As mentioned over the phone, we like your article very much. It needs to be shortened, and we will be suggesting some editorial changes. Meanwhile, I would like to get your thinking about my disagreement with this statement in your conclusion: “Today’s neo-liberal state is a different kind of capitalist class than the social-democratic, Keynesian interventionist state of the previous period.” I can’t see any significant difference in either the state or its relation to the ruling class, even though clearly there is a considerable difference between the functioning of the capitalist economy during the so-called golden age and the subsequent long stretch of stagnation. I do not mean the absence of any change at all in the capitalist class. Thus, the growing influence of the financial sector (not necessarily a separate sector) is noteworthy. But that is hardly a measure of a major change in the state.
The term “Keynesian state” has become a catchword that covers a variety of concepts and is usually misleading. It may have some meaning for the Scandinavian countries and elsewhere. But the United States? Although the concept is often applied to the New Deal, the deficit spending of the New Deal had nothing to do with Keynes (nor did Hitler’s recovery via military expenditures). It’s true Washington economists were delighted with the appearance of Keynes’s The General Theory of Employment, Interest, and Money because it gave them theoretical handles for analysis and policy thinking (e.g.,the offset to savings concept and a framework for gross national product accounts). Nevertheless, despite a promise of heavy government spending, and Keynes’s theoretical support, the New Dealers were stumped by the 1937-38 recession, which interrupted what looked like a strong recovery. There was then as there is now an underlying faith that capitalism is a self-generating mechanism. If it slowed down or got into trouble, all that was needed was a jolt to get back on track. In those days, when farm life supplied useful metaphors, the needed boost was referred to as priming the pump. The onset of a marked recession after years of pump-priming startled Washington. Questions began to be raised about the possibility of stagnation in a mature capitalism, the retarding effect of monopolistic corporations, and other possible drags on business. These concerns faded as war orders flowed in from Europe, and eventually they disappeared when the United States went to war. The notion of the “Keynesian Welfare State” has tended to disguise the fact that what really turned the tide was not social welfare, Keynesian or otherwise, but war. In that sense, the whole concept of Keynesianism can be mystification.
Although fear of a return of depression existed for a while after the end of the war, it was not long before a new spirit of optimism took over. By and large, economists began to believe that they had a handle on how to achieve permanent prosperity. They claimed scientific validity for their mixture of neoclassical economics and Keynes. With this blend, potential economic fluctuations presumably could be anticipated and avoided or at least minimized. The Second World War awoke a renewed confidence in capitalism’s potential. In addition, economists began once more to believe that they knew it all. The strong growth in the early postwar decades gave rise to optimistic myths. Even Nixon declared himself a Keynesian. The prosperity of the 1950s and 1960s was widely attributed to the wisdom and advice of the new economics. Let us, however, look at the record.
There are two aspects to the faith in what Keynesian interventionism can accomplish. One has to do with moderating or eliminating the business cycle. For this, there has to be confidence in the ability to foretell where and how far the economy is likely to turn. With this knowledge, followed by the requisite changes in monetary and fiscal policies, the business cycle can be tamed and economic insecurity overcome. As it turned out neither of these claims have substance. Forecasting is at best an art, not science, and even as an art, untrustworthy. Moreover, the tinkering with money, interest rates, and federal finance are more often than not lesser influences among the gale-force winds that tear through the economy. I don’t mean that money and fiscal policy are totally unimportant. Money has to be centrally managed for the economy to work. And at times the actions of the monetary authorities can make a real difference. For example, in a society which lives on credit, a sharp rise in the interest rate for the sake of controlling inflation may be able to hold back an inflationary wave, while at the same time causing heavy unemployment and many business failures. In general, the Fed’s fiddling with the money supply and interest rates is mostly a response to the needs of the financial community and has little, if anything, to do with creating jobs and promoting economic growth. The simple refutation about the claims for Keynesian intervention, however, is that there were three recessions during the “golden age.”
The second great achievement of Keynesianism (not claimed by Keynes himself, incidentally) is that it holds the secret of long and presumably endless, strong economic growth. Truly astonishing is the claim that, recessions or no recessions, so-called Keynesian intervention created the great wave of postwar prosperity. Just listen to Paul Samuelson, the first recipient of the so-called Nobel Prize in economics. Without a trace of shame or reservation, he proclaimed loudly and clearly in a 1968 Newsweek column:
Our economic system has far surpassed the prophecies of even the most optimistic experts. The New Economics really does work. Wall Street knows it. Main Street, which has been enjoying 92 months of advancing sales, knows it. The accountants who chalk up record corporate profits know it.1
Believe it or not, a lot of people think that this was really the case, even those who do not ignore the coexisting poverty and misery of masses of people. But was it in truth the doctrine of the new economics, or as you note, social-democratic policies that brought forth the golden age? Yes, but only if wars, imperialism, and militarism are included under the rubric of social democracy and Keynesianism.
Consider the government budget, the most relevant area of government intervention. There are two categories in the budget that lie outside the normal appropriation decisions. The first is the Social Security Trust Funds. These are accumulated from specific payroll taxes which have been producing a surplus over what is needed for current social security payments. The only effect this surplus has on year-to-year expenditures is a cosmetic one, since it helps disguise the size of the government deficit. The trust funds are, by law, sacrosanct, and the surplus may only be used to buy U.S. bonds. The second “rigidity” in the budget is the money spent to pay interest on U.S. bonds. That amount is set by the size of the government debt and the interest rates which prevailed at the time the bonds were initially issued. Now, if we deduct these two non-discretionary items from federal government expenditures, we find that in the golden 1950s seventy percent of discretionary government spending went for what is euphemistically called national defense! Welfare spending began to rise in the 1960s—the Good Society, which can arguably be seen, in large measure, as an attempt to calm the virulent civil rights struggle and the widespread anti-Vietnam War militancy. But even then, with a rise in welfare spending, sixty percent of the adjusted government spending was used for militarism.2
Spending on war goods has a special relevance to the current discussion. Much of the thinking about government spending in support of the economy assumes that increasing consumer demand will start the ball rolling. But that is not the case if there is plenty of excess production capacity or if the increase in demand is not large and reliable enough to prompt capitalists to invest in additional capacity. And yet, a sustainable expanding market economy needs active investment as well as plenty of consumer demand. Now the beauty part of militarism for the vested interests is that it stimulates and supports investment in capital goods as well as research and development of products to create new industries. Imagine what would have happened to the enormous wartime buildup of airplane factories had it not been for the Korean War and the pathology of the Cold War. The latter kept the airplane companies busy and highly profitable, meanwhile providing a base for the spread of civilian aircraft and the sprouting of passenger air travel. Military orders made significant and sometimes decisive difference in the shipbuilding, machine tools and other machinery industries, communication equipment, and much more. In short, apart from other matters, the explosion of war material orders gave aid and comfort to the investment goods industries. (As late as 1985, the military bought 66 percent of aircraft manufactures, 93 percent of shipbuilding, and 50 percent of communication equipment.)3 Moreover, it needs to be noted that spending for the Korean War was a major lever in the rise of Germany and Japan from the rubble. Further boosts to their economies came from U.S. spending abroad for the Vietnamese War.
The United States had still more in its favor as the kingpin of imperialism: not only predominance of military strength but also preeminence of the dollar. The latter, enshrined “as good as gold” by the Bretton Woods Agreement, gave the United States pretty much of a free hand to spend wildly as it spread its wings over foreign lands. Normally, countries which spend more in foreign lands than they earn abroad have to pay for the difference, either from reserves of gold and international money, or by borrowing on the international market. The United States was unique to the extent that it had no such restraint. Dollars flowed abroad for imports, for maintaining military bases around the world, for economic and military aid to real or wished-for allies, and for the rise of its multinational industrial and financial firms. This resulted in a persistent deficit in the current balance of payments. But in contrast with other countries, especially those of the third world, whose balance-of- payments difficulties cast them into debt peonage, the United States became richer and richer. The U.S. deficits get paid with U.S. dollars—either by direct increase of the money supply or the expansion of credit. This isn’t the time or place to explain the ins an outs of this subject; I thought it worth bringing up in light of common illusions about Keynesian techniques to use control of the money supply and interest rate adjustment as regulators of the business cycle. Whatever merit this belief may have, it pales into insignificance compared with the tides that buffet the Fed and the Treasury faced with the problems of keeping the dollar afloat as an international currency and as a means of coping with this country’s international debt.This was so in the earlier so-called Keynesian period, when the Fed had enough gold to back the dollar, and continues to be so after the United States unilaterally abandoned the promise made in Bretton Woods to exchange gold for dollars submitted by foreign central banks. In other words, what has allowed the United States to face these problems in ways that other countries can’t has not been Keynesianism but U.S. hegemony and its legacies.
As a footnote, let me add that the spirit and substance of neo-liberalism was very much alive in Washington and the financial community in “the age of Keynesian social democracy.” Washington didn’t need inspiration from Maggie Thatcher to initiate an offensive against labor unions. The tide against labor began in 1947 with the passing of the Taft-Hartley Act, and continued with subsequent legislation, court decisions, and the practice of the National Labor Relations Board. Furthermore, the entire apparatus of neo-liberalism was pushed, and, where possible, enforced for the sake of the open door in the third world for U.S. corporations. The road to NAFTA began early on in the postwar period. At a 1948 conference in Bogota, twenty American nations signed agreements to facilitate foreign investment. Bilateral Treaties of Friendship, Commerce, and Navigation, were negotiated with countries on other continents to pave the way for the unrestricted investment of U.S. capital. Enlargements of markets and private investment opportunities were key objectives of the World Bank and the IMF from day one. The IMF in particular assumed the robes of the colonial overseer, enforcing the rules of the game, including the discipline of austerity for the masses, in order to assure an uninterrupted flow of profits and debt service to the centers of the capitalist world. The difference between the so-called Keynesian period and today is that in earlier days there was a hush-hush aspect to the discipline imposed on the third world, whereas now neo-liberal principles are loudly proclaimed as the true faith.
There are two sides to the misconception that the state has fundamentally changed. Not only was neoliberalism alive and well in the Keynesian era, state intervention is an essential feature of the neoliberal era. Samuelson’s nonsensical boast was made just when the prosperity phase was coming to an end and the whirlwinds of financial fragility were beginning to appear. The changeover is well described by Henry Kaufman, an especially discerning Wall Streeter:
It seemed that modern economics had found ways to prevent the crisis and panic that had hit most generations at least once in their lifetime. There was much that was reassuring besides the reasonable economic performance of the 1950s and early 1960s…. Even the language of economists contained great assurance. More economists spoke convincingly about objectives and made bold predictions about future stability.
When a financial crisis finally struck it was not the old-fashioned kind. It was very mild. It was called the credit crunch of 1966. “Crunch” was too harsh a label, but like any crisis it was a surprise to the postwar generation, and for a while it laid siege to the savings deposits institutions. The subsequent crises, however, were of increasing intensity. During their most intensive moments, they contained all the ingredients that had fueled the financial debacles of old. How close we came to disaster in 1970, and then again in 1974 and early 1975, no one will ever accurately record. It was a frightening period with rapidly rising interest rates. Some spectacular business failures, spiraling preferences for high credit quality and liquidity and doubt about strength of the largest and most prominent financial institutions.4
This was written before the third world debt crisis (threatening bankruptcy of some if not all of the top nine commercial banks), the Savings and Loan disaster, the impending failure of the Continental Illinois Bank and other pitfalls for the economy. What was the nature of these crises?
Panic and, in some instances, the collapse of the financial house of cards, were circumvented by major government rescues. The rescues took on different forms, for example: giant loans by the government directly or via the Fed; takeover of Continental Illinois until its affairs were straightened out; and outright expenditures such as the $200 billion obligated to rescue the savings and loan banks. One of the outstanding features of the neoliberal period is supposed to be a reduction of state involvement in the economy. In fact, though, direct interventions by the U.S. government during recent decades were the underpinning of the economy.
By now it should be obvious why I think that there has been no decisive change in either state or ruling class. The United States is the same imperialist power, formerly the hegemon and now striving to remain the predominant country among the imperialist powers. I am not saying that all that happened was predetermined and inevitable. There are usually a range of strategic and tactical policies to consider and fight over. But as long as the fundamentals of capitalism and imperialism are inviolable, the debate over policy and the choice of policy will fall within a narrow range, the more important ones buffeted by changes in the economic tides.
It is not the state or ruling class that has changed, but the economy. M-C-M´ was in full bloom for a couple of decades but began to slow down in the late 1960s. [The formula was Marx’s way of summarizing a fundamental attribute of capitalism. M(oney) is used to buy labor, machinery and raw materials to produce (C)ommodities, which when sold yield a greater amount of money (M´)] As stagnation began to take over, the opportunities to make money in the “old-fashioned” way diminished. However, as the hart panteth after water, money panteth for more money. If M-C-Mé didn’t produce enough profit growth, then by hook or by crook other means were explored.The business world turned increasingly to financial schemes, to outwitting the constraining regulations over financial institutions, and to the spiraling of speculation to dizzying heights. But with this came an increase in fragility, at times signaling potential collapse of the whole temple.
What should a responsible business-promoting state then do? Clearly intervene with subsidies, loans, and an easing of regulations. Seeking M´, the financial folk spread their wings ever wider, defying the remaining regulations and also moving closer to the brink. What then? Once again, the government enters the fray. The more the economy depends on finance the more deregulation becomes the order of the day. And with the upsurge of international finance came the drive for deregulation in all the leading markets. To back this up, an ideology is needed: the ideal of a hands-off government (especially when social justice is at stake), except when rescue operations of business firms are called for. Other novelties of these days include the privatization fetish, which is in the aid of M-C-M´ opportunities. (Something like 20 to 30 percent of foreign investment in the third world in recent years has been used to buy up privatized infrastructure).
You may be surprised at my going on at such length to dispute a simple sentence in your piece. My excuse is that the mythology of a possibly endless Keynesian welfare state is deeply rooted on the left as elsewhere. If the belief isn’t engraved at the conscious level, it is well preserved at the unconscious. Reform proposals by progressives tend to seek ways to reestablish a Keynesian “harmony,” when what we should be working for are changes that challenge capitalism and the ideology of the market system. The educators among us have a huge educating job ahead; to explain why challenging capitalism at every opportunity is in the best interest of the working classes of the world.
Perhaps in writing to you this way I am preaching to the converted. I look forward to learning your reactions to this diatribe.
With best wishes,
- Newsweek, November 4,1968, as quoted in Richard B. DuBoff and Edward S. Herman, “The New Economics: Handmaiden of Inspired Truth,” The Review of Radical Political Economics, August 1972.
- Those who would like to check my arithmetic will find the basic data in U.S. Department of Commerce, National Income and Product Accounts of the United States (Washington, D.C.: Superintendent of Documents, February 1993), Vol.1, Tables 3.2 and 3.12.
- Ann Markusen and Joel Yudken, Dismantling the Cold War Economy (New York: Basic Books, 1992) p.37.
- Henry Kaufman, “Foreword” to Edward I. Altman and Edward W. Samets, Financial Crises, Institutions and Markets in a Fragile Environment (New York: John Wiley & Sons, 1977), p.vii.