Socialist Studies Socialist Studies

Socialist Party of Great Britain - Capitalism In Crisis - Keynesianism: Resurrecting a Past Failure.

With the collapse of economic liberalism as a policy which promised to ensure a crisis free, harmonious and self-adjusting market, governments are increasingly returning to the economic ideas of Keynes. Gordon Brown, for example, is planning to inject billions of pounds of emergency funds into new schools and hospitals to stimulate the economy as British capitalism passes from crisis to depression and the unemployment figures approach 2 million (INDEPENDENT ON SUNDAY 19.10.08).

Keynesianism is a failed policy last seen in the 1970’s when it failed to prevent stagflation; a depression plus inflation. So why did Keynes doctrines fail?

The reason why government spending on creating jobs does not reduce the total amount of unemployed workers is simple. Every increase in government spending in one direction is cancelled out by an equal amount of saving elsewhere.

This can be seen in the Trade Union scheme in the 1970’s to create jobs in the Health Service by reducing defense expenditure. If the government creates 200,000 jobs in the Health Service and sacks 200,000 workers in the armed forces it does not reduce the total unemployment.

But it is equally true of any government increase of expenditure. The only way that it can be paid for is by reducing the purchasing power of taxpayers by an equal amount.

History treats Keynesians with unsentimental savagery but it’s failure to deliver sustained full employment is not so quite straightforward.

We start with Roosevelt’s New Deal in the US from 1932 to 1939.

The New Deal was a Keynesian policy. Keynes discussed the policy with Roosevelt. The New Deal did what the Keynesians say a government should do. It greatly increased government expenditure. So it ought to have got unemployment down to negligible levels.

But in 1938, after six years of the Roosevelt Keynesian policy unemployment was still at the peak level of 19%.

The second example of the failure of Keynesian theory relates to the record of Labour Governments in the Twentieth Century excluding the 1997 Labour one.

In the half century 1924-1979 there were four periods of Labour Government. In the first period, 1924-1931, the Labour Party was anti-Keynesian. It was because Labour would not adopt a Keynesian policy that Sir Oswald Mosley, one of the Labour Ministers in charge of Unemployment resigned and formed his fascist organisation.

In the second period from 1945-1951 and in the third and fourth periods 1964-70 and 1974-1979 the Labour Party were Keynesians.

But, and this is the crucial test, in every one of the four periods of previous Labour Governments, unemployment was higher when they went out of office than when they went in.

It remains to be seen whether the Labour Government finally goes out of office with unemployment at a higher rate than when the formed the 1997 government under Blair.

The odds are against Brown’s Government. The dole queues did not take any notice whether the Government was supporting “good old Keynes” or not.

Consider the way in which the Keynesian policy collapsed in 1976. The Keynesians have two policies. The first is to cure unemployment and the second is to cure inflation.

The cure for unemployment is for the government to spend a lot more money, without an increase in taxation. The Government raises the rest by borrowing from investors which increases the national debt. It is called running a budget deficit.

The other policy is to cure inflation. This requires the government to do the opposite by running a budget surplus. This surplus is then used to reduce the national debt.

This is no problem for the government when only unemployment is going up and prices remain stable. The government runs a budget deficit.

And there is no problem when only prices are going up and unemployment stays low. The government then runs a budget surplus.

But what does a Keynesian government do when unemployment and prices are both going up fast at the same time?

This is like a patient with a serious heart condition who is also overweight who is told by his doctor that for the sake of his heart he must avoid all violent exercise, but must also run five miles every day to get his weight down.

Faced with this impossible situation the Labour Government in 1976, decided to drop the Keynesian cures and try Monetarism which did not work either.

The falling rate of employment enjoyed by the incoming Blair government of 1997 would have happened whatever government came to power.

And capitalism will go its own way despite the policy pursued by the government of the day. Capitalist politicians cannot prevent “boom and bust”. When capitalists-those that are left in the market- see favorable conditions again they will start investing capital again and exploiting workers in greater number bringing the unemployment level down.

From the perspective of the working class all this is totally unnecessary. Unemployed in conditions of poor trade and exploited in conditions of good trade workers are caught between the devil and the deep blue sea.. Far better to understand that capitalism can never be made to work in their interests and replace capitalism with common ownership and democratic control of the means of production by all of society.

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