Download Keynesian, Monetarist and Post-Keynesian Policy: A Marxist Analysis

Bob Chernomas
Keynesian, Monetarist
and Post-Keynesian
Policy: A Marxist
Analysis
In this era of the "mixed economy," monetarists, Keynesians, and
post-Keynesians apply their different assumptions and analyses to the
impact of state interventions on capitalist economies. The objective of
this paper will be to assess through Marxist categories, orthodox
economic policies as solutions to the current stagflation. I
Given the constraints of Keynesians - that is, their "full employment" political mandate - our argument will be that they are
restricted to a continuation of stagflation. The Keynesian state has
only the power to change the form of the crisis from depressiondeflation to stagflation-inflation.
In monetarist arguments, the government is perceived as the source
of the crisis. Monetarists confuse the inablility of Keynesian policy to
deal with the crisis with the cause of the crisis. Since monetarist solutions to the accumulation crisis include an undermining of wages, the
full employment commitment, and social services, it is likely to be
connected to a legitimation crisis.
Given the above, an emerging post-Keynesian alternative to both
monetarist and Keynesian solutions to the current crisis will be explored. The post-Keynesians' recognition of the inadequacy of
Keynesian policy and ofthe dangers inherent in monetarist alternatives
suggest, that it is their policies that are most likely to govern future
capitalist efforts to overcome the current economic and political
quagmire.
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Crisis and Restoration in Marxist Theory
The purpose of a Marxian analysis of contemporary policy options is
to reveal their inner relationships, where the conflicts within orthodox
theory remain "atthe surface. The objective is to demystify that which
passes for the full range of insight into the crisis, that is, the
phenomenal form of response to the current crisis provided by the
various conventional economic perspectives.
For Marx, aggregated production can be divided into three components - constant capital (c), variable capital (v), and surplus
value (s) - where constant capital is the labour time embodied in the
means of production (materials, plant and equipment) used up in a
production period; where variable capital is the labour-time equivalent
of the subsistence bundle (real wage) necessary to reproduce workers;
and where surplus value (i.e., profits, rent, interest and some taxes) is
the portion of added value not distributed to its source, labour. The
ratio of the hours worked for capitalists (s) to the hours worked to
produce the subsistence bundle (v) is what Marx defined as the rate of
exploitation or the rate of surplus value (s/v). The ratio of the
embodied labour to living labour, as defined by Marx, is the organic
composition of capital (c/v).
The rate of surplus value is only a partial expression of the accumulation process. Capitalist concern is with profitability: this involves investment in the means of production (c) as well as in real
wages (v) with the intention of making profit. Surplus value (s), divided by total investment (c + v), is the way in which the rate of profit (n)
is calculated. It is this rate of profit that regulates the accumulation
process. The denominator represents capital used up in a production
period and the numerator is the residual fund out of which expanded
reproduction becomes possible (i.e., the maximum sum available for
accumulation and reinvestment).
It was Marx's contention that there is a peculiar tendency for the
rate of profit to fall because the organic composition of capital has a
tendency to rise faster than the rate of exploitation." Since labour both
conserves values and creates new values, the rate of profit falls when
an increasing fraction of total production consists of conserving the
value of capital, while a decreasing fraction increases the value of
capital.
In order to highlight the factors that directly affect the rate of profit
equation, both the numerator and denominator of the profit rate can
be divided by v:
n=
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s
c+v
slv
clv
+
slv
vlv
c/v+ 1
Bob Chernomas/Keynesian, Monetarist and Post-Keynesian Policy
This suggests that 1. the rate of profit is directly related to the rate of exploitation;
2. the rate of profit is inversely related to the organic composition of
capital;
3. a rise in the organic composition of capital without a compensating
rise of exploitation reduces the rate of profit;
4. a decline in the rate of exploitation without a compensating decline
in the organic composition of capital will cause the rate of profit to
fall.
For Marx, this "law of the development of capitalism" was essential
for understanding the concrete crises which periodically create mass
unemployment, inflation, deflation and stagflation, alternating with
growth and prosperity. As the rate of profit falls, investment declines.
Weaker and less-efficient firms are driven out of business because they
do not have sufficient profits to stay competitive or even to pay their
bills. Their capital is either destroyed or their assets are bought up at
lower prices, reflecting an overall decline in capital values. These
bankruptcies generate rising unemployment, weakening the position
of workers. Real wages tend to decline, while the labour process tends
to be intensified (by capitalists who need to lower production costs to
compete for the declining revenue). The rate of surplus value rises
because productivity grows while real wages are falling, shifting value
added from variable capital to surplus capital.
Declining capital values coincidental with a rising rate of exploitation raise the rate of profit because lowered capital values for older
capital and lower costs of production (c + v) on new capital, coupled
with a higher rate of exploitation (s/v), raise the rate of profit on old
and new capital alike. Higher profits in the hands of a diminished
number of larger firms make possible technological innovation and
economies of scale unaffordable and unattainable before the crisis.
The function of the crisis is to restore the conditions under which
accumulation can begin anew.
Keynesian Stagflation
The state's position in capitalist society is to ensure the survival of
capitalism, and this requires the maintenance of economic conditions
for capital accumulation as well as social conditions for legitimation. 3
While the state's economic interventions must be ultimately and fundamentally determined by capital's economic requirements, politically
threatening class struggle and ideological tensions affect the extent to
which the state can permit a "purifying" crisis.
Keynesians have believed that the mixed economy is capable of
abolishing unemployment and crisis, since crisis for Keynesians results
from imperfect information, uncertainty and the resulting ineffective
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demand. However, if the source of crisis is to be found in the sphere of
production, rather than in the sphere of exchange, efforts that focus
on demand management may postpone or alter the terms of the crisis,
or precipitate the crisis, but they cannot eliminate crisis because such a
state's recuperative efforts are mislocated. The Keynesian state may
theoretically, through its control over credit and demand management, precipitate a purifying crisis already established by the conditions in the sphere of production. However, its legitimation mandate,
conditioned the post-Great Depression period, blocks a "solution" to
the accumulation crisis. On the one hand, if the problem was just ineffective demand, the purifying crisis would not have arisen in the first
place; on the other hand, the legitimation mandate of the Keynesians
prevents the state from mobilizing the necessary counteracting tendencies to offset the law of the tendency for the rate of profit to fall. The
contradictory monetary-fiscal policies employed by the Keynesians can
be traced to their attempts to juggle the contradictory needs of
accumulation and legitimation.
The failures of the Great Depression and the "economic successes"
of World War II created a political climate where full employment became the responsibility of the federal government. The role of
Keynesian policy generally has been to use monetary and fiscal policy
to prevent the bankruptcy of financial and industrial firms, in order to
avoid depression levels of unemployment and the accompanying
potential threat to the social order.
It is characteristic of Keynesian macro-policy" to 1. smooth out fluctuations in the real interest rate;
2. subsidize weakened financial institutions;
3. make credit available to less-competitive, non-financial firms at
bargain rates;
4. use deficit spending to maintain "full employment" levels of
demand;
5. transfer funds between income groups.
However, if we assume that the falling rate of profit is operational,
then it becomes necessary for some combination of the organic composition of capital to fall and the rate of surplus value to rise. For the
organic composition of capital to fall, capital values must decline. For
this to occur (other things being equal) firms must be forced to sell out
below value. Under "free market" conditions, those firms that lack
profits or access to debt will be driven to bankruptcy because they cannot pay material costs, creditors and workers, nor secure the fixed
capital necessary to stay competitive. Their stock, a claim on future
shares of surplus value or profits, would be immediately depreciated as
would their now redundant fixed capital. Both would be sold below
value. As these firms cease to purchase materials and finished products
from other firms, the weakest of those firms go bankrupt, as demand
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for their products declines with their revenues. Chain bankruptcies
occur as capital depreciates, the credit system collapses, and the
money supply declines as part of it becomes redundant (Its value is
dependent on capital values). The slaughter of capital values proceeds
along with the declining organic composition of capital, rising
unemployment, and a rise in the rate of surplus value. The results are a
deflationary-depression, the collapse of the process of expanded
reproduction, and the falling off of real production itself.
The key factor here is that capital values need not decline nor capital
be restructured sufficiently unless the profitless firm is forced to sell
out or go bankrupt. However, the Keynesians, due to the requisites of
legitimation and their belief in underconsumption theory, provide
credit subsidization and, through deficit spending, demand for these
firms' products, thereby preventing their bankruptcy. The state sustains those firms that would otherwise go bankrupt, because the state
shifts credit, capital and demand to firms so they can pay debts, buy
equipment, and pay workers - in a word, remain liquid in spite of insufficient profits and revenue. These firms are a drain on the system as
a whole because capital and labour are shared with them, even though
they do not contribute to the profitability of the system, but rather require a further spreading out of the already falling profits available to
all firms. (Further, it is precisely the bankruptcy of these firms and its
effect on capital values, as well as the effect of resulting unemployment on the rate of surplus value, that are necessary to restore profitability.) The results are stagnation and inflation. There is no
slaughter of capital values if the state is forced to keep firms solvent
where their own financial power or economic efficiency could not. The
capitalist state in this case blocks capitalism's restorative mechanism
- the crisis.
Credit availability is essential for the reorganization and expansion
of a depressed capitalist economy. But to provide this accessibility to
credit prior to the euthanasia of unprofitable and less-productive firms
and their debt, prolongs the stagnation and requires even greater injections of debt to keep the sinking ships afloat. Instead of allowing the
market to reorganize, the Keynesian state keeps the marginal firms
afloat by pumping up the debt structure, thereby contributing to inefficiency, "inadequate productivity," and the declining general rate of
profit.
With the Keynesians in ascendancy, the state steps in and maintains
employment at politically acceptable levels through deficit spending
and an expanding money supply, thereby keeping wages above and interest rates below those which would exist if market discipline were enforced. As it becomes more difficult to maintain a high level of private
investment, government spending becomes necessary to maintain high
levels of demand and employment, but it does not solve the profitabili-
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ty problem. In essence the central bank can either allow deficit deflation and the likelihood of a depression, or it can provide credit and demand in order to prevent the collapse of the private economy. The
state can keep a non-accumulating capital from restructuring by
preventing the bankruptcy and collapse of capital values.
Keynesians "resort" to stagflation because they are unwilling or
unable to face a crisis of sufficient magnitude to resolve the accumulation problems or to use the state apparatus on an expanded scale sufficient to establish the conditions for a renewed expansion of accumulation. Stagflation is the alternative to "allowing the depression to happen" or to taking greater control over the actions of capital and
labour. This is made evident by the inability to sustain a tight money
and credit policy and the "indiscriminant" use of fiscal policy.'
The Keynesian-type subsidization of firms (e.g., Chrysler in the
United States) should not be seen in terms of the state's assistance in
restructuring, but rather in terms of the state's political commitment
to "full employment." Subsidizations that maintain the viability of
profitless, inefficient firms that are not essential to the resurrection of
profitable accumulation, but a barrier to it, represent the Keynesians'
legitimation mandate.
Keynesian policy represents an attempted solution to a crisis whose
contradictory basis is beyond the policy's capacity to resolve. The
"social contract" that this legitimation mandate was founded uponlabour peace in exchange for full employment and real wage growth has run up against an accumulation crisis. The economic basis upon
which the peace between organized labour, industrial capital and the
state had been built, now turns on weak and shifting sand. If the social
order is to continue, a new economic base must be built, with new
economic policies that do not precipitate a legitimation crisis.
A Monetarist Depression
In contrast to the Keynesians, the monetarist policy would better serve
the function of restoring conditions favourable for subsequent profitable accumulation." Where Keynesian policy has the effect of "promoting the law's tendencies" (by prolonging the profitability crisis),
monetarist policy "promotes the law's counteracting influences" (by
increasing the rate of exploitation). The limits to a monetarist solution
to the current crisis can be found, however, in the fact that the
monetarist policies come in direct conflict with the problem of
legitimation. This can be seen clearly in monetarist explanations and
corresponding policies for capitalist crises.
Monetarist explanations for capitalist crises depend heavily on
Milton Friedman's "candidate" for a full-employment concept - the
natural rate of unemployment. 7 The natural rate of unemployment is
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Monetarist and Post-Keynesian Policy
defined as equilibrium in the labour-market, where there is no excess
supply or demand in the aggregate for labour. Only at the natural rate
of unemployment are workers content with current and prospective
wages. Deviations from the natural rate occur, however, when there
are errors in expectations of the price level, and therefore of the real
wage. Government demand-creation induces unexpected changes in
the price level, lowering the real wage, and driving unemployment
below the natural rate. (Workers mistake their growing nominal wage
for a higher real wage.) When unemployment is driven below the
natural rate by excess demand, the excess employment produces an upward pressure on wages, eliminating the higher rate of employment
and any real long-range change in output. In order to sustain this level
of employment, the government must accelerate demand and inflation
if workers are to continue to misperceive their real wage. This situation
of inflation without change in real long-run output is a result of the
suspension of institutionalized "non-political" control over the
money supply. The gold standard has given way to control over the
money supply by political opportunists spending their way to reelection. A money supply growing faster than real output - that is,
excess demand - is the cause of inflation.
Monetarist explanations of depression also revolve around the
"natural rate of unemployment" hypothesis. If the unemployment
rate exceeds the natural rate, there would be an excess supply of labour
that would put downward pressure on the real wage. This circumstance arises when the government allows the money supply to
decline to the extent that there is an unexpected deflation of both
wages and prices. In this case, workers (e.g., those who were
unemployed during the Great Depression) withdraw their labourpower from the market place (voluntarily quit) because they equate
(due to imperfect information) their declining nominal wage with a
declining real wage; thus, they search for employment that would pay
them what they think they are worth (their reservation wage).
However, as soon as workers realize that the price level has fallen
along with their wages, the natural rate and the market rate of
unemployment will be restored to equilibrium and deflationaryexpectations will have been dampened.
Thus, it is the accelerated increase and decrease in the exogenously
controlled money supply that leads to inflationary expectations and
deflationary depressions, and not the workings of the free market. For
monetarists, unemployment is to be explained by exogenous forces
such as individual shortcomings, government disincentives, and inappropriate monetary policy - not as the natural outcome of a fully
operative market process; that is, the characteristics involved in
monetarist unemployment are generally individualistic and policy-
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made. The reason the natural rate is greater than zero in the current
period, they argue, is that some would-be workers have chosen to price
themselves out of the market, while unemployment compensation,
welfare payments, union wages (the result of government economic
and judicial support), minimum wages, and social services exacerbate
the problem by interfering with work incentives, wage flexibility and
labour productivity, prolonging search time. Unemployment is individualistic, voluntary, and government-generated, rather than
endogeneous to the system."
In addition to the disincentives for workers, "Keynesian
stagnation" is caused by the social security system, social services,
government bureaucracy, environmental controls and the progressive
tax system; all of these reduce the supply of savings available for
expansionary capital investment because they shift income away from
those (i.e., capitalists) who would save and invest. Government borrowing and taxes crowd out the private investment that leads to the
growth in capital stock necessary for economic growth, by disproportionately increasing the "unproductive" use of society's output for
consumption and profitless government bureaucratic activity.
For Marxists, crisis is not an exogenously determined departure
from equilibrating conditions, but the equilibrating mechanism itself.
Capitalism, through crisis, contains its own mechanism for increasing
the production of surplus value in proportion to the costs of production. Bankruptcies and mass unemployment lead to a restructuring of
capital and higher productivity, which in turn promote the reestablishment of the rate of profit and accumulation. The previous investigation of what Keynesian macro-policy has done to alter the
nature of the crisis suggested that Keynesians were capable, temporarily at least, of turning a potential depression into stagflation. The
monetarists are out to recapture, at least in theory, the governmentmarket relations that existed prior to the Great Depression. The
monetarist alternative - the elimination of Keynesian stabilization
policy - would allow us the unfortunate opportunity to watch
"Marx's Law" operate under the unfettered conditions assumed in his
theory. Monetarists believe in the full-employment, optimum-growth
and stable-price effects of an unfettered market system. Controllable
exogenous effects are to be jettisoned in order that the free market
may bestow its benefits.
Therefore monetarist macro-policy? would include 1. the targeting of the money supply (i.e., a gold standard or monetary
rule) rather than interest rates;
2. no subsidizing (direct grants, cheap credit) for less-competitive
firms;
3. balancing the budget - no deficit spending to maintain demand;
4. reducing the government budget as a share of Gross National
Product; 10
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Monetarist and Post-Keynesian Policy
5. suspending the progressive tax system and transfer payments,
thereby redistributing income upwards;
6. eliminating unemployment compensation, minimum wages and the
social security system.
A monetarist state, rather than being the saviour which postpones
or overcomes crisis, participates in the precipitation of the crisis.
Monetarist credit policy would introduce or re-introduce market discipline over the allocation of money and credit. The initially higher
interest rates that result from squeezing the money supply would
create a "credit crunch" for homeowners, small businesses, and lessprofitable corporations. This directs credit away from consumption
and to the most-efficient firms. Monetarism substitutes for the
Keynesian's politically motivated subsidizations, a market discrimination as to who is the "better risk/higher return" borrower. Those that
cannot compete for credit and market demand (whether a giant like
Chrysler or the hundreds of North American farmers who are billions
in debt) begin the chain bankruptcy, slaughter of capital values
(declining organic composition of capital), decline in the money supply and the rise in unemployment characteristic of capitalist deflationdepression crises. In this way depreciation and deflation lead to
restructuring (concentration and centralization) by shifting finance
capital into the hands of those able to reestablish the rate of profit.
The effects on wages, working conditions, and worker productivity
would clearly be beneficial for those capitalists still in business after
the market has passed its judgement on inefficient firms. The
monetarist solution to inflation and stagnation is a "cleansing"
depression that for its duration makes life worse for the great majority
of working people. Monetarists argue that if the unemployment rate
exceeds the natural rate there would be an excess supply of labour that
would produce downward pressure on wages. In order to revise
workers' inflationary expectations, monetarists suggest that demand
must be depressed and that a period of high unemployment (above the
natural rate) becomes necessary. In this way the real wage can be
reduced to its "market rate," which contributes to re-establishing a
stable price level.
Predictions of how long and how much unemployment is necessary
for capitalism to recover from its current illness and return to the
"natural level" are admittedly imprecise. (The "natural rate" of unemployment has the remarkable quality of tending to coincide with the
amount that happens to prevail in the market at any given moment,
and this is precisely what a restructuring capital needs.) By monetarist
accounts, the reason the 1974-75 recession in the United States, with
its unprecedented post-World War II levels of unemployment, did not
restore price stability is that the deflationary policies were not pushed
long and hard enough. If the 1974-75recession is any indication, only
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double-digit unemployment maintained for a considerable period of
time could restore price stability (and profitability?) if monetarist
strategies are to be successfully carried out. 11 For example, Hayek calls
for twenty per cent unemployment in Great Britain to overcome that
country's current crisis, and the "rational expectations" school of the
monetarist camp denies the possibility of anything but voluntary unemployment in capitalism - at any time - including the Great
Depression. 12
Other means proposed by monetarists to revise the "unnatural"
expectations of workers, reduce search time, and re-establish incentives would be to eliminate unemployment compensation and
minimum wages in order to increase productivity and lower wages. By
increasing the reserve army of the unemployed and by eliminating
minimal income guarantees, monetarist policies enable capital to
reduce wages, to increase productivity and therefore to raise the rate
of exploitation.
the reserve army of the unemployed and by eliminating minimal income guarantees, monetarist policies enable capital to reduce wages,
to increase productivity and therefore to raise the rate of exploitation.
The "supply side" of monetarism, which accompanies the "demand side" credit restrictions, pertains to state expenditures and taxation. Orthodox economic theory does not recognize the Marxian
distinction between productive and unproductive labour. What is
universally accepted, however, is that the consumption of output,
while necessary, is "unproductive" in the sense that it is a drain on accumulation. State expenditures on bureaucracy, social services, and
transfer payments all depend on redistributed taxes, and are,
therefore, "unproductive." A cut in taxes, particularly those on the
corporations and the personal income of the rich (The Kemp-Roth bill
in the United States does precisely this), together with a reduction in
government spending, borrowing, bureaucratic and social welfare
costs that make this possible, will free profits for accumulation. This
means eliminating (down to the politically acceptable minimum) social
security, social services, unemployment benefits and welfare
payments. '
By eliminating "unproductive" state activity," it becomes possible
to increase "savings" for capital formation. The fundamental role of
the supply-side policy of the monetarists, then, is to reduce selectively
"unproductive" expenditures so that the burden of funding the
restructuring of the forces of production falls disproportionately on
the working class, poor and unemployed in particular.
Monetarists consider it deceiving to label our contemporary crisis
stagflation. Inflation is the only real problem because the unemployment rate is whatever it has to be to restore price stability. In order to
fulfil its goal of price stability, monetarist policy promotes redistribu-
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tion towards the wealthiest portion of society, increased bankruptcies
and unemployment, a reduction in the real wage, and declining social
services. This means cutting into the living standards of workers,
retirees, the unemployed, and the petty bourgeoisie; the object is to
allow the market to discipline both labour and certain portions of
capital, in the interests of capital as a whole. Monetarism favours the
rich and powerful against the weak, both in the struggle between
classes and in the competition among capitalists. In essence,
monetarist policy and rhetoric is an effort to restore the rightful place
of depression into the dynamics of the capitalist economy.
The Post-Keynesian Alternative: Planning the Rate of Profit
Economic crisis in capitalism must be resolved in such a way that the
means to resolve the economic crisis does not threaten the existence of
the system. That is, the state must moderate the effects of the
economic crisis so that it does not spill into a general political and
ideological crisis. Although Keynesians are capable of keeping the
political crisis at bay, and monetarists are capable of unleashing a
purifying economic crisis, neither group appears to be capable of
resolving the contradictions between legitimation and accumulation.
It is the avowed purpose of the post-Keynesians to resolve this contradiction - that is to resolve the economic crisis without disturbing
the full-employment mandate of the Keynesians. It is important to
note that post-Keynesians do not recognize profit shortages as the
source of the crisis, but rather believe that the crises arise primarily
from the sphere of exchange, where inflation is caused by a distributional struggle over national income, and stagnation is caused by
attempts to use a conservative macro-policy to contain inflation.
For these reasons, post-Keynesians explicitly reject the natural-rate
hypothesis and monetarist policies as economically wasteful and
politically dangerous; this is due to their belief that monetarist policies
are likely to create recession and unemployment. As for the policies of
their Keynesian predecessors, post-Keynesians call for greater government intervention in the private market; that is, monetary-fiscal
policies must be supplemented by wage policies and "investment"
planning. These were, in fact, present as elements in earlier Keynesian
practice, but they played a subsidiary role in relation to "demand
management.' ,
Post-Keynesian policy would include 1. permanent incomes policies that tie wages to productivity, with
both levels established by the state;
2. increased state control over credit, guiding it in order to finance
industrial capital;
3. increased state control over resources, allocating them to industrial
use;
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4. state-directed mergers, nationalizations, research and design pro-
grammes, and retraining for skilled labour;
5. state fiscal-tax subsidies for the construction of the appropriate fixed capital.
This package of policies is today being put forward by those
economists who want to establish that monetarist policies do not
exhaust the spectrum of policy options open to the capitalist state in
dealing with its current crisis. Sydney Weintraub, a leading postKeynesian economist, has put his opposition to monetarism rather picturesquely: "Karl Marx, wherever he is, must smile in some amusement at his conservative allies who play out his scenario of capitalism
thriving on an 'industrial reserve army of unemployed' whose function
is to keep wages from rising. Extremes lock in unintended connubial
bliss."14
As Weintraub sees it, inflation is not caused by a continuous
increase in the money supply, but a continuous increase in money
wages in excess of the average increase in the productivity of labour. 15
By limiting the growth of the money supply without affecting wages
directly, monetarism will actually cause over-all costs to rise without
the capacity to generate sufficient demand, resulting in a decline in
output and employment, but not the price level. (Weintraub argues
that the corporations' mark-up over money wages has been constant
- even on a slight decline - over the past decades and therefore cannot be said to be responsible for the inflation; nor can the corporations
be the recipient of excessive profits through inflation.) Weintraub's
solution is a Tax-Based Incomes Policy (TIP). The role of an incomes
policy in this case is to limit increases in money wages (defined to include all types of fringe benefits as well as wages) to a rate equal to the
growth of productivity in order to control inflation. Capitalists are to
be paid for lowering wage increases below productivity level increases
and punished for giving in to excessive wage demands through the
manipulation of corporate tax rates and low-interest loans. If workers
use their union power to resist the socially necessary incomes policy,
Weintraub suggests withdrawing their union's accreditation, and
denying them unemployment compensation and food stamps. 16
Weintraub argues that the advantage of incomes policies over monetarist deflation is that inflation can be halted by controlling wages,
allowing unemployment to be maintained at a reasonably low rate so
as not to create depression levels of unemployment, loss of output,
and the accompanying political threat to the system. It is obvious that
such a policy can be used to raise the rate of exploitation in a much
more "orderly" way through the increasing use of the state apparatus,
as opposed to relying on the anarchy of the market. 17Post-Keynesians
would put control over wages and productivity into the hands of the
state. At the same time the state is given the power to suspend union
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accreditation, unemployment insurance, and food stamps for those
who would resist by means of the strike. In this way the state is capable
of eliminating collective bargaining, weakening the trade union movement, and therefore weakening labour's ability to maintain its share of
national income.
Incomes policies, particularly of the TIP variety - with its permanent nature and its productivity components - enable capital, at least
temporarily, to plan a wage. share below the value of labour power
(given its social and historical character) in order to influence the
distribution of income in such a way as to help raise the rate of profit.
By tying wages to productivity, where both the norms and the power
to enforce the norms are shifting to the state, it becomes possible for
capital to plan, on an increasing scale, to raise the surplus over rising
real wages in the long run.
The other half of the post-Keynesian policy portfolio suggests that
given the instability of the market, the volatility of investment, and the
inadequacy of "fine tuning," capitalist governments must get involved
in planning investments if full employment, steady growth, and an
adequate and efficient use of resources are to be achieved.P If the
reorganization of capital is to be achieved without mass unemployment, capitalist profits must be resurrected by some other means.
"Capitalist profits can be increased only by increasing productivity
and an increasing quantity of capital capable of functioning as capital
and not by the mere availability of means of payments manufactured
by governments." 19 Investment planning means that the state must get
involved in aiding accumulation; that is, it must increase productivity
by promoting the concentration of capital and savings and by coordinating this with demand, technology, tastes, the labour supply and
resources so that unprofitability and the uncertainty that accompanies
it are avoided. The supply-side of the conservatives, which consists of
massive reductions in the state's interference in private capital formation by cutting taxes, government spending, unemployment compensation and social services, will give way to decided expansion of state
activity in an effort to expand productive capital formation.
Walter Heller, a leading economist of the Kennedy era who symbolizes the transformation from Keynesian to post-Keynesian
economics, has suggested that the central bank ought to conserve the
limited supply of credit by guiding it into the most productive channels.20 Heller contends that government-directed financing should exclude credit for corporate takeovers, commodity speculation and
foreign loans, but should give high priority to plant and equipment investment, farming, small business and residential construction. In this
way the state can use the credit mechanism to finance the existing productive capital with the greatest potential for restoring the accumulation of capital, while leaving weak capitals to be absorbed into the
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restructuring process. Through grants, subsidies, and tax breaks, the
post-Keynesian state would intervene directly in the restructuring of
capital, not indiscriminately, not guided by the ambivalence of the
Keynesians' welfare state mandate, but with the express purpose of
favouring the most profitable direction for the economy. The effect
then of a greatly expanded, state-guided investment policy, combined
with a coercive incomes policy, is to raise the rate of exploitation while
reducing the costs of production and raising productivity by restructuring a more productive fixed capital structure.
The post-Keynesian alternative is by no means specific to American
economists reacting to Reagan's monetarism. Its echoes in Canada can
be heard not only from the New Democratic Party, but also from
within the state itself. In contrast to the Economic Council of Canada,
which accepts in theory if not in name the natural-rate hypothesis
complete with an explanation of the rising non-inflationary rate of
unemployment by the changing demographic nature of the labour
force and by overly liberal unemployment insurance benefits.P' the
Science Council of Canada explicitly proposes most elements of a
post-Keynesian solution. The Science Council argues that Canada's
economic crisis, manifested by high unemployment, persistent trade
imbalances and a falling currency, is caused by high levels of
technological and managerial truncation (the result of high levels of
foreign ownership), and a lack of "demand-pull" for technologicallyadvanced Canadian products, resulting in relative technological
backwardness. The Science Council suggests that the government must
break with its focus on unemployment and inflation in isolation; that
is, it must locate these problems in a larger complex of structural difficulties. The key is not to merely regulate industry (which is often
counter-productive), but to encourage it. The government must
reverse its "laissez-faire attitude" in order to solve Canada's needs to
restructure its industrial base." This is a direct assault upon the policy
orientation of earlier Keynesian administrations and a reflection on
the inertia of the Economic Council's policy orientation and current
monetarist practice by Canadian governments.
The Science Council, which calls for new linkages between government, labour and business if structural changes and a specialized industrial strategy are to be successful, has been primarily noticed for its
emphasis on the development of a decidedly indigenous Canadian
capitalism as opposed to a continuation of an economic policy that
emphasizes the Canadian economic role as an appendage of international capitalism. But what is also clear from the Science Council
report is the post-Keynesian nature of its program, which explicitly rejects the adequacy of the Keynesian "demand-side" program for an
unprecedented aggressive government role in the "supply-side" of the
economy.
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Cbemomas/Keynesian, Monetarist
and
Post-Keynesian Policy
The post-Keynesian Science Council "policy objects and instruments,,23 would include 1. government demand, grants, tax incentives and financial support to
focus on firms with high science and technologically innovative
capacity;
2. training government officials to recognize and facilitate development of this sector;
3. a government policy which relies heavily on a sympathetic attitude
towards corporate profits;
4. the sponsoring of core companies in specific sectors with industrial
and technological strength;
5. the encouragement and sponsoring of mergers between firms, joint
ventures between government and industry, and consortia between
various groups of firms to provide the scale of enterprise needed to
allow research and development to flourish;
6. longer-term labour-force planning to overcome hardships (loss of
jobs);
7. encouraging stronger and more-specialized links between universities and the industrial sector.
If we combine the Science Council "policy objects and
instruments" with the income policy proposals of economists
associated with the Canadian Institute for Economic Policy (Walter
Gordon, Clarence Barber, John McCallum),24 we have a made-inCanada post-Keynesianism, claiming that state-guided capital restructuring and an increased rate of exploitation will allow for "planning
the rate of profit," as opposed to relying on the uncertainty of the
market method.
Conclusion
For Marxists, state interventions are not generally the result of
political opportunism, but rather of political necessity. Keynesianism
was not an historical accident, nor mere political opportunism, but
rather it arose amidst class conflict generated by the Depression, to
promote and sustain the class accommodation that existed within
capitalist countries in the post-World War II era. Income growth and
high employment was the economic basis for that accommodation and
the social harmony ideology that went with it. The accelerating
economic crisis of the current conjuncture, which Keynesianism could
only postpone, and deepen by postponing, has generated in turn new
state economic practices and a new paradigmatic ideology emanating
from monetarist economists. At the centre of monetarism is the need
to redefine full emploment to shift the focus of responsibility for
unemployment from the state back to the individual.
The "natural rate of unemployment" is the key weapon in the
monetarist ideological arsenal. Unemployment becomes a matter of
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individuals exercising freedom of choice. If people refuse to accept the
market wage rate, however low, they can use their leisure time to look
for a better job or to add value to their human capital. Those who do
not find work have made a rational and voluntary choice, absolving
the market (and the capitalist system) of responsibility. In order to implement monetarist economic policies, the appropriate working-class
consciousness must be reproduced. Such an appeal must "allow" the
state to eliminate stabilization policy and to redress the gains achieved
by the working class in the post-World War II period.
Monetarism initially appealed in an intimate way to the working
class due to the effect Keynesian inflation had on workers as consumers and as members of the nuclear family. In order to maintain living standards, certain sectors of the working class could do so only by
increased labour, both in terms of hours of work and the number of
family members forced into the market place." More work, and the
strain on family life due to less leisure time and stagnant incomes, fed
right into the main social themes of the "New Right," that is, the
defence of the family and the search for a private solution. Family life
(the traditional escape from the cash nexus and the alienating nature
of the market place) has, along with the value of money, been diluted
by inflation.
The government, as the largest and most visible of the uncontrollable external economic forces acting upon workers, became the
focus of blame. While big government once meant growing incomes
and relatively high employment, it came to represent, under inflationary conditions, the source of receding prospects for decent
incomes, accessible housing, and a secure old age. The monetarists'
appeal rested on promises to restore more family discretion over income through supposed tax breaks for working people and more
discretion over family time by eliminating inflation and restoring real
wages.
The problem for monetarism is that it cannot conceal itself for long
- as an illusion for the working class. When unemployment manifestly is rising because of monetarist policy, when food stamps have been
cut, when former recipients have been declared ineligible for welfare
and social security, and when unemployment payments have been
reduced or threatened, the attempt to restore profitability by
monetarist means proves increasingly likely to raise the spectre of
intensifying class struggle.
Given the problem of legitimation and the necessity of accumulation, some other means of raising the rate of exploitation and controlling and promoting investment becomes preferable for the state and
for the economists who seek to advise it. The most credible alternative
to monetarist economic policy is likely to be found in the postKeynesian camp. The direct intervention of the state in investment and
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Bob Chemomas/Keynesian, Monetarist and Post- Keynesian Policy
the production of surplus value have the advantage of promising to reestablish profitability, while resurrecting to some extent the full
employment, if not the real wage, component of the post-World
War II "social contract." A dose of the free-market solution appears
to have been necessary to establish the social groundwork for a postKeynesian "solution," with its permanent state controls over labour
and its extended state guidance of capital.
The post-Keynesian programme may promise to "solve" the current
crisis by raising the accumulation process to "higher ground," but one
should be under no illusions that it can, or even seeks to, transcend the
laws of motion of the capitalist system. In establishing the economic
policy conditions for capitalism's next stage of development - income policies and government-"controlled"
investment - postKeynesianism does not resolve the irreconcilable contradictions that
foster the tendency for the rate of profit to fall and the occurrence of
depressions and stagflations that result. A set of proposals that seeks
to resurrect and sustain a system that produces socially but accumulates privately, that produces for exchange-value as opposed to usevalue, cannot resolve the struggle over the distribution of factor shares
between capital and labour, nor over control of the labour process that
gives rise to profits. It cannot dispel the struggles that have arisen over
the environment. It may guide capital investment but it cannot "plan
the rate of profit" insofar as an even more concentrated capitalism
will still be one of inter-capitalist competition over the cost of production, market shares and profits - nationally and especially internationally. Since post-Keynesians do not recognize the laws of motion
underlying capitalist crisis, their resolution ultimately leaves
capitalism's economic and political contradictions unresolved, albeit
their policies may appear capable of moderating, postponing or raising
them to a higher stage.
Whether even this can be accomplished democratically is problematic, in fact. The resistance of capital to replacing monetarism with
increased state intervention in capital's investment decisions may be
expected to be considerable. On the other side, while organized labour
will favour the investment aspect of post-Keynesianism, it is likely to
resist the restriction of its long-standing democratic freedoms of free
collective bargaining and the right to strike that a permanent incomes
policy inevitably entails. We may yet find that Keynesianism's postponement of, and monetarism's rapid acceleration of, capitalism's
"purifying economic crisis," will have set the stage, not for the
necessary triumph of post-Keynesianism, but rather for the rekindling
in a new form, of the old pre-war contest between bourgeois
democrats, fascists and the Left.
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Studies in Political Economy
Notes
This article is a substantially revised and elaborated version of a paper delivered to the Committee on Socialist Studies at the annual meeting of Canadian
Learned Societies in Halifax, in May 1981. I am grateful for the encouragement and comments of Leo Panitch and other editors and referees of Studies
in Political Economy. I would like to thank Cy Gonick, John Loxley and
Anwar Shaikh for helpful criticisms and suggestions on earlier drafts of this
paper. Mike Lebowitz in particular helped to clarify and focus many of the
issues raised.
1. This is not to suggest that anyone of these three paradigms and its respective policy options is ever exclusively embraced by a given political administration, but only that it may be possible to locate the dominant policy
utilized in order to examine a given paradigm within an administration and
its capacity to overcome crisis.
2. This paper assumes the theoretical defensibility of the orthodox Marxist
position on the law of value - the theory of the tendency for the rate of
profit to fall due to the rising organic composition of capital and productive and unproductive labour. For a bibliography and a critical survey of
these controversial issues, see Ben Fine and Lawrence Harris, Rereading
Capital (New York 1979).
3. For a critical survey of Marxist thought on the contemporary state, see
Fine and Harris, Rereading Capital. chap. 8. (See n. 2 above.)
4. For analysis and evidence supporting this role of Keynesian macro-policy,
see: Edward T. Kane, "All for the Best: The Federal Reserve Board's 60th
Annual Report," American Economic Review 64:6 (December 1974),
835-50; Paul Sweezy, "Banks Skating on Thin Ice," Monthly Review 26: 9
(February 1975); and Hyman P. Minsky, John Maynard Keynes (New
York 1975).
5. This does not mean that Keynesians have not contributed to restructuring
by means of regulation, tight money and fiscal policy, but only that with
subsidies, easy money and credit, and deficit spending, Keynesian administrations have interfered with the restructuring that the market forces themselves would have fostered.
6. By "monetarist," I am referring to that set of economists who support the
idea that capitalism, when left to its own devices, will consistently maintain
conditions of full employment, steady growth and stable prices. Whereas
the term "conservative" has a broad political and social meaning, monetarism is the economic subset of notions usually associated with today's
conservative paradigm. Supply-side economics, gold standard and
monetary rule demand-side economics, all at bottom depend on the
monetarist-neoclassical theoretical analysis of how the capitalist economy
operates.
7. Milton Friedman, "The Role of Monetary Policy," American Economic
Review 58:1 (March 1968), 1-17
8. For a critical mainstream reconstruction of monetarist stagflation theory,
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Bob Chemomas/Keynesian,
Monetarist and Post-Keynesian
Policy
see: R.J. Gordon, "Recent Developments in the Theory of Inflation and
Unemployment," Journal of Monetary Economics 2 (April 1976),
185-219; and Franco Modigliani, "The Monetarist Controversy or, Should
We Forsake Stabilization Policies?" American Economic Review 67:2
(March 1977), 1-19.
9. For the respective demand-side and supply-side arguments of the "New
Right," see: Friedman "The Role of Monetary Policy" (See n. 7 above);
and Michael Evans, "The Bankruptcy of Keynesian Econometric
Models," Challenge (January-February 1980), 13-9.
10. This would include eliminating or at least reducing the rules and costs affecting the environment, worker safety, drug testing, food inspection, etc.
See Business Week, 9 March 1981, p, 63.
11. Of course, a return to 19308levels of unemployment will strain the credibility of this monetarist concept. See Abba Lerner, "Some Questions and
Answers about TIP," in Solutions to Inflation, ed. David C. Colanader
(New York 1979), where it is suggested that monetarist policies are likely to
create 20-30 per cent unemployment. It is suggested in a special issue of
Brookings Papers on Economic Activity (vol. 2, 1978, p. 241) that for
every extra point of unemployment, inflation would fall by 0.3 per cent
after one year, and by 0.7 after three years, while each point of unemployment would cost over a million jobs and $60 billion of real production.
12. See Hayek, Business Week, 15 December 1980. See also: Michael R.
Darby, "Three-and-a Half Million U.S. Employees Have Been Mislaid: Or
an Explanation of Unemployment, 1934-1941," Journal of Political
Economy 84: 1 (February 1976), 1-16; and Robert E. Lucas and Thomas J.
Sargent, Rational Expectations and Econometric Practice (Minneapolis
1981).
13. This does not include military or unproductive distributional activities of
the private market sector or state expenditures which are necessary for
capital formation but are not profitable, although the monetarists' reduction of bureaucratic activities may cut both private production costs and
distributional costs.
14. See Sidney Weintraub, "Wall Street's Mindless Affair with Tight Money,"
Challenge (January-February 1978), 36.
15. Weintraub establishes the theoretical basis and empirical support for this
argument in Capitalism's Inflation and Unemployment Crisis: Beyond
Monetarism and Keynesianism (1978).
16. See Sidney Weintraub, "TIP: A Tax-Based Incomes Policy to Stop
Stagflation," in Colanader, Solutions to Inflation, 170. (See n. 11 above.)
17. This is not to impugn the motives of Weintraub or any of the other postKeynesian strategists. (Some of their policies do not even focus on wages
per se.) Just as Keynes was bastardized, post-Keynesian policy is likely to
be bastardized as well, given the needs of accumulation and the power of
the ruling class.
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Studies in Political Economy
18. See John Cornwall, "Macrodynamics," in A Guide to Post-Keynesian
Economics. ed. Alfred S. Eichner (White Plains, New York 1978), 19-33,
for a general discussion of the need for capitalist planning from the postKeynesian viewpoint.
19. Paul Mattick, Marx and Keynes: The Limits of the Mixed Economy
(Boston 1969), 187.
20. See Wall Street Journal, 6 October 1981.
21. See the Economic Council of Canada's A Climate of Uncertainty: Seventeenth Annual Review (Ottawa 1980).
22. See Science Council of Canada, Report 29 (February 1979), ~-1.
23. Ibid., 49-52
24. See Clarence L. Barber and John C.P. McCallum, Controlling Inflation:
Learning from Experience in Canada. Europe and Japan (Ottawa 1982)
See also the statement by Walter Gordon, "An Economic Agenda for Today," issued by the Canadian Institute for Economic Policy (February
1982).
25. Elliot Currie, Robert Dunn and David Fogarty, "The New Immiseration:
Stagflation, Inequality, and the Working Class," Socialist Review
(November-December 1980), 7-32.
142
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