Keynes and the search f

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ON ANOTHER page in this issue is an interview I did with Ken Livingstone, in which he argues for the Labour Party to make 'control of capital' the centre of its econ omic policy. I argue that this is an unsatisfactory halfway house.

A policy centred on controlling the City and the funds available for investment does tackle issues more seriously than the watered-down Keynesianism of official Labour-economic policy (borrow more, spend more). But, rigorously analysed, the difference is one between radical Keynesianism and watered-down Keynesianism, not between socialism and capitalism.

Keynes himself argued that "a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to tuli employment." But he insisted that his theory was "moderately conservative in its implications" , and complained that 'the difficulty is that the capitalist leaders in the City and Parliament are incapable of distinguishing i novel measures Ior safeguarding capitalism from what they call bolshevism."

Of course a 'control of capital' proposed as friendly advice to JINBORSHAN IT'S TRUE...

PRICES DO SEEM TO BE LOWER LATELY... John Maynard Keynes, the most influential economist of this century,' was born 100 years ago this month. Martin Thomas looks at Keynes's theory and argues that it cannot guide for the labour movement.

the capitalists (as it was by Keynes) is different from 'control of capital' proposed as a first step in a struggle by Labour against them. But if we look at the theory in more detail, I think we will see that Keynes was right about it being "moderately conservative' , if about nothing else.

John Maynard Keynes was gadfly within the Establishment. First coming to fame in 1919 with a pamphlet that denounced the vindictive reparațions plan imposed on defeated Germany by the Allies as unworkable, he was active not only as an economic theorist but also as a journalist, civil servant, and political figure on the fringes of the Liberal Party.

PRICES!

Especially through his book, "'The General Theory of Employment, Interest and Money" (1936), he fundamentally shifted the focus and concerns of orthodox economics. ' By the 1920s orthodox economics had developed a whole theoretical system based on the balancing of supply and demand. The supply cost, per extra unit, of blouses or Bibles or whatever, increases, or does not decrease much, as more are produced. On the other hand, as the price of blouses or Bibles increases, demand for them declines fairly markedly.

At a very low price, demand would exceed supply, at a very high price, supply would exceed demand. A balance will be reached at that scale of production which puts supply cost equal to price. (For these economists, return on capital was always included as a necessary cost of production).

As for blouses and Bibles, so for labour. At a very high wage, everyone would be keen to work, but the additional production to be got by hiring an extra worker would not be sufficient to make it worthwhile. At a very low wage, demand for labour would be high but many workers would not consider it Keynes worth the trouble. Balance would be reached when the wage was just equal to the additional production got by hiring an extra worker, and just not high enough to persuade the idle and reluctant who remained jobless to offer themselves for work.

Cause

For an economist of this school, therefore, the only unemployment, (beyond the temporary getting stuck at too high a level. As Keynes put it, such an economist "may sympathise with labour in refusing to accept a cut in its money-wage... but scien tific integrity him to declare that this refusal is, nevertheless, at the root of the trouble.

For orthodox economists the early century, then, unemployment was a quirk, a disturbance due to some abnor swivelled whole theory round so that the question of unemployment became central.

Ine ortnodox cneory declared that supply and demand must balance because "supply creates its own demand". Wher goods are produced, the amoun added to 'via the extra

goods is equal to the amount

added to demand via the wages, profits, etc., of the people involved in the production.

The economists conceded that people might not spend all their income. They might save. But the deduction from demand due to those savings would be exactly balanced by an addition due to investment in machinery and equipment. The supply of funds from savers, and the demand for funds from industrialists seeking to buy new equipment, would be balanced by movements of the rate of interest in just the same way as supply and demand for goods was balanced by movements of their prices. If savings were going to exceed investment, then the rate of interest would fall to make saving less attractive, and borrowing to invest more attractive.

"Ought I, then, to join th ly that is attractive. But I great difficulties. To begi and the class is not my cl sectional interests, I shall comes to the class strugg personal patriotisms, like cept certain unpleasant ze my own surroundings. I c seems to me to be Justic class war will find me on bourgeoisie"

' In this theory, as Keynes put it, "money makes no real difference except frictionally." It figures only as a convenient token to facilitate exchange, not as a store of value.

Keynes looked more closely at the role of money. The rate of interest, he argued, regulated not the balance between savings and consumption but the balance between the desire to hold cash and the attractiveness of interest-bearing assets. To equate savings and investment was not so simple.

Unemployment could thus arise as follows. Investment in machinery and equipment, Keynes argued, was determined by the relation between expected profit rates on such investment and the rate of interest.

These expected profit rates, he thought, were generally low in mature capitalism (because he explained profits as being due to the 'scarcity' of capital:

as capital became more plentiful, profits had to decline).

And at any shock expectations would fall lower still.

Result: a decline in investment. And closely following on that decline would be an increase in the general desire to hold wealth in the form of liquid cash, whether for motives of caution or for speculative motives. The rate of interest would be forced up, accentuating the decline in investment.

The decline in investment would lead to much bigger decline in overal effective demand, and therefore in employment, through a process which Keynes called the "multiplier'. £l million less demand for equipment, for example, would mean *1 milion less e Labour Party? Superficial ooked at closer, there are in with, it is a class party, ass. If I am going to pursue I pursue my own. When it ¡e as such, my local and those of everyone else, excalous ones, are attached to an be influenced by what e and good sense; but the. i the side of the educated J.M. Keynes, 1925 incomes for workers and capitalists in industry.

That in turn would mean less demand for the consumer goods otherwise bought by. those people. Suppose they would have spent 80% of the £l million on consumption, and saved the rest. Then there is a loss of £800,000 in demand for consumer goods.

That in turn means a further £800,000 loss in incomes; and, following from that, yet another loss in demand, £640,000 this time ... When the process has worked itself through, then in this example the total loss of demand is £4 million. And there is a corresponding loss of jobs.

Keynes argued that savings were determined not so much by the rate of interest as by income.

The balance between savings and investment would thus be

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Keynesianism in practice? Union/management joint production teams were established in Britain during World War 2 or a planned capitalism The Stock Exchange: pillar of market harmony, or seat of potential "On the economic front, this period [192840] saw the theories of John Maynard Keynes provide the sound intellectual framework for the views which trade unionists had always instinctively held and (From the official History of the TUC)

BONUS Chicago struck, not by movements of the rate of interest, but by a reduction of overall income and employment.

There are counteracting factors. Prices and wages would fall, thus reducing the amount of cash needed for current transactions, easing the pressure on the rate of interest and allowing it to fall. But Keynes saw no reason to suppose that the rate of interest would necessarily, fall low enough to push investment up to a level allowing full employment.

"So, failing some novel expedient, there is no answer to the riddle, except that there must be sufficient unemployment to keep us so poor that our consumption falls short of our income by no more than the equivalent of the physical provision for future consumption which it pays to produce today."

What. "novel expedients" did Keynes propose? A willingness by central banks to increase the supply of money in times of downturn, and thus to keep the rate of interest low, would help. l'hat would not however be sufficient on its own. The state nust undertake additional crisis? nvestment. If it does so, the snob in his political views. multiplier works the other way. Against Marxism he wrote: El million extra spent by the 'How can I adopt a creed which, state will produce £4 million preferring the mud to the fish, total boost to demand, and a corresponding boost to employ- above the bourgeois and the ment. intelligentsia...?" Against the For the state to 'overspend' is Labour Party his chief complaint not therefore folly: in a slump it was the importance within it of is the wisest policy. 'the trade unionists, once the oppressea, Value whose As the "scarcity-value of pretensions need to be bravely capital" falls, the state would opposed." gradually have to take a commanding role in investment. main leaders of the labour moveThis would, however, preserve ment embraced Keynes-s theormuch of capitalism; it would, ies so eagerly. Here was a resindeed, be 'the only practicable pected man of science giving means of avoiding the destruc- support to the view that wage tion of existing economic forms cuts were not the answer to in their entirety" by socialism. unemployment, and support to Keynes was something of a their demands for public spendknown to be right". ing. Here was an alternative to the assaults of the Tories, free from the horrors of revolutionary exalts the boorish proletariat Fatal So easy! But is it? Keynes's system has some fatal theoretical faults. The "scarcity of capital" view of profit rests on a is not equipment. Capital is a social relation: wealth derived from Yet it is easy to see why the exploitation of labour in the past, as a power able to exploit labour in the present. By its very nature it is in perpetual movement through different forms: from money to machines and equipment to stocks of commodities to money again. As capitalism lurches through crises, there will be "excesses" of one form of capital, "shortages" of another.

But the abundance or scarcity is always relative - and likely rapidly to turn into its opposite.

Marx, like Keynes, saw a tendency for the rate of profit to fall. But Marx's theory of this tendency was located in the social workings of capital itself — its tendency to expand faster than the living labour which provides it with profits - and not, like Keynes's theory, in the idea of a natural limit at which capital loses its "scarcity value"

At other crucial points, too, the Keynesian theory appeals to supposed "given facts" from outside the theory to explain economic relations, where it should be explaining how economic relations mould those facts. The key variables in the short-term Keynesian analysis are people's propensity to consume, inducement to invest, and preference for holding ready cash rather than interest-bearing assets.

The analysis tails off into psychological speculation: and here Keynesianism betrays its roots in previous orthodox economic theory, which held that the economic balance of society was the automatic product of the interaction of the 'given facts' of people's psychological preferences for this good against that, for leisure against reward, and for present consumption against future profit.

While Keynesian economics puts the economic role of the state in the limelight, it contains no theory of the nature of the state. Again, instead of economic theory explaining the behaviour of the state, the behaviour of the state is called in as a given fact from outside to explain economic tennons.

Keynesian theory is inherently short-sighted, if only because it takes institutions and the behaviour of its fundamental psychological variables as more or less fixed: Keynes himself stated that the theory did not cover 'abnormal or revolutionary circumstances.

Moreover, it is a theory which takes a national economy as its basic unit, in an epoch when capitalism is increasingly an integrated international system. Considerations about foreign trade, capital flows, and so on can easily be added to the Keynesian scheme (and indeed Keynes himself was an expert on international trade and chief architect of the post 1945 Bretton Woods system) - but the international framework is an extra factor tacked onto the national unit, rather than being the starting point for analysis.

Keynes's theory thus fell very far short of scientific thoroughness. It was a rationalisation through a brilliant mind, of the increasing role of the state forced on capitalism development.

The most through putting into practice of Keynes's recommendations came not through the bright idealists of the New Deal but through the hard-faced men who administered the war economies of 1939-45. When the labour movement embraced Keynes's theories, it tied itself to the chariot of state capitalism, not socialism.

Bloodless

During the '50s and '60s a bloodless version of Keynesianism - running adjustments to monetary, tax, and state spending policy, with a view to smoothing slumps and booms -became capitalist orthodoxy: Most economists proclaimed that such adjustments could guarantee indefinite prosperity.

They didn't; and on close examination the adjustments of the '50s and '60s seem to deserve little of the credit for the relative stability then. More than the Keynesian public spending policies permitting capitalist prosperity, it was a matter of the capitalist prosperity permitting the public spending policies.

From the late 1960s capitalism has lurched into stagnation and acute instability because of a general decline in its rates of profit and decrease in the viability of its international trading and financial arrangements.

'Keynesian' public spending can still prompt limited economic upturns. But they bring with them a long list of problems for the capitalist state.

Profits do not come from the natural "scarcity value" of capital: they are an expression surplus value, the value produced by labour in excess of the amount paid in wages.

Deduction

Public spending is a deduction from that surplus value. it therefore tends to reduce profits. Capitalist states with high public spending tend. to lose out in international competition.

Increased public spending and increased employment strengthen workers' fights for higher wages. In a situation where capitalists are desperately striving to reverse a fall in their profit rates, that means they generally respond by trying to outstrip the higher wages by higher prices. There is an inflationary spiral. Public spending boosts also push up prices directly. Inflation and low interest rates are liable to lead to balance of payments problems. In the current chronically unstable financial situation of international capitalism, these problems are serious.

For the capitalist classes now, cuts in public spending and in employment are a class-war policy to beat down the working class and restore profit rates. Keynes recognised the class struggle - but as something separate from his economic theory, which started from supply and demand relations between individuals.

The milk-and-water version of Keynesian policies in Labour's 1983 manifesto would not work even according to Keynesian reckoning. Keynes stressed the need for an inferventionist government to maintain 'business confidence": if it didn't, a decline in private investment would probably cancel out the increased state spending. The manifesto policy would mess up the capitalists' way of running things without replacing it with a coherent alternative way.

State

A more radical Keynesian policy of 'control of capital' could keep investment high. but the capitalists would not loutside a war economy) willingly accept it. A movement strong enough to force it on them would be disastrously ill-advised to stop at that half-way house of 'control of capital'. 'Control of capital', actively opposed and sabotaged by the capitalist forces who would retain ownership and control in industry and in the state machine, would lead to chaos. Amidst that chaos the reserve forces of the capitalist class - the courts, the House of Lords, the monarchy, the police and army hierarchies -would organise for the overthrow of the Labour government.

Our programme must be, not state control and regulation of capital, but the replacement of capitalist relations with common ownership and workers' control.

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Socialist Organiser June no.136

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