The Return of Keynes? There are more and more calls to regulate the financial markets and control the risks of a financial crisis. Nicolas Benies asks if economic liberalism is finally losing ground among mainstream economists. George Soros, who made his fortune speculating in currencies and the international financial markets, raised the first alarm. "It is necessary to regulate the markets," he said, "or democracy itself will be threatened."
Most mainstream economic research is still centred on liberal style policies, though the search is on for a new version. Privatisation, deregulation, downsizing state expenditures, and the reduction of public deficits remain unassailable dogmas, even if the Wall Street Journal approves-at least for the ex-coloniesexchange controls like those that allowed Malaysia to limit capital movements, without preventing them entirely.
These meant that Malaysia was less at risk of the hazards provoked by the massive flight of speculative capital. That country's reimposition of capital controls have provoked debate in many developing countries on ways of combating the erratic movements that deepen crises, especially the debt crisis. Self-Criticism on the pace of deregulation
The American administration has drawn up its own balance sheet of the impact of deregulation on the financial markets. Without questioning the IMF as an institution, the Americans believe that the IMF pushed its policies too fast, especially on the 'developing" countries. The depth of the economic and financial crisis now buffeting Brazil, Argentina, and Mexico fits well with this autocritique.
The United States, the big American banks, and even the big industrial groups are directly threatened by this financial crisis knocking at the door. The debt crisis could have direct repercussions on the markets of American corporationsthe backlash could cause a collapse of stock prices on Wall Street. This situation is causing some nervousness, and helps to explain the actions of the American government in doing all that it can to help Brazil through its crisis, and thereby speculation about the devaluation of the Chinese Yuan, to improve competitiveness. All the governments of the developed countries, as well as the international institutions, asked China not to devalue in order to avoid the contagion of the financial crisis. For a moment, they forgot all their declarations on human rights and the antidemocratic, "socialist" regime. The ideological war stops at the borders of the capitalists' interests. New policies
The IMF has gone in search of a third generation of liberal policies, to deal with the current crisis while preserving the policy of structural adjustment.
At the height of the crisis, in the course of the last quarter of 1998, after the open crisis in the Russian federation, the G7+1 (the world's richest countries, plus Russia) tackled the question of new regulations to avoid this type of crisis. The world's leaders, however, never got beyond good intentions. The crisis eased, temporarily perhaps, but the horizon had narrowed. The liberal capitalist world never thinks beyond the short term.
Alan Greenspan, the president of the American Federal Reserve Board— which played a critical role in combating the spectre of world deflation by lowering short-term interest rates three times in rapid succession-declared that this crisis was the most serious since the end of the Second World War. Nevertheless, the leaders did nothing, acting as if the crisis would resolve itself.
It is clearly necessary to regulate the
INTERNATIONAL INSTITUTE FOR RESEARCH AND EDUCATION
André Gunder Frank and Salah Jaber [72 pages A4)
24 International Viewpoint #314 September 1999 financial markets-to define, for example, "target zones' which would limit the fluctuations of the principal currencies (the dollar, the euro, the yen) and avoid short-term speculation. The central banks, especially the European
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Central Bank, opposed this idea, attempting to maintain their independence, to defend the interests of the financial sector, and to resist any restriction on the
ECB president Wim Duisenberg refused to lower short-term interest rates of the eleven European countries that constitute Euroland, under the pretext that price stability remained the primary, if not the only, objective. In the context of deflation (a generalised fall of prices due to overproduction) and recession this priority is ideological, rather than based in any objective reality. The Left: What is to be done?
The Social Democrats, governing 13 of the 15 countries in the European Union, are in search of an economic policy that exemplifies "the third way,' so dear to Tony Blair, or the "new centre," so dear to Gerhardt Schroeder.
The German economy is being comp letely restructured. Deregulation is hitting the banking sector, which puts into question the traditional ties between finance and industry. A whole economic and social model is being restructured. *Rhine Capitalism,' often favourably compared by German politicians to savage 'Anglo-Saxon' capitalism, is on its last legs.
Social models of consensus, of sharing the fruits of growth, are about to disappear from sight. The Japanese social model of lifetime employment is also under attack. The restructuring of Sony Corporation, with the closure of 15 plants and the layoff of 17,000 employees, sounds the knell. The chairman of Sony, Idei, has declared the abandonment of the social model and the adoption of an Anglo-Saxon management model—-the 'neo-liberal corporation,' to borrow the title of a recent book by Thomas Coutrot.
Tony Blair's "Third Way' is another way of imposing this management program, which has neither plan nor future. Under the pretext of modernity," a term that the English Prime Minister is very fond of, economic liberalism is being imposed. The Financial Times reported on a visit by Blair to the West of England, where he asked business leaders if the European Union shouldn't be interested in dismantling any social policies which undermine employment, in order to reduce unemployment levels on the continent.
The debate seemed a bit more sensible as carried out by the German government in the months following their election. Oskar Lafontaine acted as the great defender of Keynesian inspired policies to stimulate the economy and confront the economic downturn predicted for Europe. The German economy, more heavily industrialised than, for example, the French, is more sensitive to the state of international markets. The last quarter of 1998 showed only very feeble growth, which is expected to continue this year. The international economy is marked by a recession that is more than 40% of the population of the world.
What was Lafontaine, along with Strauss-Kahn (the French Finance Minister) demanding? A break with the conditions imposed by the Maastricht treaty, which are reaffirmed in the Growth and Stability Pact annexed to the Amsterdam Treaty? Of course not. The two ministers have sworn respect for the treaties. Even more, the French minister has gone so far as to proclaim that the public deficit will go from 3% in 1998 (in fact, 2.9%, thanks to a 3.2% growth rate) to 2% in 1999, 1% in the year 2000, and then to 0%. Liberal dogma on keeping the public finances balanced has obviously not disappeared.
Thus, the European Central Bank has imposed economic choices going in the direction of the continuation and the deepening of austerity respecting the criteria of the Maastricht Treaty which results in a restrictive budgetary policy as well as the maintenance of a monetary policy centred on the defence of price stability and the The Return of the 19th Century
The world's leaders are returning to the precepts of non-intervention that theoretically directed state economic policy in the 19th century, until the crisis of 1929. Jean-Baptiste Say, in an oftenquoted phrase, summarised these doctrines: "products are always exchanged against products". He rejected any State intervention, any possibility of crisis, and any role for currency becoming a simple veil for exchanges.
For Say, there was no need for Political Economy. The State intervened from the beginning of capitalism: to direct it, to determine an overall strategy for all fractions of the capitalist class. Each capitalist is opposed to the other, and the "many capitals" could never
One needed an ideal "collective capitalist", writes Engels in AntiDuhring. The State is one of the essential categories of this mode of production. The passage to capitalism of the so-called emerging' countries-South Korea and Eastern Europe-shows it. The current crisis of the Russian Federation is really a crisis of the State and marks the failure of the liberal dogma and its blind confidence in the mechanisms of the market. The market simply could not exist without the State. Historic Comeback
The 1929 crash was a profound crisis, raising the possibility of the end of capitalism, as foreseen by some. Even a minstrel of capitalism such as Schumpeter wrote, in 1942, in the preface to his Capitalism, Socialism, and Democracy that capitalism would not survive this crisis, that the world was turning to socialism.
If he had read Marx a bit more closely, he would have analysed the importance of the subjective factor in the passage from one mode of production to another. Without this subjective factorthe organisation and self-consciousness of the working class barbarism dominates. And our century has been
The 'great crash' of 1929 led to another kind of state intervention. It fell to John Maynard Keynes to develop a new theory, sometimes directly inspired by Marx whom he had read carefully, and to give his name to a Keynesian' political economy, legitimising a new
John Kenneth Galbraith, a young economist who, just out of university, became part of Roosevelt's team in 1934, tells of his first encounter with the writings of Keynes in his Voyage in Economic Time. It was a revelation. Keynes was working on discrediting liberal dogmas, and arguing that another policy was possible which could stimulate the economy and combat overproduction, thereby re-legitimising the capitalist system of exploitation.
Keynes realised that it was much better to integrate the working class into the system in order to preserve what was essential, the exploitation of the workers. e International Viewpoint #314 September 1999 25
economics Roosevelt put in place his "New Deal" policies to stimulate the economy and to use the state for infrastructure projects that individual capitalists could not undertake in the absence of a rapid return on investment.
The state began a conquest of all spheres of life: economic, social, and cultural. It became known as the *Welfare' State. The capitalist state has also been called an octopus, since it is no longer possible to do anything without running into the state power. General De Gaulle's 'bonapartist' political regime in France, from 1958 to 1969, was perhaps the best example.
Social conquests became enshrined in law, by a state which gained a new legitimacy in so doing. At its height, the regime could restructure the entire French economy and break out of the bottleneck of a purely national market. This state intervention greatly aided economic growth. basIt is useless to wonder whether the intervention of the State enabled the economic expansion or if it was the growth which financed this intervention of the State. Often the two phenomena nourished one another, catalysing this growth without crisis which marked "the 30 glorious years" for the countries of Western Europe and Japan.
The second world war, with its massive destruction, was the starting point of the post-war expansion. The rebuilding of the devastated economies resulted in an enormous revival. The State took charge of those sectors that were vital for the resumption of the growth: energy, transportation, banking, and the insurance sector. his intrastructure was necessary so that the many capitals, the capitalists, could start to create wealth again and to expropriate the profit, the surplus value.
Social policy, such as the nationalisation of Renault, is explained by the climate of the Liberation. 'Socialisation? say the history books, but revolutionary' would be more appropriate. Those on bottom were no longer willing to be governed by those on top, and those on top, discredited collaborationists, were unable to enforce their rule. Thus, new elites had to be found.
General de Gaulle even appointed Maurice Thorez, the secretary-general of Communist Party, the largest party in France in 1946, as vice-president of the Council of State, in order to restore legitimacy to the capitalist State in search of an elite, of a political regime to prop it up.
The disassociation of theory from practice was as central to Keynes as to liberalism. Keynesianism is by no means a body of doctrines. Initially because Keynes was a great pragmatist and empiricist who could adapt to all situations. But also because the General Theory of Employment, Interest and Money, his best-known work (published 26 International Viewpoint #314 September 1999 in 1936), is poorly written.
And, finally, because the concrete policies which led to " Welfare" State were developed in reaction to class struggle, and are best explained by these class struggles and the strength of the counter-powers as embodied in the trade unions and the political parties of the labour movement. The Return to Keynes
Pascal Combemale in his Introduction to Keynes points out the major principles recommended by Keynes: prioritising measures against deflation, which is seen as a greater danger than inflation (in opposition to "classical' economists, who believed in relying on market forces to counter deflation); against false notions of book-balancing austerity in conditions of high unemployment, he argued that local communities had to spend more and that wages had to be raised in order to avoid a downward spiral of unemployment and loss of jobs.
He thus raised the importance of social measures to the same level as purely 'economic' measures.
He also wrote of the need to lower interest rates, in order to enable debt financing and "the euthanasia of the rentier class" (as he wrote with some irony). All of these policies require a stable environment and imply the need to reform the institutional framework of the international economy.
Unfortunately, these proposals were not accepted at the Bretton Woods conference which fixed the rules of the international economy in the post-war period.
For the rest, Keynes was a master of ambiguity. He was at the same time for and against inflation, for and against state intervention. In one of his last articles in 1946, he recalled the virtues of competition and warned against intervention.
Kaleckı, following up, explained why the "business class" may not find it beneficial in the long term to maintain full employment, because it gives too much power to workers. Keynes did not accept the idea that the history of humanity is the history of class struggle...
In 1944, Karl Polanyi wrote that "Retrospectively, one of the credits of our epoch is to have attended the funeral of market self-regulation". Who would say such a thing today? These policies of liberal inspiration have a rational core that Keynes refused to analyse: the assault on workers in order to reduce the cost of labour and thus to allow an increase in competitiveness and profit by
Social issues have completely disappeared from sight, giving way to a reasoning which makes micro-economics (the laws of operation of the firm) the last word on the understanding of the economy. It is the reification of the company, leaving aside the social and
Only the constraints of business count. Doesn't anyone realise that this is not economics, but accounting? The relevance of Keynes is his insistence on the social, on the dynamics and circular flows of the economy, to explain the concrete operation of the economy. The neoclassical liberals claim that the policies of fiscal stimulation no longer work, because since 1974 they have failed to recognise and understand the beginning of the crisis.
These policies cannot resolve the crises of a new economic period, but they can usefully be integrated into an overall vision of social construction. Growth for the sake of growth has had its day. It must now have a social and ecological content. It is necessary to restore confidence in the workers and to allow the revival of class struggle.
For Europe, it is essential to restore legitimacy to European construction. It is obvious that no government is interested in such a policy. The current priority is to undermine all social rights, rights to a job or to Social security in order to put constant downward pressure on direct and indirect wages and thus to increase
The spread of mass unemploymen and poverty in the principal capitalist powers has resulted in deep teelings or insecurity, individually experienced which largely explains the acceptance by workers of the degradation of wages, employment, and working conditions.
In France, it is possible to both have a job and to be poor, due to the ceaseless increase in the precariousness of employ ment, particularly part time work. Women are the first victims. It is time that the labour movement understands that the defence of women's rights fits directly in the social struggle for the construction of a social alternative.
Keynesianism is of much less topicality than one of the key questions the birth of a new form of State, successor to the Welfare State, together with a new mode of accumulation to take the place of "Fordism".
In spite of the declarations of the social democrat leaders, social reforms remain in the closet, such as the reforms of the rules of the international economy. Liberalism is seeking desperately to provide answers within the framework of
For now, no government calls into question the total freedom of movement of capital, and the obvious need for some form of control in order to avoid a
Deflation threatens. The prices of all raw materials are heading downwards. The small rise in the rate of the inflation, about 0.3% in France, indicates the depth
Isn't it time to think of these issues, rather than to pretend to believe that growth is on the threshold, as president Hoover kept repeating in 1929? *
was also a cause of the complete economic break-down that followed. Mainstream economists and policy advisors for the newly elected governments attempted to dress this process as a scientifically designed "transition", but virtually no actual statistics corresponded to the projections suggested by the architects of the transformation.
Transition ideologues talked about a "return to normalcy" and about "catching-up with Europe". But in reality the relative decline of the region accelerated after 1989.
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Gross domestic product dropped by 20 per cent even in the most successful east European countries. Ten years after the transition began, Poland is the only country that has regained and exceeded her 1989 GDP level. (The Poles produced 20 per cent more in 1999 than ten