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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. 123 Studies in Political Economy 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= 124 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 125 Studies in Political Economy 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 126 Bob Chemomas/Keynesian, Monetarist and Post-Keynesian Policy 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- 117 Studies in Political Economy 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 128 Bob Chemomas/Keynesian, 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- 129 Studies in Political Economy 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; 10 130 Bob Chemomas/Keynesian, 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 131 Studies in Political Economy 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- 132 ----- ._---------- Bob Chernomas/Keynesian, Monetarist and Post-Keynesian Policy 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; 133 Studies in Political Economy 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 134 Bob Chernomas/Keynesian, Monetarist and Post-Keynesian Policy 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 135 Studies in Political Economy 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. 136 Bob 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 137 Studies in Political Economy 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 138 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. 139 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, 140 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. 141 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 ~---