Keynes Has Won Hands Down

In an interview on Bloomberg, today, former MPC member, and professor of Economics at Dartmouth College, David Blanchflower, declared that, in the debate between Hayek and Keynes, Keynes has won hands down. He bases this assessment on the experience of the last few years between the US and Europe. The US has adopted Keynesian stimulus, and its economy has recovered from the recession caused by the Credit Crunch. Europe has adopted Hayekian austerity, and its economy has not only failed to recover, but is in danger of going, once more, into recession, possibly a deep one.

Blanchflower is not alone. Many economists, particularly those on the left of centre, believe that the austerity measures being undertaken, by a number of Governments, across Europe, are counter-productive, even for Capital. A similar argument is put forward by Ann Pettifor in an article at Left Foot Forward. She writes,

“My humble and not very cheering view is that because of the vast unpayable debts of the global private banking sector; because policy makers will not address the private banking crisis; and finally, because politicians wrongheadedly persist with austerity – we can expect things to get a lot worse...

In Britain, private debts make up about 400 per cent of UK GDP – and public debt only about 65 per cent of GDP. (I am guessing that politicians’ blind spot for Britain’s huge private debts is not accidental, but then I may just be a touch cynical.)

It’s the disorderly de-leveraging (‘liquidation’) of those private debts that is the cause of Britain’s double dip, and of global financial instability. The failure of the global investment bank/brokerage MFGlobal and the downgrading of various banks, is the canary in the global financial gold mine.

The problem is not the UK’s or Eurozone’s public debts or budget deficits. They are both simply a consequence of private sector failure. Because of this wrong-headed analysis, politicians in all three political parties have been driven down the dead-end of austerity...

As the year draws to an end, I simply speculate, and may be wrong. After all, George Osborne’s autumn statement represented a small, but significant u-turn: a belated recognition of the scale of the crisis and an attempt at fiscal stimulus to finance infrastructure investment...

Politicians, advised by deranged and culpable economists, will hasten, and intensify this global private banking collapse by accelerating austerity. It is those policies that will prolong and deepen the global economic crisis.

It’s time now to address the solution: first, subordination of the private banking sector to the interests of society; and second, policies for employment. Only jobs can now generate the income needed to revive the economy, to pay down private debts, and to stabilise the global economy. “Look after employment” said Keynes, “and the budget will look after itself.”

Blanchflower and Pettifor are both right, and they are not alone in making this argument. Economists and bureaucrats, within the ranks of the international state bodies, established by Capital, have also argued along similar lines. And, of course, as Blanchlower correctly points out, the US, over the last three years, has been following a policy of fiscal and monetary expansion, which it has been seeking to persuade its European counterparts to follow. Chief Economist at the IMF, Olivier Blanchard, argued, some time ago, that Europe would need to utilise a degree of inflation, in order to deal with its debt overhang. He is now arguing that European Banks should deal with the need to be more robust by increasing their capital rather than deleveraging i.e. reducing their loan book. Its obvious why he should seek such a solution.

Because banks lend many times their actual deposits, and other assets, deleveraging requires the amount of their loans to be reduced by many times the amount of additional Capital they would need to raise. In fact, its estimated that they would need to reduce their loan book by around €1.5 trillion. Such a reduction of loans, to European businesses and consumers, would certainly cause a recession. But, the problem has been demonstrated, in the last few days, in relation to one of Italy's biggest Banks, Unicredit. It needed to increase its Capital, and decided to do so by a new share offer. During the last year its shares have fallen by around 75%. They have fallen by 30% in the last few days. In order to be able to sell shares in this new offer, it had to sell them at a 43% discount!

But, Unicredit is lucky. It is the first in line to try to raise Capital. The other banks, that come after it, will have to try to find investors who have not already taken up earlier offers. If they are able to sell their shares at all, it will likely be at even larger discounts than those that Unicredit had to provide. In fact, as Pettifor sets out, its likely, at some point, that many of these Banks will, effectively, have to be nationalised, in order to provide the necessary liquidity and Capital, just as the US and UK did three years ago. European states will do that not in the interests of European workers, though they will, as the US and UK states did in 2008, phrase it in Pettifor's words as being in “the interests of society” i.e. of Capital.

Blanchflower and Pettifor are both right, as against those on the Left, who see in the austerity measures, of the UK and European politicians, the implementation of the desires and interests of Capital, because it cannot be in the interests of UK and European Capital for there to be a serious European, let alone wider, recession or Depression. It is not in Capital's interest for there to be a dislocation in the process of Capital Accumulation, and the huge reductions in profits, and destruction of Capital that would go with it. It was not in Capital's interest for there to be such dislocations during the last Long Wave Boom that ran from 1949 to 1974, which is why it used Keynesian intervention on each occasion, during that period, to cut short recessions. It was not in Capital's interest in 2008, which is why it was prepared to countenance significant intervention, and action against the Banks, to bring the crisis under control. It is not in Capital's interest now either.

The proof of that is not just to be seen in the actual economic facts, that contrast the economic recovery in the US with the increasing recession in Europe. It can be seen in the real views of the capitalists themselves. Over the last year, the US Stock Market has risen, particularly in the last few months. The surveys of business confidence continue to show increasing optimism amongst the business community. In Europe, the Stock Markets have barely flinched, even in Germany. Meanwhile, the same surveys, of business confidence, continue to fall, and, each time some new austerity measures are announced, they fall even further. If, as some of those on the Left, who have a catastrophist view of Capitalism, insist, the austerity measures are at the behest of Capital, why is that?  If they were right, then, on the contrary, Business Confidence should rise with each new announcement of austerity, it should be in Europe where the Capitalists are cock-a-hoop, and eager to invest, not in the US!!!

But, increasingly, the economic facts show that it is the other way around. The US has created 1.6 million new jobs in the last year. It created 200,000 new jobs in December alone, above the estimates. The Unemployment Rate has been on a steady downward path for several months, and survey data suggests that growth is beginning to take hold. More importantly, the employment data shows that the bulk of the new employment growth has come amongst those people with College degrees, and into new higher value production. If anything, the data suggest that unemployment amongst those without College degrees may still be growing, which shows the need for the US to increase its expenditure in education. The nature of this employment growth is important. Not only is new employment in higher value production important, because it is in these areas that the US has an international comparative advantage, helping to cover, if not reduce, its trade deficit, but a higher percentage growth, in higher wage employment, means that a proportionally larger sum feeds back into the economy via, consumption out of those wages, in higher tax receipts to the Government etc.

In essence, we have a fundamental division. In the US, as Blanchflower sets out, we have increasing, if not spectacular, growth that appears to be taking hold. Of course, its not just in the US. As Jim O'Neill set out on Newsnight yesterday, it is only those who fail to recognise that western economies are not now the dominant players in the global economy, who have not noticed that the world economy is growing, based on significant growth in Brazil, China, Russia, India, Indonesia, and many other parts of the globe. China, which has deliberately slowed its economy, to prevent inflation, is itself about to engage in another round of Keynesian stimulation. But, at the same time, those economies, which are about to go into recession, in Britain and Europe, are instead hamstrung with “wrong-headed” solutions that were appropriate for different times.  In fact, most economists believe that China itself will, before too long, have to develop its own Welfare State, in order to reduce the large amounts of personal savings that Chinese workers currently build up as protection against Unemployment, Sickness, Health Care, and Old Age.  That will be necessary as a means of diverting those savings towards consumption, in order to develop the domestic market.

Blanchflower is wrong to say that, in the debate between Keynes and Hayek, Keynes has won hands down. The Keynesian solution is the appropriate Capitalist solution for current conditions i.e. those of the Long Wave Boom. But, in different conditions, say the conditions of the 1970's, when the Long Wave Boom ended, Keynesian solutions did not work hands down. Instead, they led to stagflation. Interestingly, then as now, bourgeois politicians and state bureaucrats, and many of the economists who advised them, continued, however, to see only Keynesianism as the way out. Why wouldn't they? It had been orthodoxy for as long as most of them has been adults. Even in the early 1980's, when Thatcher was advised by Hayek himself, and his followers at the LSE, the adoption of his ideas, and later those of Friedman, was not without a struggle. As, unemployment rose, and the economy tanked the Tory “Wets” continued a guerilla struggle, and it was touch and go whether Thatcher would survive.

In the end, neither Keynesianism nor Misean, Neo-Austrian orthodoxy, nor Monetarism can provide a lasting resolution for the contradictions of Capitalism. Each is the most appropriate technical solution, for Capital, to its problems, at different times of the conjuncture, in order to overcome a particular crisis. But, none can overcome the constraints, placed on Capital Accumulation, represented by the Long Wave downturn, just as, ultimately, none of them will prevent a more rapid period of Capital Accumulation, during the Long Wave Boom – though wrong-headed policies can cause or lengthen or deepen a particular crisis, and, thereby, worsen the position of Capital in one country/region as opposed to some other, in the same way that is happening in the UK/Europe today, as against the US, China, etc. These technical solutions, at best, can only enable Capitalism to live another day, and thereby for the contradictions, that are inherent within it, to heighten, only to be manifest in a further, larger crisis somewhere down the road. Ultimately, the only solution to Capitalist Crises is the replacement of Capitalist ownership of the means of production with worker ownership of the means of production, and the development thereon, over time, of a Co-operative Commonwealth, based on planned production for need rather than for profit.