From: Dogan Goecmen (Dogangoecmen@AOL.COM)
Date: Tue Jan 02 2007 - 13:52:53 EST
some comments by Rakesh on Marx and Keynes. Dogan
attached mail follows:
Hi Dogan,
Would you kindly forward these comments on Marx
and Keynes to OPE-L. Thanks. Hope to talk about
your views on Smith soon. Please forward the book
to me if this is possible. Happy New Year.
Yours, Rakesh
A problem with the Keynesian framework is that
it very easily lends itself to right wing
appropriation: there is no inherent reason why it
could not be deployed to justify a Bush tax
regressive, militarist stimulus over a Swedish
type corporatism or an attempt to expand consumer
demand. In fact Keynesian theory leaves one
defenseless if in fact the former is more likely
in a given conjuncture to be stimulative in a
formalisitc logico-positivist sense.
The problem was recognized by Paul Crosser, State
Capitalism in the Economy of the United States
(New York: Bookman, 1960):
"The problem whether the flow of money for the
stimulation of the economy is to be channeled
into the production of nonwar goods or war goods
does not enter the analytical pricture which
Keynes offers: nor does Keynes tackle the problem
whether the money is to be spent on
labor-intensive or capital-intensive industries.
Keynes's theoretical position can therefore be
invoked in regard to any aspect of spending
which is undertaken wth the direct or implied
purpose of
stimulating production and employment. Those
who prefer government spending for public works can cite Keynes in
their favor, as can those who point to the greater economic
effectiveness of government spending for war goods production.
"Keynes's analysis is a purely formalistic logico-postivistic one
which is stripped of social economic content. His analytical
framework is therefore
of little help in a tract such as this which strives to assess the
impact of government spending and the resultant changes in the
structure of the economy and society of a given country." (p.36)
In his brilliant early reaction to Keynesian economics Erich Roll
(1938) emphasized that social democratic or corporatist, left wing or
fascist policy could be justified from within the Keynesian
framework: To Keynes and his followers "the state is a mechanism
which can be used to influence the economic system according to one's
ideals. One can readily grant that the ideals of Mr. Keynes and his
followers are noble. But can their analysis offer an effective
opposition to those whose ideals are less exalted and whose policies
are abhorrent? It is clear that they cannot. Their approach uses
abstract categories which demagogy can use and fill with its own real
content. Sismondi and Proudhon used an analysis somewhat similar to
that of Mr. Keynes for Utopian, quasi-socialist purposes. Malthus
used it to defend the remnants of feudalism against capitalist
revolution. A progressive and reactionary purpose can find
support--or at least indifference--in an economic theory that is
confined to the sphere of circulation and that operates with
psychological concepts." p. 88
Amit Bhaduri has provided the best summary that I
have yet read of the transition to neo liberalism
today:
The policy of demand management is also
politically ambiguous, in so far as either the
state or private business can be relied upon to
undertake the necessary investment for expanding
aggregate demand. Since the stimulation of
private investment is an alternative route to
managing demand, measures aimed at achieving
this, for example reduced taxes on corporate
profits or restraint on wages, become justifiable
in the Keynesian framework. These measures
constitute the case for a politically
conservative style of demand management based on
profit, and private investment driven economic
expansion within the Keynesian intellectual
traditionŠThe original underconsumptionist thesis
of wage-led and consumption driven economic
expansion, which argued essentially that a 'high
wage' is beneficial to both classes, finds its
antithesis in this case of profit and private
investment driven capitalism. And, both are based
on the Keynesian theory which assigns centrality
to aggregate demand in determining output and
employmentŠ Keynesianism in this wider sense also
leaves ambiguous the economic basis of social
democratic politics or the necessity of the
welfare state, by accommodating different forms
of cooperative capitalism. Helmut Schmidt, as the
social democratic chancellor of then West German,
articulated this conservative alternative by
pointing out, 'The profits of the enterprises
today are the investments of tomorrow, and the
investments of tomorrow are the employment of the
day after' (Le Monde 6 July 1976). It symbolized
complete reliance on private industry, and its
willingness to invest to solve the problem of
unemployment, rather than creating jobs through
direct expansion of public investment. The
economic role of the nation state was thus
circumscribed by the need to maintain, above all,
a favorable climate for private investment. This
view was an intellectual watershed. It marks the
beginning of a new conservative era in advanced
capitalist countries, when it becomes
increasingly difficult to distinguish social
democratic from conservative policies, in so far
as the economic role of the state become directed
towards strengthening the role of private
business. According to this new conservative view
of demand management, if cooperation between
capital and labour is at all to be attained, it
is better attained through the agency of private
business, but not through direct state
intervention, as the earlier version of social
democracy had advocated.
Because Bhaduri explains the accommodation of neo
liberalism by social democracy in terms of
Keynesian theory itself--that is, the transition
did not require a theoretical break, and thus
should not be considered a revolution or
counter-revolution as does Moschonas--Bhaduri
provides a foundation for the transition that
Moschonas describes in excellent and exhaustive
detail. Moschonas's phenomenologically rich
descriptions deserve quotation at length. Here
are some examples: "Šthe pursuit of policies of
deregulation and competitive rigour by social
democracy has, for the first time in its history,
directly challenged what was most dear, hallowed
and enduring in its ideological and political
tradition: the socially and economically active
role of the state, and the interests of the most
disadvantaged groups in the population. In effect
in its conscious and explicit adhesion to a
moderately but clearly neoliberal mode of
regulation, social democracy has made the
decisive ideological leap: for the first time so
openly and systematically , it has elevated the
market and devalued the utility of the
economically active stateŠFurthermore, in the
race for competitive disinflation and rigour, the
governmental left has, despite its social
discourse, departed in practice from the defence
of wage-earners, and particularly the 'poorest of
the poor'. Social democracy has thus been
transformed from a political force for the
moderate promotion of equality within a
socioeconomic system that is by definition
inegalitarian, into a force for the moderate
promotion of inequality in the face of forces
that are even more inegalitarian In other words,
it has been transformed from a force that has
long since renounced its anti-capitalist vocation
into a force that is even abandoning its
anti-plutocratic vocation (as Vilfredo Pareto
termed it)." P. 292-93 Also: "As our brief
examination of the French and British cases has
shown, the social-democratic art of laying on
both registers--deregulation and a certain
re-regulation; the market and the state--is far
from having been abandoned. And there are good
economic and social reasons for that. In this
sense, the new politics of the social democratsŠ
can be summarized thus: the 'economic state"
withdraws in favour of the market and the
'philanthropic' state timidly re-emerges to
reduce social costs created by the marketŠ[T]he
center of gravity in this tricky--and
quasi-schizophrenic--game of accommodating
contrary logics and influences weighs clearly and
heavily in favour of liberalism. From this angle,
the latest period may legitimately be considered
that of 'accommodation to 'the preferences of
capital'. In the round, the adoption of orthodox
policies and tendential decentralization of the
structures of wage bargaining have called into
question four central pillars of the
social-democratic approach: the policy of wage
solidarity, which tended in the direction of the
equality of wage labour, and hence working class
unity; the policy of full employment, which has
been definitively jettisoned, the policy of
wealth redistribution in favor of labour (though
social democracy's impact on the distribution of
income between wages and profits was
traditionally modest); and the policy of power
redistribution in favour of the wage earning
class and--above all--its trade union
representation (inside and outside the
workplace). I am therefore obliged to observe
that the adoption by contemporary social
democracy of policies of neoliberal inspiration,
and the crisis of tripartite, centralized
coordination--a modus operandi largely (but not
exclusively) specific to social democracy--have
impaired the politico-economic originality of the
social democratic alternative. It must equally be
observed--drawing on Rand Smith's
classification--that social democracy has passed
from a 'market modifying" type of strategy to a
market adapting strategy." p.200-201. See also
pp. 160-61. Weir (1992) documents the shift in
the US state from a moderate to less moderate
instrument of inequality; her focus is on the
retreat from the state's commitment to full
employment policy.
This change in the role of the state from a
welfare or Keynesian state to a punitive racial
or Schumpeterian state is easiest to
conceptualize if one starts from the simplest
game theoretic version of the Keynesian theory:
Since Keynes had provided a story of the
determination of national income, his main point
may be made in terms of a game involving the
investment decisions to be made by firms. A firm
invests in anticipation of an expanding market.
This growth is determined by the investment made
by the other firms in the economy. Our firm must
literally make a guess at the scenario to be, for
it faces irreducible uncertainty. If one firm
invests while the others do not, it will not even
recover its capital expenditure. If all firms but
one invest, the withholding firm loses out on a
profit opportunity. In this game, each firm must
perforce guess the likely behaviour of its peer
group. Now, apart from the two situations
described, there are two more to be considered.
In the first, all firms invest. This, of course,
is 'win-win', and of no interest whatsoever. On
the other hand, no firm invests. This is
disastrous for the economy! It is in having
alerted the world to this possibility that 'The
General Theory of Employment, Interest and Money'
attains its significance.
Reformist Keynesians (Bhaduri's social democrats)
simply thought that it was obvious that the best
way to encourage investment is to brighten the
prospects of final consumption through government
job creation and income redistribution.
Investment would follow consumption, so that the
autonomous increase in final consumption would
bring the economy to a higher employment
equilibrium. At this point, even if the increase
of the national debt does offset the income
directly created by deficit spending, new
savings, resulting from increased income that
results from the multiplier, may in turn offset
the national debt. In short, there is indeed the
possibility that deficit spending can be financed
out the savings it has itself created.
Keynesianism may thus allow central authorities
to ensure that no adverse movements in the
current monetary flow obtain and eventually 'ride
the wave' created by sufficiently large positive
shock to the economic system. Social democracy
would be good for not only the working class,
especially the most vulnerable minority parts
thereof, but also the entrepreneurial class as
well. Since businesses make what they spend--they
are their own source of demand--a higher level of
investment would increase the profits for the
class a whole. Though the working class (if only
it were not racially divided) may have to impose
social democracy upon the reluctant business
class, the result would be a cooperative
capitalism.
Yet capitalist reactions to government
deficit spending may be negative instead of
positive. If for example the retreat of
investment was not in fact preceded by a crisis
of final demand--in Marxian terms this would
imply that Department I or the means of
production industries would face a sales crisis
before Department II or the means of consumption
industries--the best way to raise effective
demand of which private investment is the most
important component may be to increase the risk
that the firms that withhold from accumulation
will lose profit opportunities and thereby be
without the increase in financial resources that
is needed to stay in the competitive game. Once
Keynesian is understood in terms of the game
theoretic scenario above, one can easily justify
(I think that I am the first to point out) the
transition from social democratic to private or
profit-led demand management. That is, in trying
to increase the opportunity cost of not investing
and accumulating, the state will attempt to whet
the appetite for profit or unleash (as Keynes
referred to it) "animal spirits" through
regressive taxes and anti-labor legislation.
After the failure of social democratic demand
side management and full employment Keynesianism
in the 1970s, the stage was set for the eventual
transition in the function of the state from a
welfare instrument to a class instrument:
It was no longer assumed that current investment
is determined by either current or expected
consumption. Hayek's interpreter G.R. Steele puts
the point succinctly:
[while], of course, the relative magnitude of the
demand for equipment of a particular industry
will depend upon the demand for the product of
that industry, it is certainly not true to say
that the demand for capital goods in general is
directly determined by the magnitude of the
demand for consumer goods.
Quoting from Hayek's 1978 New Studies, Steele continues:
According to Hayek, a dependency of investment
upon consumption can only apply to that
investment in capital which replicates existing
techniques; it cannot be relevant to 'investment
which can increase productivity per head of
worker by equipping a given labor force with more
capital equipment'. Hayek's explanation is that
this latter kind of investment is 'encouraged by
low product (consumer good) prices (which makes
it necessary to save on labour costs) and
discouraged by high ones.'"
Now this may indeed bend the stick too
far in the other direction: it is one thing to
say that investment can be undertaken independent
of the strength of final demand, but it is
another thing to say that a weakening of the
latter may induce more of the former. Paul
Mattick on the basis of Grossmann's
interpretation of Marx however did not shy away
from just this conclusion:
Through acceleration in accumulation, by
perpetual reinvestment, the increasing production
of final goods (which enter into consumption) can
also find outlet in the general circulation.
Under these conditions--when one part of capital
sets a series of other capitals in motion, the
capitalists can consume more, and the fully
employed workers also have more to spend--the
accumulation of capital is more impeded than
stimulated by the growing mass of commodities, so
that the boom already bears within it the seed of
crisis. Production shifts to the consumer goods
industry, which impairs the profitability of
capital as whole. The fall of the average rate of
profit thereby accentuated then leads to the
weakening of the prosperity and finally to
crisis. What this reveals is not simply a level
of consumption too high in proportion to the
requirements of accumulation but a shortage of
surplus value resulting from the process of
accumulation itself, which calls for the
restriction of consumption if the going tempo of
accumulation is to be maintained. If the amount
of surplus value created in production was great
enough to hasten accumulation even more, the
increased consumption would be no hindrance to
further accumulation but could grow together with
it. (70).
Here the increase in the ratio of profit to wages
is seen as important to the revival of
accumulation. Moreover, even if final demand is
weakening, profit-hungry firms could indeed be
induced to scrap old technologies and invest in
those processes that lower costs faster than
prices are falling. Working from a modified
Marxist framework, Robert Brenner seems to have
reached the conclusion that the propping up of
demand via debt, contracted by private and
government actors, has forestalled the scrapping
and reallocation of capital that may in fact be
necessary for the resumption of strong investment
and thus employment growth:
"But while the growth of debt...was helping to
stave off depression, it was also slowing down
that recovery of profitability which was the
fundamental condition for economic
revitalization. What the advanced capitalist
countries needed to found a new boom was a
rollback of that redundant manufacturing capacity
and output which had resulted from the
intensification of international competition and
which had been made all the greater by debt
creation--specifically the elimination of that
great ledge of high cost, low profit means of
production which stood in the way of the recovery
of the aggregate rate of profit in mfg. The
series of severe recessions that occurred form
the end of the 1960s through the early 1990s
constituted the world economy's main instrument
for accomplishing this task, and they certainly
did something to wipe out redundant productive
capacity. But the increased demand created by
rising debt tended to cut short the processes of
destruction unleashed by recession, and more
generally to soften the impact of competition.
Higher cost/lower profit firms were thus able to
long occupy economic positions that could, in the
abstract, eventually have been assumed by more
productive, higher profit, and more dynamic
enterprises. But allowing the less productive,
less profitable firms to go out of business by
letting the business cycle take as a natural
course would very likely have turned the long
downturn, with its relatively serious but
nonetheless limited recessions, into outright
depression. Simply put, the preconditions for
restoring the system to health was a
debt-deflation, leading to what Marx called a
"slaughtering of capital
values.' But since the only systematic way to
achieve this was through depression, the only
real alternative was continuing debt expansion ,
which contributed to both stagnation and
financial instability."
Finally , for those investment projects that are
meant to meet a long term trend even a drop in
immediate consumption can be favorable as firms
may decide that it is advantageous to build on
the trend and thus take advantage of lower
depression prices in materials, wages and
possibly interest rates. For such purely
economic reasons, there seemed to be no
compelling reason to boost final demand through
humane provision of government jobs through
deficit financing and the redistribution of
income. The social democrat simply cannot count
on demonstrating that the brightening the
prospects of final demand will in fact be in the
interests of private investors.
The primary task of crisis management in a
private market economy has to be the revival of
investment, though people are often led to think
the economy hinges on the recovery of final
consumption since their own purchases are of
consumer goods and official statistics make final
consumption seem more important than it is in
order to avoid double counting. About the latter,
Mark Skousen has written
Šwhen one examinesŠthe Gross National Product, this
fundamental characteristic [in modern economies
only a minor part of the community's resources is
devoted to the production of consumption goods
while most of the energies and equipment are
applied to the production of intermediate goods]
is completely lost--in fact, it appears as just
the opposite. If one looks at a breakdown of GNP,
consumer spending always appears as by the far
the largest section of the economy. For example,
in 1987, total personal consumption expenditures
in the US come to $3, 012 billion, while "gross
private domestic investment" totaled only $713
billion and government spending amounted to $925
billion. How does one explain this discrepancy,
which shows consumer spending to be four times
larger than capital expenditures? What is
happening is that the gross private investment
figures in GNP is not really a gross number after
all. It is actually a net measure and purposely
excludes 'intermediate goods' that are purchased
to be used as inputs in producing other goods and
services. It is a strictly value added figure...
In short, the GNP data exclude the critical
intermediate stages of production. Advocates of
this traditional approach do so because, they
say, they wish to studiously avoid double
counting...Further, the net method (GNP) greatly
exaggerates the role of consumption in the
economy, giving the deceptive impression that
most of the national output is in consumption
goods rather than investment. Such thinking
encourages economists and government officials to
for the misleading idea that consumer spending,
being the largest section of the economy, must be
stimulated in order to get the economy out a
slump.
The theoretical point was--to use Hayek's own
metaphor--that the continuous flow of the river
of investment can vary independently of the level
of the tide (sales of final goods) at the mouth.
The upper reaches of the volume of water is
affected by the immediate flow of the tributaries
to the mainstream (variations in new and
replacement technology). In any given period
there is no obvious correspondence between
changes in the upper reaches and the sale of
final goods; nor between the sale of final goods
and employment. Moreover, as Marx first and Hayek
later recognized, it is generally the case that
in a slump the revival of final demand is an
effect rather than a cause of revival in the
upper reaches of the stream of production. On the
chance that revival of investment could be
stimulated by regressive tax relief and
anti-labor legislation and even the allowance of
a deep recession there began (as Bhaduri
intimated above) a concerted attack on the social
activist state and the renascence of Social
Darwinism --inequality and hardship were claimed
to be "socially benign", the mitigation of
hardship "socially inimical", the fortunate and
the affluent were relieved of guilt as they
understood themselves to be "natural
beneficiaries of their own excellence." The new
Social Darwinism in public policy was coupled, as
already suggested, with a rediscovery of Hayek
in the realm of economic theory.
In the face of the argument that social
democratic full employment policy and
redistribution may not thus be the best means by
which to induce investment in a private market
economy, Keynesians were trapped by their own
positivist framework, for if it was simply a
matter of turning whichever dials most
effectively raised demand and the investment
component thereof in particular, it was an
empirical matter whether left wing demand
management did the job better than private
management or Jessop's Schumpeterian workfare
state. The stagflation of the 1970s settled the
argument in favor of the latter even as the
former failed to lift the economy decisively out
of its doldrums.
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