Keynesianism can mean a lot of things to lots of people, but the central idea is pretty easy to characterise – markets are good, but they need taming by government. Keynes' theory was massively interpreted, reinterpreted, and misinterpreted, over the years. Some within the more left-wing "post-Keynesian" tradition. Keynesian economics, as opposed to free market capitalism, maintains that the state can and should intervene in the economy in order to stop economic crises from occurring. After 1945. Keynesianism became the ideology of overall political management of the economy (e.g. "fine tuning").
Every capitalist crisis, no matter what its imputed causes, manifests itself in a declining accumulation of capital. The share of social production earmarked for expansion is considerably reduced or even fully eliminated, curtailing total social production in the process. Seen from the restricted view of the market, however, this process appears as overproduction of goods or insufficient demand. The depression that resulted was a deflationary process which affected both prices and production, but which at the same time brought about substantial changes in the economic structure and prepared the way for a new economic boom. The depression became an instrument for overcoming economic crisis, and although not deliberately encouraged, it was passively allowed to run its course. Inflation, the creation of money by the state, impairs the price mechanism. As capital grew it created obstacles to its own further expansion. Its periodic crises became more and more oppressive and persisted long enough to create a real danger that the deflationary process would lead to social upheaval rather than to a new boom. To prevent this from happening, state economic interventions were in order in the great crisis that followed the 1929 crash; their theoretical justification came later.
This interventionist policy sought to achieve by inflationary means what seemed no longer attainable by deflationary methods. Keynes assumed that the interest rate was dependent on the quantity of money in circulation. An increase in the money supply would decrease the interest rate and spur new investments, which in turn would increase employment and raise prices and profits. Since the state had the power to create more money, it was a matter of government decision whether the way to economic recovery would be through lower interest rates. However, the profitability of capital had already fallen so far that even a reduction in interest rates would not be sufficient stimulus new investments. It would therefore be necessary to make up for the defective private demand by creating more public demand. However, since an increase in public spending by way of taxation would cut even more into the profits of the private sector, it would have to be financed through state deficits. The technique, of course, was not to print more money, which would depreciate the currency, but merely to expand state credit which would absorb idle private capital and finance the increased public demand. This added demand would, it was expected, stimulate the economy as a whole sufficiently to bring it out of the depression and into a boom, which in turn would enlarge the state's tax revenue to such a degree that it would be able to pay off its depression incurred debts in a new period of prosperity. The co-ordinated employment of monetary and fiscal policies would not only counteract the deflationary trend of the crisis, they would in addition initiate a new period of upswing, which although containing inflationary tendencies, need not degenerate into a real inflation as long as unused money and real capital were still available. The specter of inflation would loom only if anew disproportionality arose between the means of payment and commodity production. But this was a real possibility only when full employment was reached, and then it could be combated by state-initiated deflationary policies. In short, it was imagined that a theory and practical policy had finally been found which would place the economic cycle under conscious state control.
Even under the best conditions, a steadily rising inflation rate leads eventually to economic stagnation. Inflation must then be halted at the point where it begins to have a negative effect on the economy. Just as governments add steam to inflation by their monetary and fiscal policies, contrary measures can slow its course. However, it is not within the power of governments to bring inflation totally to heel, since price inflation will continue despite deflationary government measures. This being the case, depression is aggravated in two directions: on the one hand, because of a stepped up general economic decline, and on the other, because of the multiplying social conflicts generated by the inflationary distribution of income. Depression, like an upswing, sets limits to inflation. But any limit can be overstepped if one is willing to accept or is unable to avoid the attendant social risks; the hyper-inflations of the past are ample testimony to this. But the risk is far greater when inflation is worldwide than when it is isolated within individual countries, as has been the case in the past. The bourgeoisie therefore tries to check it, but it can only do so by accepting lower profits, reducing public spending, and allowing depression to deepen. As the hopes that the depression will have a deflationary effect fade, they are replaced by prospects of a new boom contrived by inflationary means. Where all this will lead cannot be forecast with certainty, but at least one thing is sure: the present crisis, with its peculiar deflationary inflation, will keep the world in a perpetual state of unrest that could easily lead to catastrophe.
The mainstream economics that emerged post-war, sometimes called the "neo-classical synthesis", was a more conventional marriage of core elements of the old "neoclassical theory" with Keynesian insights. For as far as economics goes, Keynes' co-worker, Joan Robinson coined the phrase "Bastard Keynesianism" to describe the vulgarisation of his economics and its stripping of all aspects which were incompatible with the assumptions of neo-classical economics. Thus the key notion of uncertainty was eliminated and his analysis of the labour market reduced to the position he explicitly rejected, namely that unemployment was caused by price rigidities. This process was aided by the fact that Keynes retained significant parts of the neo-classical position in his analysis and argued that the role of the state was limited to creating the overall conditions necessary to allow the neo-classical system to come "into its own again" and allow capitalism "to realise the full potentialities of production." [Keynes, The General Theory] Keynesianism was a tool for saving capitalism and avoid socialism. Save capitalism by reforming it. Keynesian economics is not trying to democratise the economy. Keynesian economics is more about regulation, public sector spending and so on, its not about democratic control, or worker control. It works within the framework of how to keep growth going, it leaves class systems in place and supports them. Keynesianism is not socialist, not even close, its just responsible capitalism. It isn't calling for abolishment of social classes but rather things like more progressive taxation, universal healthcare, spending on infrastructure projects etc.
In terms of policy rather than theory, the "Keynesian consensus" typically involved a number of common elements. First, markets are volatile and sticky so they need hands-on regulation. Second, when private investment fails the government can step in via fiscal (i.e., tax and spending) policy, and if necessary with big spending programmes like the European welfare states. Third, at the international level, capital flows are stabilised with a global financial architecture: the Bretton Woods system which fixed currency exchange rates until 1971; and institutions like the World Bank and IMF.
Keynes's demand management (or pump priming money) aims to overcome crisis by increasing the rate of exploitation. If it was implement correctly, it would lead to the lowering of the working class's living standard. Keynes wrote:
“Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.” [ The General Theory]
Unlike neo-classical economist who prefer to cut nominal wage (or using deflation). Keynes preferred to cut the worker's living standard by cutting real wage using inflation so there would be fewer obstacles posed by unions to capitalist's profit restoration project. Inflation is therefore a means of attacking real wages. It can also be a concession to the working class since it tends to keep inefficient businesses functioning (every wage-slave with a grain of class consciousness knows that these are the best ones to work for!) Inflation tends to undermine debts (by reducing the value of repayments) and so favours industry relative to finance capital
Thus left-wing Keynesians who later founded the Post-Keynesian school of economics recognised that capitalists "could recoup themselves for rising costs by raising prices." Joan Robinson
The "Bastard Keynesianism" of the post-war period (for all its limitations) did seem to have some impact on capitalism. There is what is often called the "Golden Age of Capitalism," the boom years of (approximately) 1945 to 1975. This post-war boom presents compelling evidence that Keynesianism can effect the business cycle for the better by reducing its tendency to develop into a full depression. By intervening in the economy, the state would reduce uncertainty for capitalists by maintaining overall demand which will, in turn, ensure conditions where they will invest their money rather than holding onto it (what Keynes termed "liquidity-preference" and a situation we now call “credit-crunch”). In other words, to create conditions where capitalists will desire to invest and ensure the willingness on the part of capitalists to act as capitalists. This period of social Keynesianism after the war was marked by reduced inequality, increased rights for working class people, less unemployment, a welfare state you could actually use and so on. Compared to present-day capitalism, it had much going for it.
So instead of attempting the usual class war (which may have had revolutionary results), sections of the capitalist class thought a new approach was required. This involved using the state to manipulate demand in order to increase the funds available for capital. By means of demand bolstered by state borrowing and investment, aggregate demand could be increased and the slump ended. In effect, the state acts to encourage capitalists to act like capitalists by creating an environment when they think it is wise to invest again. As Paul Mattick points out, the "additional production made possible by deficit financing does appear as additional demand, but as demand unaccompanied by a corresponding increase in total profits. . . [this] functions immediately as an increase in demand that stimulates the economy as a whole and can become the point for a new prosperity" if objective conditions allow it. [ Crisis and Crisis Theory]
Keynesian capitalism is still capitalism and so is still based upon oppression and exploitation. It was, in fact, a more refined form of capitalism, within which the state intervention was used to protect capitalism from itself while trying to ensure that working class struggle against it was directed, via productivity deals, into keeping the system going. For the population at large, the general idea was that the welfare state (especially in Europe) was a way for society to get a grip on capitalism by putting some humanity into it. In a confused way, the welfare state was promoted as an attempt to create a society in which the economy existed for people, not people for the economy. So there is no denying that for a considerable time, capitalism has been able to prevent the rise of depressions which so plagued the pre-war world and that this was accomplished by government interventions. This is because Keynesianism can serve to initiate a new prosperity and postpone crisis by state intervention to bolster demand and encourage profit investment. This can mitigate the conditions of crisis, since one of its short-term effects is that it offers private capital a wider range of action and an improved basis for its own efforts to escape the shortage of profits for accumulation. In addition, Keynesianism can fund Research and Development in new technologies and working methods (such as automation) which can increase profits, guarantee markets for goods as well as transferring wealth from the working class to capital via indirect taxation and inflation. In the long run, however, Keynesian "management of the economy by means of monetary and credit policies and by means of state-induced production must eventually find its end in the contradictions of the accumulation process." [Mattick] This is because it cannot stop the tendency to (relative) over-investment, disproportionalities and profits squeeze In fact, due to its maintenance of full employment it increases the possibility of a crisis arising due to increased workers' power at the point of production. So, state intervention can, in the short term, postpone crises by stimulating production, however, these interventions do not actually set aside the underlying causes of economic and social crisis.
We frequently hear the distinction that Keynesian economics is of the Left, and the Austrian/Chicago school of the Right. Workers should not get involved in, or be distracted by, inter-capitalist squabbles but should keep their eye on the ball - to defend their own interests in the most militant fashion possible whether against the state or some private corporation. Beyond that they should be looking to get rid of capitalism in all its guises including state-capitalism, or mixed-economy. is any merit at all in workers supporting nationalisation as against privatisation. I say no because for workers to do so is a to be coopted into supporting one form of capitalism vis-a-vis another. Workers should follow a policy of strict abstentionism or neutrality on the question of economic policy which in the end is a capitalist issue not a working class issue. They should militantly pursue their class interests whether in the private sector or the state sector and not seek to ally themselves with sections of the capitalist class in wanting to expand the latter or minimise the former.
Through Keynesianism the state has become stronger and more centralised. Chomsky could state that "prisons also offer a Keynesian stimulus to the economy, both to the construction business and white collar employment; the fastest growing profession is reported to be security personnel." [ Year 501]
The pattern of a particular crisis is influenced by the concrete circumstances of the time so no crisis is merely a repetition of those which have preceded it. While there are elements common to all crises we cannot say in advance how these elements will interact in a specific situation or what is the relative strength of other factors associated with it. Consequently to understand a crisis, we can only be wise after the event.
We can say that all crises are intimately connected with two fundamental features of the system, viz., " anarchy of production " and " disproportional industrial development." These two features are again intimately bound up with each other. By anarchy of production we do not infer economic chaos, on the contrary capitalism is a system ruled by laws and compulsions of its own. What is meant is that capitalism is not a system consciously regulated by social aims. Capitalists do not meet beforehand to harmonise production in accordance with social ends. Capitalism being profit motivated production, capitalists invest in industry for no other motive and without regard for and little knowledge of other investments being carried out at the same time. Because the different branches of industry are atomistically controlled or to state it alternatively because "anarchy of production," prevails in capitalism, decisions for capital investment are carried out by Capitalists without knowledge or regard for investment decisions being made at the same time by other capitalists elsewhere. But capitalist production is social production and the different branches of industry form an interlocking whole. It can be seen then that the different yet integrated industrial spheres, governed as they are by autonomous decisions being made simultaneously, there exists in the system an inherent bias towards uneven development between the various branches of industry. When this disproportionality reaches a certain level the possibility of a crisis emerges. Thus the phase of the business cycle associated with accelerating investment, rising wages, rising employment and increasing profits, will come to an end and be replaced by the antithetical phase of reduced investment, falling employment and declining wages and profits. Capitalism may be described as a system of unstable equilibrium.
To put the matter concretely, capitalists in a particular industry have overestimated the demands for their product and so produced more than the market can absorb at a remunerative price and if we take it that other industries have not similarly expanded, then it can be said that this particular industry has over-expanded relative to other industries, i.e. a disproportionality of industrial development has taken place. This relative over-expansion of industry will, however, generate cumulative effects. Not only will the industry affected cut investment and hence production but in doin'g so it reduces its demands for commodities, including labour-power, to those industries linked to it. They in turn will cut their orders to other concerns and so on. As a result a widespread decline in production will occur. If the initial over-expansion is big enough it may permeate the entire economy and precipitate a crisis. Large scale unemployment will appear, purchasing power suffer a sharp decline and surplus products will then begin to appear on the market as a matter of course. It can be seen then that over-production in one branch of industry brings elements of over-production in other branches of industry, and by rupturing the conditions of equilibrium, initiates relative over-production, which is indistinguishable from general over-production. All crises then are crises of relative over-production. An industry can only over-expand in relation to other industries although the effect which this produces is, as has been already stated, indistinquishable from general overproduction.
Crises, as Marx pointed out, do not arise through a lack of paying consumption of the mass of the population. They arise because disproportional development in one industrial sector leads to a curtailment of investment (and so production) which by upsetting the balance of the different industrial branches brings about a general slowing down of production. The lack of paying consumption is a consequence not a cause of crises. A crisis is made possible because of the antagonistic class distribution of income inherent in a system of antagonistic class relations of production. Capitalists cut back investment because there is an unsatisfactory income distribution for them, in that profit margins are too small and wage levels too high. They are not concerned with some abstract purchasing power but in the concrete fact that the purchasing power in the form of wages is too high for the existing volume of capital to earn a given return. There is still plenty of purchasing power in the pockets, holdings, banks, etc of the capitalists, but of course they do not choose to spend.
People should ask themselvs if they think state intervention -- Keynesianism -- disproves the Marxist contention of capitalism as intrinsically prone to crisis and crises are not just incidental interludes between periods of high trade activity but an essential corrective for the uninhibited self-expansion of capital. As Marx states it: "Periodically the conflict of antagonistic agencies seek vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions, violent eruptions which restore the disturbed equilibrium for a while." [Capital]
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