Even while the economy is recast for today’s pandemic on the back of the dismal failures of the past decade, austerity is already rearing its ugly head.
At one level there must be politics here. The public must not be allowed to think that socialising the economy to meet a pandemic means the economy might be socialised when the pandemic is over. Likewise, obsessing about excessive debt means the greatly more pressing and more dangerous reality of deficient expenditure is side-lined.
But it’s not just politics. Economics is also at play. For the economics of austerity is still dominant, not yet defeated.
Economists are stuck on symptoms, rather than cause.
Ten years ago, ‘The Economic Consequence of Mr Osborne’ systematically catalogued all past failures of austerity. Earlier this year the TUC showed Osborne’s post-Crisis revival of austerity leading to the worst ‘recovery’ for at least a century: the lowest GDP growth and the biggest rise (rather than reduction) in public debt.
Recovery decades over past century
|Rank on GDP growth
|GDP growth, annual average (%)
|Public debt at start of decade, ppts of GDP
|Change in public debt over decade, ppts of GDP
Macroeconomics should address why the system has gone so disastrously wrong. Austerity is only a symptom of the consequent dismal prognosis for the private economy. While the interplay between private and public is more complex in reality, it is easy to see why many find the logic convincing.
The Keynesians may be in the vanguard of the struggle against austerity, but they are closely aligned with conventional economics when it comes to this prognosis. In analytical terms they accept the partitioning of economics into short and long runs, the first on a demand view the second on a supply view. To the extent that views differ, Keynesians err towards a more state-oriented resolution to longer-term defects. They go further than the mainstream but not as far as the Marxists on the convenient spectrum that orders political opinion on economic questions.
In contrast to conventional economic opinion, Keynes was concerned with unravelling long-term weakness in the private economy as a consequence of the deficiency of demand. (Supply was of course deficient, but first as a symptom not cause.) It led him to a greatly more positive assessment of the potential of the system as a whole.
Deficient and furthermore dangerously volatile demand was a consequence of wider failures of the private economy. Now, as in the 1920s and 1930s when Keynes devised his theory, the failed system is well described as globalised rentier capitalism.
In previous work I emphasised the harmful role of a high long-term rate of interest, and associated liberalised domestic and international monetary policies. On reflection (PEF, forthcoming) globalised rentier capitalism is better understood in terms of class relations.
The rate of interest defines, broadly, the return to Capital (or more precisely, to wealth). On the flip side, wages and working conditions define the return to Labour.
The catastrophic failures of capitalism that Keynes witnessed – and the ongoing failures of the today’s globalisation – followed from a system aligned to the interests of wealth.
His account substantiated contemporaneous accounts of ‘overproduction’ and ‘under-consumption’, owed, above all, to John Hobson. Earlier this year Michael Pettis and Matthew Klein renewed and explained Hobson’s thinking in their Trade Wars are Class Wars:
“The underlying problem was an economic and political system that ‘placed large surplus savings in the hands of a plutocracy’. Income concentration gave the rich ‘an excess of consuming power which they cannot use’ at the expense of everyone else” (p. 6).
The overlap between the theories of Keynes and Hobson can be outlined (and vastly oversimplified) as follows:
- The problem of the system is not the public living beyond the means of production. Rather it is production operating beyond the means of the public – and also of the ecosystem.
- Excess wealth is channelled into production, which becomes excessive production because workers’ purchasing power cannot keep up under deficient wages/incomes.
- The consequence is increasingly indebted firms unable to sell production, and increasingly indebted households as they borrow to top up wages and afford a basic standard of living.
- Ultimately, excess production, the inflation of debt and deficient incomes leads to financial collapse and depression.
Keynes’s policies resolved the dislocation by realigning the system away from wealth and towards the interests of labour – and ultimately to the interests of society as a whole. These policies stood conventional wisdom on its head:
- activity was to be motivated primarily by internal/ domestic demand rather than external/ international competition;
- a new exchange regime would facilitate trade but check speculation and contain global capital;
- interest rates would be set permanently low (via nationalised central banks and changed debt management policy); and conditions and protections for labour would be greatly strengthened.
At first sight the domestic motivation sits oddly with Keynes’s internationalism, and paramount concern to provide an alternative to nationalism and totalitarianism. Hugh Gaitskell would later capture the essential point: “It is recognised, at last, that the expansion of international trade depends on the maintenance of Full Employment [at home] – and not the other way round” (Daily Herald, 13 December 1946). This sets the right context for Keynes’s (General Theory, p. 383) expectation of a “willing and unimpeded exchange of goods and services in conditions of mutual advantage”.
He understood that his economic arrangements would permit the right operation of the system as a whole, meaning increased and stable activity, more and better work, and a higher standard of living and life.
When Keynes touched on class considerations he did so obliquely and leant against ‘State Socialism’:
… no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary.
He did not pursue the far greater positive feedbacks, which at the time were better understood by the left. G. D. H. Cole wrote of “the supreme challenge which his [General Theory] offers the entire economic practice of Capitalism”. Giving particular emphasis to underconsumption (noting “Marx himself can be quoted on its side”) Cole saw Keynes “discovering … Hobson [had] hold of the right end of the stick” (Backhouse’s compendium of reviews of the General Theory, p. 104). The Oxford historian A. L. Rowse said of the “political importance of the book”: “at every point, without a single exception, it is in full agreement with Labour policy in this country, and, what is even more significant, expresses in proper economic form what has been implicit in the Labour Movement’s attitude all along” (p. 111-12).
I would also note that by continuing to set the market against the state, Keynes was playing into the hands of conventional economic narrative. Better to emphasise that the market and the state could play complementary roles under socialism. Nonetheless his practical conclusions sat uncomfortably with political traditions on right and left. Only socialist parties were likely to deliver the necessary rebalancing from capital to labour. Conversely any reliance on market forces and the private economy was at odds with contemporaneous socialist doctrine.
The Attlee government vindicated the economic deliberations of the inter-war years. Full employment and vigorous growth coexisted with greatly extended public services and social provision. They proved the validity of their manifesto claim:
First, the whole of the national resources, in land, material and labour must be fully employed. Production must be raised to the highest level and related to purchasing power. Over-production is not the cause of depression and unemployment; it is under-consumption that is responsible. It is doubtful whether we have ever, except in war, used the whole of our productive capacity. This must be corrected because, upon our ability to produce and organise a fair and generous distribution of the product, the standard of living of our people depends.
In the narrow context of austerity, the full employment of the national resources also set the public debt on the rapidly improving trajectory that too often goes unremarked.
The same diagnosis is relevant today.
After almost a half century when the interests of wealth have been made paramount and the interests of labour disregarded, the authorities continue to promote the delusion that the public – i.e. labour – has been living beyond its means. (The pandemic has changed the immediate priorities, but the underlying assessment still holds – indeed many are talking up ‘scarring’ and so an even greater supply deficiency.)
Instead, once more, the global system has overproduced relative to income. Rather than supply deficient relative to excess demand – as finance ministries, central banks, the OECD and IMF insist – supply is excessive relative to deficient demand. The relentless emphasis on productivity is wholly misleading, when the immediate need is to strengthen demand not supply. Austerity is of course exactly the reverse of what is needed: a crisis of purchasing power cannot be resolved by reducing income; by cutting both the social and the real wage.
Expansionary fiscal policy is obviously part of increasing demand. And right understanding and the right operation of the system will allow the state to do whatever is needed to protect society and the ecosystem – just as it did for Attlee. Though today, with environmental considerations paramount, economic activity must be better not greater in amount.
While it is necessary to defeat austerity, that is only part of the battle.
Today’s Keynesianism not only furnishes an inadequate case against austerity, it also confines debate onto technocratic territory rather than considerations of class and power.
Just as in the 1930s and into the post-war era, the repair of the world economy requires a far greater rebalancing of class relations. Once more we need to orient policy away from wealth and towards what the trade union leader Ernest Bevin called “the great peoples of the world”.