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sanity,
humanity and science
post-autistic economics review
Issue no. 27, 9 September
2004
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In
this issue:
- G.
C. Harcourt
What
would Marx and Keynes have made of the happenings of
the past 30 years and more?
- Richard
D. Wolff
The Riddle of
Consumption
- M. Ben-Yami
Fisheries
management: Hijacked by neoliberal economics
- Deborah
Campbell
Here’s
what economics students in three countries are doing to
put their professors on the defensive
The
economics of Keynes and its theoretical and political importance: Or, what would Marx and Keynes have made of the
happenings of the past 30 years and more?*
G.C. Harcourt (Jesus College, Cambridge University, UK)
I
I start with
two propositions: first, that Maynard Keynes and Karl Marx, were they still
with us, would have made far more sense of the happenings of modern
capitalism of the past 30 to 40 years than do the more modern approaches to
macroeconomics of the same period; and, secondly, that Keynes would have sat
down and tried again to save capitalism from itself. (Marx may have rubbed his hands and
hoped that its demise, so often predicted by him and his followers, was at
last on hand – but I could not bet on either of these.) It may surprise you that I couple
Keynes and Marx together, but I would argue – the evidence is supplied in a
fine book by Claudio Sardoni (1987) – that, adjectives apart, when Marx and
Keynes examined the same issues in the capitalist process, they came up with
much the same answers. Perhaps,
on further reflection, this should not be surprising, for along with Michal
Kalecki and Joseph Schumpeter (said by Joan Robinson to have been Marx with
the adjectives changed), they have made the deepest, most insightful analyses
of the laws of motion of capitalist society in our profession. (Marx’s views on socialism are
another matter, see Harcourt and Kerr (2001a).)
II
I shall say
more about their analyses below.
First, let me clear out of the way why I think the modern approaches
are less than satisfactory. They
employ either representative agent models, or Frank Ramsey’s
benevolent dictator model, or an emphasis on certain imperfections in
the workings of capitalist institutions, such as are to be found in New
Keynesian models: sticky wages and prices, imperfectly competitive market
structures, asymmetrical information and the like.
Modelling the economy as
a representative agent rules out by assumption one of the fundamental
insights of Keynes (and Marx), to wit, the fallacy of composition, that what
may be true of the individual taken in isolation is not necessarily true of
all individuals taken together.
This implies that when looking at the macroeconomic processes at work
in capitalism, we cannot presume that the whole is but the sum of the
parts. Indeed it is not. We have, therefore, to consider the
macroeconomic foundations of microeconomics as James Crotty, citing Marx,
told us long ago now, see Crotty (1980), and on which Frank Hahn, innocent of
all this, is now working, as has been Wynne Godley too for many years. In fact that great and wise
Keynesian, Lorie Tarshis, regarded the use of the representative agent as the
greatest heresy of modern macroeconomics and explained why in Tarshis (1980),
see also Harcourt (1995; 2001a).
As for the
use of Ramsey’s benevolent dictator model, a re-read (or a read for the first
time) of his classic 1928 article, “A mathematical theory of saving” together
with his own scathing assessment of it1, ought to show how
fanciful it is to argue that, in a completely different setting, it could
illuminate what has been happening in actual interrelated modern economies in
recent decades, in fact, any decades.
As for the New Keynesians, while it is possible to applaud many of
their policy conclusions and make common cause with them on them (a plea I
first made in 1980 though my paper was not published until 1996-97, see
Harcourt (1996-97; 2001a)), I submit that their policies do not always follow
logically from their theories.
By basing their results on imperfections, they imply that if the
latter were not there in the first place, or were to be removed, all would be
well. But as Marx and then
Keynes argued, freely competitive
capitalism with power diffused equally between all individual decision
makers and the recipients of such decisions, especially wage-earners, so
that, in effect, no one individual has any power, still would not work in an
optimal manner. In particular,
it would not necessarily provide full employment of labour and capital either
in the short or the long period, so that booms and depressions, inflations
and deflations and in certain circumstances deep crises, could still be the
order of the day. An especially
astute argument for an aspect of this set of arguments is to be found in Nina
Shapiro’s 1997 paper, “Imperfect competition and Keynes”. She argues, plausibly (but fairness demands
that I refer the reader to Robin Marris’s paper, “Yes, Mrs. Robinson! The
General Theory and imperfect competition”, Marris (1997), that
immediately precedes Nina’s paper in Harcourt and Riach, vol. 1 (1997)), that
an economy characterised by freely competitive market structures would have
cycles of greater amplitudes and higher average levels of unemployment over
time than one characterised by imperfectly competitive market
structures. This insight is shared
both by her contemporaries, for example, Paul Davidson and Jan Kregel and by
distinguished predecessors, for example, Austin Robinson who always lamented
the relative lack of interest by Keynesians in the early post-war years in
the systemic effects of market structures, regional experiences and
requirements and the like, Michal Kalecki, whose review of The General
Theory which alas, though published in Polish in 1936, was not available
in full in English until 1982, see Targetti and Kinder-Hass (1982),
forcefully makes this point in his usual lucid and succinct way, and John
Kenneth Galbraith in his greatest classic, The New Industrial State,
Galbraith (1967). All
these economists, together with Marx and Keynes, were analysing how key
decisions made in an environment of inescapable uncertainty impact on
systemic behaviour.
The thrust of Robinson’s, Galbraith’s and
Shapiro’s argument is that anything that reduces the impact of uncertainty on
the decisions on the production, employment and, most importantly,
accumulation of firms (the most fundamental unit of analysis in Keynes’s
macroeconomics, a point emphasised repeatedly by Tarshis, one of Keynes’s
most devoted pupils and disciples, see Harcourt (1995; 2001a)), is likely to
result in more satisfactory and stable systemic behaviour. Especially is it likely to beget a
higher rate of accumulation on average and so a greater chance of absorbing
(offsetting) the level of saving associated, if not with full employment
levels of income, at least with high levels, certainly higher levels than
would occur in a system characterised by the Marshallian freely competitive
structures that Keynes used for most of the time in his models in The General Theory itself.
Though the New Keynesians have mounted
vigorous and, to my mind anyway, telling counter-attacks on the new classical
macroeconomics within the latter’s own framework, see, for example, Hahn and
Solow (1995), they have not themselves completely escaped from the clutches
of what Joan Robinson once aptly dubbed “Pre-Keynesian theory after Keynes”,
Joan Robinson (1964). It is true
that they have routed the extreme idea associated with the beginning of the
use of the hypothesis of rational expectations by the new classical
macroeconomists that the world may be analysed as if perfect
competition and perfect presight reigned so that the Arrow-Debreu model could
be used as the base on which to erect theory and policy. And it is also true that the rational
expectations hypothesis when it is uncoupled from the Lucas vertical
aggregate supply curve, is just a hypothesis deserving to be tested. Indeed, if it were found not to be
inconsistent with the facts, and if the world is correctly illuminated by
Keynes’s model, coupling them together would serve to reinforce policies of
intervention for then thinking alone could make it so, as it were. Yet, having cheered all this, there
are still so many remnants of what Keynes dubbed classical economics present
in the New Keynesian approach as to make it logically unacceptable as the
appropriate model or even “vision” for starting an analysis of the modern
world: that is to say, a world in which foreign exchanges have been floated,
sometimes dirtily, often freely, financial markets have been deregulated,
credit has been made “available to all”, capital controls have been removed
in many economies, labour markets have been made flexible (a euphemism for
making the sack effective again by recreating the reserve army of labour
after the full employment years of the long boom as the Marxists have it or
Golden Age of capitalism as the Left Keynesians dubbed it), international
trade has been liberalised at least in some directions, often at the expense
of the South and to the benefit of the North, and technical advances have
reduced the length of the short run in financial and other markets to hours
rather than weeks or months. For
it is not obvious that the equilibrating mechanisms of supply and demand
(even if associated with path dependence) with their underlying theme of
harmony, balance and voluntary choice are universally the appropriate tools
to use. So let us reiterate the
essential lessons that Keynes taught us.
III
I briefly
sketch what I have come to believe is the essence of Keynes's new position, as he saw it himself in 1936 and 1937, as he moved from the Tract through A Treatise on Money (1930) to The General Theory (perhaps we should
start from A Treatise on
Probability (1921) and The Economic
Consequences of the Peace (1919).) I do not give chapter and verse for
what I have to say; it is based on my reading over many years of The General Theory and Keynes's other
books, the Collected Writings,
especially volumes XIII, XIV and XXIX, and much secondary literature,
especially in recent years Robert Skidelsky’s superb three volume biography
of Keynes, Skidelsky (1983, 1992, 2000).
The
essential characteristics of the Marshallian system as Keynes viewed it was,
first, the domination of the long period and secondly, a strict distinction
between the real and the money. In
the real system, supposing there to be free competition, the object of the
analysis was to determine long-period normal equilibrium prices and
quantities, using partial equilibrium supply and demand analysis (but showing
in an appendix that the same principles apply in a general equilibrium
system, to wit, that equilibrium prices were, as we say now,
market-clearing). The analysis
was as applicable to the market for commodities as it was for those for the
services of the factors of production.
As for the process of accumulation, there was a supply of real saving,
consumption foregone, associated with maximising expected utility choices
between present and future consumption, with the rate of exchange reflecting
time preference at the margin; and a demand for saving, investment, in which
the technical possibilities of transforming present consumption into future
consumption at the margin were the key concepts. The price which cleared this market and set the composition
of the national income between consumption and saving/investment was the
natural rate of interest, a real concept.
The general
equilibrium version would have as a corollary the Say's Law level of
long-period overall output, itself a 'simple' summation of the individual
quantities of commodities (and employment) associated with the long-period
market-clearing prices of each individual market. So what determined overall employment (and zero, non-voluntary, unemployment) was not an interesting theoretical question, if it were ever
even to be asked: only simple summation was required.
When we come
to the discussion of the determinants of the general price level – so far
only relative prices and quantities
have been discussed, neither money nor money prices played any significant
analytical role – the quantity
theory of money tautology could easily be turned into a theory. For if M was determined by the monetary authorities, V was given by institutions and
historical customs and T was
interpreted as the total of transactions associated with the Say's Law
long-period equilibrium position, P
remained the only unknown.
Moreover, if V and T were given, changing M would, at least as a long-period
tendency, change P in the same
proportion. (Keynes would have
expressed all this in terms of the Marshallian/Cambridge version of the
quantity theory but the story is essentially the same.) Money, therefore, was only a veil in
the long period.
The object
of volume II of a Principles of Economics was to set out
this basic theory, analyse the causes of fluctuations around the long-period
position (the trade or business cycle) and design institutions which either
allowed the economy to return as quickly as possible to the equilibrium position after a shock;
or to move as painlessly as possible to a new equilibrium position if the
basic real determinants of it – tastes, endowments, techniques of production
– themselves changed. The
essential task of the monetary authorities was to ensure that the money rate
of interest was consistent with the underlying natural rate of interest which
like saving ruled the roost in the process of accumulation. This, in the crudest, simplest form,
was the system on which Keynes was brought up, as he came to see it.
Because of
the real/monetary dichotomy,
and because he was writing on money, Keynes felt inhibited about spending
time on the intricate happenings to output and employment in the short period
and over the cycle, "the intricate theory of the economics of the short
period". Nevertheless, in
the Tract he recognised them and especially the evils of unemployment
as well as falling prices –
hence he cheeked Marshall about our mortality in the long run – but, analytically, he was looking for
institutions and their behaviour which would give price stability and allow
the economy to settle at its long-period Say's Law position. In A Treatise on Money he presented the famous banana plantation
parable but he was unable analytically to stop the downward spiral of
activity and prices until either the inhabitants had starved to death or
there was an ad hoc change in their
accumulation behaviour (Keynes 1930; 1971, C.W., vol. V, 158-60). The endogenous process and its end
had to wait for the publication of Kahn's multiplier article in 1931 which
also contained “Mr. Meade's relation” – the derivation of the value of the
multiplier by concentrating on the leakage into saving.
Keynes
replaced the old system by a radically new, indeed revolutionary,
system. As a Marshallian his
basic tools were demand and supply functions, now aggregate ones. His emphasis was on the short period
in its own right, suitably adapted for analysis of the economy overall. (This had been the emphasis, too, in
Kahn's dissertation, The Economics of
the Short Period (1929; 1989) though Kahn's analysis was microeconomic.) The dichotomy between the real and
the money disappeared in both the short period and the long period (which
Keynes ultimately ceased to believe to be a coherent concept in
macroeconomics). Money and other
financial assts and monetary institutions entered the analysis from the
start (institutions were only
sketched relatively to the rich analysis in A Treatise on Money, a deliberate choice by Keynes). Aggregate planned expenditures
basically drove the system which operated in an environment of inescapable
uncertainty. The latter had
inescapable consequences for vital decisions, especially regarding investment
expenditures and the holding of money and other financial assets and the form
that they took. Investment
dominated and saving responded through the consumption function, the
relationship between aggregate disposable income and the distribution of
income between the classes on the one hand, and planned consumption
expenditure, on the other, intimately related to the (income) multiplier through
the marginal propensity to consume.
The amount saved (but not the form in which it was held) was treated
as a residual. Investment
was determined by expected profitability, on the one hand, and the money rate
of interest, representing the alternative ways of holding funds (and their
availability and cost), on the other.
Subsequently, in 1937, finance, especially through the banking system
and the stock exchange, was also to play a vital role as, cet. par., the ultimate constraint on
investment expenditure. The
money rate of interest therefore ruled the roost and the expected rate of
profit (the mei, the counterpart to
the natural rate of interest in the old system) had to measure up to it. The money rate of interest was
depicted as the price which cleared the money market by equating the demand
for money with its supply, not as the (real) price which equalised desired
saving and investment.
The rest
state in both the short period and the long period (the latter was ultimately
to become for Keynes and his closest followers but economics for economists)
could be associated with involuntary unemployment – people willing to work in
existing conditions but with the level of aggregate demand such as there not
to be sufficient demand for their services. Nor was there any effective way for them to signal that it
would be profitable to employ them; indeed, there would not be unless there
were to be a rise (or an expected rise) in real expenditures. Up to full employment, the outcome in
the labour market depended on what happened in the commodity market. The quantity theory was replaced as
an explanation of the general price level by old-fashioned Marshallian
short-period competitive pricing, suitably (or perhaps not) adapted to the
economy as a whole. There were
therefore at least three 180º turns between the old and the new: investment
dominated saving, the commodity market dominated the labour market and the
money rate of interest dominated the expected rate of profit. The forces which would make planned
accumulation even on average absorb full employment saving were unreliable
and weak, not to be relied on even as tendencies. Moreover, the general price level was determined by
factors other than the quantity of money.
IV
The new
system was the base on which Keynes would build his theory of inflation in How
to pay for the War (1940; 1980) and his policy proposals for the
international world order in the postwar period. In his superb review article, Vines (2003), of Robert
Skidelsky’s third volume of his biography of Keynes, Skidelsky (2000), David
Vines makes a convincing case for the proposition that Keynes provided the
conceptual basis for modern international macroeconomic theory. Of course this is not to be found
explicitly in The General Theory itself. That book was mainly concerned with a closed economy model
in order to highlight the central theoretical propositions and insights of
the new theory. Nor did Keynes
analyse the trade cycle or long-term growth issues systematically in The
General Theory and some of his obita dicta asides look rather
strange now.
For most of The
General Theory Keynes was content to discuss existence and stability
propositions in the short period, focussing especially on the factors that
were responsible for the point of effective demand at which aggregate demand
and aggregate supply, and planned investment and planned saving (more
generally, injections into and leakages from the
expenditure-production-income circuit) were equalised. (He said later that if he were to write
the book again he would have been more careful to separate out the
fundamental factors responsible for the existence of the point of effective
demand from the other set responsible for stability and reaching the point
through a groping process by business people. He thought that Ralph Hawtrey had confused the two, see
Keynes, C.W., XIV, 27, 181-82.)
In his most
stark model, one designed not so much to describe the world as is, as to
bring out most simply what was at stake, he assumed, as Jan Kregel (1976) has
told us, that short-term expectations concerning immediate prices, sales,
costs et al., were always realised and were independent of long-term
expectations concerning their future courses, the ingredients most relevant
for investment decisions, so that planned investment could provisionally be
taken as a given and the point of effective demand established
immediately. In his most
sophisticated model of (the same) reality, the independence of the two sets
of expectations was scrapped, the point of effective demand was not realised
immediately and indeed it changed over “time” as the model of shifting
equilibrium came into play. This
last apparatus is in rudimentary form the starting point for the development
of growth theory by Richard Kahn and Joan Robinson, Nicky Kaldor and Luigi
Pasinetti and the models of cyclical growth by Kalecki (independently) and
Richard Goodwin.
V
Both Marx
and Keynes recognised that when financial capital was not moving in tandem
with industrial and commercial capital (Marx would and Keynes would not have
put it this way), malfunctioning and sometimes crises were likely to
occur. Keynes set out his ideas
on this in, for example, the key chapter 12 of The General Theory on
the operation and non-operation of the stock exchange and its relationship to
real accumulation and activity generally. Another key step was in his 1937 paper on the finance
motive, see Keynes, C.W., vol. XIV, 201-23, on how the banking system
in particular holds the key to the realisation of investment plans, taking as
given the state of long-term expectations. The stock exchange also has a key role because the
repayment of the bank loans used to finance the setting up of investment
projects, the start of the process of accumulation, depends upon the firms
concerned being able subsequently to place new issues of shares and
debentures at satisfactory prices.
(The demand for the new issues comes, in part at least, from the
placement of the new saving created by the new investment.) The point is that finance and saving
are sharply separated by their roles and place – timing – in the process of
accumulation.
These ideas
were subsequently developed by Hyman Minsky in particular, writing under the
rubric of his financial instability hypothesis. Minsky spelt out ideas, perhaps more implicit in Keynes’s
and Dennis Robertson’s writings, that the natural, probably inescapable,
cyclical movements on the real side of the economy can be enhanced both
upwards and downwards by events in the financial aspects of the economic
process, resulting in the greater amplitudes of the actual cycles experienced
by economies. Minsky stressed
the feedbacks associated with the disparities between expected cash flows and
actual or realised cash flows in the accumulation/production process, on how
non-realisation acts on confidence and expectations, enlargening the boom, at
least in its early stages, accelerating the downturn and deepening and
prolonging the subsequent recession or depression.2
VI
As well as
pointing out the implications of disparities in the progress of finance
capital in relation to commercial and industrial capital, Marx’s analysis of
the inherent contradictions in capitalism are of immediate relevance for our
purposes in this paper. Unlike
Keynes and, to a lesser extent, Kalecki, Marx made a clear distinction
between happenings in the sphere of production, on the one hand, and
happenings in the sphere of distribution and exchange, on the other. As far as the possibility of and
limits to accumulation are concerned, it is conditions in the sphere of
production – the length and intensity of the working day, the state of the
class war between capital and labour, employer and employee – that ultimately
determine the size of the potential surplus created for the realisation of
profits and for future accumulation.
Whether this potential is realised or not, though, depends upon
happenings in the other sphere of distribution and exchange. It is here that Keynes, Kalecki and
developments based on their contributions come into play: the combination of
the theories of investment and of the distribution of income determined by
the expanded version of the theory of effective demand decides how much of
the potential surplus is realised in actual profits and accumulation, see,
for example, Harris (1975; 1978).
These ideas
help to explain one of the paradoxes of recent decades. Monetarism has rightly been called by
the late Thomas Balogh (1982) “the incomes policy of Karl Marx”. Ostensibly, the theory was meant to
justify policies designed to rid the system of inflationary tendencies. In fact, it was associated with the
attempt to swing the balance of economic, social and political power back
from labour to capital. (The
reverse swing had occurred cumulatively in many advanced capitalist economies
during the years of the long boom.)
The means to this end was the recreation of the reserve army of
labour, so making the sack an effective weapon again and creating cowed and
quiescent workforces and greater potential surpluses for national and,
increasingly, international capital accumulation.
What was not
realised was that the emergence of heavy and sustained unemployment,
initially ostensibly to push short-run rates of unemployment above so-called
natural rates and then let them converge on natural rates where inflation
could be sustained at steady rates and accelerating rates of inflation would
be things of the past, would simultaneously have such an adverse effect on
what Keynes called the “animal spirits” of business people, the ultimate
determinants of rates of accumulation.
Hence we have had decades in many economies in which inflation has
been drastically reduced yet accumulation has been sluggish, certainly well
below the levels needed to offset full employment saving and the levels
achieved during the years of the long boom itself. In those countries where this had not occurred,
despised Keynesian policies have continued to be used, sometimes
unintelligent ones such as those implemented, for example, during the last
six years of Ronald Reagan’s Presidency in the USA and now by President Bush
the Second.
Since
attaining full employment by the use of fiscal policies was no longer on the
agenda in the former countries and monetary policies were mainly directed at
general price levels and exchange rates, contractionary forces were widely
prevalent in these countries, as the politicians and their advisors waited
(or said they were) in vain while the impersonal forces of competitive
markets allied with monetarist rules allowed the economies to seek and find
their natural rates.
VII
I think it
is fair to say that Keynes never completely threw off the vision of the
working of economies in terms of an equilibrium framework. He did, of course, argue that
government intervention was needed to help attain a satisfactory full
employment equilibrium (internal balance) in each economy – left alone, less
satisfactory equilibria or rest states would emerge. This was an essential step towards equilibrium
associated with external balance in the international system and the
possibility then to take advantage of the classical principles of free trade
on which he had been brought up.
(Skidelsky (1992, xv) called him “the last of the great English
liberals”.) The proposals he put
forward at Bretton Woods were designed to provide the institutions and the
orders of magnitude of, for example, the provision of liquidity that would
make all this possible. That the
Americans, principally thorough Harry Dexter White, won out on both the
institutions and the orders of magnitude adopted for the post-war period was
a tragedy; for this ensured that the Bretton Woods system contained within it
the seeds of its own eventual destruction from its very inception. (How Marx would have laughed!)
One of the
major changes in vision since Keynes’s death about how markets, economies,
even whole systems work, associated with Keynes’s followers, especially
Kaldor and Joan Robinson, is the concept of cumulative causation. The concept has its origins in Adam
Smith (what has not?) and was brought into prominence in the modern era by
Allyn Young, Kaldor’s teacher at the LSE, and subsequently championed by
Kaldor and independently by Gunar Myrdal, especially in their post-war
writings. The way I illustrate
the essential idea of the concept for my students is through the analogy of a
wolf pack (I am not a zoologist so I may be completely wrong about how wolves
behave; but as I am an economist, at least I think so, let us assume I
am right). There are two major
views on the workings of markets, economies, whole systems. The dominant one is that akin to a
wolf pack running along. If one
or more wolves get ahead or fall behind, powerful forces come into play which
return them to the pack. (The
parallels with the existence of an equilibrium that is stable, and that the
forces responsible for existence are independent of those responsible for
stability are, I hope, obvious.)
The other view has the forces acting on the wolves who get ahead or
fall behind make them get further and further ahead or fall further and
further behind, at least for long periods of time. This view captures the notion of virtuous or vile
processes of cumulative causation.
My contention is that, according to which view is “correct”, makes a
drastic difference to our understanding of the world and how specific
policies may be perceived, recommended and evaluated.
I illustrate
with an example, the case for freely floating exchange rates. A classic paper arguing for them is
by Milton Friedman (1953). Underlying
his argument is the first wolf pack analogy, that in a competitive setting
there exists a set of long-period stable equilibrium exchange rates that
quickly would be found and then kept by a free float. Moreover, in this setting the
systemic effects of speculation would be beneficial, for speculators with
their superior knowledge, intelligence and information would help the system
to reach the equilibrium pattern more quickly than in their absence and then
sustain it there.
But suppose
that the second wolf pack analogy is the correct or at least more correct
description of how foreign exchange markets work. Then there is no set of stable equilibrium exchange rates
“out there” waiting to be found and now a float combined with speculative
activity will be systemically harmful, accelerating the movements away in
both directions of exchange rates from one another and also of systems, at
least for long periods of time.
I submit that the second scenario is more akin to what has happened
over much of recent decades, and provides a rationale for various schemes
suggested to curb the action of speculators. (My own suggestions may be found in Harcourt (1994; 1995;
2001b). I had generalised the
Tobin tax proposal without, I must confess, being aware at the time of its
existence!)
It is not
only in markets characterised by cumulative causation processes that
speculation may be systemically harmful. Any market in which stocks dominate flows and expectations
about the behaviour of other participants in the market dominate the more
usual economic factors – preferences, cost of production – in the setting of
prices may experience periods when speculation is harmful. (The seminal and classic paper on
this is Kaldor (1939).) An
obvious example is the stock exchange.
On this we may recall Keynes’s famous description in Chapter 12 of The
General Theory of what may happen when “enterprise becomes a bubble on a
whirlpool of speculation”, Keynes (1936; C.W., vol. VII, 1973, 159).
VIII
Let me close
with another example of how Keynes and Keynesian/Kaleckian/Marxian ideas are
still relevant for both our understanding and policy making.
The ideas I present now are based on Kalecki’s famous 1943 paper,
“Political aspects of full employment” and the writings of my two greatest
Australian mentors, the late Eric Russell and the late Wilfred Salter, both
devoted Keynesians, see Harcourt (1997; 2001b) for the arguments and
references.
Kalecki set
out graphically the vital difference between the political economy of getting
to full employment after a deep slump, when all classes are in favour of
this, the wage-earners in order to get jobs, business people in order to
receive higher profits, the government in order to reduce the risk of serious
social unrest, on the one hand, and the political economy of sustaining full
employment, on the other hand.
In the second situation, as I argued above, cumulatively economic,
social and political power shifts from capital to labour. The capitalist class, indeed
conservative elements generally, get more and more uneasy about the emerging
situation. An environment is
created in which, for example, monetarist ideas will be well received, and
more than one economist will be prepared to be a hired prize fighter in
support of them as government (and central bank) actions.
Is there a
possible answer to this, on the face of it, inescapable dilemma in our sorts
of economies? Keynes and his
followers recognized that attaining and then maintaining full employment
would carry with it cumulatively rising risks of inflationary pressures
associated with rising money-wage demands. It is no accident that Joan Robinson always said that from
1936 on, “Incomes Policy” was her middle name, a perceptive insight no doubt
reinforced by having an actual middle name of Violet. Russell and Salter recognized this
dilemma and argued in Australia for a full employment policy that included an
incomes policy implemented through our centralised wage fixing body (then the
Australian Arbitration Commission).
In broad outline, at a starting point, money incomes were to be
adjusted periodically for changes in prices and in overall
productivity. Not only is this
adjustment equitable, it is also efficient.
It is
equitable because at the level of the economy as a whole, capital and labour
are complements and the impact of their combined activity on overall
productivity ought to be reflected in changes in the real incomes of
all citizens. It is efficient
because with full employment, such an overall policy discourages low productivity,
often declining industries whose time has passed and encourages high
productivity, often expanding industries whose time has come. The result is a regime with
higher increases in overall productivity than would occur otherwise,
certainly than would occur in a regime characterised by so-called flexible
markets, such as are the UK’s and the USA’s pride and joy. There would be therefore an agreeable
quid pro quo for money income restraint in the form of rising real
incomes, so providing a possible solution to Kalecki’s dilemma. There are, of course, all sorts of
qualifications and modifications and exceptions to the starting rule – I
discuss these in the article referred to above. Here I wanted to set out the core argument as starkly as
possible.
IX
In conclusion, may I say
that Keynes and his ideas are still alive and well; that subsequent
developments by others complement agreeably his own revolutionary
contributions; and that people of good will who wish to see established just
and equitable societies world-wide have in these ideas an essential starting
point?
End Notes
* A lecture given at the conference on “Keynes and after”, held at the
Faculty of Economics and Business Administration, University of Iceland,
Reykjavik, on 10 October 2003.
1.
In a letter to Keynes (28.6.1928) when he submitted the article to the Economic
Journal, he wrote: “Of course the whole thing is a waste of time”. It had distracted him from “a book on
logic … [because] it [was] much easier to concentrate on than philosophy and
the difficulties that arise rather [obsessed him]”
2. For some policy implications of Minsky’s
insights, see Harcourt (2001a), ch. 15.
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______________________________
SUGGESTED CITATION:
G. C. Harcourt, “The
economics of Keynes and its theoretical and political importance: Or, what
would Marx and Keynes have made of the happenings of the past 30 years and
more?”, post-autistic
economics review, issue no. 27, 9 September 2004,
article 1, http://www.btinternet.com/~pae_news/review/issue27.htm
The Riddle of Consumption
Richard D. Wolff (University of
Massachusetts, Amherst, USA)
Shaun
Hargreaves Heap recently reminded us (PAER no. 26, 2 August 2004) that The
Affluent Society raises an issue as important today as when Galbraith
wrote nearly fifty years ago. Why do consumers want ever more goods and
services when the evidence suggests that more consumption delivers no greater
happiness? Heap praises, discusses, and adds to Galbraith’s explanations for
this riddle of consumption or what might better be called the fetishism of
consumption. However, neither Galbraith nor Heap recognize, let alone
discuss, one solution to the riddle derived from Marx’s theory of
exploitation. Indeed, capitalist exploitation helps to explain not only the
fetishization of consumption, but also neoclassical theory’s parallel need to
ascribe disutility to labor and a compensatory utility to consumption.
Galbraith
and Heap are troubled deeply by the spectacle of endlessly rising consumption
spending, by the acquisitive value system it reflects and reinforces, and by
the negative social effects flowing from both ever-rising consumption and
that value system. The fetishization of consumption strikes them as a serious
social problem. It undercuts the happiness of consumers, threatens the
environment, and increasingly dominates public services and especially
education which they believe could and should be sources of different,
preferable value systems. Galbraith and Heap explain ever-rising consumption
as the effect mostly of qualities they believe to be intrinsic to modern
individuals. For example, people derive utility from consumer goods in terms
of their relative – not their absolute – consumption. As others’ consumption
grows, so too must theirs, thereby generating an endless rise of consumption.
Similarly, people are vulnerable to advertising and mass media that generate
ever new desires and tastes. Today’s desires reflect yesterday’s
circumstances of the past; because former generations scrambled for
subsistence, people keep buying long after subsistence is no longer an issue.
The conventional wisdom that more consumer goods and services is always
better than fewer endures, notwithstanding all the contrary evidence, because
belief in conventional wisdoms is a human predilection. Extending Galbraith’s
psychological explanations, Heap stresses modern identity insecurity. Because
their personal identities are now fluid and hence insecure, people turn to
consumption as the means to define and refine individual identities.
Galbraith
and Heap do cite one cause for endless increase in consumption that is not a
matter of individual psychology. Because rising consumption keeps the masses
employed, it brings ever more people out of absolute poverty. This secures
“social harmony” by “mitigating” the social tensions bred by “social
inequality.” While both Galbraith and Heap are vague on this point, it does
represent the germ of a social (dare one say “objective”) rather than
personal, psychological (dare
one say “subjective”) theory to explain ever-rising consumption. However, why
settle for a germ when a much more developed and nuanced social theory of
rising consumption is available from classical political economy and
especially from Marx?
John
Locke argued that post-feudal European society could work well, despite the
loss of social controls operated by absolutist feudal hierarchies, if each
worker disposed of only as much land as that worker could farm. He, Thomas
Jefferson, and others believed that social inequalities bred social tensions
which risked degeneration into civil chaos or regression back to feudal
absolutism. The tensions could be avoided if production exhibited a rough
equality of labor, means of labor, and hence reward from labor across
individuals. However, the actually existing capitalism that came increasingly
to prevail in post-feudal Europe generated growing inequality (Adam Smith’s
accumulation of land and stock). Capitalism thus risked social catastrophe
and self-destruction unless it could somehow “mitigate” the rising inequality
between, speaking broadly, capital and labor. Smith’s idea was that
capitalism might mitigate deepening inequality by raising consumption. Put
bluntly, workers falling ever further behind and below capitalists in terms
of wealth, income, power, and culture, might accept that if they enjoyed an
ever-rising level of personal consumption. For generations of capitalism’s
champions, it thus became axiomatic that a secure capitalism is one that
delivers a rising standard of consumption to its working classes. Crises
threaten not because rising inequality attends capitalist development, but
only when that inequality is not compensated by rising worker consumption.
Marx’s
theory of capitalist exploitation developed Smith’s idea further and in new
directions. In the theory of relative
surplus value presented in Capital vol.1, Marx showed how
competition among capitalist firms within each industry typically generated a
secular fall in the value per unit of each industry’s output. That meant, in
Marx’s mathematical model, that the value of labor power would fall since
each item in the worker’s consumption bundle contained less value. Assuming
workers labored the same number of hours and thereby produced the same value
added, the fall in the value of their labor power left a greater mass and
rate of surplus value for their capitalist employers. In short, more of the
value added by laborers accrued as surplus to their employers as less was
returned to them as wages; the exploitation of labor rose. The real wages of
workers remained the same because the reduced value of their wages matched
the reduced value per unit of the consumer goods they purchased. Marx
concluded that capitalism thus displayed a remarkable self-reinforcing
mechanism: each capitalist’s need for more surplus generated a competition
that provided it for all capitalists.
Marx
recognized, however, that this happy circumstance for capitalists required
that workers accept a rising rate of exploitation and its consequences:
rising social disparities between workers’ and capitalists’ wealth, income,
power, and culture. If, as Marx no doubt hoped, workers resented exploitation
per se and its increase still more, the old problem of inequality generating
social conflict could resurface with a vengeance. Marx’s argument implies the
two parts that a solution to this capitalist problem would require. First,
the value of labor power should not fall as much as the unit values of
consumer commodities fell, thereby enabling a rise in real wages. So long as
the value of labor power falls, the mass and rate of surplus value rises to
the benefit of all capitalists. Exploitation can thus increase while workers
also enjoy a rising standard of consumption. However, this part of the
solution is not, by itself, sufficient. Rising exploitation still entails the
same set of deepening inequalities that worried the classicals. Thus the need
for the second part of the solution: workers must care much more about their
own level of consumption than about exploitation, rising exploitation, and
deepening social inequality.
Modern
capitalism, in those areas where it is the most secure, reflects the
successful combination of both parts of this solution. Exploitation rises to
the benefit of capitalists, while real wages also rise and workers focus on
rising consumption as the point and purpose of their work. They measure the
tolerability of their labor by the adequacy of its compensation in terms of
consumption. At a minimum, workers accept exploitation and its social
consequences because they are compensated by consumption. Better still, for
capitalism’s survival, workers may come to believe that exploitation does not
(or no longer) exist, so that consumption can be viewed as the compensation
simply for labor activity itself.
For
successful modern capitalisms, then, real wages must rise tendentially and
workers must be ceaselessly reinforced to believe that rising consumption is
the adequate, appropriate reward for their productive efforts. In contrast,
unsuccessful capitalisms are those who do not deliver rising consumption or
who cannot persuade their workers that rising consumption is all that should
matter in relation to their work.
In this persuasion, neo-classical economic theory plays a central
role. It teaches that work necessarily entails an intrinsic disutility
compared to consumption which is an intrinsic utility. Work’s intrinsic
disutility flows from exertions of mind and muscle (as opposed to “leisure”).
Each worker rationally balances, at the margin, the disutility of those
exertions against the utility of the consumption enabled by the worker’s
income (revenue from those exertions). Rationality for workers is defined so
as to exclude any thought or action in regard to exploitation and its social
effects. Indeed, neoclassical economics teaches, contra Marx, that
exploitation does not (or no longer) exist; there is no surplus in
production. To the extent that neoclassical economics informs journalists,
politicians, school-teachers, ministers and others, it organizes the
persuasion needed to secure capitalism’s rising rates of exploitation and the
social inequalities thereby deepened.
Marx
thus offers a different explanation for the seemingly endless rise in
consumption from those discussed by Galbraith and Heap. They profess to be
mystified as to why people demand more consumption even though it does not
make them “happier” and they resort to rather simplistic psychological
explanations for that demand. In contrast, Marx’s theory of relative surplus
value explains why rising real wages are possible, why they can occur as a
consequence of capitalist competition, and why, in successful capitalisms,
they are accompanied by a consciousness that ever more consumption is better.
For Marx, it is a matter less of intrinsic human psychology than of an
attempt to manage the deepening inequalities of capitalism.
Such
management would fail if workers recognized exploitation and its social effects
and refused to accept personal consumption as adequate compensation for them.
It would fail if workers reacted to the disutility of their labor by
demanding that the quality of their labor activity be changed by ending
exploitation (rather than or in addition to demanding that their consumption
be increased). It would fail if workers stopped believing that more
consumption is better and focused instead on changing the social conditions
of consumption by, among other measures, eradicating exploitation.
This
analysis of rising consumption as a means of managing the social effects of
rising exploitation implies a Marxist critique of both environmentalism and
of socialist politics focused on raising workers’ wages. On the one hand,
environmentalism effectively questions rising consumption by stressing its disutilities. However, in so far as
that recognition remains disconnected from Marx’s larger argument about
exploitation and rising consumption, environmentalism’s impact will be
constrained and undermined. One the one hand, socialists’ focus on raising
wages and consumption standards mobilizes workers around immediate needs.
However, in so far as that focus subordinates or disconnects from Marx’s
central opposition to exploitation within production, socialists risk
becoming inadvertent adjuncts to capitalism’s successful management of rising
exploitation and its social effects.
______________________________
SUGGESTED CITATION:
Richard D. Wolff, “The Riddle of Consumption”, post-autistic
economics review, issue no. 27, 9 September 2004,
article 2, http://www.btinternet.com/~pae_news/review/issue27.htm
Fisheries management: Hijacked by neoliberal
economics*
M.
Ben-Yami (Israel)
This is a story about a fashionable political-economic ideology that
has taken over the management of many fisheries. It happened as a
matter-of-fact offshoot, sort of by-catch, of the neoliberal or neoclassical
paradigm.
In the beginning fish were
aplenty and there were no rules upon the face of the deep, and the spirit of
free access moved upon the waters. And the fishermen saw that it was good and
fished as many fishes as they needed to feed their families and their
neighbors.
But people were multiplying and replenishing the earth, and more and
more fishermen had to catch more and more fish to meet the demand of the
ever-growing humanity.
And governments said: let there be management, so that there would
always be enough fish left in the seas to procreate. And they limited the gear, the
vessels’ size and numbers, the duration of fishing seasons, and the access to
some fishing areas, and they called it input or effort regulation.
But, the fishermen kept fishing and their fleets kept growing, and the
governments saw that it was bad. So the governments made the licenses, and
their scientists thought up the “maximum sustainable yield” (MSY), which was
the amount of fish that could be safely extracted, and they made the “total
allowable catch” (TAC) for each sort of fish in the sea. But the fishermen
kept competing, and over-capitalizing, and the fish became scarce.
And the economists said unto the governments: let there be property
rights. And they spawned “individual transferable quotas” (ITQs), which were
rights to catch the given quota of fish that the fishermen could buy from
each other. And they believed that it is good and said unto the fishermen:
Behold, rights’ privatization is your salvation. And the governments sent the
ITQs upon waters to replenish the seas and subdue all fisheries. And it was
good.
This is more or
less the gospel, which prevails throughout fisheries administrations in many
countries. It made some people
richer and so they became its devoted believers and supporters, while the
many made poorer, or afraid to become so - its adamant opponents. And in
almost every single case the consequence is continuing concentration of
fishing rights in fewer and fewer hands, often enough in the hands of major
corporate interests, at the expense of small-scale, family, and skipper-owned
fishing operations of one or two small or even medium-sized fishing vessels.
Fisheries management
is supposed to look after the health of the fish resources exploited by
fishermen. This requires knowledge of fishery biology and ecology, population
dynamics, and historical data of the fishery and of environmental and
associated stock fluctuations in its area. As fisheries management can only
manage people, it entails negotiations, legislation, technology, and
enforcement. There's a whole catalogue of management systems and technical
and administrative methods that managers can use to try to achieve their
targets.
Traditional management replaced. Old-type management by tribal and community
leaders and local fisherfolk’s organizations based on traditional knowledge
of the resource and traditional justice, is now almost totally extinct. It
has been replaced throughout most of the world by bureaucratic and
technocratic mechanisms heavily influenced by political and economic
considerations that, while interested in fish as marketable merchandise and a
source of profits to the operators, have only little to do with safeguarding
the resource as a source of income to fishing people. Fisheries management
has thus become a power play over benefits from the resource. Stakeholders
are many, starting with fishing people and local interests in fishing
communities, through recreational fishermen, environmental lobbies and
coastal development interests, and ending with powerful corporations and
market forces, whether local, national, or multinational.
The political attitude of the powers in
charge determines the choice of the management system and how it is applied
through licensing that controls fishing capacity, quotas allocation, or
limits set on effort. The system chosen determines the distribution of the
benefits derived from the resource to the different stakeholders. For
example, allocating fishing rights (and hence benefits) to a large number of
small-scale fishermen would call for different management methods than
allocating them to a large company.
Neoliberal economics invaded management of various commons and
national resources as an extension of a dominant paradigm - though very much at issue - in the industrialized world. Its
gospel is being spread over the world and its political, financial, and
academic institutions by troops of disciplined economists, rewarded for
devotion, and punished for dissent. So, what is this neoliberal or
neoclassical teaching in economics that has also impinged on fisheries? And
on what basis are its devoted adherents preaching that theirs is the only way
society can take to utilize its fish resources in a feasible and efficient manner?
The old “classical” economic teaching has
introduced the belief in the “invisible hand” guiding rational individual
decisions driven by self-interest eventually into an optimum economy, in
which free market forces are taking care of all aspects of peoples’
life. An implied outcome of such
“free play” is that any financial profit derived from a common, fully,
partly, or quasi-privatized resource, would somehow trickle down and
redistribute itself all over the society. But this is a myth and a fallacious
contention, if not an outright lie. It is common knowledge that, in most of
the world’s countries, a big share of such benefits indeed trickles down, but
to various investments abroad, and to imported luxury products and services.
The “trickle down” theory can approach the real situation only in a few rich
countries, where profits feel secure and investments promise further
accumulation of capital.
Criticism. Recently, more and more economists
and other social scientists started casting doubt on the neoclassical gospel,
nicknamed by some “autistic economics”.
Awarding the 2002 Nobel Price in economics to two professors, one of
them a psychologist, who refuted the theory that, as a rule, individuals
make rational economic decisions, reflected this growing criticism. Economic
determinism inherent in the neoliberal theory doesn’t work; the markets’
reaction to prices, the prices’ reaction to the dynamics of supply and
demand, and peoples’ reactions and economical activities don’t fit that
theory’s assumptions. Hence, its weakness in economic analysis and
forecasting.
Some economists and other social scientists
argue that, contrary to its pretense to scientific, objective approach,
neoclassical economics is in fact a social-political narrative and a methodology
used by global economic and political interests to concentrate power in the
hands of corporate national and multi-national institutions. Thus, individual
businessmen and small and medium-scale private enterprises, not to speak of
wage earners, are losing their influence on socio-economic decision-making to
powerful commercial-industrial centres and their collaborators in
governments.
This transfer of power is promoted,
legislated, and executed through democratic processes occurring within the
existing legal framework with the help of well financed journalistic and
media campaigns and more or less biased scientific publications, with Thus, the “invisible hand” has been
transformed from the sum of the multitude of individual decisions into the
sum of the political and economic decisions of powerful interests.
Profit maximization. Neoclassical economics
are supposed to aim at and produce maximization of social and national benefits, which in fact are dollar equivalent measures of how economists
value goods and services (including non-market goods and services). It
preaches maximization
of profits or rents often attained at the expense of heavy social costs. The big question is how these costs and benefits
are defined and calculated; since social costs are very difficult to estimate, any portrayal of
economics as an absolute, scientific methodology is simply fallacious, and honest economists
admit that they cannot adequately calculate all social benefits and all
social costs.
It is obvious that losses incurred through
forfeiture of alternative actions, and due to various social, and other
external costs, many of which cannot be evaluated in terms of dollars and
cents are a part and parcel of any economy. As long as we are not taking into
account all the costs and benefits resulting from production and market
fluctuations, various management steps, defaults to act, social, economic,
and cultural dislocations of people and their ramifications affecting coastal
communities, as well as other "externalities" difficult to express
in monetary terms, we are unable to calculate true net social costs and
benefits.
Social benefits. Many people associate the term
"social benefits” with how benefits derived from national resources are
distributed across the society. They ask, for example, how many people make a
living from a certain resource. A “less efficient” small-scale fishery that
employs many more people than an “efficient” big-owner fleet, may feed less
monies to the "national purse", but as a rule is directly and
effectively more beneficial to people and their communities. Only an in-depth
analysis can establish which option would produce truer national benefit
values. Thus, it is
quite consequential who defines national and social benefits, and how.
For example,
calculation of net national benefits for an industrial shrimp fishery in a
non-industrial country must include a deduction of the costs of all imports,
such as expatriate manpower, fuel and lubricants, vessels, deck and
propulsion machinery, processing and refrigeration equipment, and fishing
gear, as well as insurance and maintenance costs incurred in
foreign-currency. In some cases, the only net benefits from an industrial
shrimp fishery in such countries are the revenues from license fees and the
employment of nationals, while a major share of the proceeds for the shrimp
exported is going abroad, along with the product.
Policy costs. Therefore, responsible resource managers
along with responsible economists must openly account also for the values
that are non-financial/commercial, and the diverse peripheral socio-economic,
political and cultural costs, as well as the taxpayer's money needed for
dealing with human problems resulting from management decisions. Only then
would the society and its governments be informed of the true costs of
any policy proposition leading to allocating their natural resources into the
hands of a few. Nowadays, such transfers are facilitated by governments’
obsession with privatization as a panacea to all maladies of the economy.
The
neo-liberal gospel preaches that practically nothing can work efficiently, if
it is not somebody’s private or corporate property. The massive ideological
privatization practiced in some countries has embraced also such natural
resources, as water, forests, various energy sources, and public transport.
Even economically viable, and efficiently run national resources are often
falling victim to the privatization Moloch. How wrong this ideology can be
has been recently well illustrated by a whole series of flops of some mammoth
privatized and corporate companies, due to both, mismanagement and corruption,
as well as by the rather disappointing results of the privatization of the
British railway system. “Swissair”, “PanAm”, “Enron”, and other recent
bankrupt giants have not been run by governments.
One consequence
of the domination of neoclassical economics is the rather obscure struggle
between free enterprise and corporate interests. In the
past, the conception of capitalism
Sometime ago, after the
demise of the Soviet system, one would think that free enterprise had won.
One is not so sure nowadays. Like the Soviet monopolistic concerns, some of
the giant companies of the "capitalist" world are run by
exploitative bureaucracies supported by ideological economists, who seem to
consider small and family-owned enterprises a noise and a nuisance in their
concept of "economically efficient" world.
Invasion. The invasion of
fisheries by the neoclassical economics has been a logical consequence to its
domination of the global, and many national economies. Like many historical
invasions, it was partly invited from inside the fisheries and given a
friendly reception by large-scale interests and their proxies in the
management mechanisms. Once in, it seems to be here to stay, especially in
all those countries where, for various reasons, it is not met with strong
opposition.
What brought this ideology into
the fisheries is its claim that privatization is the most efficient, if not
the only mode of exploiting a resource. This, even if the resource belongs to
the whole nation, as is the case with water, forests and, for that matter,
fish in the sea.
Input control. When,
following the Second World War, the spiraling growth of fisheries brought
about the need for management, it was initially based on, so called, “input
control”. This implies regulation of fishing effort through such means as
limited access, fishing time and areas, as well as other regulations that try |