Bye bye Milton, hello Keynes
7:15 am - October 20th 2008
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We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step ~ Prime minister James Callaghan, Labour Party conference speech 1976
Britain will boost public spending to help pull the economy through a looming recession, Chancellor Alistair Darling said in an interview published on Sunday ~ Chancellor Alistair Darling, cited by AFP, October 2008
The term ‘the long boom’ – in the classical periodisation of postwar capitalism, anyway – is generally used to describe the years circa 1947-1973, in which the system seemed to have overcome its cyclical tendencies.
While national economies still saw their ups and down, major recessions were thought to be a thing of the past, thanks to government mastery of Keynesian demand management techiques. That’s what revisionist social democrats wanted us to believe, anyway.
The massive slump of 1974-75 shifted the paradigm overnight. But what exactly was it that brought such a seachange about? Mainstream accounts of the causation concentrate on the oil shock of 1973 and/or trade union militancy as the chief factors at work. Most Marxists prefer to postulate instead a classic capitalist crisis of overproduction.
Yet in political terms, it is undeniable that the main impact was to open up the space for the Milton Friedman school of monetarists – the forerunners of today’s neoliberals – to blame Keynesianism for the impasse, and thus to overturn the tables. Thatcher and Reagan willingly implemented the space cadet free market blueprints on offer, arguing there was in fact no alternative.
As Marxist economist Ernest Mandel pointed out in his book The Second Slump – which deals with the 1970s slump – this transformation was deliberately exploited by the ruling class, as part of their strategy to counter the secular tendency of the rate of profit to fall by weakening the principle organisations of the workers:
For the international bourgeoisie, the ‘historic function’ of the 1974-75 recession was precisely to put an end to ‘full employment’ as the ‘priority objective of economic, monetary and social policy’ and to reintroduce permanent and massive unemployment to weigh on the labour market.
So it was that the mid-1970s recession left a residue of structural unemployment in the main imperialist countries estimated by the OECD at 15.5m people as of the end of 1976. Joblessness on such a scale had not been seen for some four decades. Mass unemployment has been with us ever since.
It is worth noting that in Britain, the move away from Keynesian ideas of full employment actually occured on the watch of a Labour government. While it took a Tory administration to bring in full-on free market fundamentalism, monetarism was introduced by what was still then the mass party of the working class.
Some 32 years later, another capitalist crisis has forced another Labour government into reinstituting a watered-down version of traditional counter-cyclical policies. Following on from a wave of bank nationalisations – a remedy straight out of the Labour programme of 1973 – Darling now appears to be promising a return to good old fashioned pump priming economics, in a manner of which JMK would have approved.
His comments are likely to generate widespread outrage in the rightwing press this morning. But forget the synthetic outrage and the inevitable accusations of socialist recidivism; this is not a lurch left so much as a lurch back towards what was once the centre. It’s welcome, but it isn’t going to be anywhere near enough to turn the clock back, let alone take us forward.
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Dave Osler is a regular contributor. He is a British journalist and author, ex-punk and ex-Trot. Also at: Dave's Part
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Reader comments
Either today’s neo-liberals are not Friedmanite, or today’s neo-liberals have never been in (enough) control of monetary policy. Free-marketeers haven’t endorsed the current status quo as either just or efficient: http://blog.iea.org.uk/?p=135
Having said that, liberals have good reasons to prefer this busted state-capitalism that we currently have to the alternatives that you would espouse: http://www.cato-at-liberty.org/2008/10/15/gods-that-fail/
Failed capitalism is rather less catastrophic than failures of other systems.
I am not sure if I understand the point that you are making here Dave. Are you saying that the 1973 slump was not caused by the oil price hike or that this was not the primary cause of stagflation?
Also didn’t the Tories respond to the 1987 crash by reflation (cuts in tax and interest rates) precisely because their previous monetarist response to the 1979 oil price shock had been so politically damaging? The effect of the reflation did, indeed, cause inflation to rise and lead to the sharp rise in interest rates that caused the recession of the early 1990s.
Britain got out of that partly by devaluating and partly because there was a long period of cheap oil and a globalisation of the productive process (out-sourcing to India, China, Brazil, etc.) which kept inflation down (by suppressing wages in the developed world). This allowed governments to keep interest rates low and firms to achieve very high rates of profitability – which, in turn led to the creation of a series of speculative bubbles.
The main reason why the Bank of England has been so slow to cut interest rates this time around is that it has been scared of repeating the mistakes of 1987. Instead the developed world has tipped over into recessession (although Brazil is still predicting growth next year) and this is what has given Darling the flexibility to reflate away.
The titling of this post almost made me spit tea across my laptop in a distinctly unladylike manner. Nicely done 🙂
why would JMK approve of the current government’s flapping and flopping? he was not in favour of running budgetary deficits during the good times. Darling and Brown are dancing on the edge of stagflation – and that is a painful disease
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