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The Hidden Return of Keynesianism

"The real cause of crisis - the unrealistic profit expectations of financial investors - is made taboo or totally unrecognizable. Neoliberal financial investment is like a ship that runs aground on account of the tide while the passengers throw their possessions overboard in the false assumption that their heavy cargo is responsible.. The market-radical attacks on the welfare state amount to rewinding the film of capitalist exploitation
The Hidden Return of Keynesianism

The cause of the present crisis lies in the unrealistic profit demands of financial investors, not in excessive social benefits

By Christoph Deutschmann

[This article is originally published in: Frankfurter Rundschau, December 1, 2003 is translated from the German on the World Wide Web,

In 1936 John Maynard Keynes published his General Theory of Employment, Interests and Money. He opposed the view of his orthodox colleagues that unemployment was caused by the stubborn refusal of workers to accept real wages corresponding to the productivity of the economy. The greatest economic crisis in the history of capitalism preceded Keynes' work. This crisis temporarily made 20-40 percent of the gainful population of industrial countries unemployed. This crisis was considerably intensified by the rigorous austerity policy of the government recommended by economic experts. The common sense of political actors was responsible, not science when one administration after another refused to balance the declining tax revenues with new spending cuts and instead financed the budget loopholes through credit. Later the academic economy under the influence of Keynes first discovered that spending cuts are not the right means for mastering the crisis.

The present crisis is not comparable with the catastrophe of 1929-33. Governments learned the Keynesian lesson and combated recession with a massive expansion of the re-indebted public budgets. Therefore the beautiful fašade has now disappeared today from the "stability pact" of the Euro lands. Keynesianism is not dead but very lively.

Strangely enough, the government, parties, economy and media seem to have no more urgent interest than to declare Keynesianism dead. When public debts reached record-highs, the Red-Green government held to its goal of lowering taxes proposed in the planned tax reform and reducing new indebtedness. Keynes' concept of involuntary unemployment in capitalism is no longer socially acceptable. As in the old pre-Keynesian times, the unemployed should be held responsible for their fate with the Hartz program and Agenda 2010. Politicians of all camps, journalists, economic leaders and professors outdid each other in urging new spending cuts. A public discourse developed that in its circular inevitability fatally recalls primitive rain-dance rituals. What is holding back the rain? The gods are angry. To soothe the gods, a goat must be sacrificed. If the rain is still held back, the gods must still be angry. Therefore ten goats must be sacrificed. Then what?

The course is said to be "without alternative". Which course is without alternative: the Keynesian way that is actually followed or the anti-Keynesian way that is in the political limelight? Keynes in no way insisted on a budgetary policy of least resistance though this is often wrongly imputed to him today. Rather he saw the state in the role of a helper in need in a dilemma arising as a result of the increasing social wealth. With the growth of the national income, the share of consumer spending falls and the saved part of income grows. These savings must be invested to prevent a decline of effective demand. However finding profitable investment opportunities becomes increasingly difficult since all investment is motivated by future consumption. The profit rate falls and ultimately tends to zero. Capital loses its scarcity value in a society that lives in excess and can easily produce all essentials. Means of production will be used in the future but good management cannot gain their replacement costs.

Money as a Public Good

The problem is that owners of assets will not face this situation and accept the consequences of a decreasing scarcity of capital. They believe they have a natural right to profits and withdraw their savings from the market as soon as the expected interest rate falls below a certain level. Then financial assets are no longer invested but hoarded or parked in short-term investments. This leads to a decline of effective demand and employment. The cause of crisis in the Keynesian model is the stubborn refusal of owners of capital to accept the economic consequences of an objectively decreasing scarcity of capital, not the stubborn insistence of workers on high wages and social benefits.

Thus the necessity arises of skimming off the excess savings and bringing them back into the economic circulation. However since the owners of assets will not do this themselves, only the state can accomplish this task. As Keynes proposed, the state can progressively tax income. If this remedy is not enough, the only other possibility lies in balancing the lacking private investments with deficit-financed state expenditures and stabilizing effective demand with fiscal measures. Keynes foresaw a long-term process of the "socialization of investment", the gradual transformation of money into a public good whose production and distribution are increasingly decided according to political viewpoints and no longer only according to private viewpoints.

From a modern perspective, Keynes must be criticized for a fatal misjudgment of the political balance of power. Frightened by the crises of the seventies, the owners of assets resisted the Keynesian welfare state and bundled their power in worldwide pension- and investment funds. They successfully established a hegemonial regime about which Keynes could hardly have dreamt. The national capital- and currency markets were deregulated. The increasing international mobility of capital opened up an El Dorado of speculation- and investment possibilities around the globe. This put national monetary- and fiscal policy under pressure. Under the threat of unfriendly reactions of investors, the nation states drove one another into a competition over lowering taxes and spending. In addition the public budgets fell into dire financial straits through the tax evasion of capital- and business taxes, around 70 billion Euros annually in Germany alone. The inequality of incomes and assets increased.

While Keynes underrated the power of owners of assets, his crisis diagnosis is more accurate than ever. Growing financial assets demand profits. However profits do not grow from capital as branches grow from a tree. Profitable investment possibilities must be found to satisfy the claims of investors. Where are these possibilities? In the nineties, people believed that a great new technological vision existed in the Internet and the "information society". People hoped for an upswing that would absorb the enormous assets. However the vision turned out to be largely a deception. The billions of investments did not flow into real projects but only inflated a speculation bubble that ultimately burst. While desperately sought, great new technological visions are not in sight.

Everyone must search for new business ideas since business people themselves no longer have these ideas. Workers are stylized as "worker entrepreneurs" and "pseudo-independents". Profit can only be realized by marketing new technologies, products and services. However new technologies struggle for attention in an affluent society already inundated with innovative possibilities. More and more pressurized workers are sent into markets that have long been satiated. The battle around market shares often assumes grotesque forms.

Expansion of Credit Financing

These problems are not hidden from financial investors. Financial investors park their money in short-term liquid investments. When financial assets are not invested, decreasing demand and decreasing income soon result. The political actors do not see this directly but only in the mirror of rising costs. They attempt to cut and save in the false assumption that they can no longer "afford" these costs. The real cause of crisis - the unrealistic profit expectations of financial investors - is made taboo or totally unrecognized. Neoliberal financial investment is like a ship that runs aground on account of the tide while the passengers throw their possessions overboard in the false assumption that their heavy cargo is responsible.

The words and deeds of social democrat and conservative governments diverge greatly. They swear frugality and draft austerity programs with one hand and give money with the other. They remain Keynesians and can hardly act differently as democrats. This is also a constant lesson from worldwide economic crises. No democratically elected government can stand up to the ever-new cutting and cancellation of programs urged by the neoliberal advisors. The more governments follow the market-radical insinuations, the more credit-financed spending must be expanded to prevent a complete crash of the economy. Keynesianism is not dead but has become a political necessity.

The market-radical attacks on the welfare state amount to rewinding the film of capitalist exploitation, artificially making the population poor. In the midst of a world of unparalleled mass prosperity, individuals should be driven into a social-Darwinian struggle for survival garnished with empty words like "individualization", "entrepreneurship" and so forth. However the cause of the crisis lies in the over-accumulation of financial assets for which profitable investment opportunities cannot be found any more, not in an overly generous welfare state.

The economic justification for a very unequal distribution of incomes and assets falls away in a society that can no longer mobilize people for new great technological projects. Obviously it would be best if the rich realized this and voluntarily drew the consequences. Since this cannot be expected, only the stopgap remains of a compensatorial expansion of credit-financed state spending. Growth cannot be realized. Only the system crash can be prevented - at the price of an increased danger of inflation. Still society gains time to reflect about a new economic order in which it must no longer grow and run after the golden calf. This painful rearrangement full of conflicts is inevitable for all developed industrial countries.

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Now this is very good... 09.Dec.2003 12:48


It points out clearly the hypocrisy of economic leaders who claim to support free markets on the surface but realize, underneath the surface, that they will never work with adequate stability. They just won't admit that and so they can continue their dirty name-calling on labor unions and political progressives. I am not an expert on Keynesian economics but Keynes was, much more than any really renowned economist today, a true pragmatist. He understood that without economic justice there cannot be peace, and his understanding was backed up by 1930s political reality in Europe as fascism and Stalinism took over. The use of full-blown Keynesianism, not the bits and pieces of it we have today, did promote stability and economic growth among the market economies of America and Western Europe. When you combine this fact with a strong labor movement and a social-democratic political movement, the stage is set for an economic system much more innovative, fair, and worker-empowering than what we have today. I'm not saying Keynesianism is the utopia, there were definite problems and flaws that became revealed in the Sixties and Seventies, and Keynesian economic culture remained quite capitalistic and at times imperialistic. But I'd much rather see CEO incomes at 40 times the entry level worker instead of 400 times.

With the post-industrial economy much of the midcentury policymaking is obsolete but there will inevitably be new theories in the realm of economic science that will enable the common people to put their lives under their own control and give a more democratic voice in the operation of the global economy. Isn't economic democratization what "socialism" is all about, anyway?

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