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 traditionThe 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 employment 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: "the 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 stateFurthermore, 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 democrats 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 market[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 when one examinesthe 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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