One of the most significant consequences of the collapse of neo-liberal
economics, with its worship of the "self-regulating market", has been the
revival of the great English economist John Maynard Keynes.
Not only do his writings make Keynes very contemporary. There is also the mood
that permeates them, which evokes the loss of faith in the old and the yearning
for something that is yet to be born. Aside from their prescience, his
reflections on the condition of Europe after World War I resonate with our
current mix of disillusion and hope:
In our present confusion of aims, is there enough clear-sighted
public spirit left to preserve the balanced and complicated organization by
which we live? Communism is discredited by events; socialism, in its
old-fashioned interpretation, no longer interests the world; capitalism has
lost its self-confidence. Unless men are united by a common aim or moved by
objective principles, each one's hand will be against the rest and the
unregulated pursuit of individual advantage may soon destroy the whole.
Governing the market
Government must step in to remedy the failure of the market. This is, of
course, the great lesson that Keynes imparted, one derived from his wrestling
with the problem of how to bring the world out of the Great Depression of the
1930s. Keynes argued that the market, left to itself, would achieve equilibrium
between supply and demand far below full employment and could stay there
indefinitely. To kick-start the economy into a dynamic process that would move
it toward full employment, the government had to serve as a deus ex machina
by spending massively to create the "effective demand" that would restart and
sustain the engine of capital accumulation.
As preemptive measures to stave off a depression, President Barack Obama's
US$787 billion stimulus package, as well as those of Europe and China, is
classically Keynesian. The measure of Keynes's triumph after nearly 30 years in
the wilderness is the marginal impact that Republicans, Russ Limbaugh, the Cato
Institute and other species of neo-liberal dinosaurs have made on the public
discourse with their talk of "passing on a huge debt to coming generations".
The revival of Keynes is not, however, simply a policy matter. Two ideas have
displaced the theoretical assumption of the individual rationally maximizing
his or her interest from the center of economic analysis. One of these ideas
driving current thinking is the pervasiveness of uncertainty in the making of
decisions, which investors try to deal with by assuming (improbably) that the
future will be like the present, and by coming up with techniques to predict
and manage the future based on these assumption. The related Keynesian notion
is that the economy is driven not by rational calculus but by "animal spirits"
on the part of economic actors, that is, by their "spontaneous urge to action".
Key among these animal spirits is confidence, the presence or absence of which
is at the center of the collective action that drives economic expansions and
contractions. Not rational calculation but behavioral or psychological factors
predominate. From this standpoint, the economy is like a manic depressive
driven by chemical imbalances from one pole to the other, with government
intervention and regulation playing a role akin to that of chemical
mood-stabilizers. Investment isn't a matter of rational calculus but a manic
process that Keynes described as "a game of Snap, of Old Maid, of Musical
Chairs, the object of which to pass on the Old Maid - the toxic debt - to one's
neighbor before the music stops." Here, notes Keynes's biographer Robert
Skidelsky, "is the recognizable anatomy of the 'irrational exuberance",
followed by blind panic, which has dominated the present crisis."
Unbridled investors and submissive regulators are not the only protagonists in
the recent tragedy. The hubris of neo-liberal economists also played a part,
and here Keynes had some very relevant insights for our times. He saw economics
as "one of these pretty, polite techniques which tries to deal with the present
by abstracting from the fact that we know very little about the future."
Indeed, he was, as Skidelsky notes, "famously skeptical about econometrics,"
with numbers for him being "simply clues, triggers for the imagination", rather
than the expressions of certainties or probabilities of past and future events.
With their model of rational homo economicus in tatters and econometrics
in disrepute, contemporary economists would do well to pay heed to Keynes'
advice that if only "economists could manage to get themselves thought of as
humble, competent people on a level with dentists, that would be splendid".
Yet, even as many welcome the resurrection of Keynes, others have doubts about
his relevance to the current period. And these doubters are not limited to
neo-liberal diehards.
Limitations of Keynesianism
For one thing, Keynesianism is mainly a tool for reviving national economies,
and globalization has severely complicated this problem. In the 1930s and
1940s, reviving industrial capacity in relatively integrated capitalist
economies revolved around the domestic market. Nowadays, with so many
industries and services transferred or outsourced to low-wage areas, the
effects of Keynesian-type stimulus programs that put money into the hand of
consumers to spend on goods has much less impact as a mechanism of sustained
recovery. Transnational corporations and TNC-host China may reap profits, but
the "multiplier effect" in de-industrialized economies like the United States
and Britain might be very limited.
Second, the biggest drag on the world economy is the massive gulf - in terms of
income distribution, the pervasiveness of poverty, and the level of economic
development - between the North and the South. A "globalized" Keynesian program
of stimulus spending, funded by aid and loans from the North, is a very limited
response to this problem. Keynesian spending may prevent economic collapse and
even spur some growth. But sustained growth demands radical structural reform -
the kind that involves a fundamental recasting of economic relations between
the central capitalist economies and the global periphery. Indeed, the fate of
the periphery - the "colonies" in Keynes' day - didn't elicit much concern in
his thinking.
Third, Keynes' model of managed capitalism merely postpones rather than
provides a solution to one of capitalism's central contradictions. The
underlying cause of the current economic crisis is overproduction, in which
productive capacity outpaces the growth of effective demand and drives down
profits. The Keynesian-inspired activist capitalist state that emerged in the
post-World War II period seemed, for a time, to surmount the crisis of
overproduction with its regime of relatively high wages and technocratic
management of capital-labor relations. However, with the addition of massive
new capacity from Japan, Germany, and the newly industrializing countries in
the 1960s and 1970s, its ability to do this began to falter. The resulting
stagflation - the coincidence of stagnation and inflation - swept throughout
the industrialized world in the late 1970s.
The Keynesian consensus collapsed, as capitalism sought to revive its
profitability and overcome the crisis of over-accumulation by tearing up the
capital-labor compromise, liberalization, deregulation, globalization, and
financialization. In this sense, these neo-liberal policies constituted an
escape route from the conundrum of overproduction on which the Keynesian
welfare state had foundered. As we now know, they failed to bring back a return
to the "golden years" of post-war capitalism, leading instead to today's
economic collapse. It is not, however, likely that a return to pre-1980s'
Keynesianism is the solution to capitalism's persistent crisis of
overproduction.
The great lacuna
Perhaps the greatest obstacle to a revived Keynesianism is its key prescription
for revitalizing capitalism in the context of the climate crisis, namely the
revving up of global consumption and demand. While the early Keynes had a
Malthusian side, his later work hardly addressed what has now become the
problematic relationship between capitalism and the environment. The challenge
to economics at this point is raising the consumption levels of the global poor
with minimal disruption of the environment, while radically cutting back on
environmentally damaging consumption or over consumption in the North. All the
talk of replacing the bankrupt American consumer with a Chinese peasant engaged
in American-style consumption as the engine of global demand is both foolish
and irresponsible.
Given the primordial drive of the profit motive to transform living nature into
dead commodities, capitalism is unlikely to reconcile ecology and economy -
even under the state-managed technocratic capitalism promoted by Keynes.
We are all Keynesians again?
In other words, Keynesianism provides some answers to the current situation,
but it does not provide the key to surmounting it. Global capitalism has been
laid low by its inherent contradictions, but a second bout of Keynesianism is
not what it needs. The deepening international crisis calls for severe checks
on capital's freedom to move, tight regulation of financial as well as
commodity markets, and massive government spending. However, the needs of the
times go beyond these Keynesian measures to encompass massive income
distribution, a sustained attack on poverty, a radical transformation of class
relations, deglobalization, and perhaps the transcendence of capitalism itself
under the threat of environmental cataclysm.
"We are all Keynesians again" - to borrow but slightly modify Richard Nixon's
much-quoted phrase - is the theme that unites US President Barack Obama,
economists Paul Krugman and Joseph Stiglitz, investor and philanthropist George
Soros, UK Prime Minister Gordon Brown, and French President Nicholas Sarkozy,
though in the implementation of the master's prescriptions, they may have
differences. But an uncritical revival of Keynes might simply end up with
another confirmation of Marx's dictum that history first occurs as tragedy,
then repeats itself as farce. To solve our problems, we don't just need Keynes.
We need our own Keynes.
Walden Bello is a member of the House of Representatives of the Republic
of the Philippines and president of the Freedom from Debt Coalition. A retired
professor of sociology at the University of the Philippines, he is currently a
columnist at Foreign Policy In Focus and a senior analyst at the Bangkok-based
analysis and advocacy institute Focus on the Global South. He is the author of
15 books, the most recent of which is The Food Wars (New York: Verso,
2009). He can be reached at waldenbello@yahoo.com .
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