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International Socialism, March 1999


Dan Atkinson & Larry Elliot

Reflating Keynes: a different view of the crisis


From International Socialism 2:82, March 1999.
Copyright © International Socialism.
Copied with thanks from the International Socialism Archive.
Marked up by Einde O’Callaghan for ETOL.


One disadvantage of writing for publications of the scope of International Socialism is the time gap between first thoughts and press time. Initial jottings for this article were made in January and made much of the ‘eerie calm’ that had descended on the world economy after the turbulence of last year. Thigh slapping self congratulation from the great and good concerning their brilliant handling of the crisis combined with an above average supply of gossip and trivia covering the Prince of Wales’s girlfriend, the doings and sayings of dimwitted actors and actresses and the ‘trial’ of President Clinton to give the impression that the lowering thunderheads of 1998 were giving way to fluffy, benevolent white clouds.

But that was January and this isn’t. Eerie calm has lost its old staying power and the crisis has re-emerged, bigger and badder than ever. The powers that be in the world economy are looking rather less like skilful pilots who have ridden the storm and rather more like the cartoon characters in Scooby Doo, who, older readers may remember, would laugh nervously at their foolishness at having been spooked by a floating net curtain or a prowling cat. Seconds later the real ghost would appear, moaning and gibbering. Britain today is like a haunted house waiting for the ghost. Overseas the phantoms are strutting their stuff and rattling their chains, and just about the only factor keeping them at bay is the vast, puffed up bubble of Wall Street. Messrs Blair, Brown, Greenspan et al. are in an awkward position. Being modern thinking chaps, they don’t believe in ghosts. Markets take care of themselves and government’s job is an auxiliary one, supplying the corporate interest with a properly trained, properly priced people product and laying on ‘supportive’ legal structures and a sound currency. But the wailing and howling won’t go away, so, half ashamed, they and their advisers seek handy hints by furtively thumbing the teach yourself exorcism book, in this case the works of the supposedly discredited old flake, John Maynard Keynes.

As the crisis deepens, we can also expect to see cigarette holders jammed between teeth and stout declarations that we have little to fear but fear itself as world leaders reach for the mantle of the original Keynesian statesman, the late President Roosevelt. But just as quoting a little dog Latin and waving a crucifix around is unlikely to make a non-believer into an effective exorcist, so affecting a jaunty air and tootling around in a wheelchair is unlikely to transform any of the current crop of premiers and presidents into a Rooseveltian giant.

When we began work on The Age of Insecurity in the summer of 1997, the disintegration of the Far Eastern ‘Tiger’ economies had only just begun. But the book would have taken much the same shape even had the Pacific Rim continued to enjoy apparently rude economic health. At the centre of our argument was a moral, not a practical, point. The loading of all risk and insecurity on to working people and the concomitant ‘age of security’ for the financial interest was inherently objectionable in itself. True, the silent coup d’état by the free market interest in the mid-1970s had not exactly delivered spectacular results when set against the ‘failed’ post-war period of demand management and Keynesian expansion. Unemployment was higher, not lower. Growth was slower, not quicker. Real wages were stagnant or falling. Between 1990 and the end of 1996 one million people in Britain lost their homes as a result of mortgage company repossessions. Personal bankruptcies had ‘stabilised’ at 22,000 a year for England and Wales, three times the ‘crisis’ levels of the mid-1970s.

But a purely economic, quantitative analysis would have been little more than journalism in book form. Our view was that the malfunctions were traceable to a moral flaw in the free market system and that any analysis would have to start there. This explains the inadequacy and the ill fated nature of the measures currently being proposed on both sides of the Atlantic to fend off the gathering storm. They have no analytical base, and thus represent a series of unconnected, ill thought out, ad hoc responses from people who long ago triangulated and Third Way-ed out of their thinking any critical bent towards the market system. On this reading, all problems are temporary and government’s first duty is not to make them worse. Furthermore, such problems are most likely have their roots not in the free market system but in ‘barriers’ to its proper operation – thus chancellor Gordon Brown’s call last year for a World Financial Authority. Would this body put banks and hedge funds under some sort of proper surveillance or control? Er, not exactly. It would be governments who would come under the beady eye of the WFA, which would be keen to ensure they did nothing to ‘distort’ the financial system. There are no free lifetime Mensa membership cards available in return for guessing who would be running such a body: secondees from the new breed of mega-banks such as Citicorp or Deutsche Bank and staff on loan from the International Monetary Fund, the international enforcement arm of the US Treasury.

A true Keynesian analysis would start from the belief that the free market, far from harnessing human moral imperfections to the public weal, amplifies and compounds them. A guilty secret lies at the heart of each stage of capitalist development, whether enclosures, slavery, colonialism or the appropriation of the law to deliver free gifts such as limited liability. In the words of Lord Hailsham, we do not believe the Old Adam has been banished by Adam Smith. No Keynesian would persist with the current fiction that treats giant entities such as Exxon or Ford as private economic actors indistinguishable from a corner shop or a one man carpentry business. By contrast, Third Way politicians behave as if such entities are doing their host nations an enormous favour by condescending to base themselves in the territories concerned and, unless they are treated properly, they will, at a moment’s notice, up sticks and head off somewhere ‘out there’.

But out where, exactly? Such corporations have no independent existence beyond that conferred on them by the law governing incorporation, contract and so forth. With no courts, no police, no bailiffs, no legal framework, they would crumple like a puppet whose strings have been cut. On the European continent there is at least some understanding of this. But the much trumpeted new era of social democracy in Europe is unlikely to be giving the financial interest many sleepless nights. Social democrats in France and Germany declare that the social model is not up for negotiation, that workers have rights, that laissez faire capitalism may be all very well for the Americans but not for Mother Europe and that, in short, mighty deeds are about to be done in defence of ordinary working people, deeds that have yet to be specified. In all the excitement it is easy to forget that all the tools with which Lionel Jospin, Oskar Lafontaine and the rest of the gang could have tackled big capital were surrendered by their predecessors. Europe as a bloc has forsworn exchange controls, signed the GATT free trade deal and pledged allegiance to the new economic system.

As a result, thousands are thrown out of work as bourses reel under a wave of takeovers and mergers. Belgium’s banking system is dismembered, France is dragged into the era of ‘shareholder value’, and Germany’s BMW ponders huge cuts while its rival, Daimler Benz, merges with Chrysler preparatory to massive redundancies. The not so bravehearts running European social democratic parties, confronted with the contradiction between lofty rhetoric and the reality on the ground, declare there to be no alternative, citing the 1982–1983 franc crisis as proof positive that monkeying around with the free market brings swift and severe punishment. Either Europe’s social democrats are very stupid or very dishonest. The franc crisis did not ‘prove’ that domestic reflation ‘doesn’t work’, but that domestic reflation is incompatible with holding a fixed exchange rate. Faced with the choice of abandoning the reflation or abandoning the European Monetary System, President Mitterrand and his finance minister Jacques Delors chose the former. At least they had that choice; both men then laboured mightily to ensure their successors would not, hence the hapless position of Mr Jospin in the face of chronic unemployment. To visit Brussels and talk to the European left is to enter a hallucinatory neverland in which all the problems of the world economy are more or less sorted out, with the euro sitting triumphant on top of the New Europe. In this Fantasy Island, Europe is menaced not by economic turbulence but by criticism of irrelevances such as ‘enlargement’ or ‘the Europe of the regions’.

With European elections looming, it is worthwhile spending some time examining the attitudes of the British left in Europe to the international situation. Central to their viewpoint is the idea that world politics is – or ought to be – a mirror of world commerce. Hence ‘multi-layered government’ marks the way ahead, with a sort of global directorate keeping an eye on the big picture, regional head offices in Brussels, Washington, Tokyo and so forth and branches at national, regional and local level. Those who accuse Euro MPs in general of pursuing a secret agenda to shift authority to EU level miss the point; in the minds of Labour MEPs there is no ultimate focus of authority, merely a corporate style chain of decision making. All this suits the real corporations very well indeed, but it is hard to see how the toiling masses are supposed to benefit from the recasting of politics as a value free technical activity.

A leaked position paper on forthcoming talks on the Multilateral Agreement on Investment (MAI) makes the point. The MAI has been dubbed the ‘multinationals’ charter’, with good reason; it would oblige sovereign states to remove all barriers to corporate activity, on pain of severe penalties. The EU is taking soundings on the MAI negotiations, and among those being consulted are so called NGOs – non-governmental organisations such as those dealing with the environment or Third World hunger. Hilariously, the EU has decided to treat ‘business interest groups such as UNICE (the European federation of employers’ organisations) or CEFIC (the branch organisation of chemical industry in the EU) as NGOs’. Therefore, roughly half of the NGO participants in the dialogue meeting were industry representatives, the other half representing citizens’ organisations. And the viewpoint of these ‘NGOs’? According to the EU, ‘The European business community has made clear its position in favour of multilateral rules on investment both through its representative bodies (UNICE, ERT) and through informal direct contacts with investment decision makers.’ There’s a surprise.

But none of this seems of any great interest to the European left – or certainly not its British component – which prefers to fend off imaginary dangers such as a rerun of the First World War or the imminent introduction of death camps across the European Union. In conversation with the left’s Euro-representatives, one is reminded of the story of the man who stood daily on a busy street in New York, waving his arms in the air. Asked by a policeman what he was doing, he replied that he was frightening away the elephants. ‘There are no elephants in Manhattan,’ replied the officer. ‘Exactly,’ the man said. ‘Doing a good job, aren’t I?’ Key to their demoralisation, and that of their Westminster compatriots, is the conviction that technical developments have rendered their old beliefs redundant. Capital can move ‘at the press of a button’, they declare, thus ‘old fashioned controls’ are obsolete. This is the view summed up by Julian Le Grand of the London School of Economics on Newsnight on 20 October 1998. Attacking those who repeated the ‘mantra’ of exchange controls, he said Tony Blair did not think he could do much about globalisation ‘and most thinkers think he’s right’. Only non-thinkers, in other words, disagree with the world according to Blair.

Financial globalisation is nothing new: 100 years ago economists hailed the telegraph as having ushered in a single interest rate and a single world stock market, which it had, given the free market structure of that time. What changed the Victorian world market was not the tearing down of all telegraph poles but the political will to challenge the free market. The European left is very keen on political will as well, but sees it in crude quantitative terms: because corporations are big, political units have to be big to match them. This is the sort of economic and political illiteracy that, many years ago, reacted with outrage to the news that the pop singer Adam Faith earned more than the prime minister. It is the sort of size is important thinking that holds up the euro as a great hope for the left, on the grounds that it is (a) large and (b) susceptible, at some indeterminate future point, to manipulation by left of centre European governments in the interests of jobs and growth.

In such an atmosphere, the much vaunted, about to happen ‘Euro-Keynesianism’ is nothing of the sort, unless one simply equates Keynesianism with large public sector budgets and deficits, in which case the world’s greatest Keynesian was former president Reagan. The basis of Keynesian thinking is law, ie the one thing the Euro-left considers to be politically unimportant. It is about the intelligent application of the law and the adaptation of the legal framework to right the wrongs of the market. It is, above all, a recognition that the economy is a human creation, not a force of nature, and that what has been created can be adapted.

Indeed, one true Keynesian of stature was not President Reagan but President Lincoln, who, in his 1865 monetary policy document submitted to the US Senate, declared:

Money is the creature of law, and the creation of the original issue of money should be maintained as the exclusive monopoly of national government ... The wages of men should be recognised in the structure of and in the social order [sic] as more important than the wages of money ... Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.

This is all far too boring for the Euro-left, which is concerned only that Europe be a ‘big player’, able to call the shots in a leftish sort of way, in its dealings with big business. As if in guilt for having all but evacuated politics from their world view in favour of a conflict free vision of pragmatic deal making, the Euro-leftists make ritual calls for the European Parliament to be given more power, presumably so that it will be able to do more of nothing more effectively. When they are not hallucinating escape clauses into the Maastricht Treaty that may spare the continent from deflation and mass unemployment, they are congratulating themselves on achievements in which they played no part, such as the fall of the Berlin Wall. Sovereignty, the one legal status that has been proved to be capable of coming to grips with economic and social reform, is dismissed as a ‘hang up’ when it is not being condemned as the inevitable prelude to war, racism and genocide. Britain’s Euro-leftists speak the truth when they deny trying to shift sovereignty to Brussels: they scarcely recognise the concept other than as a synonym for power or size. Presumably they take a similar view of the individual equivalent, the state of adulthood, and believe secretly (although they would never say it) that a poor or disabled individual is less of a person than a rich or muscular one.

It is common to hear European Labour described as a stronghold of Old Labourites. This is highly misleading. The left in Europe shares with Tony Blair the ability ascribed by John Laughland to President Mitterrand, that of shifting discussion to an area where no discussion is possible. Despite its deflationary credentials, the euro perfectly mirrors Euro-leftism. It treats exchange rates as barriers to trade, rather than facilitators of it. So do the Euro-leftists. It treats transaction costs as an intolerable burden, rather than an entirely natural feature of all economic activity, from walking to the corner shop to shipping oil from one side of the world to the other. So do they. Above all, it assumes that national currencies create differences, rather than reflect them. So do they.

In the Euro-left’s euro fantasy, the euro currency zone will be a sea of tranquillity in which no bad things will happen. That the widely different economies of Europe will find expression for their differences through other financial instruments – as they doubtless will – is never considered. Only occasionally does the comforting idea that the big, big euro will biff George Soros on the nose come under any scrutiny. Yet success or failure in controlling capital is entirely a matter of political and legal determination and has nothing to do with the size of a currency area. Taking a dozen jellyfish and putting them together does not transform them into a hammerhead shark, merely into a very large jellyfish. But the spineless behaviour of the European Union in the face of the capital interest does not dishearten the Euro-left. Of course, there is plenty of reflationary activity in Europe but, in the absence of values, principles or politics, it expresses itself in the sort of Euro-Reaganism for which the continent’s business interest is crying out. There is the Euroco defence and aerospace combine, planned supplier of taxpayer funded boondoggles such as the Eurofighter and the obsolete Airbus A3XX super-airliner to European industry. There are the trans-European railway networks, make work schemes for steel and engineering giants. There is Europol, to keep the populace under surveillance.

And there is the strained relationship with the United States, where policy makers are getting edgier and edgier about Wall Street’s vertiginous rise as the Federal Reserve Board, the central bank, cuts interest rates again and again to keep the world system from toppling over. With even Microsoft’s Bill Gates warning that new technology stocks are overvalued (the equivalent of Mr Coleman expressing concern at the amount of mustard being left on the sides of plates), Washington DC is accusing the rest of the world in general and Europe in particular of hitching a free lift on the back of what is – given the colossal borrowings and zero savings of US citizens – a hugely risky exercise in economic management. Some in Washington with a sense of history are doubtless recalling July 1927, when Benjamin Strong, governor of the New York Federal Reserve Bank, convened a confidential meeting of bankers at the home of Ogden Mills, under-secretary to the US Treasury. Also present were Montagu Norman, governor of the Bank of England, and Charles Rist, deputy head of the Bank of France. At issue was the need to maintain the boom of the 1920s. Strong had just slashed interest rates by half a point to 3 percent. He told Rist, ‘I will give a little coup de whiskey to the stock market.’ He certainly did that. The market surged ahead throughout 1928 and for some of 1929. By the time of the Wall Street Crash, Strong had died and was unable to defend what proved to be a reckless action. Almost none of Strong’s additional liquidity found its way into productive investment. Instead it provided a reserve tank of petrol for the last crazy mile of high speed speculation. It all sounds horribly familiar, doesn’t it?

Washington’s anti-European strictures are given a special edge by the launch of the euro. The United States’ pain-free deficit is built on the privileged position of the dollar which, as the medium for two thirds of world trade, is able to be a strong currency without being a hard currency. In other words, the US can borrow abroad without any effect upon the volume of purchasing power at home. The euro, despite its shaky start, threatens to challenge the dollar and bring the deficit structure crashing down. To talk publicly in such terms, however, would raise the intolerable threat of a genuine debate on the instability of the world system so, instead, Washington and Brussels confine themselves to arguments about banana quotas. Similarly, the White House, unable and unwilling to confront the real world crisis, manufactures substitute crises which it then ‘solves’ by firing missiles at Sudan and Afghanistan or by bombing Iraq. There was a special irony (probably not shared by Iraqi civilians) in the recent Iraqi air strikes, given that, on any measure, their legality and ethical basis are far shakier than those of the Kissinger-Nixon ‘Menu’ strikes against Cambodia in 1969, a series of bombings cherished by the Clinton generation as proof positive of Nixonian barbarity. Not even the North Vietnamese ever claimed the Menu raids resulted in a single civilian Cambodian death; today Blair and Clinton merely ‘regret’ the inevitable civilian casualties.

The hunt for scapegoats has become widespread as the crisis deepens, although it (usually) takes less life threatening forms. At home unemployed workers are told to look no further than the bathroom mirror in seeking the cause of their plight. They, through idleness, lack of training and a ‘negative’ attitude, are to blame. Around the world it is ‘explained’ that the latest scene to be visited by economic turmoil brought it upon itself. Thus Malaysia (pre-crisis) was the most exciting country on earth and post-crisis is a crony riddled, corrupt, one party state. Russia (pre-crisis) was vigorous, salty, bursting with rude energy, the new Klondike. Post-crisis it is a Mafia infested basket case, run by ex-Communists. Indeed, it has never properly emerged from Communism and is, in fact, still Communist, thus handily proving (once again) that Communism ‘doesn’t work’. Brazil, where the breakdown of its internal system of loans has brought the contagion to the American continent, ceases to be ‘tomorrow’s giant’ and becomes an indolent nation full of Portuguese speaking layabouts who spend their whole time mugging each other and playing the guitar. This instant revisionism works both ways. President Clinton, formerly a discredited wide boy who wanted to nationalise the US health system, is now a far sighted statesman who wants to privatise the US pension system. Billionaire speculator George Soros reinvents himself as a thoughtful merchant philosopher, while even the sovereign state – formerly written off as a bit player in the exciting new borderless economy – is ushered in out of the cold and asked to propose initiatives to stave off collapse.

But in the absence of tough minded analysis, political leaders are more than likely to ask little or nothing in return for keeping the show on the road. This would be doubly mistaken. Firstly, it is simply wrong for the citizens of the countries concerned to write blank cheques, even were such action likely to restore calm. Secondly, it will not work. The turbulence of 1997–1999 is not some terrible aberration in an otherwise sound system – it is the system. This is how it is bound to function, with chronic instability, low growth, high unemployment and fragile real wages. Imagine a car without brakes. The only possible way to pilot such a vehicle would be very slowly, giving plenty of time to run to a halt when trouble threatened. Then imagine a salesman promoting the car on the grounds that brakes were unnatural, inefficient, an intolerable, totalitarian interference in the car’s operation and, if applied constantly, the enemy of any kind of movement whatever. It is a truism that a car with brakes can actually be driven at much higher speeds than one without. It is also a fact that a brakeless car, even driven dead slowly, will still be involved in more accidents and worse accidents than one with brakes.

It is time to refit the world economy with some brakes before the current smash turns into a multi-vehicle pile up. There is not much time; as you read this, Wall Street may already be clattering and depression threatening. To end where we began, when writing ahead of events, it is always later than you think.

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