Keynesian International

David Marquand

  • Controlling the Economic Future: Policy Dilemmas in a Shrinking World by Michael Stewart
    Harvester, 192 pp, £18.95, November 1983, ISBN 0 7108 0182 3
  • In Defence of the Mixed Economy by Andrew Shonfield, edited by Zuzanna Shonfield
    Oxford, 231 pp, £15.00, February 1984, ISBN 0 19 215359 5
  • The Welfare State in Crisis: Social Thought and Social Change by Ramesh Mishra
    Harvester, 208 pp, £15.95, December 1983, ISBN 0 7108 0240 4

As the name they gave their subject implied, the great political economists of the 19th century knew that the economy cannot be studied fruitfully in isolation from the polity. The notion that there is, or should be, a distinct and autonomous discipline of ‘economics’, whose practitioners are solely concerned with economic relationships, and for whom the corresponding political relationships are professionally irrelevant, would have seemed to them absurd, even shocking. By a curious paradox, however, the 19th-century tradition of political economy has fallen further and further into abeyance the more closely the economy and the polity have been intertwined in practice. Nowadays, in this country at any rate, economists study economics, while political scientists study politics. The result is that neither discipline has much to say about the central economic and political problems of our time.

For, as all these authors remind us in different ways, those problems are neither political nor economic. They are politico-economic. They spring from the interactions between the polity and the economy, and between different polities and different economies: from the way in which political and economic relationships impinge on each other, both within and across national frontiers. Of course, there is nothing new in interactions of these sorts. Wars and booms; empire and exploitation; inflation and instability; bad harvests and bread riots; tight labour markets and uppity wage-earners; national aggrandisement and protective tariffs; trade and the flag; blood and gold – the links between all these have been familiar for centuries. But the connections between the two domains are closer and more complicated than they used to be, and their policy implications more uncomfortable. In a sense which has not been true in the past, it is now a waste of time to look for economic solutions to our most pressing economic problems – or, for that matter, for political solutions to our most pressing political ones. What we need are politico-economic solutions – and we have forgotten how to think in politico-economic categories.

Hence the prolonged crisis of managed welfare capitalism in which the Western world has been engulfed since the early 1970s, and which has provoked a strange, atavistic neo-liberal counter-revolution against the Keynesian social democracy of the 1950s and 1960s. Socially and politically, the current crisis has much in common with the Great Depression of fifty years ago. Now, as then, millions of people have been condemned, through no fault of their own, to the half-life of involuntary unemployment. Now, as then, the victims retreat into a kind of numb despair, while the rest of us pass by on the other side. Now, as then, incalculable damage has been done to the cohesion of our societies, and therefore to their chances of sustained recovery. Now, as then, governments seem powerless to act.

Analytically, however, the contrasts are more significant than the similarities. Then, governments seemed powerless to act because they did not know how to act. They sat and watched the unemployment figures mount because they lacked the economic expertise to get them down. As A.J.P. Taylor once put it, they were like doctors before the invention of antibiotics. All they could do was to prescribe rest and liquids, and take their fee. Present-day governments are in a quite different position. There is no secret about what needs to be done. The difficulty lies in doing it. Since Keynes, everyone has known that the key to the level of employment lies in the level of demand. Everyone has also known that governments can stimulate extra demand if they want to. Though the British and American Treasuries sometimes give a different impression, that knowledge has not mysteriously vanished. The trouble is that we can no longer put it to work. Our inability to do so does not spring from imperfect economic understanding. It springs from imperfections in our institutions, attitudes and values.

There is, in fact, a terrible irony about the neo-liberal counter-revolution which is doing so much damage to the moral quality of our civilisation. The neo-liberals object to Keynesian economics. They have no quarrel with its underlying political assumptions. But Keynes’s economic teaching is still valid, and in turning our backs on it, we have turned our backs on one of the most hopeful intellectual constructs of the century. The reason his system has collapsed is that its political foundations have crumbled. Instead of abandoning the economics and sticking to the politics, we should be trying to revise the politics so as to make the economics workable again.

Revision is needed in two areas. As Michael Stewart shows in his brilliant and disturbing analysis of the political economy of global interdependence and tightening resource constraints, conventional post-Keynesian economic management is spatially myopic. Keynes and his followers presupposed national economic sovereignty, or at any rate the possibility of national economic sovereignty. Indeed, one of the main objects of the Keynesian revolution was to make the nation-state master in its own economic house. Governments were to be freed from the old, classical disciplines, which had forced national economic policy into an international straitjacket. Henceforth, they would be able to follow expansionary policies if they wanted to expand, without looking over their shoulders at the rest of the international economic community. The agonies and humiliations of 1931, when external financial pressures forced the elected government of a sovereign state to adopt policies which it believed to be cruel and wrong, would be things of the past.

And so, for a time, it proved. But, as we have now discovered, only for a time. For Ramsay MacDonald and Philip Snowden in 1931, read Callaghan, Carter and Mitterrand in our own day. National economic sovereignty is once again an illusion. The huge, unprecedented growth in world trade which was one of the main engines of the long boom of the 1950s and 1960s has remade the old, classical straitjacket in a new form. Much more than in the past, we all live by taking in each other’s washing. Much more than in the past, our livelihoods therefore depend on our neighbours’. The result, Michael Stewart shows, is that national economic variables can be as strongly affected by the policies of foreign governments as by those of the national government which, in the Keynesian system, is supposed to enjoy sovereignty over them. Deflation in country A also deflates the economy of country B, which exports to country A. Reflation in country B will help to reflate the economy of country A. If country A reflates while country B deflates, it may do more to raise output and employment in the market-hungry export industries of country B than in the industries within its own borders. If it reflates alone, while countries B to Z are all busily deflating, its reflation may be swamped by the combined effect of the others’ deflation.

The growth of the Euro-currencies and the relaxation of exchange controls has made this network of mutual dependence even tighter and more difficult to escape. Huge sums can now be switched, almost instantaneously, at any moment of the day or night, from one currency into another. ‘Strong’ currencies are strengthened and ‘weak’ currencies weakened: governments which try to stem these self-reinforcing tides are overwhelmed. The net effect, Michael Stewart suggests, is that the whole system is biased towards deflation. The national governments which decide whether to deflate or reflate do not – indeed, under our present political arrangements, cannot – take the transnational repercussions of their decisions into account. Each of them is responsible only for the welfare of its own nationals; no one is responsible for the welfare of the totality of nationals. Each therefore fights its own corner, and each discovers that in this Hobbesian struggle of all against all, deflation is safer than reflation. For deflationary policies run with the grain of the system; reflationary policies against it. Deflationary governments are rewarded; reflationary ones punished. Thus countries with ‘weak’ currencies dare not reflate, while countries with ‘strong’ currencies have no incentive to do so. Brave souls who try to buck the system end by making humiliating changes of course, which disillusion their supporters and destroy their credibility. Keynesianism in one country is no more possible than socialism in one country.

The moral is plain. If we are to escape from the present deflationary impasse, we must somehow transcend national boundaries and act on a world scale. Since national economic sovereignty is an illusion, we must enthrone an international economic sovereign. The trouble, of course, is that no such sovereign is in sight. After the war, when Marshall Aid primed the pump of Western Europe’s economic recovery and set the long boom of the next quarter of a century in motion, the United States was so much stronger than anyone else that she could assume the burdens of sovereignty herself, at any rate in the Western world. But those days have gone, and there are no new candidates for the post. In these circumstances, Michael Stewart thinks, the choice lies between ‘de-linking’ and ‘co-ordinating’ – in other words, between trying to cut through the network of interdependence with import and exchange controls, and establishing more effective machinery for the co-ordination of national economic policies. Rightly, he rejects de-linking – not least because, as he points out, co-ordination will in any case be necessary to overcome the even more intractable resource and ecological problems which loom only just over the horizon. Thus co-ordinating is all that is left.

‘Co-ordinating’, however, is a feeble word for what his argument implies. If he is right, we must internationalise what are now national decisions, and replace the present system of nominally sovereign, but in practice helpless, nation-states with a system of transnational power-sharing. That requires more than co-ordination, as that term is normally understood. Though he does not make the point himself, his logic is, in fact, remarkably similar to the logic which led the founding fathers of the EEC to reject intergovernmental co-operation à l’anglaise in favour of the ‘Community method’, and Roy Jenkins to relaunch the concept of monetary union during his first year as President of the Commission. With all its faults, the EEC is still the best available prototype of the sort of transnational power-sharing to which his analysis points. The strength and persistence of the opposition to such power-sharing from the Community’s member governments – above all from Britain’s – are eloquent testimony to that most fundamental of contemporary contradictions, the contradiction between the traditional structure of the nation-state and the welfare of its citizens.

They do not testify alone. A similar contradiction can be found in the second area where Keynes’s political assumptions need revision. Not only did he presuppose national economic sovereignty: he also assumed that sovereignty would be exercised by a liberal state, governed according to the traditional rules of pluralist democracy. In the Keynesian system, as much as in classical liberal systems, the government governs. It has more functions than classical liberal governments had, but it discharges them in the same way. It decides how the economy is to be steered, and it does the steering. It may, of course, fail to reach its objective. Some helmsmen are less competent than others, and some weather conditions more adverse. But its is the only hand on the tiller. It does not have to share it with strange creatures of the deep.

In the real world, however, that is exactly what governments are obliged to do – at any rate, if they pursue Keynesian economic policies. As well as transforming the role of government, the Keynesian revolution transformed the power relationships of the economic agents whose behaviour it enabled government to influence. Full employment is bound to strengthen organised labour at the expense of capital. In the absence of countervailing pressures, wages are forced up, profits eroded and investment and the balance of payments endangered. In societies where these forces are particularly strong the result has been an inflationary sauve qui peut, as group after group comes to the conclusion that the only way to avoid being trampled upon is to trample on others first. Thus post-Keynesian governments sooner or later have to choose between two options. They can turn their backs on the whole Keynesian revolution, and try to break the power of organised labour by allowing unemployment to rise. Or they can establish systems of corporatist consensus-building, in which capital, labour and the state bargain together to settle the distributional conflicts which set the wage-cost spiral in motion. In the first, neo-liberal option, the state retains its power at the cost of shedding one of its most important functions. In the second, social-democratic one, it retains its functions at the cost of sharing its power.

That is only the beginning of the story. The late Sir Andrew Shonfield was one of the last, and in our time one of the greatest, representatives of the 19th-century tradition of political economy. His posthumously-published study of the institutional and philosophical dilemmas now facing managed welfare capitalism is characteristically rich and suggestive, though tragically incomplete. Two conclusions emerge. The first is that the societies which have weathered the storms of the 1970s and 1980s most successfully – Japan, West Germany and the smaller social democracies of Northern and Central Europe – are those in which corporatist consensus-building is most firmly entrenched. The second is that corporatism succeeds only if it is open, uninhibited and ‘transparent’. If it is covert, furtive and opaque, as Britain’s intermittent corporatist experiments have been, it will fail.

Shonfield did not live to explore the implications of that second conclusion as fully as he must have hoped to do. Even so, the thrust of the argument is clear enough. Pace the neo-liberals, Britain’s economy has declined, not because it is too corporatist, but because it is not corporatist enough: because successive British governments have been unwilling or unable to embrace the corporatist option enthusiastically and unapologetically, and because they have therefore failed to create enduring structures within which corporatist consensus-building can take place. In Scandinavia and Central Europe, everyone knows that government and the interests bargain together to reach a consensus and most people approve of their doing so. In Britain, their bargaining has been kept behind closed doors, as though it was something to be ashamed of. Ours has been the corporatism of the nod and the wink, of whisky and sandwiches at No 10, of arm-twisting in the corridors, combined with buck-passing in public. The result, as Shonfield puts it,

was a modified variety of corporatism which did not fulfil the transparency conditions. Nor did it bring the public interest to bear adequately on the corporatist bodies. This described the UK in the 1960s. In the subsequent period, from Heath’s initial principle of ‘no talk’, through the Labour Government’s social contract in the mid-1970s, to the apotheosis of anti-corporatism under the Thatcher Government, the UK made little progress in establishing a regular system of corporatist collaboration between government and the representatives of business and labour. It is precisely because the UK, and also the US, have not developed methods to work for such collaboration sufficiently that they are markedly disadvantaged under present economic pressures and at times appear ungovernable.

Setting out from a different starting-point, and addressing a different audience, Ramesh Mishra comes to a similar conclusion. He distinguishes between a ‘differentiated’ welfare state, pursuing Keynesian economic and Beveridgean social policies, and a more corporatist variety, of the sort found in Austria and Sweden, which he describes as ‘integrated’. In the ‘differentiated’ welfare state, the economy is regulated from the demand side only. Economic and social policy are thought to belong to different realms, and are decided independently of each other. There are no institutional barriers to the pursuit of sectional interests, and economic power acknowledges no social responsibility. In the ‘integrated’ form, the economy is regulated from both the demand and the supply sides. The economic and social realms are seen as interdependent, and changes in one are traded off against changes in the other. The representatives of the major economic interests bargain together over a broad range of economic and social policies, recognise their responsibility to the wider society around them, seek consensus and practise class collaboration. These are, of course, ideal types: no society fits either model perfectly. All the same, Mishra argues convincingly that, despite occasional shamefaced and ad hoc moves towards ‘integration’, Britain’s political economy remains ‘differentiated’, and that her economic decline, and the neo-liberal counter-revolution which that decline has helped to provoke, both stem from that fact.

Once again, the moral is plain. The old, 19th-century model of the sovereign state is doubly obsolescent. Not only do we live in an interdependent world, we also live in an interdependent society. Global interdependence requires the state to share power with other states, across national boundaries. Social interdependence requires it to share power with the organised interests within those boundaries. It is because we have failed to draw that moral – or, more precisely, because we have failed to draw it explicitly and apply it unambiguously – that we now find ourselves trapped in the neo-liberal cul-de-sac.

The reasons are complex and elusive. A party system which fortifies class antagonisms and a class structure which fortifies the party system; a conception of private interest which recognises no obligation to the public interest; a conception of the firm which recognises no obligation to its employees; a conception of the market which does not distinguish between the fast buck and a legitimate reward for risk-taking; defensive, inward-looking and fragmented trade unions; short-sighted, ill-educated and authoritarian managements – all these bear some of the blame. But two reasons stand out above the others. The first is that our whole political culture is permeated with a deep, stubborn, almost instinctive resistance to the very notion of power-sharing. The second is that we lack a generally accepted ‘governing philosophy’, from which we could derive the criteria to settle the distributional conflicts which have torn our industrial society apart. Both reasons are cultural, attitudinal, in the last resort moral, rather than technical or institutional. We have not been trapped in the neo-liberal cul-de-sac by failures of technique, or by an unwillingness to create new institutions. The last fifteen years of our history are littered with sophisticated technical devices which failed to work, and new institutions which collapsed almost as soon as they were created. We are in the cul-de-sac because we have lacked the will and imagination to develop the social morality appropriate to the interdependent society in which we live. None of the books reviewed here tells us how to put that fault right. Between them, they have done a great deal to diagnose it. And diagnosis is the first step towards cure.