“We are all Keynesians now,” Richard Nixon, the soon-to-be-disgraced President of the United States and godfather of the modern Republican Party, is supposed to have said in 1971. And it seemed to be the truth, although not for long.
In his 1936 General Theory of Employment, Interest and Money John Maynard Keynes had made sense of people’s traumatic experience of the Great Depression by explaining that capitalist economies can sometimes suffer from insufficient demand for goods and services. The austerity policies advocated by the economic establishment and implemented by most politicians (including the British Labour Party, as we saw last week) would only make this worse, Keynes said.
What was needed was for the government to fill this gap in demand by increasing its own spending, even if this meant the public accounts going into deficit.
That prescription formed the basis for an active ‘demand management’ through fiscal policy (government expenditure and revenue collection), which would be relied upon by both progressive and conservative governments for a couple of decades from the end of the Second World War in 1945.
This was a period of high growth, productivity increases and low unemployment that would be remembered as an economic ‘golden age’. It seemed as if Keynes had hit upon a magic formula (even though many of the policies were less-than-faithful applications of his ideas).
But then everything started to go wrong in the 1970s with a puzzling combination of stagnation and high inflation (’stagflation’), and his theories fell out of favour.
For the moment though I’m less interested in the specific successes and failings of fiscal ‘demand management’ than I am in the wider implications of Keynes’ theories for progressives as a justification for state intervention and state provision.
Because Keynes’ work came along at just the right time for progressives — particularly those working within the ’social democratic’ tradition.
In the 1920s social democrats were still aiming to establish a socialist economy, and had given very little thought to how they might operate within a capitalist one. They set up commissions to think about how to carry out the nationalisation of industry, but the commissions didn’t get very far, and the social democrats began to feel rather stumped.
Keynes broke them through this impasse, because they were able to interpret him in a manner that gave them a new way forward.
According to political studies academic Adam Przeworski, Keynes gave social democrats “something they urgently needed: a distinct policy for administering capitalist economies.” He identifies several things that social democrats gained from Keynesianism:
- A sense of potence: “From the passive victim of economic cycles, the state became transformed almost overnight into an institution by which society could regulate crises to maintain full employment.”
- A belief that ongoing improvement could be achieved: “the welfare of citizens can be continually enhanced by the active role of the state”.
- An economic justification for advancing the interests of workers: ”it was a theory that suddenly granted an universalistic status to the interest of workers . . . Corporatist defense of the interests of workers, a policy social democrats pursued during the twenties, and the electoral strategy toward the ‘people’ now found ideological justification in a technical economic theory” because it was a way of stimulating aggregate demand.
- A new ‘ideological discourse’ around social spending: for example, Stockholm school economist Bertil Ohlin in 1938 described the cost of the health service as “an investment in the most valuable instrument of all, the people itself” and talked about an emphasis on “‘productive social policy”.
- A shift to a focus on consumption rather than on control over the means of production.
In combination, these elements provided a theoretical framework that made sense of the emerging welfare state.
They also bound social democracy into a role as custodians of the capitalism:
. . . having strengthened the market, social democrats perpetuate the need to mitigate the distributional effects of its operation . . . Mitigation does not become transformation: indeed, without transformation the need to mitigate becomes eternal. Social democrats find themselves in the situation which Marx attributed to Louis Bonaparte: their policies seem contradictory since they are forced at the same time to strengthen the productive power of capital and to counteract its effects.
Of course state provision within the economy did not wait for the imprimatur provided (indirectly) by Keynesian economics. Public provision of health and education went back decades, as did some forms of age and disability insurance. Chancellor Bismarck’s reforms in Germany in the 1880s are generally seen as an early milestone.
Moreover, it does not appear that public provision in these areas prompted major theoretical objections at the time (so long as the insurance was not too generous) so there does not seem to have been a need for progressives to articulate a theoretical case for state action to be “allowed” in these spheres.
In the 1930s and 1940s however came an elaboration of the role and purposes of the welfare state, which proceeded from the quasi-Keynesian ideas identified by Przeworski above. This provided for both a systematic justification and an extension of the provision that had already been occurring.
At the same time, aided by the disillusioning impact of the Great Depression and public servants who had had their appetites for economic planning whetted during the War, the state also increased its regulatory influence over private industry. There were even a few privatisations (although driven by short-term pragmatism rather than any strategic plan).
It was probably around this point that conservative thinkers began a concerted effort to develop a critique of state activity, not just from a liberal philosophical perspective in defense of liberty, but on economic efficiency grounds. Over succeeding years, the case was put together that the state was inherently less productive and more prone to waste; that government interventions were subject to all sorts of distortions and perverse consequences; and that the welfare state would create dependency and become unaffordable.
These arguments didn’t get very far at first, but their proponents continued to hone them, and when the ‘Keynesian welfare state’ stumbled in the 1970s they pressed their advantage. The progressive theoretical framework took a battering from which some would say it has still not fully recovered, and conservative (neoliberal) ideas about the limitations of state action have dominated public debate to varying degrees for the last forty years.
Those ideas have now had their own stumble with the Global Financial Crisis but are still holding onto their footing for now. Keynesian economics seems to have a renewed vigour today, and Keynesian economists such as Paul Krugman, Brad DeLong and Martin Wolf are warning that the world economy may face further setbacks. If so, the neoliberal approach may suffer the same fate that Keynes did in the 1970s.
It remains to be seen however whether the progressive movement is prepared to repeat what it did in the the 1930s and 1940s and extend a change to post-neoliberal economics into a renewed political programme that can capture the public agenda in the way that the welfare state did then.
Links
The full set of posts in the Theoretical Foundations series.
An interview with Adam Przeworski, covering his involvement with and discarding of Analytical Marxism.
Wikipedia entries on Bertil Ohlin and Marx’s The Eighteenth Brumaire of Louis Napoleon.
Further Reading
Adam Przeworski, Capitalism and Social Democracy (1985), Chapter 1 (esp pp. 31-43).
Donald Sassoon, One Hundred Years of Socialism. The West European Left in the Twentieth Century (1997), Chapter 6.
Tags: Adam Przeworski, Bertil Ohlin, John Maynard Keynes, Richard Nixon
This is a good discrete summary of the ebb and flow of the debate Dave, thanks. I feel like I’ve just sat in on a pols refresher class (I’m sure at some point I personally knew some of this stuff even if I’ve retained little of it).
Being a person who’s mostly engaged in the pragmatics of policy implementation, I’m interested in your views about where we might first see a test of whether a Keynsian revival is in fact underway? Certainly, the Australian government’s response to the GFC conforms with the Keynsian framework you outline at the begining of this post with significant investment in activities designed entirely to prop-up domestic demand. But now as they throttle back their many and various investments, I’m anticipating a return to orthodox policies.
Thanks for that, Paul. I think your assessment about orthodoxy reasserting is correct for now, but as I tried to imply towards the end there, the current crisis may not be over yet, and a second round of what we endured in 2008-09 might be hard for orthodoxy to come back from. Have a read of “The Third Depression” by Paul Krugman, who’s probably the most high-profile representative of the “Keynesian revival” (you can find the link in Friday’s “Weekend Reading” post), for one take on that.
But also, it does depend to some extent on the progressive movement developing a viable new political economy that can wrap around those basic Keynesian policy prescriptions.
I need to find more time to read the range of books you allude to/review. I did read Krugman’s third depression NY Times post and confess I felt oddily disconnected from it sitting here in Sydney where the ASX has largely recovered (despite still being very volatile), the property market is increasingly bouyant and all the talk is about mining super taxes… could the Australian economy be somehow isolated from a US depression even if NZ is not?
Steve Kell, an economist you could easily reference amongst the North American and Europeans you noted in an earlier post, argues that Australia’s avoided the worst of the GFC mainly because we have less debt and have done less deleveraging – public and private – thus maintaining or even stimulating demand. That said, his view is consistent with Krugman’s insofar as he has long been concerned about private debt (specifically mortgages) and the risk around property speculation (which while significant is constrained relative to NZ’s by capital gains taxes and constrained relative to the US by more rigorous prudential regulation).
Kell’s recently written on this very issue here http://www.debtdeflation.com/blogs/2010/06/27/there-is-no-gfc/
You raise an interesting point about Australia. My impression is that you’ve had a pretty mild Great Recession over there (and indeed NZ hasn’t been as hard-hit as Europe or the US either). I’d tend to add relatively strong govt stimulus and a relatively greater orientation towards Asia than the Atlantic to Kell’s explanation (interesting article/site by the way – thanks for that).
Having spent a few months in the UK (London) last year, I’d say that things do feel rather different closer to the epicentre of the Crisis than they do ‘down under’. The financial aspect of the Financial Crisis is far more evident there for one thing, with the bailouts a very big part of the picture — the smaller scale and more conservative practices of the Australian banks may have shielded us a bit in this respect.
But, for all that, if the world economy stays in the doldrums longterm or, worse, we have a further meltdown, it’ll definitely have an impact on the Lucky Country and Godzone.