The crisis: Is Keynes the answer?

Whenever there is a serious economic crisis, as there obviously is at the moment, and the ruling class responds, as it always does, with vicious cuts and mass unemployment the working class movement faces a choice: should we fight back with anti- capitalist demands and policies or should we go for policies designed to make capitalism work better?

For those who chose the second option, and that includes most Irish trade union leaders, the economist John Maynard Keynes is almost always a key point of reference, and some variety of Keynesianism is usually the economic strategy they support.

This is because Keynes’s ideas seem to offer a relatively painless option, on the one hand avoiding the need for the massive cuts and job losses being imposed by the likes of Fianna Fail or the British Tories, and on the other avoiding the need for major working class struggle or – God forbid! – revolution. Keynes also appeals to some quite radical people who either think his ideas were more radical than they really were or simply doubt the possibility of a real anti- capitalist struggle.

So who was Keynes; what did he stand for; and what attitude should the workers movement take to Keynesian ideas?

John Maynard Keynes (1883-1946), later Lord Keynes, was probably the most famous and influential economist of the twentieth century. He was educated at Eton and Cambridge, a friend and advisor to Lloyd George, and a member of the Liberal Party. He was a fully paid up member of the British establishment, a conscious and consistent supporter of capitalism, and strongly opposed to widespread nationalization or socialism. He despised Marx, calling Capital an "obsolete economic textbook that contains nothing but out-of-date controversialising" and said he had no desire to live in a society dominated by "the boorish proletariat."

He did, however, react to the Great Depression of the 1930s with powerful criticism of the economic orthodoxy of the day. That orthodoxy was basically what today we would call neo-liberalism. It stated that governments should not interfere with the working of the capitalist market – the role of government was only to maintain the general conditions, law and order etc., in which the market could operate. This was because, it was claimed, the laws of the market, left to themselves, would produce the best possible allocation of resources and indeed make any prolonged period of mass unemployment or recession impossible. Government intervention in the economy was not only unnecessary, but positively harmful as it would upset the spontaneous and inevitable restoration of balance and equilibrium.

Keynes flatly rejected this. He denied there was any law guaranteeing that the free market would work well or produce full employment. On the contrary it was perfectly possible for capitalism to settle at a ‘low equilibrium’ of poverty, stagnation and high unemployment. But it was possible, he argued, for governments to intervene in the economy in such a ways to restore growth and prosperity.

What was required was to increase , not cut, public spending so as to raise the purchasing power of the population (what economists call ‘effective demand’) and thus stimulate demand for goods which would in turn generate more production and more employment in an ongoing upward spiral (a ‘virtuous’, as opposed to a ‘vicious’ circle). To the objection, heard then as now, that such an increase could not be afforded, Keynes argued that governments should run a deficit i.e. borrow so as to spend above their income for a period, on the assumption that as the economy expanded so the government’s income from taxation would increase and the deficit would be eliminated.

Keynes’s ideas were generally not accepted in the thirties ( though Roosevelt’s New Deal in America could be seen as a kind of partial, and not very successful, Keynesianism) and the Depression was only brought to an end by the Second World War which ‘stimulated’ economy activity and ‘restored full employment’ by slaughtering 50 million people.

When western capitalism entered its long post-war boom , on the basis of a mixed state-private economy and massive ongoing arms spending , Keynes was given the intellectual credit for this (though they weren’t really Keynesian policies, and a more profound explanation of the boom in terms of the effect of arms spending on the rate of profit, was provided by the Marxist ,Michael Kidron). Keynesianism became the dominant economic theory in governments and universities for twenty five years.

But when crisis returned in the seventies in a form that combined unemployment and inflation Keynesianism was proclaimed dead and the political/academic consensus shifted back to the worship of the market, variously referred to as monetarism, Thatcherism and neo-liberalism. This served as the ideological basis for the sustained assault on trade unions and the working class in the Thatcher /Reagan years. Blind faith in market forces continued to prevail through to the ‘globalisation’ era of the nineties and early noughties. Then came the crash of 2008 which drove a coach and horses through the ideas of neo-liberalism and Keynes came back into fashion.

And no wonder! When a Keynesian economist like Michael Taft, Political & Economic Researcher with UNITE says “Expand demand - more spending, not less, is what the economy needs to maintain and expand business activity... You can’t cut-and-tax your way out of a recession - you spend” .it is a breath of fresh air compared to Cowan and Lenihan’s cuts.

And when Taft demands, “A flat-rate base pay increase between €25 and €30 per week,”and says ‘Re-introduce pay-related unemployment benefit”. [quotations from his article of November 2008 Towards a New Economic Narrative] the workers’ movement should certainly agree.

Unfortunately neither Keynes analysis nor Taft’s proposals go nearly far enough to solve the crisis or point a way forward for the working class. First it must be understood that when Taft says WE should expand , there is no WE, there is the capitalist class and its government which has all the power and there is US, the workers, and if we want them to do something that benefits us , like a flat rate pay increase, we have to force them, by mass action and struggle.

Second, Keynes (and Taft) only grasps one aspect of the crisis of capitalism, namely the problem of over production, or lack of effective demand ( which Marx, incidently, had analysed as early as The Communist Manifesto of 1848) and not the problem of the falling rate of profit. In Capital Vol. 3 Marx shows that capitalism, a system based on production for profit, nonetheless generates a tendency for the rate of profit to fall.

This is because all profits derive from the surplus value extracted from labour (‘surplus value’ is the technical term used by Marx to refer to the gap between the wages paid to workers and the value of what they produce), but each individual capitalist tries to increase their share of the total profits in society by investing more and more in labour saving machinery. This has the effect of reducing labour as a proportion of total outlay and thus reducing the overall rate of profit (the proportion of profit to total investment). When the rate of profit falls capitalists become reluctant to invest. It is precisely such a decline in the rate of profit that has underlain the global crash since 2008.

If public spending, wages and employment are increased, as the Keynesians and socialists both want, the capitalists will likely respond with an investment strike which, if they are left in control, will again plunge the system into crisis and throw workers on the dole.

This is why, going beyond anything Keynes would have countenanced, we need demands that challenge capitalist control of the economy – like the demands for one publically owned bank which serves the people, and for seizing the assets of the rich – and ultimately we need a workers movement to take control of the government and the state, i.e. we need socialism.



John Molyneux
4 October 2010