Is Global Keynesianism Possible?
10 April 2009
Beijing China
Significance of growth
• For labour: determines scope for expansion of
employment
• For capital: determines scope for re-investment
of corporate profits
• Therefore if growth is too slow it means the
rate of profit will fall
• Under capitalism this is periodically inevitable
(business cycle)
• Result: fall in stock prices, leading to
destruction of capital / unemployment
The Keynesian answer
• Use of government policy to offset cyclical
decline in growth through:
– Fiscal expansion (deficit financing)
– Monetary expansion (low interest rates and easy
access to credit)
• This will encourage business to maintain
output and investment and consumers to
consume – thus reversing the downward cycle
Problems
• Danger: liable to result in inflation if money
supply is expanded too fast or if markets lose
faith in value of the currency because of high
budget deficit
• Not clear if it will work in any case unless there
is high level of effective demand
Background to present crisis
• Follows 35 years of declining global growth
• Rising productivity of capital and labour
• Corresponding decline in growth of demand for
investment capital and labour
• Financial liberalisation since 1980s has facilitated
speculative investment
• Very lax monetary policy since 2001, leading to
unsustainable credit expansion
• Resulting exceptional growth from 2003 to 2007 (45% a year)
Prospects
• Households in US and other western countries hugely
in debt; need to rebuild balance sheets
• Same applies to many businesses
• Hence they need to reduce rather than expand
borrowing and consumption in the short term
• Cyclical contraction therefore unavoidable
• Rise in fiscal deficits and monetary easing now
occurring only likely to cause inflation
Implications for policy
• Growth maximisation must cease to be policy goal (at least in
industrialised countries), because
– growth rates high enough to satisfy needs of the profits
machine are unattainable
– growth above very low levels is more and more
unsustainable environmentally
• Immediate: governments must intervene to minimise
economic disruption and social distress, taking over private
assets where necessary)
• Longer term: new economic model must be developed based
on more rational principles
Return to first principles I
The essentially Ricardian theoretical basis of conventional
economics, which has predominated since the Industrial
Revolution, is fundamentally flawed and designed
primarily to serve the interests of owners of capital in that
– it focuses on bringing effective demand into line with
productive capacity rather than adjusting capacity to
the actual or potential level of need / effective demand,
and
– it assumes that more or less free competition will
always tend to equilibrium at levels consistent with the
full employment of productive factors.
Return to first principles II
• Give priority to meetings needs / wants of
consumers, workers and taxpayers
• Extension of welfare economics (now more
clearly in conflict with capitalist priorities)
Alternative vision for the future
• Give priority to stability and security (economic and
social) consistent with equity and maximum economic
efficiency (long-term lowest economic cost)
• Subject the corporate sector to proper public
accountability (public support and protection to be
conditional on respecting public priorities)
• Abandon the unattainable fantasy of full employment
in favour of a radically different system of income
distribution based on a) universal entitlement to a
basic / citizen's income (at a flat “survival” level)
regardless of means or employment status and b)
more regulated labour (and product) markets