As governments across the world spend trillions to help private capital survive the global financial crisis, is it not misleading to talk of a shift to Keynesian policies?
JBF: I think there has been, as Paul Krugman says, a "return of depression economics," and in that sense we can talk about a revival of broadly "Keynesian" policies. Keynes advocated expansive fiscal policy and deficit financing in a depression, and all governments are now seeking to put such expansive policies in place to some degree — although generally not on a big enough scale. Also Keynes clearly advocated government attempts to reflate the economy in the face of deflationary pressures, in the context of the banking crisis of the early 1930s. So in this sense too we can talk about a return to Keynesian economics.
But the real action right now is elsewhere, in the direct government salvaging of financial capital. This has little to do directly with Keynesianism and in fact reflects the continued dominance of financial capital in the crisis. Keynes was far from being a big supporter of speculative finance and argued for the "euthanasia of the rentier." In the course of this downturn the United States has committed up to $10 trillion in aid to financial institutions, by such means as guarantees of bank debts and asset-backed securities, direct investments, the establishment of currency swap lines with central banks, and programs for the purchase of mortgage-backed securities. In comparison to this, Obama’s total fiscal stimulus is less than $400 billion a year. The annual public works spending for the entire country in the stimulus package is less than what Bank of America by itself has received in financial support commitments from the Federal Reserve and the Treasury in this crisis. What we are seeing therefore is a socialization of private financial losses on a scale never before conceived. None of this has much to do with Keynesianism as such.
Those who might reasonably be called "Keynesians" of a sort today (though not nearly as critical of the system as Keynes himself), such as Paul Krugman and Joseph Stiglitz, represent a different policy mix. They would argue for a bigger fiscal stimulus and would probably be less immediately responsive to financial capital. (Another Keynesian or post-Keynesian figure of a more radical sort is James K. Galbraith.) But such individuals are not in charge today in Washington, while more decidedly conservative economists who represent the interests of Wall Street, such as Bernanke, Geithner, and Summers, are ensconced in the Federal Reserve, the Treasury, and the White House.
The fact that Keynesianism, even of the mild sort represented by Krugman and Stiglitz, is still on the outside in all of this has to do, in my view, with the shift in the nature of capitalism from monopoly capital to monopoly-finance capital beginning in the 1980s. This meant that financialization was increasingly the focal point of the economy. I wrote at length on this together with Fred Magdoff in our recently published book, The Great Financial Crisis: Causes and Consequences. The present economic catastrophe is in many ways a crisis of financialization (i.e., the shift in the center of gravity of the economy in the last three decades or so from production to finance) overlaid on deeper problems of stagnation. Hence, financial capital is still the focus during the downturn. Keynesianism, classically, was concerned much more with what economists call the "real economy" related to production of goods and services (as measured by GDP), than with the financial economy, geared to speculation in asset prices. So in that sense Keynesianism, though given some impetus by the crisis, is still secondary to what is going on immediately, since the center of attention is still on the financial implosion.
One reason that Keynes’s theory is considered so relevant today of course has to do with what he called the "liquidity trap": the interest rate falls to a near-zero level and hence monetary policy is no longer able to stimulate the economy through reductions in the interest rate. This was a description of what happened in the Great Depression and it was repeated in Japan in the 1990s. It is this that brings "depression economics" into play. Bernanke, Geithner, et al., argued that if banks were restored to solvency they would resume lending. But the destruction of the supposed assets on the bank balance sheets, still unquantifiable, has been to date beyond repair. Banks therefore hold on to every scrap of tangible equity — cash — they obtain. Keynes long ago explained that this was what the banks necessarily would do in such a situation. Fiscal stimulus offers hope of halting or slowing the collapse, but far greater sums are poured into what still seems to be an intractably insolvent banking system. Such policies are not Keynesian.
In a recent interview you spoke of the bastardization of Keynes’ ideas. What did you mean and who was the real Keynes?
JBF: Keynes even before The General Theory was recognized as an outstanding, perhaps the most illustrious figure, in orthodox economics of his day, the heir to Alfred Marshall at Cambridge. But in response to the Great Depression he became both a critic of economic orthodoxy and of capitalism itself. However, his criticisms of capitalism, though far-reaching, suggested that there were technical ways out that could save the system from some of its worst faults. He is thus an ambiguous figure. There is the pre-Keynesian Keynes (prior to The General Theory), Keynes as a critic of capitalism, Keynes as a system savior, as well as the later "bastard Keynesianism," invented in the 1950s and ’60s by those seeking to reestablish the neoclassical orthodoxy, with only small concessions to the "Keynesian revolution." All of this of course creates complex issues of interpretation. When we speak of Keynes we are usually referring to the Keynes of The General Theory of Employment, Interest, and Money, which was published in 1936, and related works and not the Keynes of his earlier A Treatise on Money (1930).
Keynes, as he himself emphasized in the preface to The General Theory, fought hard in response to the Great Depression to free himself from the orthodox neoclassical economics of his earlier years. This required something of a revolutionary break, which he never followed out to completion, leading to various interpretations of his theory. Monetarists, like Milton Friedman, preferred the A Treatise on Money Keynes (what we would call the pre-Keynesian Keynes) and mostly rejected The General Theory. The main group of so-called "Keynesians," like Paul Samuelson, tried to repair the damage resulting from Keynes’s break with economic orthodoxy, so as to create the neoclassical-Keynesian synthesis or what is more commonly called the "neoclassical synthesis." Joan Robinson famously called this in 1962 "bastard Keynesianism," since it jettisoned all of Keynes’s major criticisms of the system.
One way to understand the evolution of bastard Keynesianism (as I explained in the March 2008 issue of Monthly Review in an article entitled "A Failed System") is in terms of the way that Keynes employed the concept of "the general theory" and how that later came to be subverted. Keynes explained in the beginning of his magnum opus that orthodox economics (what we now call "neoclassical economics") was a "special theory" pertaining to a full employment economy, which in reality hardly ever existed under capitalism. In that sense his "general theory" was meant to address the usual case of an economy of unemployed resources. However, neoclassical economists after the Second World War argued that partly due to Keynes’s own influence, which had led to fiscal and monetary fine-tuning, the main dilemmas that Keynes had raised hardly ever applied. As a result Keynes’s own economics was reclassified as a "special theory" while the orthodox neoclassical economics, which saw the economy as naturally tending to full employment, was pronounced the true "general theory."
Under Friedman’s inspiration, full employment was redefined to be compatible with actually existing unemployment through the introduction of the notion of the "natural rate of unemployment." Keynes was pronounced dead, since a depression/deflation, in which his ideas would be operative, could never occur again. Ben Bernanke, chairman of the Federal Reserve Board and an academic scholar of the Great Depression, said a few years ago that we had entered the Great Moderation, in which the business cycle had essentially smoothed out. In fact these views played a role in getting him appointed as Fed chairman. I have discussed this (together with Fred Magdoff) in The Great Financial Crisis.
Of course the truth was that Keynes’s critique of capitalism never ceased to be relevant, as is now readily apparent. But economic orthodoxy was unable to move beyond Keynes to address the larger issues he raised (nor did Keynes himself in the end do so). Paul Sweezy was thus right in saying somewhere that Keynes represented the last major scientific representative of bourgeois economics. From Keynes on there was nowhere to go but the rejection of capitalism itself. Far from an apologist for the system, Keynes had written in the Yale Review in summer 1933: "The decadent international but individualistic capitalism, in the hands of which we found ourselves after the [first world] war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous — and it doesn’t deliver the goods. In short, we dislike it, and we are beginning to despise it." But he did not follow his views to their logical conclusion in the rejection of the system, while mainstream, bastard Keynesianism retreated from his view.
What was the essence of Keynes’s ideas and why are his ideas suddenly seen as relevant again?
The essence of Keynes’s contribution was the demolition of Say’s law of markets. (A secondary element was Keynes’s rejection of the then orthodox theory of interest, and its replacement by one based on liquidity preference.) Say’s Law argued that supply created its own demand, so that there could never be an actual glut of production. Hence, full employment was regarded as the natural tendency of the system. If there were limits to economic expansion they were on the supply (cost) rather than the demand (sales) side.
Marx had rejected Say’s Law from the beginning, calling it "the childish babbling of a Say, but unworthy of Ricardo." But neoclassical economics was built on it. Keynes had to undergo a great struggle to overcome this. Part of the problem was that neoclassical economics was erected on the notion of a kind of barter economy model with money laid over the top like a veneer. Once monetary exchange was viewed as central to the inner workings of the capitalist economy it became apparent that it was possible for overproduction or insufficient effective demand to emerge. In working this out, Keynes, in his early notes to The General Theory, actually used Marx’s shorthand of M-C-M′ (Money-Commodity-Money′ [the last equal to M + ∆m or surplus value]) as a way of figuring out the contradiction in Say’s Law. (Keynes got this from a secondary source rather than from Marx himself.) Meanwhile Richard Kahn, a close associate of Keynes and the originator of the Keynesian multiplier, came up with a way of conceiving the savings and investment relation that replicated (unbeknownst to him) Marx’s reproductive schema. As a result of this critique, Keynes was able to separate out more clearly the two sides of accumulation (savings and investment) and to argue that it was investment that determined savings and not the other way around as previously thought. The famous "paradox of thrift" could be explained then as excess savings (ex ante) that could not find investment outlets. In terms of effective demand as a whole, the problem was a lack of consumer demand due to income inequality, and then leading fairly naturally, but not inherently, to weaknesses in investment demand, as a normal shortcoming of the system. For Keynes the proper policy response was to increase government spending to compensate for a lack of consumption and investment demand — to the point that full employment was reached. But this of course ran normally straight into the class barriers of the system.
What was the substance of Keynes’ critique of capitalism and how does it differ from the other great critic of capitalism Karl Marx? What are the short-comings of Keynes critique of capitalism?
JBF: Keynes, as I explained in "A Failed System," pinpointed what he called two "outstanding faults" of capitalism: an enormously unequal division of income and persistent, built-in unemployment, tending toward what was to be called an "unemployment equilibrium." Orthodox economics was by nature blind to both of these flaws, and thus was, in his view, "incompetent to tackle the problems of unemployment and of the trade cycle." Keynes made it clear that he believed that the investment or accumulation function of the mature capitalist economy was systematically depressed over the long run. As Joan Robinson wrote in 1955 in a piece on "Marx, Marshall, and Keynes," Keynes showed "that there is a natural tendency for an advanced capitalist economy to run into chronic stagnation, with permanent unemployment, and that it is by its very nature highly unstable." Yet, Keynes never provided an actual theory of stagnation, and those early Keynesians who did so based on his suggestions, such as Alvin Hansen, also fell short of what could be seen as a complete theory of the stagnation tendency of advanced capitalism. It was thus left to Marxist theorists, such as Michal Kalecki, Josef Steindl, Paul Baran and Paul Sweezy, to develop this further.
Keynes by the time he wrote The General Theory no longer believed in the harmonious self-regulation of capitalism, along orthodox lines, as represented by Hayek and neoliberalism. As Robinson said, Keynes represented "the disillusioned defence of capitalism." He tried to deal with what he saw as the system’s major flaws through various technical fixes, probably knowing that this would never be sufficient. He could never get himself to wage a full-fledged critique. Keynes still hoped for a kind of rational capitalism, as I explained in my article "The End of Rational Capitalism" (Monthly Review, March 2005). Still, his critique was so radical in its implications that his analysis was not acceptable to the system except at those moments when its back was against the wall. Keynes went so far as to point to the need of a "somewhat comprehensive socialization of investment," the "euthanasia of the rentier," lessening of income inequality, and limited controls on international capital flows. All of this meant that he remained a "dangerous" figure from the standpoint of the system.
To get an idea of Keynes’s limitations from a Marxist perspective it is useful to compare him to the Polish economist Michal Kalecki, who developed most of the essentials of the "Keynesian revolution" before Keynes himself. Kalecki was a Marxist economist, whose work also became crucial in defining Keynesianism. In Kalecki one finds the legacy of Marx and Luxemburg. His work contains not only a powerful critique of class-based accumulation and imperialism, but also a developed theory of monopoly capitalism. Keynes lacked all of these elements. A particular deficiency was Keynes’s continued adherence to notions of pure and perfect competition, even though his younger colleague Joan Robinson, part of the Cambridge "circus" that helped generate The General Theory, was one of the foremost developers of the theory of imperfect competition. (Paradoxically, Robinson herself did not integrate this into most of her later work.) Kalecki’s concept of the "degree of monopoly" (focusing on the price markup on labor and raw material costs) became a way of integrating class income distribution under capitalism (governed in Marx by the rate of exploitation), with concentration and centralization, and economic stagnation. All of this was essentially derived from Marx and placed in a contemporary context. Kalecki’s work led to the development of Josef Steindl’s Maturity and Stagnation in American Capitalism and Paul Baran and Paul Sweezy’s Monopoly Capital.
The most important concept in Marx’s economics is the rate of exploitation. For Keynes this is entirely missing. Kalecki, however, provided a link between Marx and Keynes (from the Marxist side) with his theory of long-run income distribution: workers spend what they earn, and capitalists earn what they spend. The trouble is that capitalist spending on accumulation is affected by expected profits on new investment, which become depressed if (among other factors) consumption is weak due to growing inequality and unemployment. "The tragedy of investment," as Kalecki said, "is that it is useful." Capital will not invest if it has a large idle capacity of plant and equipment and expects this excess capacity to grow as a result of the building of new factories and the anticipated weakness of final markets. This contradiction of accumulation, ultimately related to income distribution, explains why the U.S. and other advanced capitalist economies have been experiencing creeping stagnation over recent decades — a fact partly disguised by the secular build-up of debt before the crash (i.e. financialization).
Recently, it has been more and more recognized that Keynes also pinpointed a third outstanding flaw of capitalism, and that this was crucial to his overall theory. Thus he stressed that, with the rise of the market for industrial securities and the developed financial system, there were two price structures under capitalism, one related to GDP and the other speculation in asset prices. And the correlation between the two price structures was unstable, and dependent upon unpredictable social-psychological pressures. This created enormous speculative binges, which strongly impressed themselves on Keynes, particularly following the 1929 Stock Market Crash. The socialist economist Hyman Minsky drew out the importance of Keynes’s critique in this respect in John Maynard Keynes and subsequent works. From this Minsky developed his famous theory of financial instability.
Minsky’s analysis, though, was still oriented towards explaining periodic financial bubbles/crises and not so much the secular process of financialization building up over decades. The analysis of financialization as a response to stagnation was dealt with systematically by Marxist economists Harry Magdoff and Paul Sweezy, in a series of works — The Dynamics of U.S. Capitalism, The End of Prosperity, The Deepening Crisis of U.S. Capitalism, Stagnation and the Financial Explosion, and The Irreversible Crisis, written between the early 1970s and the late 1980s (with subsequent essays in the 1990s). These works were rooted in Marx-Kalecki, but also drew on Keynes, and particularly in the later years, on his critique of speculation. Magdoff and Sweezy understood that the financial explosion was not merely a phase immediately prior to the peak of the business cycle — ultimately Minsky’s view — but a process causally interconnected with stagnation extending over multiple business cycles.
Is it likely that as the crisis deepens there could be a shift to Keynesian policies especially if there is a new wave of struggle and resistance in the face of the bailouts.
JBF: There has already been something of a switch toward Keynesian-style policies, out of sheer necessity. But Keynesianism is inadequate to deal with the overall crisis of capitalism. Further, there is a great deal of resistance to Keynesian measures structurally from the capitalist class, as well as resistance to Keynes’s ideas at the level of economic theory and policy. One has to remember that Keynes helped account for the Great Depression, but Keynesianism and civilian government spending did not lift the economy out of the depression. Rather the Great Depression ended when it merged into the Second World War. So there is no historical case of an effective Keynesian response to conditions of depression (unless you count so-called "military Keynesianism" of the kind that began in Germany with Hitler and reached full flower in the Second World War).
We talk in the United States of the possibility of a new New Deal associated with the expansion of civilian government spending. The New Deal itself was never Keynesian in inspiration, but it did lead to a moderate (though inadequate) increase in civilian government spending and, more importantly, in the creation of jobs and work relief programs, Social Security, etc., i.e. programs that genuinely benefited the majority of the population. A new revolt from below (such as that associated with the rise of industrial unionism in the 1930s) in the United States and other countries could produce similar programs, which might be justified this time around on the basis of a Keynesian stimulus. Some have tried to interpret Obama’s stimulus in the United States that way. But the current stimulus is far too small to have much of an effect under present circumstances, and 40 percent is taken up by tax cuts. (Nor, it should be noted, is Obama’s stimulus package progressive in the sense of the later New Deal.)
In the United States, in fact, there has been a ceiling on civilian government spending as a share of GDP (as Paul Baran and Paul Sweezy were the first to point out) that has lasted for seventy years. Given that it has persisted so long, we can conclude that there are enormously strong class forces keeping that ceiling in place. So any attempts to increase the share of civilian government spending in national output, even in the deepest crisis since the Great Depression, face strong resistance, as we are already now seeing. (The fact that the ceiling on civilian government spending has remained in place does not mean that the level of government expenditure benefiting the general population has been maintained. Instead there has been a vast growth in recent decades of the "criminal justice system," police and prosecutors, prisons, and incarceration, giving the United States by far the largest percentage of its population incarcerated of any country on earth.)
If you look at those economists who are taking a kind of Keynesian stance — figures such as Krugman or Stiglitz, both of whom received the Bank of Sweden’s Memorial Prize in Economic Sciences for their services to the economics mainstream — the level of criticism of the system is very muted compared to Keynes himself. There is here no mention of the "outstanding faults" of the capitalist system or the "somewhat comprehensive socialization of investment." Until fairly recently, Krugman was a strong critic of what he called, in the title of a 1997 article (originally published in Slate), "Vulgar Keynesians." In that piece he wrote:
You might think that raising wages would reduce the demand for labor; but some early Keynesians argued that redistributing income from profits to wages would raise consumption demand, because workers save less than capitalists . . . and therefore increase output and employment [through their spending]. Such paradoxes are still fun to contemplate; they still appear in some freshman economics textbooks. Nonetheless, few economists take them seriously these days. There are a number of reasons, but the most important can be stated in two words: Alan Greenspan. . . . Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. (Krugman, The Accidental Theorist, 1998, 30-31)
In his introduction to the 2007 edition of Keynes’s General Theory issued by the Royal Economic Society, Krugman observed that Keynes was "wrong" in thinking that the economic contradictions of the 1930s would persist and that problems of stagnation would continue. I mention Krugman only because he is one of the very best liberal economists, and frequently identified with Keynesianism. He and Stiglitz and some others are certainly "disillusioned defenders of the system." But they are a far cry from Keynes himself in this respect. To be sure, Keynes, as I have noted, offered no real solution to the problems of deep stagnation, financialization, and widening inequality that currently beset the capitalist economy. Nor were his criticisms of the system ever acceptable to the vested interests.
What this means is that real solutions to the contradictions of capitalism lie not in Keynesian economics but in a revolt from below of the population, which holds out the potential for a change in the rules of the game. Joan Robinson said somewhere that a political movement strong enough to reform capitalism would also be strong enough to introduce socialism. Therein lies our hope and their fear.
Can there be an exit from this crisis through a shift to green capitalism, i.e. massive investment in renewable energy, green technologies — a kind of "green Keynesianism" as proposed by the folk of New Economics Foundation.
JBF: There is a lot of talk recently about "green Keynesianism." Robert Pollin and others at the Political Economy Research Institute at the University of Massachusetts issued a report last year on Green Recovery, which was conceived in essentially these terms — as is the work of the New Economics Foundation in Britain, with which I am less familiar. In this context, Obama’s stimulus package has been interpreted by many as a "Green New Deal" or as "Green Keynesianism," due to its emphasis on the development of energy saving technology. Theoretically, any increase in government spending at this time can help soften the downturn and even contribute to the eventual restoration of economic growth. As Keynes said, if the government simply put people to work by having them dig holes in the ground it would help stimulate the economy under such circumstances. So there is no doubt that spending on the environment would, like any other spending, serve to promote growth.
What kind of spending one does of course matters economically in the degree to which it immediately provides jobs and socially in its usefulness. Dollars spent on investments in future technology are certainly less efficient in putting people to work immediately than work relief programs. Environmental spending can of course be of either kind, but the bulk of green spending in the Obama plan is, I gather, directed at research and long-run technology and investment projects. This will not give as much bang for the buck in terms of current job promotion and in fact is heavily geared to subsidies to industry. We might even say that what is being advanced is not so much green Keynesianism as "green Schumpeterianism," since it is primarily aimed at stimulating investment with new technology.
In spending on the environment in a capitalist economy one runs up, like everywhere else, on deeply entrenched class forces of resistance. Those things that could be done to address the ecological crisis, such as the closing of coal plants and their massive replacement by other forms of energy, or the establishment of a national carbon tax with 100% dividends to the public, as proposed by NASA’s James Hansen, are not done, because the vested interests won’t allow it. Either it interferes with economic growth or with profits or both. Obama heavily committed himself during the presidential campaign to the continued support of big coal.
Indeed, there are really two questions here. Can a green Keynesianism lead to economic recovery? And can we save the environment this way? My take on green Keynesianism is that it is much too limited in nature, and too technologically driven, to constitute the nucleus of a full economic recovery. In fact, we are faced with a deep, long-lasting problem of economic stagnation and the crisis of financialization, as discussed in The Great Financial Crisis, which Keynesianism by its nature can do little to address. With regard to the environment — to be understood as by far the most serious challenge of our time since the climate, the earth’s species, and human civilization are all threatened — what is currently needed is not an economic recovery plan or faster economic growth, but an ecological revolution. This would necessarily be a social revolution, on a far more massive scale than anything yet imagined. This is an issue that I have addressed in my forthcoming book (to be published in April) The Ecological Revolution.
Keynes can help us understand the flaws of capitalism but he cannot take us very far down the road to meeting the challenges of the twenty-first century. His practical suggestions were in the end simply limited to trying to fix what he called "magneto" (or alternator) problems. He avoided directly addressing the larger contradictions or "outstanding faults" of capitalism that he saw. He never got beyond advocating more in capitalist terms, while we live in a world where we need to focus on enough. For this we need not Keynes (or Schumpeter), but the much more revolutionary — economically, socially, and ecologically — figure of Marx. (See my Marx’s Ecology.) Keynes represented the last great scientific defender of a "rational capitalism" that has now proven to be impossible.
Publishied by Amandla Magazine, South Africa