The Unkindest Cut of All (1996)

From the July 1996 issue of the Socialist Standard

It is rather amusing for Socialists to listen to the various apologists of capitalism try to justify their support for welfare cuts on the grounds that it is either “immoral” for the state to impose high taxes (the source of state expenditure), or that it is in the interests of the “nation” that welfare payments are kept to a minimum

That the double-speak beloved by newspapers and economists is a key clement in the ideological battle waged by the ruling class against the workers should be evident enough to anyone with a notion at all of class and class struggle. It is hoped by the bosses that the drip-drip-drip of this Chinese water torture will unbalance even the most rational of minds. Sometimes the newspapers and economists join together in a combined offensive on a particular topic of concern to their paymasters—the capitalist class. Recently the object of their ire has been welfare expenditure.

Robert Skidelsky, biographer of Keynes, and ennobled for his services to bourgeois economics, wrote on this theme in the Sunday Times on 11 February. His key argument was summed up in the headline of the piece — “Cuts To Benefit the Nation”. Coming in the wake of Peter Lilley’s announcement of planned changes and cutbacks for the social security budget, Skidelsky aimed to demonstrate why welfare cutbacks and other reductions in state expenditure would benefit “the nation”. By this he did not, of course, mean everyone. In fact, he probably meant only a small number of people at all would directly benefit, though he did not specifically say this. But who could the beneficiaries be?

Nation or Class?

The “nation”—primarily the productive resources of a state like Britain— is not owned in common or on anything like an equitable basis. Britain, like every other country, is a state divided on class lines between those who own and control the means of living and those who do not. For instance, recent statistics from Social Trends, an official government publication, show that one out of every 20 adults has a stake in the means of living equal to the other 19 put together. The top five percent of the population own 53 percent of all financial assets. It is the capitalist class—those who do not need to work for a living—who by-and-large own “the nation”, setting their wage slaves to work to put more wealth in the form of profits back in to the capitalists’ hands.

Although lackeys like Skidelsky present it as such, cutbacks in welfare expenditure and the like are not designed to benefit wage and salary earners. Workers receive an amount sufficient to keep them and their families in a fit condition, with skilled or highly educated workers usually receiving more than the unskilled. Their wages, properly speaking, are a real amount intended for this purpose not a hypothetical sum, and so the burden of taxation (which finances welfare payments) ultimately falls on the capitalist class. Workers may pay some taxes, but the burden specifically falls on the surplus value accruing to the capitalists and not on the wages and salaries of the workers, hence the interest of the capitalists and their representatives in keeping taxation as low as possible. High taxation eats into profits and reduces the amount available for accumulation as new capital.

The state currently takes about 42.5 percent of Gross National Product in Britain, about a third of which is taken up by social security expenditure, currently a colossal £92 billion. This means a large amount of tax taken out of profits, and the proportion has been moving up in most advanced countries for decades, with the state stepping in to cushion the fall from market failures and being further burdened by demographic change.

State expenditure acting as a drag on profits and capital accumulation is the real bottom line for the capitalists, but Skidelsky has a more lofty way to justify the competitive money-grubbing of the capitalists:

". . . the main argument for slimming down the state is moral: it is wrong that governments should take 40 percent and more of our earnings and decide to spend it as they see fit".

Skidelsky goes on to declare himself in favour of cutbacks in state health and education services, on the ground that this can only benefit “our earnings”, but it is a strange kind of morality which has to go to these lengths to defend the wealth of the privileged and justify taking a few more crumbs back oft' the poor. But then when has the morality of capitalism ever been concerned with anything more than the sanctity of profit?

Britain already has some of the lowest benefit levels in the western world so savings made from the unemployed or single mothers will be minimal, though this in itself will not stop the government from trying to stop people claiming benefit or cutting back on payments, as recently with Unemployment Benefit. This is part of the reason why an even greater line of attack has been waged on pensions, with employees being encouraged to take out private schemes to supplement the state pension. Since the 1980 decision to link state pensions with prices rather than earnings the basic state pension has fallen from 22 percent of average male earnings to 15 percent and no government of capitalism in Britain is likely to be able to offer pensioners anything better. The number of those living beyond 75 is expected to double from 4 to 8 million over the next fifty years and this demographic change alone will put further pressure on government expenditure, particularly the social security budget.

Hard Labour

The apologists for capitalism—whether Lord Skidelsky or, for that matter, Tony Blair—see little wrong with attacking the poor when capitalist profit dictates it, and no one should be fooled that attacks on welfare are merely the preserve of the right-wing of capitalism’s political apparatus. The pressures on them from the competitive market economy are the same. The last Labour government from 1974-9 had an equally bad record with inflation eating away at benefits and savings, together with real cuts in wages and salaries. As with the Conservatives, unemployment also rose and along with it job insecurity.

Given his infatuation with private pension schemes and the welfare arrangements beloved in the Far East, Blair and his cohorts offer nothing really new from what the Tories offer now. All that has changed in the world of welfare reform has been some of the language used justify further attacks on a beleaguered working class— the “drip, drip, drip”, this time with an allegedly moral dimension. Skidelsky has in fact put the argument of those who wish to attack benefit levels most succinctly— how despicable of the poor to drain the capitalists of profit! What he—and they— conveniently overlook, though, is that the workers made the profits for the owning class in the first place.

Lord Skidelsky is actually chairman of the Social Market Foundation. A more bizarre title for an organisation could not be found, for given the class nature of capitalism and the attacks it unleashes on the poor, what could be more anti-social than the market? But then such is the double-speak of our times.

Dave Perrin

The second coming of Keynes (1993)

Book Review from the April 1993 issue of the Socialist Standard 

Fanning the flames of the current resurgence in Keynesian economic thought is the second and most relevant book in Lord Skidelsky’s three-part biography of John Maynard Keynes. John Maynard Keynes—The Economist As Saviour 1920-37 (MacMillan. 1992, £20) covers the period when Keynes's most influential and original work was undertaken.

Its subtitle is appropriate enough, for it was in this period that Keynes effectively manoeuvred himself into the dubious position of being seen as the saviour of capitalism. It was certainly a time in which capitalism seemed to need a new saviour, for as the economy dipped in the early 1930s, so did the reputations of the orthodox and dominant capitalist economists like Marshall and Pigou, who had thought a major world slump unlikely.

Law of markets

To these economists—dubbed the "classical school" by Keynes—"Say’s Law" that every seller brings a buyer to market largely held true. Unemployment in the capitalist economy was considered by them to be a essentially transient phenomenon caused principally by temporary and isolated overproduction in certain spheres of industry that did not become generalized, or by wage inflexibility promoted by trade union power. Any long-term unemployment. they thought, could be eradicated through adjustments to real wages.

Keynes, in his General Theory of Employment, Interest and Money (1936), was the first capitalist economist to mount a serious challenge to these views and in so doing developed a theory which he claimed could save capitalism from itself and from the economists who had failed to understand it. As Skidelsky puts it:

  All these (economists], Keynes said, lacked a theory of effective demand, the fatal flaw in the system, he pointed out. lay in the variability of spending relative to earnings; and this was rooted in the use, and purposes, of money. The result was that the market system was liable to collapse into prolonged depression. If the logical flaw in classical reasoning which "proved” this was impossible could be corrected. and communities induced by policy to consume what they can produce, the existing system could be saved, (p. 484)

Keynes’s discovery of the "logical flaw" in the classical economists’ arguments—Say’s Law of markets—was not, however, as revolutionary as Keynes and many of his followers contended. Seventy years earlier Marx had commented that:

  Nothing could be more foolish than the dogma that because every sale is a purchase, and every purchase a sale, the circulation of commodities necessarily implies an equilibrium between sales and purchases . . . its real intention is to show that every seller brings its own buyer to market with him . . . But no-one directly needs to purchase because they have just sold. (Capital, Vol. 1, chapter 3, section 2a).

Moreover, the theory of effective aggregate demand developed by Keynes was itself deficient and led his own key arguments against Say's Law being rooted in under-consumptionist economic thought. Keynes argued that saving constitutes a subtraction from aggregate demand, and that as capitalism proceeds to concentrate more and more wealth into fewer hands, it would be imperiled by the increasing inability of the rich to consume or directly invest all of their wealth.

A good deal of the policy carried out in Keynes’s name by governments wishing to avert slumps has centered on attempts to revive aggregate demand by reducing the incentive to hoard and save wealth and by redistributing income to those sectors of society most likely to spend it. It has never worked, precisely because serious attempts at doing this imperil the very profit-accruing sectors which the capitalist economy finds necessary for its further expansion. This was classically the case with the last British Labour government from 1974-6 when unemployment more than doubled despite concerted intervention on Keynesian lines.

Currency crank

If Keynes’s legacy on the trade cycle and the nature of effective demand in the capitalist economy has been, at best, mixed, much of Skidelsky’s book is spent outlining the genesis of his thought on the one area where he was more muddled still—monetary matters. In his Tract On Monetary Reform (1923) and in the Report of the MacMillan Committee on Finance and Industry (1931) which he helped draft, Keynes outlined the spurious "credit creation" theory which can even now be found in most modern economics textbooks. Keynes's argument was that banks could create multiples of credit, and hence new deposits, from a given initial deposit base, and by so doing, add to purchasing power.

The justifications advanced by Keynes and the MacMillan Committee for the credit creationist view were entirely bogus and rested on an ideal model of a banking system that was very far removed from actual banking practice. In their simple model of a banking system only one bank existed. Into this bank a depositor came along and deposited £1,000 in cash. Operating with a ten percent cash reserve ratio, the bank then lent out £900 which was withdrawn by cheque, only to come back to the same bank as a new deposit. After this transaction. the deposits in the bank totalled £1,900 made up of the initial £1,000 plus the later cheque deposit of £900. Against this liability, the bank had assets of £1,000 cash and £900 owed to it by customers.

Keynes and the MacMillan Committee alleged that this process could be repeated nine more times with a ten percent cash reserve, so that the bank’s books would eventually show £10.000 in deposits balanced by the £1,000 cash together with £9.000 in loans owed by borrowers. Therefore, from an initial £1,000 cash deposit base, the bank had "created" £9,000 of credit. granted as new deposits.

Keynes's theory was entirely spurious because in the real world of capitalism this cannot happen. The assumption of a one-bank financial system is totally unrealistic, as is the assumption that the only money to be withdrawn from the bank’s accounts would be by cheque. Although Keynes and the MacMillan Committee assumed a ten percent cash reserve, they also assumed that in practice this cash reserve would never be called upon by depositors. They took it for granted that the initial £1,000 cash deposit remained entirely unchanged throughout the whole series of transactions. a totally unrealistic proposition by anybody’s standards.

Price level

Keynes’s incorrect views on credit creationism led him to make a number of equally absurd contentions about other monetary matters. Foremost among these was the idea that the banks, because of their ability to create purchasing power, effectively determine the price level. This is what Keynes argued in his Tract On Monetary Reform:

  The initial price level is mainly determined by the amount of credit created by the banks . . . the amount of credit, so created, is in turn roughly measured by the volume of the banks' deposits, (p. 178).

In recent years this view has largely been taken up by the so-called “monetarists" and has periodically been the view held by Conservative governments since 1979. To them, as for Keynes, notes and coins are only the insignificant “small change of the monetary system", with the money supply consisting predominantly of bank deposits supposedly “created" by the actions of the banks themselves. Because of this view a smokescreen has arisen whereby the real cause of the persistent rise in prices since the beginning of the Second World War has been obscured—that is, the policy of successive governments of issuing an excess of inconvertible paper currency in the vain hope that its effects would be only beneficial to the economy as a whole.

In his book Skidelsky makes it clear that the principal opponent of credit creationism and its related fallacies within the realms of capitalist economics was Professor Edwin Cannan of the London School of Economics (who Skidelsky erroneously says regarded himself as a socialist). Cannan correctly contended that banks can “create" nothing and do not determine the price level, being only intermediaries in the financial process who lend out sums of money that have been deposited with them at higher rates of interest than they pay to depositors to attract money in.

Unfortunately, Skidelsky does not acknowledge the sustained opposition mounted by the Socialist Party to the credit creationist viewpoint—virtually alone among all the political parties in Britain and an opposition underpinned by the Marxian proposition that wealth can only arise through production and not via the process of circulation. Nor, in accepting the general Keynesian outlook on effective demand, unemployment, inflation and credit, does he show any awareness of why the “second coming" of Keynes is unlikely to be any more successful than the first. Skidelsky and others should note that the working class has experienced Keynesian failure before, and we don't want or need a repeat performance.

Dave Perrin

Wages and the cost of living (again) (2011)

From the March 2011 issue of the Socialist Standard

As inflation begins to kick off again, is it a return to the 1970s?

The government and the Confederation of British Industry are banking on an “export-led recovery”. They are hoping that, with the fall in the value of the pound making exports cheaper, there will be an increase in production in the sectors producing for export which will have a knock-on effect on the rest of the economy.

There is no guarantee that this will happen, especially as others – in particular, the US and German-dominated Euroland – are hoping for the same. But there is another side to a fall in the value of a currency. While it makes exports cheaper, it makes imports dearer.

When, in the days of formal devaluations, the Labour government of the day was forced in November 1967 to devalue the pound, by 14 percent compared against the dollar, the Prime Minister Harold Wilson made his famous remark about the “pound in your pocket”:

  “From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued. What it does mean is that we shall now be able to sell more goods abroad on a competitive basis.”

Technically, he was right. If you had a pound in your pocket it didn’t become 86p (in today’s money). But he was being disingenuous as he knew that the devaluation would make imports dearer and so lead to higher prices for imported goods. The cost of living would go up, leading to “the pound in your pocket” not being able to buy as much as previously.

It’s happening again now. The government has let the foreign value of the pound fall; the price of imported goods (such as oil and gas, and oranges and bananas) has gone up. So, as a result has the cost of living. Figures for January for the Consumer Price Index showed a rise of 4 percent compared with the previous January, well above the 2 percent that the Bank of England is supposed to keep it at.

It’s going to continue. According to Sean O’Grady, the Economics Editor of the Independent (21 January), there is “mounting evidence that manufacturers are having to pass a rapid rise in import costs on to the consumers – with the acceleration in imported inflation at its highest since 1975, the year that recorded the highest import inflation in modern British history.” He went on to quote the CBI’s chief economic adviser, Ian McCafferty:

  “Manufacturers have come under intense pressure to pass on rising costs: they have increased prices markedly in this quarter [last quarter of 2010], and expect to raise them at an even faster pace over the next three months. This will drive further inflationary pressure in the wider economy.”

What this means for workers is clear. Unless money wages go up too (by the same percentage) real wages – what wages can buy – will go down. Which is what the government and other apologists for capitalism want. As Bank of England Governor Mervyn King declared in a speech in Newcastle on 25 January that “the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.” He noted approvingly:

  “Average real take-home pay normally rises as productivity increases – money wages normally rise faster than prices. But the opposite was true last year, so real wages fell sharply. And given the rise in VAT and other price rises this year, real wages are likely to fall again. As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.” (LINK. His emphasis)

People on benefits are protected to a certain extent by these being indexed to the Consumer Price Index, so if this goes up so do their benefits. So are workers in unions, as unions are usually able to obtain a wage increase at least equal to the increase in the cost of living.

Now voices are being raised to stop this. As if to show that the Keynesians are just as anti-working class as the Free Marketeers, Keynes’s biographer Lord Skidelsky and Michael Kennedy wrote to the Financial Times (29/30 January) claiming that “the indexed incomes policies of the 1970s were a national disaster”. They called for increases in the cost of living due to increases in the price of imported goods to be excluded from the Consumer Price Index. Which of course would mean a reduction in the standard of living for those with indexed incomes.

Tim Shepherd replied the following week (Financial Times, 5/6 February) warning that manipulating the cost of living index would be “a slippery slope that will reduce the credibility of the indices” (as if this hadn’t already happened – only last October the government changed the link for benefits to an index that goes up more slowly). But he too asserted that “real wages need to fall when the terms of trade move against an economy”.

The terms of trade compare export prices with import prices and “move against an economy” when more exports are needed than before to pay for the same amount of imports. But this is precisely what happens when the value of a country’s currency falls; it decreases export prices and increases import prices, so increasing the gap between them.

So it really could be the return to the 1970s that Lord Skidelsky and the others fear. Then, governments, both Labour and Tory, tried all sorts of ways to hold wages down – wage restraint, incomes policies, wage freezes, anti-union laws – and the workers and their unions fought back. Strikes were more frequent than today. The governments and the media described this as a wages-prices spiral, blaming the workers for fuelling it with their wage demands. But it was more of a prices-wages spiral, with workers trying to keep their wages going up in line with rising prices (caused, at that time, mainly by currency inflation).

Strictly speaking, an increase in import prices is not “inflation” as inflation is not any particular price increase but only (as the word itself suggests) an increase in the general price level due to an overissue of the currency. Currency inflation is still moderately practised by governments who often aim to keep it at around 2 percent a year. One of its effects is in fact to increase export prices along with all other prices and is a factor in whether a currency floats up or down relative to others.

If the rise in the cost of living is going to speed up as in the seventies then the workers’ response will have to be what it was then – to push, including by going on strike, for money wages to go up to maintain living standards, even though this time, given mass unemployment, employers will be in a stronger position.

What this confirms is that built-in to capitalism is a class struggle between workers and employers. But it’s not just over wages and working conditions. It’s ultimately over the ownership and control of the places where wealth is produced.

As capitalist ownership of the means of production is created and upheld by the state, the struggle needs to be carried over from the workplace on to the political field. It means organising not only in trade unions and the like to wage what is essentially a defensive struggle. It means organising politically to put up candidates against the parties of capitalism (Tories, Labour, Liberals, Greens, Nationalists) with a view to wresting political control from them and using it to declare private, class ownership of the means of production null and void so that they become the common property of society as a whole. This is why, in addition to trade unionism, a socialist political party is needed.

Adam Buick

From Recession to Slump (1992)

From the December 1992 issue of the Socialist Standard

When is a recession not a recession? Answer: when it's a slump. Up to now pro-capitalist economists, journalists and politicians have avoided this word because of its associations with 1930-like conditions which, they have proclaimed for years, could never come back. But now the taboo on using it being broken and the talk is about "the danger of sliding into slump" and how this can be avoided.

“Recession” was a word invented in America after the war by the followers of the pre-war British economist Keynes. Big slumps, they preached, could be avoided by the application of Keynesian “demand-management” techniques, but relatively minor downturns could still occur. These were “recessions" but there was no need to worry since Keynesian policies would always prevent them turning into slumps. Thus the Penguin Dictionary of Economics defines a recession as “a sharp down-turn in the rate of economic growth or a modest decline in economic activity, as distinct from a slump or depression which is a more severe and prolonged downturn".

There is even an official internationally-agreed definition of a recession: two successive quarterly falls in the total production of goods and services (“seasonably adjusted real Gross Domestic Product", to be precise). On this definition, Britain has been in a recession since the end of July 1990, GDP having fallen or been stagnant every quarter since then. It is this that has got the pro-capitalist economists worried. According to their theory no recession should have lasted this long. No “recession" has in fact ever lasted this long. Hence their doubts about whether this time it is not a slump rather than a mere recession that they are faced with.

Worried
Gavyn Davies, a City economist who is also an economic adviser to the Labour Party, is worried:

  So do we now face a "slump"? As far as 1 am aware, this word has no precise economic definition, but it is generally used to denote a state of enduring decline in activity, in which a total collapse in confidence—often associated with an overhang of excessive private sector debt— leads to permanent weakness in asset prices and capital spending. It is further associated with a decline in the general price level (negative inflation), and describes a situation in which monetary policy alone is powerless to stimulate demand. It is a word most often applied to describe the calamity of the 1930s, from which a combination of Lord Keynes and international rearmament (mainly the latter) eventually rescued the world. (Independent, 19 October).

He concludes by saying he doesn't know whether we are yet in a slump. William Rees-Mogg, former editor of the Times who now writes a regular column in the Independent, is bolder. He has frankly compared the present situation to the depression of the 1930s:

The belief that has previously restrained the Government from acting decisively is that this is an ordinary 10-year recession, like those of 1973 or 1981. The evidence is that it is a major debt deflation crisis, more like the 1930s, the 1870s or the 1820s. (26 October).

As a Monetarist Rees-Mogg has his pet theory as to what causes a depression. As he wrote in his column the week before, “each great depression is worldwide. It is set up by inflationary expansion of debt. It is produced by the painful process of liquidating that debt, which forces down asset values and destroys businesses and jobs". So, for him, a depression is a “debt deflation crisis" and the way-out lies in reducing the burden of debt by reducing interest rates. This, purely monetary, explanation is inadequate and superficial.

It ignores why at times businesses go into debt and why banks are prepared to lend them money. Businesses go into debt when they think they can invest the borrowed money in production and make sufficient profits both to pay the interest and still have plenty left for themselves. And when the prospects of profit-making by businesses are good, banks are prepared to lend them money because they can be sure that they will be paid their interest. So the key factor is the rate of profit not the rate of interest. In fact interest is a totally dependent factor: it can only be paid out of profits. As profits arise out of production it is here, in the field of production not that of money, that we must look for the explanation as to why slumps occur.

In a period of boom all the various competing businesses imagine that they will be the one to benefit from the expanding market and all plan to expand their productive capacity, generally borrowing to do so. There eventually comes a point, however, after all the planned for extra productive capacity comes on stream, when the amount produced in some key sector exceeds the amount required by the market. A crisis of overproduction then occurs. Factories cut back on production; workers are laid off; orders for supplies are reduced; all this has a knock-on effect, leading to a contraction of the total market. Then what they call a recession and we call a slump sets in.

Gavyn Davies explained the onset of the present slump well enough in an article he wrote in the Sunday Telegraph soon after it started:

  Around July [1990], companies began to complain in private that demand had suddenly fallen away without much warning . . . What we are now observing is the flip side of the boom in confidence which led to so much borrowing and investment from 1985 to 1989. In those years, output growth was persistently stronger than anyone expected . . .  As consumers threw caution to the wind, companies decided it was time to invest, and the level of capital formation rose to heights which had never been seen before, relative to GDP . . . It was not until the middle of 1990 that companies suddenly realised their expansion plans were not supported by the prospects for demand . . . [T]he main casualty over several years is likely to be capital spending, since productive capacity has run ahead of demand. (27 January 1991).

In a slump businesses are left with the problem of paying from their reduced profits the interest on the loans they contracted to expand productive capacity during the boom period. Rees-Mogg wants to help them by reducing interest rates. This would certainly reduce the money they have to pay the banks and to that extent increase their retained profits, but there is no reason to suppose that in itself this would be enough to lead them to invest in expanding production again, as the example of the US shows were interest rates are as low as 3 percent yet the slump there persists.

Recovery after a slump only begins when the prospects for profit-making revive. This is sometimes called "confidence” and in a sense it is: businesses have to be "confident" that if they invest in increasing production they will be able to sell what they produce and make a profit. This is not a question, as Major and Lamont evidently believe, of just talking about things getting better and giving the impression you really believe this (even if you don't). Something concrete is required and that can only be a real change in the opportunities for profit-making.

Falling asset values

Ironically perhaps—since what is involved is a capital loss for businesses—the main factor bringing this about is the decline in “asset values” that both Rees-Mogg and Davies highlight. In a slump the value of the capital invested in buildings, factories, plant, machinery, raw materials and stocks falls in real terms. Marx called this “the devaluation of the elements of constant capital” and it comes about either through firms writing off the previous value of their assets or through them going bankrupt and their assets being bought up by other firms at a lower price. Either way the rate of profit is increased, as this is calculated as the ratio of the amount of profits to the total capital invested. If the latter falls in value the rate of profit increases even if the amount of profit remains unchanged.

This fall in asset values is a key element in the Marxian explanation of the function of slumps under capitalism: to clear away deadwood and allow capitalist production to resume on a fitter, leaner basis. It works by raising the rate of profit, so eventually making the businesses that survive ready to invest in production again in response to the only incentive they know—profit.

Contradiction

The present slump has led to a revival of Keynes' discredited ideas. The Independent, in a ten-point plan it has launched to “save Britain from slump”, declares “as Keynes pointed out, if the private sector will not spend, the public sector must” (22 October). The Guardian is even more enthusiastic. The front page of its magazine section (3 November) featured a full page photo of Keynes with the caption “Is this the only man who can save us now?”. The opening words of the main article, by Robert Skidelsky, author of a new book on Keynes entitled The Economist as Saviour set the tone: “the search for a saviour to lift us out of the slump has led us back, not unnaturally, to John Maynard Keynes”.

However, it is not the “spending your way out of a depression" aspect of Keynes' policies that Skidelsky emphasises, but rather his clever little scheme to decrease real wages in a slump. Keynes argued that workers would offer less resistance to their real wages being reduced by rising prices than by a direct cut in their money wages and so advocated a policy of (mild) inflation as the best way to bring about the necessary reduction in working class living standards. He was, in other words, just as much an enemy of the working class as any callous Free Marketeer. The “us" he wanted to save was not us but the ruling class of which he was himself a well-heeled member.

“Spending your way out of a slump” seems to be the common-sense solution. The only problem is where is the government to get the extra money to spend from. There are three possibilities. One is to raise it through taxes. Another is to borrow it. And the third is to print it. All have their drawbacks. Printing the money will simply lead to double-figure inflation which will eventually adversely affect the balance of payments. Borrowing it will tend to push up interest rates, increasing the debt burden on productive industry. Taxes, like interest, can only come in the end from the profit-making sector of the economy, and increasing taxes on businesses which are already suffering from a fall in profits is clearly no way to encourage them to increase production again.

The last Labour government tried to apply Keynes' policy of “if the private sector won't spend, the public sector must” during the 1973/4 slump. In the end Callaghan had to confess to the 1976 Labour Party Conference:

  We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment. (Times, 29 September 1976).

There is a fundamental contradiction here which no government can overcome. Capitalist businesses have cut back on production because the market for their goods has shrunk and they can't make the same amount of profits as before; the government can't spend what the businesses aren't investing, because all the possible ways of financing this will further undermine the profitability of industry. The plain fact is that in a slump there is virtually nothing any government can do to speed recovery. All they can do is to wait for the slump to run its course—to wait for asset values or real wages to fall sufficiently to restore the prospects for profit-making— while refraining from doing anything to make matters worse.

Adam Buick

Cooking the Books: Neither Keynes nor Hayek (2011)

The Cooking the Books column from the October 2011 issue of the Socialist Standard

On 26 July Paul Mason, economics editor of the Tonight programme, chaired a debate at the London School of Economics between supporters of the doctrine of J. M. Keynes (1883-1946) and those of F. A. von Hayek (1899-1992). The Keynesians were represented by Keynes’s biographer, Lord Skidelsky, and an economist working for an international trade union federation; the Hayekians by George Selgin, professor at an American business school, and Jamie White, an eccentric philosopher. The debate was later broadcast on BBC Radio4 and is available as a podcast.

Lord Skidelsky explained Keynes’s basic argument that once capitalism had got itself into a slump there was no automatic mechanism to bring about a recovery; on the contrary, without government intervention to sustain and increase spending, the economy would tend towards an equilibrium position well below full employment. At the start of the 1930’s slump Hayek had advocated “liquidate everything” – let failing businesses and banks go under – but, Skidelsky said, you can’t cut your way out of a slump.

Jamie White, who is rather more than a Hayekian (more an anarcho-capitalist), said that Hayek was right to have advocated liquidation as the way out of a slump; the businesses that survived would be more efficient and their investments would lead the recovery. To the applause of the claque of Hayekians in the audience, he said that Roosevelt’s spending policies had only prolonged the depression of the 1930s. You can’t spend your way out of a slump, he said, as had been shown in the 1970s and was being demonstrated again now.

The American business professor said that Keynes had had no theory as to why capitalism got into a slump in the first place. Hayek had; it was that government monetary policy promoting cheap credit encouraged an artificial boom which led businesses to invest in activities that were not sustainable and which would sooner or later collapse. This had happened in the 1920s and was the cause of the present slump when “over-investment” in housing and finance collapsed. Once this situation had been reached the only way out was to let liquidation take its course. There was no painless exit from a slump caused by an unsustainable boom bursting. The only way to avoid a slump was to avoid the preceding boom by not allowing the government to pursue a lax monetary policy. And the way to do this was to abolish central banking and let the market determine interest rates and bank loans.

It is true that Keynes had no truly coherent theory as to why capitalism got into slumps from time to time. On the other hand, the purely monetary explanation offered by Hayek is inadequate. Slumps are indeed caused by “over-investment” leading to overproduction but this comes about through the anarchic pursuit of profits that is part of capitalism. When a boom is underway the market is expanding; competing businesses assume that they will benefit from this and plan to expand their production; in the end production expands more than the market, resulting in overproduction, a financial crisis and then a slump.

When it comes to how to get out of a slump, the Hayekians have a point. Inefficient businesses have to be eliminated. Marx made the same point but from a different position, seeing slumps as part of a boom/slump cycle that was built-in to capitalism, as periods during which, precisely, unprofitable businesses were eliminated as a condition for capital accumulation to resume.

Unlike both the Hayekians (who say slumps can be avoided by governments adopting a laissez-faire monetary policy) and the Keynesian (who say that appropriate state intervention can end the boom/slump cycle), Marx held that there was no formula for steady growth without booms and slumps. For him these were endemic to capitalism, being in fact its “law of motion”.  They will keep on recurring as long as capitalism does and there is nothing governments could do to stop this.