Keynesianism, Monetarism and the Crisis of the State
Simon Clarke
Introduction
The challenge of monetarism
The Hidden Hand and the Limits of the Capitalist State
State and economy in the eighteenth century
The theory and practice of mercantilism
The challenge to mercantilism
The division of labour and the rationality of exchange
Money and exchange
The hidden hand and the accumulation of capital
Capital, labour and the equality of exchange
The market and the state
The limits to the state
The principles of public finance
Political Economy and the Rise of the Capitalist State
Adam Smith and the crisis of mercantilism
Classical political economy
Ricardo and the problems of post-war reconstruction
Political economy and constitutional reform
The reformed state and economic regulation
The administrative reform of the state
The mid-Victorian boom
Money, Credit and the Overaccumulation of Capital
The limits of liberalism and the critique of money
Money and exchange in petty production.
Commercial capitalism and the development of money
Commercial capital and the rise of capitalism
The contradictions of political economy
The social form of capitalist production
Capitalist competition and the overaccumulation of capital
Money, credit and the overaccumulation of capital
Overaccumulation crises and the development of state money
From the hidden hand to monetary policy
The Form of the Capitalist State
Capital and the state
Civil society and the state
Capital and the development of the capitalist state form
The limits of the liberal state form
The working class and the state
Overaccumulation, class struggle and the nation state
Economics, politics and the ideology of the state
Class Struggle and the State: the Limits of Social Reform
Capital, the state and the reproduction of the working class
Pauperism and the state
Political reform and social administration
The crisis of 1873 and the Great Depression
Depression, industrial relations and social insurance
The limits of social reform
Overaccumulation and the Limits of the Nation State
The national form of the capitalist state
The international system of nation states
The 1873 crisis, the nation state and the rise of imperialism
Overaccumulation and imperialist war
War, Revolution and Depression: The Limits of Liberalism
The impact of war
The post-war reconstruction of liberalism
The reconstruction of the liberal world order
The problem of the staple industries
The 1929 crash and the collapse of the gold standard
Money and credit in the crisis of overaccumulation
Economists and the State: The Keynesian Revolution
The marginalist revolution in economics
The economists and the depression of the 1920s
The state and the depression of the 1930s
The Keynesian Revolution
The political impact of Keynesianism
Post-War Reconstruction and The Keynesian Welfare State
Wartime planning and the budget
Planning for post-war reconstruction
Planning for a new international order
The reconstruction of Anglo-American imperialism
Marshall Aid and the rebuilding of Europe
Planning and the budget
The legacy of Labour
The foundations of the post-war boom
Welfare, wages and the working class
Keynesianism and the boom
The regulation of accumulation on a world scale
The limits of liberal Keynesianism
Keynesianism, Monetarism and the Crisis of the State
The brief triumph of Keynesianism
The problem of productivity
The rise of Keynesian interventionism
The limits of Keynesian intervention
The challenge to Keynesianism
The turn to the market
The class struggle and the crisis of Keynesianism
The crisis of Keynesianism and the rise of monetarism
The challenge of monetarism
The triumph of monetarism
Overaccumulation and the world crisis of Keynesianism
Conclusion
Money, the market and the state
The limits of monetarism
The crisis of social democracy and the future of socialism
Introduction
The challenge of monetarism
Over the past decade Keynesian full employment policies have been abandoned in one country after another, to be replaced by monetarist policies that place a premium on price stability. The monetarist counter-revolution has not only abandoned the Keynesian commitment to full employment, but more fundamentally has challenged the Keynesian conception of the role of the state in the regulation of capitalism, returning to the pre-Keynesian emphasis on the primary role of money and the market. How are we to understand this development, and what is its significance?
Monetarists would claim that their triumph simply reflects the failure of Keynesianism and the correctness of their point of view: a new sense of realism has replaced the Keynesian fantasy of universal plenty, a popular demand for freedom has arisen to challenge the tyranny of the state. Many Keynesians, by contrast, see monetarism as a reactionary throwback, a misguided academic theory that has been pressed by doctrinaire economists on bigoted and narrow-minded politicians. But to see monetarism as the triumph of either rationality or irrationality is to attribute too much coherence and too much power to theories that serve more to legitimate than to guide political practice. The ideas of monetarism are important, but their importance is ideological, in giving coherence and direction to political forces which have deeper roots.
The most popular explanations for the rise of monetarism look for these roots in political developments. The triumph of monetarism is commonly explained by the political failures of the left, that opened the way for the populist ideology of the New Right, manifested most dramatically in the rise of `Thatcherism' and `Reaganism'.[1] The appropriate response of the left is then supposed to be a political response, to regain the ideological initiative. The left has to develop a new politics and a new ideology, that will address the popular hopes and fears to which the New Right speaks, and rebuild a united movement that will win the hearts and minds of the people.
The problem with this approach is that the rise of monetarism cannot be explained in terms of purely political developments. `Thatcherism' and `Reaganism' are only variations on a theme that has been played around the world. Moreover the rise of monetarism has not been specifically tied to the rise of the New Right. In Britain it was under a Labour government, and most particularly from 1976, that monetarist policies began to be pursued and Keynesian objectives abandoned. Moreover the turn to monetarism under Labour did not only involve a turn to monetarist economic policies and objectives. The Callaghan government played all the New Right tunes, however off-key, attacking the trades unions, extolling the virtues of the family, pandering to racism, tightening the administration of social security, stressing its commitment to `law and order', launching the `Great Debate' on education. Although in Britain Thatcher replaced Callaghan, in Southern Europe, Australia and New Zealand social democratic governments have taken it upon themselves to carry through the monetarist revolution, in the guise of a `politics of austerity', while social democratic parties around the world have capitulated to a `new realism'. Thus monetarist policies have been forced on governments of very different political and ideological persuasions, although policies that have in some cases been adopted only under the force of circumstances have in others been espoused enthusiastically. While social democratic governments submit to the power of money in the name of realism, right-wing governments proclaim its power as that of a moral principle. These differences are important, but to stress the distinctiveness of the variations is to ignore the underlying theme. The rise of monetarism cannot be explained in terms of contingent political developments, in terms of personalities and political factions of the right and the left, for these developments are systematic, to be observed throughout the capitalist world. These political developments express a deeper crisis, of which they are themselves a part.
An alternative set of explanations looks to the economic crisis to explain the rise of monetarism, seeing monetarism as a capitalist response to the crisis. There are two very different interpretations of the significance of monetarism along these lines. The first interpretation rests on an identification of Keynesianism with the interests of `industrial capital' and monetarism with the interests of `financial capital'. Keynesian policies involve high levels of state expenditure in support of the productive sector of the economy, state intervention in financial markets to secure cheap credit for industry, and demand-management to provide a growing market for industry, making possible a high and rising standard of living and of welfare provision for the mass of the population. Although such policies serve the general interest, as well as the particular interests of industrial capital, they do not serve the interests of bankers and financiers, who seek high interest rates and the freedom to invest their money where they can achieve the highest returns, without regard for the common good.[2]
On this interpretation the crises of the 1970s arose because the interests of financial and industrial capital came into increasingly sharp conflict with one another, these conflicts coming to a head in the form of financial crises as the freedom of mobility of financial capital threatened to undermine Keynesian industrial strategies. The rise of monetarism reflected the victory of financial over industrial capital. Bankers exploited their financial power and their privileged access to the state to force governments to adopt restrictive financial policies that restored financial stability and confidence, but at the expense of high interest rates and cuts in public expenditure that drove the economy into recession. The appropriate response of the left within such a framework is to reassert the virtues of Keynesianism within a strategy that subordinates financial interests to the needs of national industrial regeneration, exposing and confronting the narrow and unpatriotic self-interest of the bankers and financiers that hides behind the ideology and politics of monetarism.
This explanation has a superficial plausibility. The economic crises of the 1970s, like those of previous decades, did indeed take the form of financial crises whose resolution sacrificed the real economy on the altar of money. However on closer examination the plausibility of the account soon breaks down. How could financial capital manage to impose policies which are so transparently against the national interest? If Keynesian industrial strategies could really have succeeded, if only they could subordinate financial capital to the state, why has government after government, elected on manifesto commitments to such strategies of national regeneration, capitulated and pursued monetarist policies? Why should ambitious politicians drive the economy into recession if they could so easily have adopted policies which would have brought prosperity and votes? Only the crudest of conspiracy theories could explain such pervasive irrationality.
The problem underlying such an account is that there is no evidence that the supposedly sharp conflict of interest between `financial' and `industrial' capital actually exists. Industrial capital has no more interest than financial capital in the expansion of production for its own sake. Both forms of capital are motivated by the one concern, profit. Only a relatively small part of the capital, even of manufacturing companies, is tied up in plant and buildings required to carry on production, and even the apparent fixity and immobility of those assets proves illusory when production becomes unprofitable. On the other hand, a significant proportion of the assets commanded by the financial institutions takes the form of loans to, and shares in, manufacturing enterprises. Moreover the financial institutions derive the bulk of their profits not from investment of their own capital, but from concentrating the savings and bank deposits of the mass of the population, so that they do not necessarily benefit from high interest rates, their profits depending primarily on commissions and on the difference between interest paid and profits received. The profitability of financial institutions depends on a high level of demand for their loans, which in turn depends on general capitalist prosperity. When the economy goes into a recession, so that there is surplus capital available, the financiers search ever more desperately for outlets for this capital, which is diverted into ever more speculative channels. But this diversion of capital is not the cause of the shortage of funds for productive investment, but the consequence of the shortage of profitable opportunities.
The very distinction between financial and industrial capital is becoming increasingly anachronistic as accumulation on a world scale is dominated by multinational corporations, which take the form of financial holding companies, closely integrated with multinational banks and financial institutions, which move their capital freely between countries, between branches of production, and between productive and financial investments. It was these multinational corporations who closed plant, moved productive investment abroad, and diverted their funds into cash and into financial and speculative investments in the course of the crisis. Far from being the victims of the rise of monetarism, they were its driving force.
The fundamental error underlying this influential approach is its misunderstanding of the power of money. The power of money is not the power of banks and financial institutions, although it is the latter who wield the power of money, it is the power of capital in its most abstract form. Thus the conflict between the needs of the domestic economy and the interests of multinational capital is not a conflict between the interests of different fractions of capital, but between the interests of multinational capital and the needs of the mass of the population. The irrationality of monetarism is not the irrationality of economists and politicians, it is the irrationality of capitalism.
The second kind of economic explanation of the crisis sees it not as a confrontation between `industrial' and `financial' capital, but between capital as a whole and the working class. There are two dominant versions of this approach. On one interpretation the rising wages and high standards of welfare provision associated with the Keynesian Welfare State represented a significant achievement of the working class, asserting its own interests against the interests of capital. In a period of boom capital could afford the concessions required to finance the Keynesian welfare state, in the interests of political and industrial peace. However the continued advance of the working class eventually encroached on capital's profitability and precipitated, or at least intensified, a crisis of profitability. Capital had therefore to reverse the gains of the post-war decades, cutting state expenditure and increasing unemployment in order to weaken the working class politically and industrially so as to restore profitability. Monetarism is the ideological mask that seeks to conceal this capitalist counter-offensive. The appropriate response of the left is a militant and determined counter-offensive to restore the gains of the post-war boom and to bring capital under social control.[3]
This approach has the merit of bringing the capitalist crisis and the class struggle to the fore. Unfortunately it is much too simplistic. The rate of growth of wages and improvement in welfare provision in the post-war boom had little to do with the strength of the organised working class. Britain had probably the strongest and most militant working class, but consistently had the lowest rates of growth of wages and welfare spending. Rather than militancy being the cause of the profitability crisis, it is far more plausible to argue that it was the consequence, as workers aspirations were increasingly frustrated by the inability of capitalism to deliver the goods. More importantly, the transition from Keynesianism to monetarism does not simply involve a rise in the rate of exploitation. Monetarism does not consist in a frontal assault on the working class, pushing the trenches back a few hundred yards like a Somme offensive, any more than Keynesianism represented an unequivocal advance of the working class. If things were so simple the popularity of monetarism with the working class electorate would be inconceivable. Monetarism rather involves a fundamental restructuring of the relations between capital, the working class and the state, involving not simply a shift in the balance of economic and political power, but a change in the form of the state and class relations, in which some elements of the working class gain at the expense of others.
It is this observation that underlies the second approach which sees the roots of monetarism in the capitalist crisis. In this case the crisis is not simply a crisis of profitability, it is a structural crisis, throwing the predominant institutional forms of regulation of capital accumulation into doubt. The crisis of profitability is not the result of a fall in the rate of exploitation, but of the growing barriers to accumulation presented by the exhaustion of the technological possibilities of the third industrial revolution. It is therefore a crisis of the overaccumulation of capital in relation to the outlets for its profitable employment. First, increasing industrial profits require the massive replacement of labour by machinery, which substantially increases the fixed costs of the enterprise. Second, there are limited opportunities for increasing productivity in the service sector, so that the latter acts as an increasing drag on profitability, whether services are publicly or privately provided. Third, accumulation in the metropolitan centres has run ahead of the supply of raw materials, and especially oil, leading to a sharp deterioration in their terms of international trade. The simplest version of this argument sees the class struggles that ensue from this profit squeeze primarily in economic terms.[4]