Keynes' flaws

Michael Roberts reminds us of something important – that Keynesian economics has severe shortcomings. I agree.

For me, the problem with Keynes was what he didn’t say. He was largely silent about three related issues: class, power and profits, or least he dismissed them lightly:

the problem of want and poverty and the economic struggle between classes and nations, is nothing but a frightful muddle, a transitory and an unnecessary muddle. (Preface to Essays in Persuasion)

It’s no accident that it should have been so easy to find a Keynesian-neoclassical synthesis, as both schools of thought ignored these matters.

This omission, however, has had several baleful effects.

One is that, in regarding full employment as a narrowly technical matter, Keynes overlooked the fact that capitalists have a powerful interest in maintaining unemployment – both because it disciplines workers, and because it gives capitalists influence upon the state to ensure that it maintains business confidence. As Kalecki wrote (pdf):

[Capitalists’] class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the " normal capitalist system.

Post-war Keynesianism broke down in the 1970s in part precisely for this reason: full employment squeezed profits (pdf) which choked off growth.

Secondly, Keynes “paid even less attention to monopoly power than some of his neoclassical colleagues.”* The possibility that capitalists or bosses would use this power to extract massive rents eluded him. (Again, of course, Kalecki was his superior on this point).

Thirdly, Keynes saw the problem of capitalism as basically one of cyclical swings which are remediable by a few levers of macroeconomic policy. This might have been true once. But as Michael says, it’s doubtful now. Long-term stagnation might require different remedies.

One of these remedies, I suspect, lies in far greater worker democracy.  

Which brings me to a fourth problem. In a sense, Keynesianism was profoundly conservative. In believing that technocratic governments could provide workers with decent wages and full employment, Keynesianism did away with the need for industrial democracy: one of the achievements of Keynes was to eclipse movements such as guild socialism. It wasn’t Keynes himself who said “the man in Whitehall knows best” but one of his disciples, Douglas Jay – and that encapsulated a key part of Keynesian ideology, its belief in top-down management.

Populism, of course, is a backlash against just this. That slogan “take back control” and the dismissal of experts represent a rejection of Keynesianism; the baby of decent macroeconomic policy is being thrown out with the bathwater of elitism. It’s far from clear that Keynesianism has the intellectual or political resources to fight back.

Now, at this stage we might channel Leijonhufvud (pdf). The Keynes I’m thinking of here is the capitalist-friendly one. But there’s another Keynes. There’s the Keynes who said that “a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment”. And there’s the one who argued in the best chapter in the General Theory that bosses do not and cannot know what they’re doing.

It’s this Keynes that deserves to have a lasting influence.

* Howard and King, A History of Marxian Economics voll II, p101.

Comments

[Jackart]

Worker democracy is as stupid and counterproductive as its political kind. Because people are mostly idiots. Countries however are strong, and people have no choice but to be part of one and so can survive people's idiocy. No-one will risk capital on a business run by workers and so a democratic business will (and have) failed more than normal Ltd co's.

Unless those workers are competent, in which case it's a partnership and LO! These exist.

You keep going on and on about this marxist nonsense. But there is no evidence that worker democracy works. Every time you mention bosses' incompetence, you don't sound like a dispassionate and intelligent writer, you sound like a brexiter, making up evidence against the EU. Marx had some insight into the problem of exploited workers. However most of his answers are utter bollocks. I find your continued adherence to this stupid faith endlessly disappointing as you're one of the few bloggers to have changed my mind.

[cjcjc]

1 - Does the UK not have pretty much full employment now? And equities are at all time highs (yes the domestic ones too).

2 - Under what circumstances would workers ever vote for layoffs?

[cjcjc]

PS of course bosses have (currently) access to an almost unlimited source of labour thanks to EU freedom of movement which both you *and* they are frightfully keen on...

[D]

Hi Jackart

What has Mr Dillow changed your mind on?

Really interested!

[Luis Enrique]

So does full employment actually choke of growth? If so, is it only capitalists that should have reservations about i

[aragon]

"Post-war Keynesianism broke down in the 1970s in part precisely for this reason: full employment squeezed profits which choked off growth."

The collapse of Bretton Woods in 1971/2, and the Oil Crisis in 1973/79, seem much more significant events in the 1970's.

https://en.wikipedia.org/wiki/Monetarism

"The rise of the popularity of monetarism also picked up in political circles when Keynesian economics seemed unable to explain or cure the seemingly contradictory problems of rising unemployment and inflation in response to the collapse of the Bretton Woods system in 1972 and the oil shocks of 1973. On the one hand, higher unemployment seemed to call for Keynesian reflation, but on the other hand rising inflation seemed to call for Keynesian disinflation."

[...]

"James Callaghan himself had adopted policies echoing monetarism while serving as prime minister from 1976 to 1979, adopting deflationary policies and reducing public spending in response to high inflation and national debt. He initially had some success, as inflation was below 10% by the summer of 1978, although unemployment now stood at 1,500,000. However, by the time of his election defeat barely a year later, inflation had risen to 15.4%."

https://thenextrecession.wordpress.com/2017/03/27/keynes-civilisation-and-the-long-run/

"here is not too much investment (business investment rates are low) and interest rates are near zero or even negative. The long depression is the result of too low profitability and so not enough investment, thus keeping down productivity growth. Low real wages and low productivity are the cost of ‘full employment’, contrary to all the ideas of Keynesian economics. Too much investment has not caused low profitability, but low profitability has caused too little investment."

Profitability is not the problem, but rent extraction is, and this is a consequence of the exclusive pursuit profit maximisation.

"We shall indeed all be dead if we do not end the capitalist mode of production. And that will require a revolutionary transformation. A tinkering with the supposed faults of ‘liberal’ capitalism will not ‘save’ civilisation – in the long run."

Well I have expressed before the view that technology will provide the impetus for fundamental changes in society.

https://www.theregister.co.uk/2017/03/28/robots_are_killing_jobs_after_all/

"Acemoglu said that as with past technological innovation, robotics is creating productivity growth. "What it is not doing is to create jobs," he said.
"There might be several reasons for this:

"We are still at the beginning of this process. It took several decades for the new spinning and weaving technologies of the British Industrial Revolution to start creating jobs and higher wages.

Many other technologies, such as computers, were displacing some workers but also complementing some other workers quite strongly (eg, computers were highly complementary to college graduates, middle managers and engineers). Robots may be less clearly complementary to existing sets of skills available in the workforce.

We may be facing bottlenecks in other areas that are slowing down the creation of new jobs.""

This is not allowing for:
The autonomous vehicles (driving jobs).
The Warehouse Robots (warehouse jobs).
The service destroying software bots (Hi Watson!), that cover everything from Journalism, to Law to Medicine.

Of course we have the Star Trek (or Asimovian), socialist utopia or the Star Wars, neo-feudalism distopia.

We do live in interesting times...

[aragon]

Asimov did have the conflict between the Earthers (neo-feudalism) and the Spacers (neo-socialist) utopia.

And it all started with the Foundation/Foundation and Empire/Second Foundation trilogy, based upon the Greeks.

What happened to Nuclear Power too cheap to meter.

Capitalist and compound interest happened making the Capital costs too great to sustain without (or even with) metering. It is not the running costs but the burden of Finance that killed the nuclear dream. Now the Greens want demand management of energy!

For how long are the public expected to endure the hair shirt?

Populism is the worm turning...on immigration and neo-liberalism/neo-feudalism.

[Ander]

You were compelling until you identified modern populism as the backlash against Keynesianism. Modern populism mostly preys on those left impoverished as Keynesian economics was undermined in the 80's and 90's- for example mining communities in the North of England and South Wales, or depressed holiday towns on the South Coast of England.

[Anarcho]

"You keep going on and on about this marxist nonsense. But there is no evidence that worker democracy works."

Seriously? There is a substantial body of evidence that shows that it works -- it works so well, in fact, that managers in companies that try it soon stop it (because they know that they are danger of loosing their jobs as they are no longer needed).

"there is a vast quantity of empirical evidence demonstrating that participatory workplaces tend to be places of higher morale and greater productivity than authoritarian workplaces." (David Schweickart , Against Capitalism, 228)

J.5.12 If self-management were more efficient then surely capitalists would introduce it?
http://anarchism.pageabode.com/afaq/secJ5.html#secj512

Although, of course, traditionally it was anarchists -- starting with Proudhon -- who raised the idea of workplace democracy, not Marxists. Indeed, Marx said nothing about it as one Marxist academic admits:

“Marx’s picture of life and organisation in the first stage of communism is very incomplete. There is no discussion of such obviously important developments as workers’ control. We can only guess how much power workers enjoy in their enterprises”. (Bertell Ollman, Social and Sexual Revolution, 65-6)

[aragon]

To be on topic:

I was referring to Neo-liberalism with regard to the worm turns remark.

But I do think that the Keynesian economist have made too many concessions to the Monetarists in order to achieve Simon Wren-Lewis's economic mainstream consensus.

https://en.wikipedia.org/wiki/Post-Keynesian_economics

"Modern Monetary Theory is a relatively recent offshoot influenced by the macroeconomic modelling of Wynne Godley and Hyman Minsky's ideas on the labour market, as well as chartalism and functional finance."

The reduction of Labour content in Goods and Services requires a fundamental rethink about economics. And a new economic settlement.

[TrumpisaJew]

lol, Star Trek wasn't socialist you fool, Star Trek was American style fascism. I am amazed at the stupidity of some of these posts, I mean, you people just don't get it.

Nor was there any "populist" backlash against "Keynesianism". Do you know what real populism is or the global elite fake ones they pedal?

[Peter K.]

Excellent blog post!

"TrumpisaJew," obnoxious troll. Go away.

[Keith]

There are complex issues here. To defend Keynes, he was obviously keen to present his macro as a technical fix so it would be as popular as possible with different sides of politics. As a liberal and academic he was appalled by violence and stupidity. So he had a strong bias towards dismissing the struggle of classes. His policy prescriptions are organised around demand management and productivity only enters on the assumption steady demand boosts productivity and so must be good for growth. He had a low opinion of actual businessmen as being blockheads, but had the same attitude to workers. If you assume there are no easy ways to increase productivity growth in the long term, that productivity is not under control of any one, then his concentration on short to medium term demand is perfectly reasonable. You could try to organise firms based on workers control but still find that over the whole economy productivity growth is the same.

The counter argument to the idea that workers would have too much power under the socialist scenario is to argue that bosses have too much power under capitalism and that reduces productivity as well.

Off course Chris is silent on the question of incomes policy. That is how centrist politicians such as Heath and Wilson aimed to maintain profits, growth and employment. The decision by both left and right to ditch incomes policy and regional policy led to huge unemployment and is a long term driver of UKIP and Brexit. It is the abandonment of keynes, beveridge and national economic planning which drives the so called populist politics. The social democratic system promised control of the economy for human ends and now we only have certain right wing anti EU obsessives willing to argue for a form of control. Off course without a radical change to a more interventionist policy neither trump or Brexit will deliver any control to the people who are attracted by them. The rejection of the policies associated with Keynes happened a long time ago and hardly constitute an explanation for current events. Rather I submit the current events vindicate the older interventionism. The sense of insecurity and instability of the post Social democratic period feeds populism and a certain kind of hysterical irrational reaction from segments of the population. Exploited by groups who were opposed to Keynesian policy and who helped to dislodge it.

[Jake]

I think one of the reasons for larger discontent is that the labour class feels that taking part in this system is essentially detrimental to their interests and that nothing has meaningfully changed. Power structures are still heavily biased against them. Its clearly visible in contemporary politics. The class of people responsible the most for the current predicament haven't been prosecuted the least. This powerlessness and feeling of worthlessness takes a heavy emotional toll on people collectively.Any opposition party has to recognise this and alongwith offering an alternative vision of society has to also offer justice.