Stumbling and Mumbling

Symptoms of stagnation

This morning, I got a call about my recent road accident, which of course I never had. Which highlights an important fact – that capitalist stagnation is not merely about arid aggregate data on flatlining productivity, real wages and business investment but about everyday life.

If the cold calls aren’t about non-existent accidents, they’re about my computer viruses, unpaid tax, my pension, or the impending disconnection of my broadband. Fraud and mis-selling are on the rise.

Why? Because in a world of secular stagnation there are fewer legitimate business opportunities – which diverts some entrepreneurs towards crime. Of course, some people are wrong’uns who’ll be fraudsters anyway, and some are moral paragons who never will be. At the margin, however, costs and benefits determine behaviour and so stagnation promotes fraud.

This is by no means the only manifestation of stagnation. We see another in financial markets.

Historically, high asset prices have been a sign of optimism and of confidence in economic growth: investors piled into railways stocks in the 1840s or internet shares in the 1990s because they wanted part of a bright new future. The bubble of the 1920s, wrote J.K. Galbraith, was fuelled by “boundless hope and optimism”. High prices today, by contrast, are a sign of pessimism. The valuations of US big tech betoken a belief that monopoly power – that enemy of economic growth – is here to stay. And the (now-deflating) boom in crypto-currencies was (is) founded in part on the view that people would lose faith in fiat money – something only likely in a severe economic and political crisis.

The housing crisis is another pessimism-driven boom. The lack of alternative profit opportunities is diverting activity to property speculation, and the low interest rates caused by stagnation are the main reason for soaring prices. This leads to a vicious circle. Because housing is so expensive, youngsters have less to spend on other things, which further entrenches stagnation. And not just economic stagnation, but cultural stagnation too. Musicians and artists used to be able to live rent-free and so had the leisure to cultivate their craft. Now, they can’t. As I’ve said:  

Cheap housing gave us Blondie and Philip Glass. Expensive housing gives us Mumford and Sons.

Which isn’t the only way in which stagnation breeds a turn away from meritocracy. When industries expand rapidly, they create opportunities for people from humble backgrounds. The post-Big Bang boom in finance meant that an oik like me could get a decent job. Similarly, the growth in journalism in the 50s and 60s sucked in working class people, as did the booming tech sector in the 90s. When industries stagnate, however, opportunities are fewer so employers can be fussier about whom they hire – and that means excluding bright people from poor backgrounds. The careers of Dido Harding, George Osborne and Gavin Williamson are the tip of an anti-meritocratic iceberg.

Stagnation of course also has political effects. If the overall economy is stagnating, then for every area that’s improving, others are declining. Justin Webb (1’32” in) says towns like Batley and Hartlepool are “hankering after past glories.” Which echoes Will Davies’ point that voters are on an “unhappy, angry quest for something that had been mislaid.” Hence the disillusionment with mainstream politicians. One of Webb’s interviewees says:

Mill towns are all dying…there’s no real industry here…you could spend billions here and there’d still be no jobs…Politicians talk a good game but deliver nowt.

Traditionally, this has been fertile ground for the far-right. Markus Brueckner and Hans Peter Gruener conclude that, across Europe, “lower [economic] growth rates are associated with a significant increase in right-wing extremism.” Which of course vindicates Ben Friedman’s finding:

The history of each of the large Western democracies – America, Britain, France and Germany – is replete with instances in which [a] turn away from openness and tolerance, and often the weakening of democratic political institutions, followed in the wake of economic stagnation that diminished people’s confidence in a better future. (The Moral Consequences of Economic Growth, p8-9)

The symptoms of this aren’t all as innocuous as Churchill-worship and flag-waving. They include the manufactured attacks upon “wokesters” and support for a government which is attacking basic rights to protest and even vote. And of course Brexit. As Thiemo Fetzer has written:

Leave supporting areas (and leave voters) clearly stand out by being more deprived, having lower levels of income and life satisfaction, less access to high status-jobs, and living in areas with overall weaker economic structure…the critical mass of voters that tipped the referendum in favour of Leave did not do so out of an ideological opposition to the UK’s EU membership, but as a protest against the status quo.

All of which vindicates our old friend:

The mode of production of material life conditions the general process of social, political and intellectual life. 

Which is why I can’t support the de-growth movement. Shifting from (say) 2% to zero trend growth isn’t merely a small difference in degree. It has all manner of cultural and political effects, many of them unpleasant. And of course, there is a constituency which supports this – not just financial and political grifters, but social conservatives, (some) home-owners and parts of financial capital which profit from the ultra-low interest rates caused by stagnation.

What we need is an alternative to this – one which sees that the cause of many of our social and political problems is capitalist stagnation, and which offers an alternative to this. This need not be a very leftist programme: it should reprise Blairite themes of modernity, hope and optimism. Such a project, however, requires an opposition – which we do not have.

The right's intellectual decline

It is sometimes through small windows that we can see a big picture. So it is with the Times’ recent attempt to compare how other songwriters match up to Bob Dylan as a poet.

The thing here is that if I were looking for rivals to Dylan on this point, I’d not look to David Bowie or Joni Mitchell, much as I love them, but to Dar Williams, Jolie Holland, John Prine, Josh Ritter or the incomparable Townes Van Zandt.

That the Times didn’t do so, preferring more famous names, is an insight into a bigger feature of the latter-day right – that it has a very narrow cultural and intellectual palette.

I don’t mean by this that they are uncultured and ill-read: many are far from it - although Nigel Farage has boasted of not listening to music or reading books. Culture, however, is not merely a consumer good. It is something that creates us. Even a big diet of political biography or second-rate literary fiction need not create very much.

What I do mean, though, is that there seems to have been a decline on the right in its intellectual referents.

Thatcher, for example, would often pepper her speeches with talk of Hayek, Popper or Friedman. And that wasn’t mere showboating: such men formed her worldview. It is not at all clear that Johnson has any equivalents (at least not since Juvenal) or even that he and his colleagues are interested in acquiring any*. 

We see this too in the right’s attitude to Marxism. It uses this merely as a boo-word, oblivious to Marxism’s intellectual content. Contrast that to my formative years, when the right could call upon thinkers who had seriously engaged with Marx such as Kolakowski, Berlin or Hollander**.

A lack of interest in Marx is part of the right’s indifference to economics generally. As Stian Westlake has said, “Tories, both in government and more generally, seem to have stopped talking and thinking about economics.” That’s an astounding change since my formative years when think-tanks like the IEA or Adam Smith Institute provided at least intellectual energy***.

Which is part of a wider philistinism: yes, dear reader, economics, done properly, is a cultured science. One example of this was the government’s advice that ballet dancers take up careers “in cyber.” I suspect very few government ministers know how to code, but they know that it is Not Art and therefore a Good Thing. The crassness of that advert was not, however, the nadir: new depths have been reached by the “strong Britain, great nation” song and the ahistorical motive behind it.

Such philistinism is also evident in the government’s taking a “wrecking ball” to the music industry by failing to support technicians though Covid and by putting barriers in the way of touring.

And it’s evident in the attempt to suppress academic freedom. Thatcher disliked universities because they were part of the public sector. This government dislikes them because of the sneaking feeling that they might contain intellectuals.

Which is one reason, I suspect, why it is so keen on culture wars. The problem with debates about economics, welfare policy, foreign affair and so on is that you need some knowledge to participate in them. Culture wars, however, have no such barriers to entry. Hence the endless parade of gobshites on LBC, TalkRadio and GB News: yes, the latter has had an expert guest, but this greeted on Twitter in the same way that people share videos of a dog doing a cute trick.

Now, you might object here that I’m being unfair in singling out the Tories. To some extent, I am. The intellectual decline of the Tory party is part of a general decay of intellectual standards in public life. Where, for example, is the Labour equivalent of Tony Crosland today?

What’s notable, however, is that the Tories’ philistinism is electorally successful. Their appeal now is largely confined to the uneducated. YouGov estimate that in the 2019 General Election voters with degrees or higher qualifications split 43-29 per cent in favour of Labour over the Tories, whereas among those with GCSEs or less, the Tories led Labour 58-25 per cent. And today, satisfaction with Johnson’s performance as PM is far higher among the uneducated than among graduates. Dominic Grieve has a point when he says that “sophisticated” voters can see that Johnson is a charlatan.

Of course, this difference is partly a function of the fact that the Tories appeal is to the old who tend to have fewer qualifications. But the scale of this age difference is also a new phenomenon. In the 1987 general election, for example, The Tory lead among over-65s, at 14 percentage points, was only a little above its six-point lead among 25-34 year-olds. And of course back then, the Tories had big support among graduates, not least because having a degree was associated with higher income.

The issue here is not that John Stuart Mill was right to claim that “stupid people are generally Conservative.” Intellectual ability is an over-rated virtue in politics. If we listen to them properly – that is, not through phone-ins or focus groups - lay people have important and useful things to say. And of course, being educated in one field is no protection against being an idiot in others.

Instead, the point is that the Tories’ appeal to the uneducated whilst alienating graduates puts them on the wrong side of history, given the trend towards increase educational qualifications. A party which, in Will Davies words, “refuses to see any value in the next generation of employees and citizens” doesn’t deserve a future, and it might not have one.

* I exempt Jesse Norman from this charge, although the link between his intellectual work and his political career is not wholly obvious.

** Although when I read The Open Society and its Enemies, I was actually struck by how little animosity Popper displayed towards Marx.

*** Though not perhaps from the days of Alec Douglas Home.

"Heterodox" economics as rediscovery

One of the perils of growing old is that you get that jaded “seen-it-all-before” feeling. Which is the reaction I have to so-called heterodox economics. What you youngsters call ”heterodox economics” is what I call “stuff I remember learning in the 1980s”.

Which is not to denigrate it. Quite the opposite. It is the rediscovery of old truths which were forgotten after the late 80s.

Here are some examples of what I mean.

First, Lance Taylor and Nelson Henrique Barbosa Filho complain that standard inflation theory “leaves out social conflict”. But the account of inflation I learned in the 80s put class conflict centre stage. “Conflict over the distribution of income affects the general level of prices in advanced capitalist economies” wrote Bob Rowthorn in his 1977 paper Conflict, Inflation and Money which as good as introduced the Nairu. And in the Layard-Nickell model, the Nairu is the unemployment rate necessary to bring peace in “the battle of the mark-ups.”

One implication of this is that controlling inflation needs more than technocratic monetary policy tightenings, which only cut inflation by raising unemployment. It also requires changes in property rights to overcome class conflict. James Meade and Martin Weitzman, for example, proposed capital-labour partnerships which would give workers significant shares of profits and so mitigate wage militancy. This was hinted at by William Beveridge in 1944:

If…it should be shown by experience or by argument that abolition of private property in the means of production was necessary for full employment, this abolition would have to be undertaken. (Full Employment in a Free Society, p23)

It’s no accident that this view was totally forgotten when capitalists triumphed in the battle of the mark-ups.

Beveridge’s Full Employment in a Free Society saw something else that was subsequently forgotten and is only now being rediscovered – that the purpose of fiscal policy was not to balance the books but to ensure full employment:

It must be a function of the State in future to ensure adequate total outlay and by consequence to protect its citizens against mass unemployment.

Which illustrates Randall Wray’s point (pdf):

The main principles of functional finance were relatively widely held in the immediate postwar period. However, with the rise of the Phillips curve, the return of the Quantity Theory, the development of the notion of a government budget constraint, and accelerating inflation at the end of the 1960s, functional finance fell out of favour.

MMT is largely a rediscovery and repackaging of functional finance.

These are not the only examples of the Great Forgetting. Back in the 80s, macroeconomic modelling was about building structural models based upon econometric estimation of relations between macro variables. This was supplanted by dynamic stochastic general equilibrium models based upon microfoundations - usually, where the foundations were mythical rational representative agents rather than anybody you’d meet in the real world.

But these models have failed – either to predict the economy or to explain it, as Servaas Storm points out in a brilliant essay. Sure, later generations of such models have added real-world features, but Joe Stiglitz says these are like adjustments to Ptolemaic epicycles – attempts to fix a faulty theory with increasingly awkward patches.

Which means there is a place for structural models we had in the 80s. Yes, these have wonky microfoundations and it’s not obvious that they have a great predictive record. But as Simon says, they can do a better job of highlighting important relationships and mechanisms. Perhaps this is an example of something Robyn Dawes said – that improper (pdf), rough and ready models can do a decent job. Maybe they are like old cars – prone to breakdown, but easier for a reasonably skilled person to fix.

I’ve another example of the Great Forgetting – the Cambridge capital controversies. These showed that there were grave problems with the ideas of an aggregate production function and a marginal product of capital. One problem is that you can only aggregate different capital goods by adding up their prices, but these prices are a function of how much they could produce, so we have circular reasoning*. A second problem was noted by Sraffa – that a marginal product can only be discovered if things change, which doesn’t happen in equilibrium:

The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the ‘proportions of the factors of production’ there can be neither marginal product nor marginal cost. In a system in which, day after day, production continued unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost of a product) would not merely be hard to find - it just would not be there to be found. (Production of Commodities by Means of Commodities, pv)

Herbert Scarf noted a further problem – that marginal products require there to be constant returns to scale, but:

If production really does obey constant returns to scale, there is nothing to be gained by organizing economic activity in large, durable and complex units; in short, there is no economic justification for the existence of firms.

All of which means that, as John McCombie and Marta Spreafico say (pdf):

the marginal productivity theory is deeply flawed empirically and cannot, as a matter of logic, be substantiated theoretically.

Casual empiricism tells us that wages don’t equal marginal product for individuals simply because they differ in their bargaining power. And given these problems with aggregate production functions, it’s hard to see that marginal product theory applies (pdf) to aggregates of people either.

All this however was largely forgotten after the 80s. As Geoff Harcourt has written:

When theories of endogenous growth and real business cycles took off in the 1980s using aggregate production functions, contributors usually wrote as if the [Cambridge capital] controversies had never occurred and the Cambridge, England contributors had never existed.

In the same vein, Greg Mankiw tried to defend (pdf) the high incomes of the 1% by invoking marginal product theory, oblivious to these issues.

Which is all the weirder because, as Robert Solow replied (pdf) to him: “economic rents are pervasive…it is too nonchalant to presume that all market incomes reflect true productivity.” Indeed, one development of recent years has exactly been growing interest in the importance of rent extraction – highlighted by the work of researchers such as Lindsey and Teles, Thomas Philippon, Brett Christophers, or Jan De Loecker (pdf) and Jan Eeckhout (pdf).  Which returns us to a theme of Joan Robinson – that the economy is dominated by imperfect competition and must be analysed (pdf) as such.

Of course, my account here is a little stylized. I don’t like talking about “mainstream” economics because it is often a straw man. But I think I’ve outlined a tendency for there to have been a Great Forgetting after the 80s, which a younger generation is reversing. But should this generation call themselves “heterodox”? On Twitter, Peter Doyle has suggested not. I agree. Perhaps we should regard the Great Forgetting as the aberration in economics, and the rediscovery of an economics as an empirical-based intellectual tradition as a restoration of normality.

* When Ian Steedman taught international trade theory at Manchester in the 80s, he refused to use the word “capital” in two-factor models, because he thought the notion of aggregate capital absurd.

Johnson's appeal

A few days ago on Twitter I asked why so many people are happily complicit in Boris Johnson’s dishonesty. Based on a small focus group – which is as scientific as any other such group – here are a few theories.

First, Johnson exudes a sunny optimism – in Tom McTague’s words, “an all-encompassing belief that things will be fine” – encapsulated by slogans such as “Get Brexit done”, “level up”, “Global Britain”, and “build back better”. This contrasts with the Guardian’s endless list of complaints about the country, and with the nay-saying fiscal conservatism of the May government: one Tory friend of mine describes Philip Hammond as a “ghoul”. Nobody likes a whiny little shit; they prefer the optimist.

You’ll object here that Johnson achieves this optimism by ignoring details such as the Irish border trilemma. True. But detail is for wonks – what Johnson calls fact-grubbers. Most people don’t pay enough attention to politics to fret about detail; their analysis goes no deeper than Laura Kuenssberg’s. So big-picture cheerfulness sells. What worked for Ronald Reagan works for Johnson.

Allied to this optimism is a form of liberality. Matthew Parris in the Times reminds us that the politician whom Johnson sees as his polar opposite is Hillary Clinton. What marks her out is her censoriousness, her desire to police the “racist, sexist, homophobic, xenophobic, Islamophobic” language of the “basket of deplorables”. By contrast, his supporters see Johnson’s serial political incorrectness not as a licence for racists and homophobes (which many of them are not) but as an endorsement of free speech against the “wokesters” who want to police our language. He gives us, says one friend, a “licence to relax.”

Of course, the idea that Johnson is striking a blow for freedom is a fiction. His government is restricting the rights to protest, to migrate and even to vote whilst empowering the security services to commit crimes. But remember, people pay little attention to detail. What they see is an image of somebody standing up for freedom.

What’s more, Johnson has assets that mitigate his serial dishonesty. One is that he doesn’t preach. In the 90s, Tories’ dishonesty and slightly rickety sex lives were a liability because they made them appear hypocritical in light of John Major’s “back to basics” campaign. Because Johnson has never pretended to be a moral paragon, he appears not as a hypocrite but as a loveable rogue. He is like your rugby club team-mate boasting about fiddling his expenses or tax return. Sure, he’s defrauding somebody. But it’s other people, so we laugh along. That contrasts to MPs’ expenses scandal, which took money from us. If you think all politicians are liars, Johnson’s transparent dishonesty is a breath of fresh air.

This is not the only way in which Johnson flouts the rules of normal politicians. He doesn’t pretend to be a man of the people by feigning an interest in football or popular music, as with Gordon Brown’s claim to like the Arctic Monkeys. He doesn’t wear the uniform of politicians, eschewing a well-fitting suit in favour of a Worzel Gummidge look. And he doesn’t pretend to have a command of the facts. He is comfortable in his own skin, in a way that some Labour leaders have not seemed to be.

And this is popular. Many people have had enough of technocratic politicians, whom they perceive as failures. Johnson is different. He provides a spectacle of grotesque chaos while laughing in the face of the normal order of things. He’s like punk rockers rebelling against the pompous prog rock that went before. And that leaves many of us feeling like Bob Harris*, befuddled by what seems to us to be an artless and charmless rejection of the rules we have become accustomed to.

In saying all this, I’m not claiming that Johnson is clever enough to have consciously capitalized on these sources of appeal. More likely, I suspect he is the lucky beneficiary of a political environment has selected for his schtick, just as the natural environment selects for accidental mutations or the business environment selects for strategies that entrepreneurs or investors have adopted without full knowledge of their consequences.

Nevertheless, the question arises: could the left emulate his success? In one sense, no. Whereas working class people can be lovable rogues – think of Jack Duckworth – only posh people can achieve wealth or power through this route. Johnson’s class is an asset: my mum thinks he is more educated than I am (which he’s not) simply because he talks proper. And of course the media would scrutinize leftist dishonesty much more carefully than Johnson’s lies. Life ain’t fair and the world is mean.

Also, we must guard against skating to where the puck has been. Just because the environment today selects for Johnson’s attributes does not mean it will continue to do so. 

Nevertheless, there are, I think, two things we should learn.

One is to not be priggish humourless moralistic whiners, but to present instead an image of fun-loving liberality. We must lighten up, drop the censoriousness and laugh more.

The other is the need for optimism. Remember that Barack Obama’s breakthough owed a lot to the slogan, “yes we can.” The left needs to show that it can somehow improve things: building on McDonnell’s economic agenda is one possibility here. And this requires not just policies, but the self-confidence to sell them. Johnson shows that politicians can succeed by not being scared of their own shadow. The left should learn from this.

* Harris actually coined the phrase “mock rock” in 1973, to describe the New York Dolls, a pre-punk band but my point holds.

On economic intuitions

Recently on Twitter Will Bott asked: “a piece of string is wrapped tightly around the Earth. In order for the string to be lifted an extra metre in each direction, roughly how much longer would it need to be?”

Less than half of respondents got this right*, and 37% were wrong by a factor of 10,000. Which tells us that our intuitions can be not just wrong, but wrong by orders of magnitude.

This is not the only evidence here. Shane Frederick has devised a cognitive reflection test – three questions in which there is an intuitive but wrong answer and a non-intuitive but right answer. He has found that even at the US’s top universities, less than half of students get all three questions right.

Which poses the question: if our intuitions can be so wrong, might people’s intuitions about economics also be wrong with adverse impacts on policy-making?

Yes. The most obvious example is the idea that the government’s finances are like a household’s and so governments must “balance the books.” You don’t need me to tell you this is nonsense.

Another, albeit less egregious example, is immigration. Intuition tells us that an increased supply of workers bid down wages and so immigration must be bad for workers. The truth, however, isn’t so simple because there are other mechanisms at work: migrant workers also add to demand; any incipient fall in wages raises demand for workers, or cuts prices or interest rates, and so on.

David Leiser and Zeev Kril show that laypeople interpret economics by using a “good-begets-good heuristic.” Which might explain attitudes to Brexit; if you think Brexit is a good thing for whatever reason, you’ll be inclined to think it good for the economy too.

Of course, all this is old hat. Back in 1850 Frederic Bastiat warned against relying upon our intuitions because the economic mechanisms which we see are only a few of those that actually operate. And more recently Bryan Caplan has argued that irrational voters systematically misunderstand economics:

Compared to the experts, laymen are much more skeptical of markets, especially international and labor markets, and much more pessimistic about the past, present, and future of the economy. When laymen see business conspiracies, economists see supply-and-demand. When laymen see ruinous competition from foreigners, economists see the wonder of comparative advantage. 

But, but, but. The public’s intuitions are not always wrong. Leiser and Kril say that one example of the good-begets-goo heuristic is that people think that a good thing such as falling unemployment is associated with another, such as lower inflation. That contradicts the Phillips curve. But it’s not a catastrophic interpretation of the 2010s, when joblessness declined in the UK and US whilst inflation also stayed low.

Similarly, right-wing economists have for years objected to the public’s intuitive support for minimum wages and rent controls on the Batiatian grounds that these have unseen adverse effects. We now know, though, that such effects are small. Arindrajit Dube summarized the evidence as pointing to “a muted effect of minimum wages on employment.” And J.W. Mason says “there is no evidence that rent regulations reduce the overall supply of housing.” (In both cases the reason is similar: the interventions offset monopoly or monopsony.)

Non-economists’ intuitions aren’t always terrible.

We’ve other evidence on this point. One is that yield curves are far better predictors of recessions than economists, who are essentially useless for this purpose.

The other is my chart. It shows that the ratio of retail sales to the All-share index has been an excellent predictor of medium-term equity returns. When spending is high relative to the index equities subsequently do well, and when spending is low they do badly.

This is partly evidence that equities over-react: the ratio of prices to a simple time trend can also predict returns. But it’s also because spending is partly forward-looking: we spend more if we expect good economic times – and these are times when equities do well.

Intuitions, when aggregated, can then be correct. Bond investors intuitions about future rates, and households’ intuitions about their future incomes, tell us something about future economic conditions that economists cannot.

Hayek and Polanyi were, therefore, right - sometimes. Our knowledge of the economy doesn’t consist only of conscious evidence-based propositions but also of hunches, gut feels and instincts – which are sometimes correct.

Which poses the question: when are intuitions right, and when wrong?

I’d suggest two criteria, which aren’t necessarily 100% reliable.

One is: are people backing their belief with real money? Bond investments and household spending decisions involve hard money. Voters’ opinion on fiscal austerity, by contrast, is not. And cheap opinions are more likely to be poor quality ones.

Another is: do the conditions for there to be wisdom of crowds actually hold? One of these is that opinions be uncorrelated. Except where there are strong peer effects, this is likely to be true of household spending decisions. But it is not true of attitudes to politically-charged questions such as austerity or Brexit, where the influence of the media (among other forces) generates correlated and incorrect opinion.

So, this is one area where we need triangulation. Sometimes, we should listen to laypeople’s intuitions and ignore experts and sometimes we should do the opposite. Our problem is that existing institutions do a bad job in selecting for when listen and when not.

* The correct answer is around 6m. You don't need to know the circumference of the earth to work this out. You just need to know that the circumference is equal to 2πr.

Full employment, capitalism - and beyond

Is genuinely full employment possible? And if it is, is it compatible with capitalism? These are questions raised by President Biden’s ambition for an economy where “employers have to compete for workers.” This, he hopes, will “give workers more ability to earn a higher wage” and “the power to demand to be treated with dignity and respect in the workplace.” This, he claims, “isn’t just good for individual workers, it also makes our economy a whole lot stronger.”

This might not be a purely American question. James Meadway has argued that a world of ongoing pandemic risk “is one in which the balance of power at work can shift dramatically back in favour of labour.”

Certainly, there’s a precedent for por-worker policies making economies a whole lot stronger. In the 50s and 60s western economies had fullish employment (for men at least). And profit rates and equity returns were good: the S&P 500 for example delivered a real total return of 9.1 per cent per year between 1952 and 1972, which is even better than it has done in the last 20 years.

There are good reasons for this. Because workers tend to spend more of their income than billionaires, transferring cash to them can boost demand. The assurance of high demand can encourage firms to invest more. And the prospect of rising wages should incentivize them to invest in labour-saving technologies – things which can boost productivity. Through these mechanisms, everybody wins. This is what Marc Lavoie and Engelbert Stockhammer call wage-led growth (pdf).

But can we really return to the 1950s? One reason for thinking so is that anti-labour policies and low taxes in most developed economies have led to slower growth in both output and productivity. This fact, say Özlem Onaran Giorgos Galanis, suggests that wage-led growth is possible (pdf).

I have my doubts, however. As Steven Marglin and Amit Bhaduri – and the bitter experience of the 1970s crises - showed, cooperative capitalism is only one possibility (pdf). It is also possible that full employment will squeeze profit margins and depress animal spirits and investment, resulting in lower growth and the end of full employment.

The first thing to note here is that the full employment Biden has in mind is very different to that of the 50s and 60s. Back then, aggregate demand was high largely because of high private sector demand, in part because the war had created a backlog of demand for civilian capital goods; the federal budget was in rough balance for much of this time. Biden’s ambition for full employment by contrast is founded upon an expansion in public investment. That’s an admission that in a world of capitalist stagnation, the private sector won’t get us to full employment.

It’s theoretically possible, however, that public spending will stimulate private investment via accelerator effects.

There is, however, an offsetting mechanism. It’s that neoliberalism is performative; it creates behaviour as much as describing it. For the last few decades the ruling ideology has been that low wages and low taxes are business-friendly. Capitalists might well therefore regard a world of rising wages and higher taxes as a scary prospect, and so they’ll depress animal spirits and capital spending. Also, whilst in the 50s and 60s businesses had the technical skills to replace labour with capital, these skills might well have been lost after years in which the question for businesses has been of how to exploit cheapish labour: “robots taking jobs” is something which is much more discussed than observed – as indeed, the productivity stagnation demonstrates. Sustained high aggregate demand, then, might not be sufficient to kick-start productivity growth.

There’s another reason for doubt. Remember a basic national accounts identity for profits. By rearranging the facts that GDP is equal to both the sums of expenditures and incomes, we get:

P = (C – W) + I + (G – T) + NX.

This tells us that if consumption (C) rises as much as wages then – ceteris paribus – profits (and indeed the share of profits in GDP) don’t change. What capitalists lose in high costs they recoup in higher revenues.

For much of the 50s and 60s this was indeed the case. In the early 70s, however, C grew more slowly than W and so profit margins were squeezed: this was more pronounced in the UK than US. I fear this could happen again if workers use higher wages to reduce debt or simply if those higher wages result in the government clawing back tax credits. (There’s also the issue that, with economies more open now than in the 50s and 60s, higher wages will leak more overseas in the form of increased imports rather than domestic demand.)

Even if all my doubts are wrong, however, there’s another problem: do capitalists really want full employment even if it is compatible with decent profits?

One problem here was famously described (pdf) by Michal Kalecki:

Under a regime of permanent full employment "the sack" would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laisser-faire…But "discipline in the factories" and "political stability" are more appreciated by the business leaders than profits. Their 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.

The other problem is that recent years have in the UK and US seen a big increase in the influence of finance capital relative to that of industry. And whilst full employment might have been good for General Motors (it increases demand for cars) it is not so good for Goldman Sachs. Finance capital requires low interest rates both to support asset prices and to render profitable strategies of “picking up pennies in front of a steamroller.” Low rates, however, require a sluggish economy.

We’re already seeing fears of higher inflation, in the UK and US. Economists reply to this that there’s a simple solution to higher inflation – to raise interest rates or reverse QE. Technically, this is correct. But it ignores the class aspect – that higher rates jeopardize some powerful interests. And it also ignores the fact that higher rates reduce inflation precisely by increasing unemployment. We could square this circle by tolerating higher inflation; as Servaas Storm says, wage-led growth requires (pdf) loose fiscal and monetary policy. But one lesson of the 70s is that higher inflation can itself kill off full employment, not least by creating uncertainty.

Biden’s hopes for full employment are therefore a bold experiment. But what if they fail?

The answer is not to retreat back to regressive neoliberalism. Instead, as Marglin and Bhaduri concluded, we must “recognise the ultimate desirability of making accumulation independent of profitability”.  As William Beveridge wrote in 1944:

If…it should be shown by experience or by argument that abolition of private property in the means of production was necessary for full employment, this abolition would have to be undertaken. (Full Employment in a Free Society, p23)

Mainstream economists have long forgotten this – if indeed they ever knew it – and have discussed employment and inflation on the implicit assumption that capitalistic ownership is immutable. But it needn’t be. James Meade and Martin Weitzman, for example, thought the solution to the collapse of wage-led growth was to introduce a big dose of profit sharing between capitalists and workers. As long as firms’ aggregate revenues – wages and profits combined – are growing well, they (only might) have an incentive to expand.

Of course, a lot of work needs doing on the precise form such post-capitalistic ownership structures will take: it’ll vary from industry to industry and country to country. And it poses the question: what function do capital-owners actually fulfil?

But that’s my point. Biden’s talk of fiscal expansion, higher minimum wages and full employment shows that the left has won a lot of intellectual battles. But the ultimate battle – about who should own companies and how – has barely even started.