Every 40 year or so, it falls to the mass of the population, led by a politicised youth, to deliver a knockout blow to the prevailing economic/political consensus. The affluent (neo)liberal classes are inevitably horrified when this happens, since it rocks the foundations of their comfortable way of life. The role of the masses, after all, is to do as they are told… and to do it quietly. And for the most part they do. So long as enough crumbs fall down from the top table, most people are happy to live their lives without giving a second thought to such esoteric areas of inquiry as economics and politics.
The problem is that the elites, and the affluent liberals who are paid to represent their interests, turn out not to know a great deal about politics and economics either. Most of them spout illiterate nonsense about magic money trees and not paying ourselves more than we earn as if this is some divine truth handed down from the gods. In reality, this nonsense is designed by a more enlightened inner circle to mislead and misdirect the mass of the population.
Those few among the elite and their paid advisors who understand how money works are fully aware that the state is neither a household nor a business. The essential difference being that the state really does make money, while the best households and businesses can hope to do is to earn it. They also understand the contradiction inherent in the dual economic role played by the masses – that they must simultaneously act as workers and consumers. If there aren’t enough consumers to purchase all of the goods and services produced in the economy, then businesses go bust. This generates a vicious circle because the ensuing unemployment lowers consumption still further.
This was well understood – but not properly learned – the last time we experienced a major financial crash and ensuing decade of depression. Writing in 1943, Polish economist Michal Kalecki set out the reasons why the elites of the 1930s continued to undermine consumption despite knowing full well that it was in their interest to do the opposite:
“Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?”
For Kalecki, there are three political objections that outweigh the elites’ economic best interests:
- Dislike of state interference in the economy
- Hostility to the idea of subsidised consumption and direct state investment
- Opposition to the political consequences of maintaining high-paid full-employment.
To this day, business leaders take every opportunity to promote the importance of maintaining “confidence” in the economy. A loss of confidence, we are told, will surely result in another crash and further depression. Since state interference is bound to shake business confidence, it is to be avoided at all costs. As Kalecki observed, this is a political rather than an economic argument:
“Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.”
State investment is opposed because it risks direct competition with the elites’ (today largely financial) business interests. Even when governments pledge only to invest in non-competitive objects such as road building, schools and hospitals, elites resist out of fear of mission creep:
“This conception suits the businessmen very well. But the scope for public investment of this type is rather narrow, and there is a danger that the government, in pursuing this policy, may eventually be tempted to nationalize transport or public utilities so as to gain a new sphere for investment.”
The alternative means of expanding consumption in a depressed economy is to subsidise it directly, for example by increasing pensions and benefits. The elites should welcome this because it boosts their profits without the need for state involvement in business:
“In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’—unless you happen to have private means.”
The fundamental secret of wealth in a capitalist economy is simply that it is not derived from work. Wealth is actually derived from what economists call rent-seeking (which is not to be mistaken for activities like renting out a property or a car, since these have wider social benefits). Work might provide someone with the initial seed capital with which to develop a rent-seeking activity. But true wealth accrues to those who benefit from passive income streams that require no effort. On the other side of this, however, is the requirement that a much larger part of the population have no other source of income than the sale of their own labour. Were the state to raise pensions and benefits to too high a level, people would be able to avoid work altogether. Worse still, in a full-employment economy in which consumption is subsidised, the foundations of capitalism itself would be undermined:
“Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.”
In this, Kalecki effectively sets out what actually happened in the late 1960s and early 1970s as the post-war boom petered out and the political consensus collapsed. Once the baby boomers – the first generation not to have lived through the privations of depression and war – came of age, they were prepared to revolt against the prevailing business as usual that had bought full-employment with inflation, labour militancy, collapsing public services and capital strikes. They also chose to reject the conventional wage-control policies that were supposed to maintain the status quo, since in practice these benefited a labour aristocracy in a handful of key industries at the expense of the wider working population whose real wages were falling. Thatcher and Reagan were a direct rejection of the consensus. The (neoliberal) political revolution that they unleashed was in part a return to the economic orthodoxy of the 1920s and 1930s, but with one key difference – this time it was global.
Traditional capital controls were removed, allowing corporations to relocate to areas of the planet that had lower wages and fewer regulations. The power of labour unions was broken simply because strikes could be countered with further offshoring. It is no accident that the only large scale trade unions left today are in national public services that cannot be relocated overseas (although they can be privatised and cut). Rather than funding consumption through full-employment and subsidised incomes, neoliberalism turned to the magic of credit. The working masses could borrow money to buy houses, then use rising house prices to borrow against the value of their homes to engage in even more consumption.
The US Democrats under Bill Clinton and New Labour under Tony Blair became the beneficiaries of the neoliberal consensus. Both chose to throw their traditional working class supporter base under the bus by embracing the financial industry and encouraging and extending the credit-based economic boom that began with “Big Bang” deregulation in the mid-1980s. The US rust belt and the populations of Britain’s ex-industrial heartlands could go hang – they had nobody else to vote for in any case. And there were enough votes from the property-owning baby boomers to prevent a return to Republican/Tory governments. All that mattered was to keep the lines of credit open.
It was a Ponzi scheme, of course. House prices were not rising because of any intrinsic property of houses. Rather, shortage of supply coupled to excessive lending served to drive house prices higher. The price of a house was determined by the highest amount potential buyers were able to borrow. To keep the game going, however, mortgage lenders had to find ever more complex means of lending money to people who probably couldn’t afford it. Securitisation and insurances helped keep the party going far longer than it should have. But when Ben Bernanke decided to respond to rising oil prices with a hike in interest rates in 2006, he tipped sub-prime borrowers over the edge. The ensuing financial crisis was a massive success in curbing the inflation that Bernanke feared, although only at the cost of almost destroying the global banking and finance system and plunging the global economy into an ongoing depression.
For millions of people in the de-industrialised regions of Europe, the UK and the USA, the economic and political landscape looks eerily similar to the 1930s. The famous “elephant graph” of global incomes lays bare the plight of the working and lower middle classes in the developed countries of the world; even as their elites have grown fat by exporting their jobs to a rising working class in Asia.
As in the 1930s, mass unemployment, falling incomes and a political elite that claims “there is no alternative” serve only to drive people to the extremes. As always, behind the claims of economic competence and sound finance is the political defence of elite privilege:
“There are, however, even more direct indications that a first-class political issue is at stake here. In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler.”
The failed alternative policies of the 1930s put forward by the elites also resonate today:
“In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in ‘playing with’ (public) investment or ‘wasting money’ on subsidizing consumption.”
If this sounds familiar it is because it is because it is the same policy of austerity cuts, tax breaks for the rich, low interest rates and quantitative easing that has been failing us since the crash of 2008. And as the policy fails the majority of the population, so the populist extremes gain support.
Aided by financial support from that part of the elite that understands the dangers involved in maintaining business as usual, the political figureheads of the new populism lure a gullible population with siren songs about “taking back control” and “making America great again.” Kalecki makes clear that fascism was (and is) always about saving the elite from their own folly:
“One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.
“The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of ‘sound finance’, which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.
“The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, ‘discipline in the factories’ and ‘political stability’ under full employment are maintained by the ‘new order’, which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.”
But history does not repeat itself (although it often rhymes). Dig beneath the insults that pass for debate on the political left today (if you are going to label everyone who disagrees with you a fascist, a racist or a misogynist then pretty soon you are going to be up to your neck in fascists, racists and misogynists!) and we see not fascism, but a generalised wave of anti-establishment sentiment that is as likely to produce a centrist like Emmanuel Macron or a leftist like Corbyn or Sanders than it is to produce extreme right wing populists like Farage, LePen and Trump.
In any case, there is no “going back,” whether it is to the right wing glory days of Thatcher and Reagan or the post war boom years of the 1950s and early 1960s. The economic conditions that allowed both of those economic and political consensuses to form are no longer present. Theresa May and Donald Trump are not going to bring the jobs back from China and Vietnam. Nor, given growing concerns about climate change and resource depletion, is there much to be gained from attempting to bring back highly polluting, coal-powered heavy industry to regions of the world where the scarred ex-industrial landscapes have only recently begun to heal.
Perhaps economist Steve Keen’s version of the future for the USA, UK and Europe is a better path to follow. One in which, like the 1930s, the great depression is ended by a war… but this time, that war will be one to ward off the consequences of climate change. Drawing on the work of economists like Kalecki, Keen argues for the state investment and full-employment that will be required to build a sustainable economy in future. This, surely, is preferable to the unrealistic promises of Trump and the British Brexiteers. As Kalecki concludes:
“But perhaps the fight for full employment may lead to fascism? Perhaps capitalism will adjust itself to full employment in this way? This seems extremely unlikely. Fascism sprang up in Germany against a background of tremendous unemployment, and maintained itself in power through securing full employment while capitalist democracy failed to do so. The fight of the progressive forces for all employment is at the same time a way of preventing the recurrence of fascism.”
It is indeed long past time to cast off the infantile economics of so-called “sound finance” and align our economic goals with our inevitable struggles against the effects of fast depleting resources and an increasingly hostile climate. This can be achieved with a new democratic consensus based on the innate human decency that provides a decent standard of living for all; and understands that extremes of wealth and poverty only ever result in misery for all concerned in the long run. The alternative, I fear, will not be more business as usual, it will be violent change involving the Kalashnikov or the Guillotine.