Some years ago, I reviewed a book – State Building – by Francis Fukuyama. This was one of his lesser known works, he is more famous for being the theorist of the ‘end of history’ – a view fashionable during the days of neo-liberal triumphalism circa the 1980s. But the views espoused are much the same in both works. After the collapse of communism in Eastern Europe, and social-democracy effectively throwing in the towel in Western Europe, Mr Fukuyama postulated that liberal, deregulated, market capitalism was now the historical norm, and if countries had not arrived at this terminal point in their history then in the fullness of time they surely would. This teleology became the received wisdom in official circles, and I would argue still is, at least among the political, financial and media elites. Paradoxically, this consensus – let’s call it the Thatcher/Reagan settlement – represented almost a theoretical mirror image of the cruder types of Marxist historical materialism.
The term ‘cruder’ is used sparingly, since it is questionable whether Marx himself too this view. After all, he opined that “…circumstances make men just as much as men make circumstances.” (The German Ideology) which denotes the presence of both structure and agency in the process of historical development.
Of course, claims such as Fukuyama’s, viz., knowledge of the future is possible, are always going to be contestable; such a view necessarily precludes human agency from the historical process and the process itself is therefore a force of nature. It therefore followed that politics was no longer about choice and, according to the post-modernist fraternity, the grand political narratives were redundant. Henceforth politics was to be simply about daily administrative chores. To be fair Fukuyama later admitted that he was wrong. Additionally, the more humanistic interpretation of Marxism – as espoused by inter alia Lukacs and Gramsci – does allow for human intervention in the historical process, in fact it insists upon this.
Suffice it to say the present ideological imperatives have become entrenched in the modish milieu of ‘opinion formers’ who inhabit the institutions of state, media, business and academe. It should be understood, however, that the ideology itself is full of inconsistences and represents an amalgam of diluted Austrian libertarianism and only a grudging acceptance economic interventionism. In addition, most of the people who hold these views are generally unaware of these inconsistences and frankly don’t know what they are talking about. It would be useful, therefore, examine the undiluted theories.
The Hayekian/Austrian school
For a long time after WW2 these theorists, Von Hayek and Von Mises and their followers, were exiled to a virtual leper colony of macro-economic theory. This was a period of the Roosevelt/Attlee settlement, the Trente Glorieuses in the west, and the spread of communism over Eastern Europe, China and Indo-China. The pre-war regime of depression/fascism/war, emanating from uncontrolled markets, market crashes, followed by trade wars of the 1930s and culminating in shooting wars, was definitively rejected by the electorates of the western world. Free marketeers bided their time until their moment came. This moment came in the 1970s as the post-war growth petered out into stagflation. They found a populariser of their beliefs – albeit in a crude form – in Milton Friedman of the Chicago School and what was termed ‘monetarism’ – this was in fact little more than a more recent version of the quantity theory of money.( See below) These ideas migrated from academe via the broadsheet press and finally to the right-wing and fake-left political parties headed at the time by Thatcher and Reagan.
The ‘Austrian school’ believe that attempts to control capitalism through state intervention will fail and will in fact be counter-productive. This is because such interventions distort the price mechanism leading to misallocation of resources, inflation and asset price bubbles. The archetype of this would be the credit/property boom and subsequent bust which took place in 2002-2008. This was enabled by the accommodative actions of central banks starting in New York with the ‘Fed’ and London with the Bank of England, the virus then spread around the world. Interest rates were kept artificially low and both heads of the two respective central banks as well as Treasury officials, oversaw the creation of the credit bubble – Mervyn King at the Bank of England and Fed boss Alan Greenspan in the US. Thus, the natural cyclical tendencies immanent in the capitalist system were given an additional push by government monetary policy. It has long been argued, along with copious empirical evidence, that booms and busts are intrinsic to the system. Why then would such a pro-cyclical policy find support from the financial PTB?
The answer is disarmingly simple: booms and bubbles (at least during the boom phase) are popular with the public and are therefore good politics. Who can ever forget ‘the-end-of-boom-and-bust’ triumphalism of the period. During the boom phase of the cycle investors and consumers tend to become overconfident and make foolish investment and purchasing decisions. Prices start to rise due to the continual demand for factor inputs, growth becomes more and more febrile, banks make foolish loans (Northern Rock, and the Royal Bank of Scotland come to mind), finally, when rises in income and borrowing can no longer support rises in asset prices, the whole thing collapses. This is what happened in 2008. Enter the bust. Bad investments and overspending now come to light. Companies go bust, unemployment mounts, debts are written down simply because debtors cannot pay, and all the misallocations of resources can clearly be seen with half-finished empty houses standing as the self-evident physical symbols of the manic bubble period which preceded them.
For the Austrians the business cycle had a necessary and important function within capitalism. The crisis phase of the cycle was crucial if capitalism was to renew itself and purge itself of the false values and the misallocation of productive resources which had grown up during the boom phase. The crisis was a moment of truth, when suddenly the plans, the claims and the expectations which had been formed during the upswing were put to the test. Many of them would be found wanting, and those responsible for them would have to face the consequences. The process was not just to keep capitalism efficient, it was also necessary to keep capitalism moral. Only if agents bore full responsibility for their actions would the values of prudence, reliability and sound judgement and trust, on which capitalism relied, be upheld. The crisis purged capitalism in a double sense: both practically and morally. To many of its defenders the two were equally important. It was what gave capitalism its moral legitimacy and its practical dynamism.
– The Spectre at the Feast – Andrew Gamble
According to the Austrians, recovery would not be achieved by bail-outs, Keynesian deficit spending, or by rescuing companies which were simply inefficient or did not supply consumers or investors with their preferences as demonstrated by the market price mechanism. Such policies would also simply create ‘moral hazard’ a tendency for investors and consumers to carry on as usual with losses being underwritten by the state; in this situation there was no intention or incentive for improving their business efficiency. These bailed-out entities were the economy’s living dead, kept alive on state support – zombie banks as in Europe and Japan and zombie auto companies like Fiat, Kia, and GM, or insurance companies like AIG, all of which should have been allowed to fail. With their failure more competitive efficient companies would arise in their place.
Now here is the interesting thing. During whole chaotic episode at no time did respective governments live up to their ‘free market’ rhetoric. If they had been consistent free marketeers, the banks would have been left to fail instead of being rescued. But banks were now deemed ‘too big to fail’ – a fool-proof insurance policy against incompetence and greed. No such bail-outs were, however, extended to small bankrupt firms or the newly unemployed.
According to Austrian theory recovery could only get underway when, as during classical depressions, prices fell, which meant that if wages and interest rates fell more slowly – if at all – then disposable income would start to increase. This being the case consumers would start to spend again. Similarly, bankrupted and distressed firms would be bought out at fire–damage prices by the more efficient firms with more up to date equipment. Growth now resumes given the destruction of existing capital values. The process of accumulation can restart., Von Hayek and Von Mises and co., were partisans for capitalism – warts and all. But there would be no trickle-down effect. would be winners and losers. There was no pretence that the system was equitable and worked for everyone. And the notion of crisis free capitalism is compared to religion without sin.
Summing up, capitalism is intrinsically cyclical. The Growth periods tend to run out of control resulting in bad investments and resource misallocation. This process is fed by easy credit and excess liquidity courtesy of the central banks. Asset price inflation rises to a level which can no longer be sustained by rises in income or further borrowing. The boom reaches an inflexion point – and pop! The whole process now swings into reverse – the bust has arrived and rectifies the situation by liquidating all the mal-investments and making way for a reconfiguration of the system on a more sustainable and efficient basis. Capitalism restructures itself through these types of crises.
Although the Austrian (and indeed Marxist) analysis of the bust seems broadly speaking correct, the policy prescriptions of the Hayekians seem frankly alarming. The scope and interdependence of the system is such that the notion of simply letting the bust take its course would lead to quite massive economic, political and social dislocations on a global scale – a catastrophe which would dwarf the depression of the 1930s. In a strictly logical sense the reasoning of the Austrian school is correct, but their policy prescriptions are simply too terrible to contemplate.
The Libertarians are actively promoting policies sure to bring about immediate economic hell, in the faith that punishment and suffering are the prerequisites to an economic afterlife in a better world. While in the end their philosophy of economic karma may ultimately prove correct, before accepting the remedy through collapse, other approaches should be put to the test. Economic reincarnation could take a lot longer than the Libertarians anticipate. The Renaissance did follow the fall of Rome – but only after 10 centuries.
– The New Depression – Richard Duncan (p.105)
“Other approaches should be put to the test.” Agreed, failing banks should not be bailed out, they should be nationalised.
Keynes and his followers
In his Magnum Opus The General Theory of Employment Interest and Money (1936) Keynes elaborated what he believed to be the chaotic situation which had arisen in the world economy during the 1930s and what he believed to be ways out of economic depressions. This was the case during the roaring 20s with runaway credit (debt) fuelling a stock market bubble until the 1929 blow-out. Credit duly contracted as the defaults multiplied, and so the Roaring 20s transmuted into the depressed 30s.
In 1930 the US money supply comprised currency held by the public (9%) and deposits held at commercial banks (91%). Banks used these deposits to fund their loans. When the credit that fuelled the Roaring 20s could not be repaid, the banks began to fail. When a borrower defaults it not only destroys credit, it also destroys the deposits which funded the credit.
Between 1930 and 1933, 9,000 US banks failed. The corresponding destruction of deposits caused the country’s money supply to contract by a third from $46 billion in 1928 to $31 billion in 1933. As the money supply shrank the happy economic dynamic that expanding credit had made possible, went into reverse, and the global economy spiralled into catastrophe.
– The New Depression – Richard Duncan (p.121)
Post-crash, the problem was not excess demand but insufficient demand. This became known as debt-deflation. This is where Keynes and his co-thinkers entered the scene. With consumers and investors not spending, aggregate demand in deflationary conditions is flat, or even falling. Therefore, the solution could only be increased spending by the government. This to be carried out by a mixture of monetary policy (lowering interest rates and Open Market Operations, now referred to as Quantitative Easing – QE) and/or fiscal policy. The ensuing increase in aggregate demand would feed through to the rest of the economy and give rise to an increase in output which would be eventually self-sustaining. Governments would find it necessary therefore to run budget deficits during this period. Q.E.D. So it was argued.
This approach was taken up by the Roosevelt administration when it came to office in 1933. At that time unemployment in the US stood at the alarming figure of 25%. A raft of policy measures Works Programme Administration (WPA), National Recovery Act (NRA), Tennessee Valley Authority (TVA) Civilian Conservation Corps, were implemented. Unemployment fell to 14% by 1936, but then rose again during a new recession in 1937/38 to 20%. So, the track record of Keynes policies seems patchy to say the least.
In our own time we have seen almost a repeat of the 1930s debacle. The long boom of 1980-2007 was floated on a sea of debt. The present crisis is, however, much larger and more global than that of the 1930s. The whole credit/property induced boom came to a shuddering halt when the sub-prime borrowers in the US defaulted. House prices, which, had been rising by double digit percentages since the early 90s collapsed in 2006 and have been falling, apart from one or two transient minor upturns.
The same was to also happen in Iceland, Ireland the UK and Spain who had also built their policies around house-price inflation. Mortgage backed derivatives – i.e., those financial products which were based upon these dubious repackaged mortgages – were parcelled up and sold as new financial products to brain-dead investors around the world, after being fraudulently given the triple AAA seal of approval by the ratings agencies. However, these derivatives were only producing a stream of income so long has the mortgagees continued to pay their instalments – when they defaulted the derivatives became worthless, investors then found their newly acquired ‘assets’ had turned into liabilities, overnight.
Many banks were effectively insolvent, and the great bank panic of 2008 spread around the world. Governments found it necessary to bail-out these institutions in order to avoid a global meltdown. So, the banks simply transferred their junk ‘assets’ onto the sovereign nations’ balance sheets. Needless to say, this was only the opening of the great recession of 2008 which is ongoing. The crisis has now apparently moved from the US – whose fundamental problems remain unresolved however – to Europe where the problem seems more acute.
Since the nadir of 2008/09 there has been a stabilisation rather than what we might meaningfully call a recovery. This is a characteristic of depressions: a significant downturn, weak recovery and a long period of sub-optimal growth. Growth was flat or falling in Europe, although there are very marked regional disparities, and very weak in the USA, again with regional disparities. Interestingly, perhaps with all the clamour regarding austerity in the eurozone, no mention is made in the 40 or so US states –effectively insolvent – which were to see swingeing austerity programmes.
Concomitant with this there are high levels of unemployment on both sides of the pond. Official figures for US unemployment, as found in the Bureau of Labour Statistics, are completely fraudulent since whole swathes of de facto unemployed have been disappeared off the register simply by definition. The same disappearing trick was used with the core inflation figures. The Bureau of Labour Statistics uses U3 but the figure for U6 is double. And if the same definition was applied as used to be the case then unemployment would be almost 4 times the official account. The same statistical ledger main is used when defining inflation. Each redefinition gives a lower figure.
This manipulation of statistics is the same for inflation, GDP growth and various other economic data. These are not measurements of objective facts, but simply political constructions. (See John Williams Shadow Government Statistics).
The general Keynesian response to the present situation has been a hue and cry for stimulus at all costs. Keynesian counter-cyclical policies may consist of monetary and fiscal policy. This was not, until more recent times not been adopted in the eurozone, has been partially adopted in the UK and adopted in the US. In the eurozone the policy of deflation – very much the German approach – has been adopted.
This has put the weaker economies in the peripheral zone through the wringer of austerity and a grinding depression. No stimulus policies were undertaken, but in recent times the ECB under Draghi has joined the money printing club. Results have to say the least, not been exactly encouraging, particularly in the southern and eastern peripheries. This situation has received press coverage ad infinitum much of it justified, but much incredibly biased and ignorant, but hey, this is the ‘white noise democracy’ aka the mainstream media in action.
In the UK there occurred a bizarre mismatch of policies: a loose monetary policy with the Bank of England lowering the base rate to 0.5% and Quantitative Easing, and a tight fiscal policy with the Treasury cutting back on public spending. The result? The worst of both worlds, inflation and stagnation – good old 1970s stagflation.
The poster child for the Keynesians was United States which has thrown everything but the kitchen sink at the problem in both fiscal and monetary terms. This has produced some low growth – mostly stock buy-backs, which is not growth but asset-price inflation – stimulated by the Fed’s free money policy of historically low interest rates and QE. The fall in unemployment was massively overstated (sometimes genuine but more often by massive massaged by the usual statistical and definitional jiggery-pokery) but each additional stimulus has had less of an impact than the one preceding it. A sort of diminishing returns has set in, whereby more and more of the ‘fix’ is needed to get any sort of result.
… in the 1970s the increase in GDP was about 60 cents for every dollar of increased debt. By the early 2000s this had decreased to close to 20% of GDP growth for every new dollar of debt.”
The Great Financial Crisis – Foster and Magdoff (p.49)
The Federal Reserve had initiated QE by injecting literally trillions of $s into the economy. In addition, it lowered interest rates to 0.25% – zero to all intents and purposes. The Fed’s purchase of paper assets was facilitated with the printing of paper monies. These paper assets consisted of US Treasury bonds and junk securities from government sponsored enterprises such as Freddie Mac and Fanny Mae, the two government agencies whose remit as to issue mortgages to prospective US homebuyers. This meant that the assets purchased by the Fed were nothing more than debt, un-redeemable debt at that. This is a weird situation where the US central bank was buying US bonds issued by the Treasury department so that the US Federal government could pay its current bills.
And where did the Fed get its money from? Out of thin air apparently, it simply printed the stuff! When the stage is reached where governments have to pay their current expenditures by printing money then the alarm bells should start ringing. An idea of the monies involved is described as follows:
Before the first round of QE began, the Fed held roughly $900 billion of assets. When it ended on March 31, 2010 the Fed’s balance sheet had more than doubled to $2.3 trillion and by 2017 this had risen to $4.5 trillion (Frank Lee). There is no precedent for fiat money creation on this scale in the US during peacetime.
Richard Duncan Ibid.
Increasing the supply of paper money in the economy in the absence of demand for it can only produce one result – inflation, albeit after a time lag. However, this was a view based on the belief that this Fed money printing spree actually got into the real economy of visible and invisible goods production – which it didn’t. Most of it handed out as free money by the Fed to the banks went straight back into the Fed’s excess reserve facility, or was hoarded by banks, or went abroad searching for more salubrious investment climes or was simply stuffed under the mattress. The whole policy was predicated on the belief in the Quantity Theory of Money expressed in the formula M+V=P. Where M=Money, V=Velocity of Circulation and P=General price level. When a mass of money is injected into the economy (M) and assuming the Velocity of Circulation stays the same there will be a rise in the general Price level (P). However, this assumes that V (velocity of circulation) does not change. This latter is the crucial variable. The circulation of money is the speed that the money moves around the economy. However, the velocity of money did change – it slowed down.
Put another way if a £ or $ undergoes 10 transactions per day this will produce growth and an increase in the general price level. If this drops to 5 transactions, which is to say that the velocity of circulation slows down, there will be a corresponding decrease in income generated. Put another way if there is a big injection of capital in London but most of this capital does not reach the real economy then the velocity of circulation slows down, money supply contracts and inflation does not occur. In 2008, a recession in the US caused the velocity of circulation to fall and therefore money supply grew In, 2005-07, money supply was growing at between 10 and 15% a year. After the credit crunch and global recession, money supply growth became negative. The fall in the money supply was due to a decline in bank lending and lack of demand by firms which were experiencing spare capacity.
Furthermore, both food and fuel price increases are left out of the calculation in what is termed US ‘core inflation’; another egregious example of officialdom’s statistical sleight of hand. Were those price rises added in then at the very least the US inflation figures would almost certainly double.
As far as fiscal policy goes the US has consistently run budget deficits since the 1990s when it actually recorded a small surplus. The cost of the government takeover of Fannie Mae and Freddie Mac, the cost of ongoing wars in the middle east, the cost of bailouts to various financial institutions, the cost of fiscal transfers to cash-strapped states and various stimulus programmes has raised the US budget deficit is $21 trillion 2017 which given that the Gross Domestic Product of the US as of May 2017 was $19.4 trillion, makes the ratio close to 105%. This from a baseline debt-to-GDP of $68% in 2008. Longer term implications of America’s chronic debt problem are manifest.
Over the next 20 years, the Social Security Trust Fund won’t have enough funds to cover the retirement benefits promised to Baby Boomers. That means higher taxes, since the high U.S. debt rules out further loans from other countries. Unfortunately, it’s most likely that these benefits will be curtailed, either to retirees younger than 70, or to those who are high income and therefore aren’t as dependent on Social Security payments to fund their retirement.
Second, many of the foreign holders of U.S. debt are investing more in their own economies. Over time, diminished demand for U.S. Treasuries could increase interest rates, thus slowing the economy. Furthermore, anticipation of this lower demand puts downward pressure on the dollar. That’s because dollars, and dollar-denominated Treasury Securities, may become less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand.
The bottom line is that the large Federal debt is like driving with the emergency brake on, further slowing the U.S. economy. (Article updated March 3, 2012)
Add in private debt to the equation – i.e., the debts of household sector corporate sector, business sector, non-corporate businesses, State and local government – then the debt soars to something like $50 trillion, or 363% of GDP. Then of course there is the chronic trade deficit on current account which adds a further dimension to the problem, but let’s not labour the point. The seriousness of the situation is only matched by the complacency of the US authorities who seem to think they can go on raising the budget borrowing ceiling and that overseas investors will simply keep on buying their Treasury bonds forever. If ever there was a definition of unsustainable this is it.
These structural problems in the US economy could well be fatal if these colossal debt levels are not reined in. The US is being kept afloat by their ownership of the global reserve currency and the willingness (for now) of investors, mainly China, Japan and the oil-rich states in the middle-east to keep purchasing US Treasury paper – assets of dubious value and paltry yields. Overseas investors are aware of this situation and have begun lower their exposure to the US$s and dollar denominated assets by diversifying into other assets and have also started to trade in their own currencies rather than the dollar. Straws in the wind perhaps, but indicative of future trends.
Taken by themselves Keynesian demand-side policies of stimulating the economy hardly begin to grapple with the problem. This is because deeper problems are on the supply-side not the demand-side of the economy. They can be classified as follows:
- (a) Deindustrialisation as the manufacturing base is hollowed out and investment emigrates to cheaper venues;
- (b) ageing populations
- (c) rising energy costs and scarcity,
- (d) saturation of markets,
- (e) lack of leadership at the political level,
- (f) finance running amok,
- (g) the ability to create paper money and assets without limit,
- (h) an inadequately trained workforce, skills and
- (i) investment deficits
- (j) structural unemployment brought about by new technologies. Of course, I could have added in the issue of climate change but didn’t want to depress my readers unduly.
Keynesianism is fixated on the demand-side. (Keynes in fact was not so fixated. He was also aware of factors which give rise to supply side problems of growth and full employment, namely the fall in the marginal efficiency of capital (MEC): i.e., the actual and expected fall in the rate of profit regardless of demand the level of demand. But in a world beset by the sort of supply-side problems listed above traditional demand-management policies used since the war will not be effective. This actually serves to validate the Austrian and Marxist theory that upturns and booms in a capitalist economy are the result of the destruction of existing capital values. Japan and Germany roared ahead because their own industries and infrastructure was decimated, and they had to install the most modern up to date capital equipment and technologies and again start from scratch. Economies which start from a low base tend to have very high rates of growth.
Such policies may have been appropriate for the post-war period with the usual cyclical movements of the trade cycle, but dare I say, this time it’s different. What we are now confronted with is a systemic global crisis of capitalism. In the present situation Keynesian policies – which are commonly understood and promulgated by his epigones – are unlikely to have the desired effect for the following reasons (emphasis mine):
Keynes’ theory that government spending could stimulate aggregate demand turns out to be one that works in limited conditions only, making it more of a special theory than a general theory which he had claimed. Stimulus programmes work better in the short run than in the long run. Stimulus works better in a liquidity crisis than and insolvency crisis, and better in a mild recession than a severe one. Stimulus also works better for economies that have entered recessions with relatively low levels of debt at the outset … None of these favourable conditions for Keynesian stimulus was present in the United States in 2009.
– Currency Wars – James Rickards (pp.186-7)
It has been calculated that growth would have to be at the rate of 6% per annum which when inflation is factored in reduces to actual growth of 2% to make any inroads into the huge debts. This seems very, very unlikely, although this is what the US authorities will attempt to do.
One final point with regard to Keynesian policies: They are often thought of as an alternative to austerity, when in fact they are simply austerity by other means. It is an open secret, though never admitted, that both the Fed and the Bank of England are attempting to monetize the debt levels in both countries. This entails keeping inflation one or more jumps ahead of wages, pensions, benefits and interest rates. This inflation is engineered by the central bank which devalues the currency – supposedly to make exports more ‘competitive’ and printing money through QE, but importantly to amortize sovereign debt. Devaluation leads to an increase in import prices which will tend to feed through the rest of the economy causing domestic inflation.
That is its whole raison d’être, and in this respect, it is no different from a policy of deflation. Thus, the disposable income of the mass of the population is effectively pushed down as prices rise, and the most acutely affected will be the poorer sections of the community or anyone who keep their assets in cash. The more opulent, however, will be able to switch into stronger currencies, stocks/bonds, and physical assets such as precious metals, property, l’objets d’Art and fine wines which will appreciate in price. Inflation will help debtors since their debts will be effectively amortized, i.e. grow less as inflation lowers the magnitude of the debt. Of course, the principal debtor is the government. Forcing down interest rates to near zero in an inflationary environment gives savers two options. Do nothing and watch their savings melt away, or just go out and blow the lot. Similarly, investors will be forced into more risky investments as they see the paltry return to safer bolt holes such as gilts being eaten away by inflation. It all rather sounds like a re-run of 2002-2007 credit-fuelled growth madness!)
Keynesians see the problems of past and present capitalism as purely technical. They apparently believe that capitalism can be ‘fixed’ using appropriate tools and that it would therefore be possible to have permanent semi-boom conditions. Ah, if only that were the case. Actually, the survival of capitalism is a political not an economic question. Economic power is political/ideological power.
What Is To Be Done?
Can Capitalism survive? No, I do not think it can…Can Socialism work? Of course, it can.
Capitalism, Socialism and Democracy – Joseph Schumpeter (1941)
On the first point Schumpeter was wrong, but it is now a question which needs to be raised again. On the second point, he was right. The present crisis will be solved sooner or later (preferably sooner) but the question is how, by whom, and for whom?
The question for socialists is what the strategy for the coming struggles within this system should be – a system which cannot go on in its present form for the simple reason that it needs to grow at a compound rate of 3% forever – infinite growth in a finite world, which is, however, not possible. Socialism or a collapse into barbarism seems to be on the agenda once again. But we shouldn’t be surprised by this; it is surely what we have been expecting since the trouble started brewing in the late 60s. Capitalism moves in huge cyclical convulsions, and this is one of them.
This is a huge question and I can only allude to possible areas of political action. The first thing to realise is that the historical window for a social-democratic Keynesian solution to the crisis is now closed. It was only made possible by a specific conjuncture of political and economic circumstances. The Thatcher-Reagan settlement and globalization marked the death-knell of the Keynes/Beveridge consensus. Does this mean that socialists should not support a policy of reform within the system? Not at all. But this support must perforce have in view the objective of forcing a paradigm shift away from of simply gaining and defending reforms – to a struggle for real political and economic power.
It should also be clearly understood that such reforms as advocated by most of the liberal-left (now fake-left) have now been abandoned, in practice if not in theory. On the real left even public spending on work creation programmes, investment in green technology, a national investment bank – will only provide a temporary fix, and may well have negative downsides, such as inflation.
However, such demands can raise questions and challenge the political balance of power and shift the argument in favour of the 99%. Socialists, however, need to go much further than the type of Keynesian stimulus programme as advocated by a ‘left’ which cannot be trusted. Such a programme might consist of the following set of policies.
- Public works programmes to reduce unemployment. Or full maintenance for the unemployed.
- Nationalization of all deposit taking institutions and the setting up of a national bank.
- Strict rules on credit creation and the Shadow banking system.
- More transparency and an end to over-the-counter (OTC) trading.
- Closure of tax havens. Stop tax avoidance scams such as Transfer Pricing.
- Withdrawal from overseas conflicts and NATO.
- Harmonisation of corporate tax rates within the EU.
- End of the global reserve status of the US dollar.
- Indexation of wages, pensions, benefits, interest rates to inflation
- A move away from indirect to direct taxation, and higher tax rates for the upper quintile of the population.
- Tax harmonisation in Europe to prevent tax competition and the race to the bottom.
Of course, at the present time, there is minimal possibility that such demands will be met; the class enemy have the power and the veto, notwithstanding the democratic will of the people. Moreover, some of these questions can only be raised at regional and/or global levels. This opens up several additional cans of worms. There is the seemingly intractable issue of Europe. Reversion to national currencies as advocated by some seems a chancy option leading to devaluation and trade and currency wars?
However, Remaining in the EU means austerity, stagnation and permanent debt vassalage attendant on the policy of internal devaluations. Then there are global currency and trade issues: What replaces the dollar as the basis for a global currency? Special Drawing Rights? A new gold standard? Or Keynes’ idea of a global currency – Bancor – to replace national currencies in international trade. And crucially is the looming issue of climate change and massive ecological damage and negative externalities which is the corollary of consumer capitalism.
The task seems truly Herculean, the point is, however, that these issues must sooner or later (preferably sooner) be raised. They cannot be evaded. We do not choose history, history chooses us. And this is the labour of Hercules which history has bequeathed upon us.