after the lockdowns. The scale of these varied across countries, with the economic impact varying as a result. The US stimulus was particularly large and has helped restore its collapsed employment rate to the pre-pandemic level in recent weeks. However it is also arguable that this dramatic boost to demand has helped to fuel inflation. EU countries tended to be less ambitious fiscally, with the supply shocks contributing a greater share of the rise in inflation there than they have done in the US. The current inflation varies between countries, with Japan seeing a much smaller increase given its structurally weak demand and its historic struggles with deflation and weak growth in recent decades.

One of the big questions that has fuelled much debate in the media, not least on Twitter, is whether central banks need to be raising interest rates, which their own models say will only fully affect the rate of inflation a year or two down the line, when the global economy has begun to slow and forecasts of recession are becoming more frequent. If the very purpose of monetary tightening is to reduce demand in the form of investment and consumption and raise unemployment, which economists tend to think of as socially undesirable even if they may sometimes be intentional consequences of policy, the question arises as to whether such moves are necessary. Continue reading

The scissors of slump — Michael Roberts Blog

Last week, US Treasury Secretary Janet Yellen told the US Congress that “We now are entering a period of transition from one of historic recovery to one that can be marked by stable and steady growth. Making this shift is a central piece of the President’s plan to get inflation under control without sacrificing the […]

The scissors of slump — Michael Roberts Blog

Considering the work of a maverick economist: introduction to a new series

AndrewSmithersI recently happened upon the work of economist Andrew Smithers, whose books and articles portray an unconventional and original thinker, and one who is unafraid to challenge the conventional wisdom in economic theory and policymaking. He could be classed as heterodox, while not falling easily into any particular political or ideological category. He studied at Cambridge in the 1950s, and was taught by, among others, the distinguished post-Keynesian Nicholas Kaldor, as well as Brian Reddaway. While he is now retired he continues to contribute to economic debate, via the Institute for New Economic Thinking, the Financial Times and elsewhere.

He has many years experience in international investment and has written extensively on financial economics, bringing together the spheres of finance and the real economy. His latest book is The Economics of the Stock Market, which is on my current reading list. However, I decided to start with his 2013 work The Road to Recovery, written in the wake of sluggish global growth following the financial crisis, followed by Productivity and the Bonus Culture, published in 2019, which tackles more comprehensively phenomena described in the earlier book.

The global economy has more recently been hit by shocks arising from a pandemic and war, but one of Smithers’ main contributions to economic debate is his argument that poor growth in output and productivity in the US and UK is largely down to the ‘bonus culture’ that has arisen in recent decades. Continue reading

A macroeconomic paradox and the importance of Michal Kalecki

Here is a very short video of post-Keynesian economist Marc Lavoie describing one of the macroeconomic paradoxes coined by Michal Kalecki. Kalecki was a Polish economist who inspired much of the field of post-Keynesian economics, and who independently produced the concept of demand-deficient unemployment at around the same time as his far more famous contemporary John Maynard Keynes. He was more influenced by the work of Karl Marx than was Keynes, whose General Theory employed microeconomic concepts drawing on the ideas of Alfred Marshall, another influential Cambridge economist. In the video, Lavoie outlines how generalised wage cuts by firms in an economic recession or depression may well fail to increase employment. (Thanks to The Case for Concerted Action blog for drawing my attention to this video.)

Economic recovery from Covid and the threat of inflation

The fear of rising inflation in countries emerging from the Covid-induced recession has been all over the financial and business press in recent days. This follows higher than expected price increases, particularly in the US. Some economists and commentators have argued that the increase is temporary, down to factors on the supply-side such as bottlenecks, in response to the ‘bounce back’ in consumer spending as households begin to spend accumulated savings, and significant fiscal stimulus. Plenty of demand and problems with supply offer a simple explanation of price rises. When demand exceeds supply, prices rise, and this can also be the case at the level of the economy as a whole.

When I was studying economics at school, textbooks proffered a variety of explanations of inflation, or sustained increases in the price level. Continue reading

Deficits, savings and a post-lockdown consumer boom

Lockdown restrictions are slowly being lifted here in the UK, and after a severe downturn there are signs of economic recovery, with consumption predicted to rebound substantially. It may be some time before the economy returns to its previous growth ‘trend’, but the signs are that consumers are returning to the shops as pent-up demand is beginning to be unleashed.

If this rebound in consumer spending takes place, it will be funded, at least in part, from the high levels of household saving that have been accumulated during the lockdowns. It is my contention that these high rates have been made possible in part due to a massive increase in government borrowing. Without the latter, household incomes and savings would have been much more constrained than otherwise. This is a typically Keynesian argument, and it will be illustrated with a ‘financial balances’ equation. Continue reading

Covid-19 and the unbalanced budget

Countries across the world have responded to the economic damage induced by the global pandemic by allowing budget deficits to rise dramatically. They have undertaken a variety of schemes ostensibly designed to support the economy. But what kind of support is most effective?

The pandemic itself, and the policy responses, have induced dramatic economic ‘shocks’ to both aggregate demand and aggregate supply, that is the demand and supply for the economy as a whole. The increased uncertainty about the future among consumers, alongside the various lockdown restrictions, have generally reduced aggregate consumption, the largest component of aggregate demand. They have also changed the composition of consumption giving rise, taking the most obvious example, to an accelerated rise in the demand for online shopping and home delivery. Continue reading

Pandemic of inequality

The Levy Institute has just published a short paper on the inequalities associated with the Covid-19 pandemic in the US. It can be found here. A summary of the paper is below.

The costs of the COVID-19 pandemic—in terms of both the health risks and economic burdens—will be borne disproportionately by the most vulnerable segments of US society. In this public policy brief, Luiza Nassif-Pires, Laura de Lima Xavier, Thomas Masterson, Michalis Nikiforos, and Fernando Rios-Avila demonstrate that the COVID-19 crisis is likely to widen already-worrisome levels of income, racial, and gender inequality in the United States. Minority and low-income populations are more likely to develop severe infections that can lead to hospitalization and death due to COVID-19; they are also more likely to experience job losses and declines in their well-being.

The authors argue that our policy response to the COVID-19 crisis must target these unequally shared burdens—and that a failure to mitigate the regressive impact of the crisis will not only be unjust, it will prolong the pandemic and undermine any ensuing economic recovery efforts. As the authors note, we are in danger of falling victim to a vicious cycle: the pandemic and economic lockdown will worsen inequality; and these inequalities exacerbate the spread of the virus, not to mention further weaken the structure of the US economy.

The authors focus on the greater likelihood of ill health among the poorest in the population, and how they are more likely to suffer serious complications should they contract Covid-19.

They also repeat the case often made in papers from the Levy Institute, that high levels of inequality have weakened aggregate demand and growth, not least in the US. This has been associated with high levels of household and corporate debt, and played a major role in the historically weak recovery from the 2008 crisis. If steps are not made to reduce inequality, not least in access to healthcare, the US economy is likely to continue to perform poorly over the long term. This will be in addition to the shocks resulting from the response to the pandemic itself.