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     Aug 29, '14

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Keynes is dead; long live Marx
By Ismael Hossein-Zadeh

Many liberal economists envisioned a new dawn of Keynesianism in the 2008 financial meltdown. Nearly six years later, it is clear that the much-hoped-for Keynesian prescriptions are completely ignored. Why? Keynesian economists' answer: "neoliberal ideology," which they trace back to President Reagan.

This study argues, by contrast, that the transition from Keynesian to neoliberal economics has much deeper roots than pure ideology; that the transition started long before Reagan was elected President; that the Keynesian reliance on the ability of the government to re-regulate and revive the economy through policies of demand management rests on a hopeful perception that the state can control capitalism; and that, contrary to such wishful

perceptions, public policies are more than simply administrative or technical matters of choice - more importantly, they are class policies.

The study further argues that the Marxian theory of unemployment, based on his theory of the reserve army of labor, provides a much robust explanation of the protracted high levels of unemployment than the Keynesian view, which attributes the plague of unemployment to the "misguided policies of neoliberalism." Likewise, the Marxian theory of subsistence or near-poverty wages provides a more cogent account of how or why such poverty levels of wages, as well as a generalized predominance of misery, can go hand-in-hand with high levels of profits and concentrated wealth than the Keynesian perceptions, which view high levels of employment and wages as necessary conditions for an expansionary economic cycle. [1]

Deeper than 'Neoliberal ideology'
The questioning and the gradual abandonment of the Keynesian demand management strategies took place not simply because of purely ideological proclivities of "right-wing" Republicans or the personal preferences of Ronald Reagan, as many liberal and radical economists argue, but because of actual structural changes in economic or market conditions, both nationally and internationally. New Deal- Social Democratic policies were pursued in the aftermath of the Great Depression as long as the politically-awakened workers and other grassroots, as well as the favorable economic conditions of the time, rendered such policies effective. Those favorable conditions included the need to invest in and rebuild the devastated post-war economies around the world, the nearly unlimited demand for US manufactures, both at home and abroad, and the lack of competition for both US capital and labor.

These propitious circumstances, along with the pressure from below, allowed US workers to demand respectable wages and benefits while at the same time enjoying higher rates of employment. The high wages and the strong demand then served as a delightful stimulus that precipitated the long expansionary cycle of the immediate post-war period in the manner of a virtuous circle.

By the late 1960s and early 1970s, however, both US capital and labor were no longer unrivaled in global markets. Furthermore, during the long cycle of the immediate post-war expansion US manufacturers had invested so much in fixed capital, or capacity building, that by the late 1960s their profit rates had begun to decline as the enormous amounts of the so-called "sunk costs," mainly in the form of plant and equipment, had become too high. [2]

More than anything else, it was these important changes in the actual conditions of production, and the concomitant realignment of global markets, which occasioned the gradual reservations and the ultimate abandonment of the Keynesian economics. Contrary to the repeated claims of the liberal/Keynesian partisans, it was not Ronald Reagan's ideas or schemes that lay behind the plans of dismantling the New Deal reforms; rather, it was the globalization, first, of capital and, then, of labor that rendered Keynesian-type economic policies no longer attractive to capitalist profitability, and brought forth Ronald Reagan and neoliberal austerity economics. [3]
It should be emphasized that Keynesian stabilization policies were not abandoned for purely ideological reasons; i.e., because, as many critics of neo-liberalism argue, a laissez-faire animus spread from Chicago, infecting politicians of all parties and persuading them of the benefits of free markets. ... Keynesian systems of financial regulation (capital controls and managed exchange rates) could not withstand the growing pools of unregulated international credit, the Euromarkets, which came to dominate international finance. [4]
When financial regulations, capital controls and a new international monetary system were established at the Bretton Woods Conference in the immediate aftermath of World War II, international financial or credit markets were effectively non-existent. The US dollar (and to lesser extent gold) was, by and large, the only means of international trade and credit. Under those circumstances, international credit took place largely through the International Monetary Fund (IMF) and the central banks of the lending/borrowing countries - hence, the enforceability of controls.

This picture of international credit/financial markets, however, gradually changed; and by the late 1960 and early1970s, those markets had grown to the tune of hundreds of billions of dollars, thereby allowing international credit transactions outside of the IMF- central banks channels. The two major factors that significantly contributed to drastic inflation of international financial markets were (a) the computer-generated international credit, and (b) the immense proliferation of eurodollars, ie US dollars deposited in overseas banks. The footloose-and-fancy-free global finance/credit has grown so big during the past several decades that it has made domestic or national controls and regulations virtually ineffectual:
Critics of international finance have made various proposals to stabilize the system and make it more appropriate to the purposes of economic and social development. The most common suggestion has been a return to the cross-border capital controls that existed during the 1940s and the 1950s. Such controls, in many cases, were not eliminated until the 1990s. However, international bank deposits and financial assets held abroad are now so large that it would be difficult to enforce such controls. Indeed, the main reason for getting rid of such regulations was precisely because they could not be enforced. [5]
It is obvious, then, that the weakening or undermining of control and/or regulatory safeguards was brought about not so much by purely ideological tendencies of certain politicians or policy makers as it was by the actual developments in international financial markets.

It started long before Reagan
The claim that the abandonment of Keynesian policies in favor of neoliberal ones began with the 1980 arrival of Ronald Reagan in the White House is factually false. Indisputable evidence shows that the date on the Keynesian prescriptions expired at least a dozen years earlier. Keynesian policies of economic expansion through demand management had run out of steam (ie, reached their systemic limits) by the late 1960s and early 1970s; they did not come to a sudden, screeching halt the moment Reagan sat at the helm.

As Professor Alan Nasser of Evergreen State College points out, arguments that "policies of economic equity represented costly trade-offs in terms of efficiency" were made by economic advisors of the Democratic administrations long before Reaganomics solemnized such arguments. Arthur Okun and Charles Schultze had each served as chair of the Council of Economic Advisors to Democratic presidents. In his Equality and Efficiency: The Big Tradeoff, Okun (1975) argued that "the interventionist goal of greater equality had inefficiency costs that injured the private economy." Schultze (1977) likewise claimed that "government policies which impact markets in the name of fairness and equality are necessarily inefficient," and that such policies were "bound to disadvantage the very people policymakers intended to protect, and to destabilize the private economy in the process". [6]

Jerome Kalur also points out, "Chamber of Commerce and Business Roundtable efforts to gain control of government regulatory decision-making were initiated at least nine years before" the election of Ronald Reagan to presidency, "when corporate attorney Lewis Powell submitted to the Chamber his now well-known memorandum 'Attack of American Free Enterprise System." [7] In concert with Powel's legal offensive against labor and regulatory standards, big business moved swiftly to "impede union organizing" and "to eliminate regulatory controls via streams of think-tank propaganda from the likes of The American Enterprise Institute (1972), The Heritage Foundation (1973), and the Cato Institute (1977)" [8]. Kalur further writes:
When Powell handed his memorandum to the Chamber, American business had 175 registered lobbyist firms at its service. By 1982, the number of K Street corporate financed arm-twisters had grown to 2,500. Corporate supported PACs numbered 400 in the early 70s and 1,200 by 1980. In short, big business was already causing a decline in union memberships, strongly influencing federal agencies and laws, and mastering the SEC long before the advent of the Reagan presidency. With Powell elevated to the Supreme Court corporate America was by 1978 advancing toward its goal of un-restricted campaign contributions through clandestine vehicles. [9]
While theoretical turnaround from New Deal- Keynesian economics by the luminaries of the Democratic Party pre-dated President Carter, policy implementation of such theories began under the Carter administration. Reagan picked up the Democrat's copy of gradual agenda of neoliberalism and ran with it, replacing the rhetoric of capitalism-with-a-human-face with the imperious, self-righteous rhetoric of rugged individualism that greed and self-interest are virtues to be nurtured. Neither President Clinton eased the supply-side economic policies of the Reagan years, nor is President Obama hesitating to carry out such policies.

The role of the state
The Keynesian view that the government can fine-tune the economy through fiscal and monetary policies to maintain continuous growth is based on the idea that capitalism can be controlled or manipulated by the state and managed by professional economists from government departments in the interest of all. The effectiveness of the Keynesian model is, therefore, based largely on a hope, or illusion; since in reality the power relation between the state and the market/capitalism is usually the other way around. Contrary to the Keynesian perception, economic policy making is more than simply an administrative or technical matter of choice; more importantly, it is a deeply socio-political matter that is organically intertwined with the class nature of the state and the policy making apparatus.

The Keynesian illusion has been nurtured or masked by two major myths. The first myth stems from the perception that attributes the implementation of the New Deal and Social Democratic economic reforms that followed the Great Depression and Word War II to the genius of Keynes. Evidence shows, however, that implementation of those reforms, and therefore the rise of Keynes to prominence, were more a product of the fierce class struggles and overwhelming pressures from the grassroots than the brains of experts like Keynes. Indeed, beyond narrow academic circles, Keynes was not even heard of in the United States when most of the New Deal reforms were put in place.

The second myth stems from the view that attributes the long economic expansion of the 1948- 68 period in the US to the efficacy or success of Keynesian policies of demand management. While it is certainly true that expansive government policies of the time played a big role in the fantastic economic developments of that period, additional favorable conditions or factors also contributed to the success of that expansion. These included the need to invest and rebuild the devastated post-war economies around the world, the need to supply the vast post-war global demand for consumer as well as capital goods, lack of competition for US products and capital in global markets - in short, the fact that there was enormous room for growth and expansion in the immediate post-war period.

Harboring these myths and illusions, Keynesian economists envisioned a silver-lining in the 2008 financial meltdown and the ensuing Great Recession: an opportunity for a new dawn of Keynesian economics. Nearly six years later, it is abundantly clear that Keynesian policy prescriptions are falling on deaf ears.

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