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Keynes, Steindl, and the Critique of Austerity Economics :: Monthly Review
Nina Shapiro more on Economics, Global Economic Crisis
Keynes, Steindl, and the Critique of Austerity Economics Nina Shapiro is professor of economics at Saint Peter’s College, New Jersey, and a member of the editorial board of the Journal of Post Keynesian Economics. One may feel tempted to apply the term paradigm to the changes in economic doctrines and especially to the great revolution brought about by Keynes and Kalecki. If one considers the great bulk of the economic profession, however, the term is misplaced. Keynes has never been accepted by more than a minority. Kalecki’s importance has hardly been known outside a small circle. The dominant doctrine was the neo-classical synthesis, a hotchpotch of ideas. I do not think I am excessively frivolous if, instead of paradigms, I speak of fashions in economics. —Joseph Steindl1 Austerity is now “in fashion,” as governments respond to the revenue shortfalls of the crisis through deficit reduction plans and fiscal stability pacts, and economists blame it on the profligate spending of households and countries.2 Consumers, they say, bought houses they could not afford and countries consumed more than they produced, while loose monetary policies made this spending possible. Governments “got prices wrong,” keeping interest rates too low for too long,3 and while increases in government spending might alleviate current employment problems,4 this deficit spending is inflationary, and in any case will not help in the long run as budget deficits raise interest rates, “crowding out” business and household spending. It is as if we have stepped back in time, to the depression years of the 1930s, when monetary theories of the cycle were dominant, the “overinvestment” of the boom blamed for the downturn, and effective fiscal actions proposed by Keynes and others blocked by preoccupation with the public debt and its burdens. The analysis here is concerned with the systematic rejection of Keynes’s and Kalecki’s revolution in economics and the resurrection of Say’s Law (supply creates its own demand) of pre-Keynesian economics in all but name—a view that underlies today’s austerity economics. It was Josef Steindl, author of Maturity and Stagnation in American Capitalism, who offered the most thoroughgoing critical perspective on this shift—a shift in fashion rather than paradigm, reflecting the inability of received economics to accommodate a genuine scientific revolution.5 Steindl was a great neo-
as Steindl said in another context.
.”7 Critics argued that the new theory was not as new as Keynes claimed.8 In spite of his monetarist background—he is known for his monetary account of the Great Depression—he still seems to remember something about Keynes. but in the way “many economists as well as laymen” think about the economy. unemployment equilibrium occurred under these conditions alone. but also what Steindl called “stagnation as policy” backed up by a reversion to pre-Keynesian thinking. When stagnation returned this time. households as a whole cannot.” Its demand constrained. so that while Keynesian employment policies could be effective—and many members of the new “neoclassical synthesis” school advocated them—their Keynesian justification was invalid.” and thus encumbered. as Steindl emphasizes. before the economy strengthens. applicable only under special conditions—such as inflexible labor markets (“sticky prices”) or “money illusion. Thus. it was stagnation not only as an underlying tendency. and the Monetarist “counterrevolution” occurred long ago. and the “dismantling of the General Theory started as soon as it was published if not before. But while the Keynesian revolution never took hold.10 While the individual household can accumulate assets by saving. The General Theory was written for his “fellow economists.6 This pre-Keynesian stance of the economics profession perhaps should not be surprising in that most economists. of what Keynes and the experiences of several decades have taught us about full employment. and his arguments form the backdrop for the discourse on monetary and fiscal policies. the difficulty in understanding them lies not in the ideas themselves. by the traditions of the discipline. reducing household wealth. never accepted Keynes. as Steindl notes. The relevance of Keynes to the economic debates of the day is evident. Conclusions drawn from this analogy. Keynes’s influence remains. it was just a “special case” of the conventional (“classical”) theory. And the best account of these lessons is Steindl’s own. who lived long enough into the present period to provide critical insights into the growth of the neoliberal fashion. in however a muted form. The Paradigm Keynes is not easy to understand. Not only was the new theory not so new. Keynes argued. the basic ideas are simple.Marxist/post-Keynesian economist.while the textbook presentations of his ideas are their “neoclassical synthesis. They reason from the “analogy between the individual household and society as a whole. are misleading. after Keynes. as Steindl says.”9 Yet.” assuming that what holds for the individual household holds also for all households together. For when households spend less they reduce each other’s income. it was quite wrong. and dangerous if applied to the economic problems of our times. as is the importance of reconsidering his arguments—reminding ourselves. His ideas are still voiced in the profession. he also warns us of the risks of cutting budget deficits too soon. while Bernanke emphasizes the importance of fiscal discipline in his policy prescriptions.
Firms.” A cut in the wages paid by an individual firm will not hurt its sales—its employees are not a significant part of its market—but a reduction in the wages paid by all enterprises will hurt theirs. as the “classical economists” argued (and their contemporary counterparts still do). Wages are incomes as well as costs—“purchasing power. But the wage cuts that increase the profits of firms reduce the sales of others. They can only be understood by looking beyond these experiences. Sales revenues will fall by the amount of the wage cuts. and foreign sales can make up for sales losses in home markets. it is not necessarily in their interests to do so. to the interconnections between them. whereas income determines spending in that of the individual household.One person’s spending is another person’s income. Macroeconomic relations are quite different than those experienced in the day-to-day operations of households and businesses. as Steindl notes. The “profit maximizing” output need not be the full employment output—its production may leave a part of the labor force unemployed. The deflation of wages and prices will increase the debt burdens of households and firms. Households do not buy. The “circular flows” in the economy—the transformation of income into sales revenue. which are not very important for the individual household or firm—their spending is too small a proportion of overall spending to react back on their own operations—but are critical for large economic units. There is. the wage cuts will probably worsen it.” of household and business saving taking income out of the income-spending stream. as Steindl puts it. as opposed to households. and sustain output and employment levels. spending determines income in the case of households as a whole. “always a danger of leakages. reducing their purchasing power. But all countries cannot sell more to other countries than they buy from them. as firms will suffer revenue shortfalls. more of their income will be taken up with debt payments. and for the operation of the economy as a whole.11 If a firm could pay lower wages. such as governments. Examining these shows that there are feedbacks. There is no “invisible hand” that leads them to spend what they spent in the past. businesses or the government must spend more than theirs. can also sell products abroad. and firms do not produce. and thus back into income—do not maintain themselves. The trade surpluses of
. or to spend the amount that would ensure the full employment of resources. so that the profits of firms will be no greater than they were before the wage reductions. its costs would be less. revenue into production expenditure.12 These leakages have to be offset by spending “injections” for sales revenues to replenish income flows. If households spend less than their income. “it is the analogy between the firm and the economy as a whole which gives rise to the usual faulty reasoning”: that a cut in wages can increase employment. Here. and this would increase the profitability of its production and probably lead to an expansion of output and employment. and instead of improving the employment situation. the same amount of products year after year. “circular relations” such as the spending-income-spending loop. and demand for products will fall as firms cut costs and households save more. Production and employment will be cut otherwise. An important instance of these circular economic relations is the relation between wages and employment.
15 Investment depends on both the profit available for it. But that investment is decided by firms.
. because their savings rates make full employment dependent on a “high growth rate. the exact opposite. what keeps the “income-spending” stream flowing.” Trade surpluses can increase growth and employment in some countries. as the household saving. and the profit expected from it. the business saving is not as inflexible. not by households. but fall by a greater percent than their income. Higher-income households have higher saving rates.13 As Keynes would put it. for.14 Investment in plant and equipment. or as damaging to the economy. the “propensity to consume” falls in the downturn. business savings promote investment. in fact. The profit for it is accumulated out of the earnings of firms. whereas household savings depend on the personal income distribution. but because there is too little. The effects of household saving thus look quite different when viewed from the macroeconomic perspective of Keynes rather than the microeconomic perspective of “classical economists. This expenditure on means of production is the critical offset to the saving of households. as the unemployment rate increases and fear of job loss spreads through the labor force. and insofar as the external (“debt”) financing of their investment is constrained by their own capital. Business savings depend on the profit share of national income. These occur not because there is too much spending in these economies.” and the investment needed for this is not necessarily there. as Steindl argues. but they cannot ameliorate the problems of the global economy. investment is undertaken for profit—the firms that undertake it are capitalist enterprises. The adverse effects of that saving cannot be emphasized enough. The idea that they can is. to finance their children’s education or provide for retirement. while the savings rates of all but the highest-income households—the “1%”—tend to rise in a recession. and in this respect.” They are. the reason for their periodic downturns and depressions.” in this case between the national economy and the world economy. and the factors that decide it have nothing to do with saving propensities or consumption preferences. intensifying the “multiplier” effects of the initial decline in output. they can only be achieved if other countries “do not live within their means. They retain earnings in order to accumulate enough for expansion.16 Yet. they can save a greater percentage of their income in that they have more income to spend. businesses save for the purposes of investment. This rise in savings rates worsens the recession as the expenditure of households will not only fall with their income. again. is essential in a capitalist economy. their owners or managers. the savings rates of capitalist economies are the root cause of their problems. the result of a “false analogy. as Steindl would say. Business savings automatically adjust to conditions in the economy in that the profits of firms rise and fall with their sales.countries are the trade deficits of others. in the expansion or modernization of production facilities. and while households save for the purposes of future consumption.
indeed airplane manufacture is a duopoly. as the orthodox economists assume. where businesses are free to produce and invest to whatever degree they deem profitable. it will vary with the “hopes and fears” that decide them. for competition to perform this function. as Steindl emphasizes. the price cuts needed to eliminate any of them would cut out the profits of all. But. and firms will not expand these if they already have a sufficient amount. In ridding industries of their excess capacity. though it does erupt. competition creates space for expansion. the future will necessarily be different from the present. for any of the firms to try to take over the markets of the others. as Keynes emphasized. enough to meet the demand for their products. for. The “special sales efforts” required would be too costly. with enough differences in their costs and finances for the price competition of the lower cost.” so there will be no intensification of competition when a recession reduces industry sales and firms left with more capacity than they can utilize.”18 As investment depends on uncertain expectations. the return on them will be uncertain and investment ultimately based on business “optimism”—what Keynes called “animal spirits” and what we call today “business confidence. such as automobiles and commercial aircraft. but also on future conditions. And since prices will not fall either—the competition that cuts them is not present—there will be no increase in real incomes to boost consumer spending and thus offset the fall in investment. Capacity utilization is thus an important determinant of investment—as important as business savings—and when excess capacity develops in an industry. eliminating it through the elimination of firms.21 Manufacturing industries. because sales fall off or there is excessive investment.They will reinvest profits only if they expect that investment to be profitable. No specific level of investment can be counted on. are highly concentrated. and reason for its importance. and the price (and/or advertising) war too protracted. and finances strong. it also increases productive capacities. These. “marginal” firms that can be easily or swiftly “knocked out. since plant and equipment investments are long-lived with their profit dependent on product sales and costs over their entire lives. can be quite different from the conditions of the past.”17 And. sustaining the investment in them. investment not only increases the demand for products. Cutthroat competition is rare today. It has to be a competition between differently placed firms. In neither case are there any small. with a small number of enterprises dominating the market.20 This elimination of excess capacity is the critical function of competition. In these industries such recessions will reduce the investment of firms rather than their numbers as these try to adjust capacity to sales through postponement of investments. and in a capitalist economy.
. For if the costs of the firms were similar. It will not. still less the level needed for full employment. be just a “statistical shadow of the past.19 The difficulty of securing this investment is compounded by the results of investment itself. and its profitability depends not only on current conditions in the economy. it must take a certain form. investment will be cut unless competition can “knock” the excess capacity out. driving them out. “progressive” ones to drive out the high cost “marginal” concerns.
and the difficulty of maintaining unemployment under the savings rates of these economies. The monopolization of industry ends the competition that sustains demand and revitalizes investment. while the debt that financed the bubbles remained to be serviced and repaid. the underlying cause of the Great Depression. economic policies as well as economic developments were a part of the problem. collapsing household wealth and necessitating greater household saving. Both were financed with credit. he also would probably say. as he did in his explanation of the “stagflation” of the 1970s that “economic theory cannot be the same for every country. This credit expansion fueled the bubbles. The economy collapsed and remained depressed until an exogenous development. Few would have expected two decades ago the degree to which some of the high-tech information and communication industries have become oligopolies (even near monopolies due to extensive network externalities) as in the case of Microsoft. with borrowings from banks and other financial firms. according to Steindl. But while he would explain the current crisis in the same Keynesian manner as he explained past crises. brought demand back up. as well as the difficulty of ending it. Apple.
. Google. An obvious parallel between the current crisis and the Great Depression is the inflation in asset prices that preceded them—the stock market boom of the 1920s and housing market bubble of the early 2000s. or the debt refinancing and equity withdrawals they allowed. as was the case in the 1970s. Instead of increasing consumer spending through the optimism and capital gains they created.”23 New situations demand “new explanations. they depressed it. economy and double-dip recessions of the European? He would probably point to the parallels between this depression and that of the 1930s. lifting “animal spirits” and reducing the financing costs of investment. nor for different time periods in one and the same country. reminding us of the recurrent downturns of capitalist economies. the Second World War. when the market crashed the full effects of the industrial concentration were felt. when they “burst” their investment and wealth effects reversed. Past and Present What would Steindl say about the “lesser” depression of recent years—the slow growth and continuing high unemployment of the U. but as they mature such industries become more oligopolistic in nature.New industries inevitably experience a shakedown process during which there is considerable price competition. such growing concentration and centralization can be expected to proceed with similar effects on price and investment. and while these stimulated the economy while they lasted. and this industrial concentration was.22 It was the reason for the long-term decline in investment that preceded the Depression (its rate fell off at the turn of the twentieth century). and Cisco.S. Despite relatively high competition in this area. And while the stock market boom of the 1920s held off the downturn. and would not have been possible without their “margin-lending” and debt securitizations (collateralized debt obligations).” and.
according to Steindl. of course. he had already warned us of the adverse effects of this increasing inequality in his writings on the economic developments of the 1970s and ‘80s. along with the persistence of oligopoly.24 and though the recipients of this interest may spend some of it on consumption. as financial investments are liquid and their returns quick. are risky and long-lived. they are likely to be financial firms and wealthier households.”28 and today. and.25 Most of the interest paid out of household income will go back into finance. in both absolute and relative terms. as Steindl also emphasized.has a depressing effect on investment as well as consumption. used for the purposes of financial investments or speculations. in fact. raising it above the level of household incomes. so that while consumer credit can increase consumer spending in the short run.26 Another important parallel between the decades preceding the current crisis and that of the 1930s is the rise in income inequality. in part. attracted. affected the
.Debt-financed consumer spending is quite different from income-financed spending.29 Bull markets provide lucrative alternatives to investments in production. by the growing importance and prestige of the financial sector. While the upward trend in household saving increased the importance of the financial sector. industrial firms had already been drawn into finance by the 1980s. which produced a “class of international rentiers from the OPEC countries. They require a greater financial commitment than stock or bond investments. Its long-run effects are. Consumers have to pay interest on the debt they contract. shifting income from households with lower saving rates to those with higher ones and thus further increasing the household savings rate. neither of which spends much of their earnings. the interest payments on the debt will reduce purchasing power. it cannot do so in the long run. Steindl certainly would have emphasized this. but the oligopoly that was highlighted in his explanation of the Great Depression also played a role. and this interest can be paid in only one of two ways: out of their incomes or through incurring more debt. The increasing size of industrial enterprises. as the long post-war (1950s and ‘60s) prosperity of capitalist countries raised household incomes. capital gains. in plant and equipment. as Steindl emphasizes. and other financial earnings (such as bank commissions and fees). These financial incomes increased. the same as an increase in household saving: they reduce effective demand. new products and technologies. This adverse effect of finance is probably even greater today than it was at the time Steindl noted it (1982)—the financial sector has become still larger—and its growth. given the importance of income distribution in the determination of household savings. and. whereas the debt financed spending cannot. worsening rather than ameliorating the employment problems of capitalist economies. resulting in a “significant accumulation of personal savings held in the form of financial assets. while real investments. we have a similar source of financial accumulations. In either case. in the trade surpluses of China and other nations.”27 This growth of finance was furthered by the oil price hikes of the 1970s. Here he noted the connections between the upward trend in household saving and rise in “rentier” income—interest. dividends. The latter can continue as long as income is earned. the increase in financial incomes increased income inequality.
into financiers (“rentiers”). or their divisions. in any case. and Cameron’s modifications of it. about the efficiency of financial markets and rationality of their risk pricing.
. But. The decline in the growth rate of the U. are usually ruinous under oligopoly. was the modern expression of the “maturity” of economies that Steindl associated with stagnation in his work on the Great Depression. Steindl certainly would have investigated its role in the current crisis. 9 (February 1985): 37. no. Obama’s Budget Control Act (signed in to law in August 2011). see Malcolm Sawyer. when the monetarist high interest policies became dominant. ↩ Such as the “Austerity Treaty” of the EMU. and. He had not realized their appeal to financiers. and countries have become disillusioned with the austerity prescriptions of today’s “classical” (preKeynesian) economists. for its ideas about finance.Its arguments were too simplistic to be taken seriously. 2.” Cambridge Journal of Economics 36. who were seeking new markets for their risk management and had found a rationale for new credit instruments in the “efficient market hypothesis” of the rational expectations models. And he most definitely would have emphasized the role of economics.internal organization and management of enterprises. 1 (January 2012): 205–21. For the details of the British plan. in this sense. played a major role in both the deregulation of the financial sector and the financial innovations that brought on the current crisis. while the “rigorous” rational expectations models in fashion were too abstract and implausible to be influential. and Britain’s 2010 Fiscal Responsibility Act. attention shifted from production to finance. been strengthened by the regulatory policy changes of the 1980s and ‘90s: the deregulation of the financial sector and the new financial instruments (such as derivatives) developed with its freedom. no. This lure of finance has. Steindl thought that economics had “reached rock bottom” with the supply-side economics of the 1980s. and since this can be achieved more quickly through mergers and acquisitions than battles over market shares.30 but it quickened in the 1970s. Quarterly Review 37. Management became more and more concerned with the market power and position of the enterprise. no. since the financial crisis has exposed the bankruptcy of these notions. This change in the outlook of management developed gradually through the years. First published in Banca Nazionale del Lavoro.” Monthly Review 36. “Reflections on the Present State of Economics. if anything. “The Tragedy of UK Fiscal Policy in the Aftermath of the Financial Crisis. ↩ Josef Steindl. These made it profitable for industrial firms to turn themselves. and these battles. 148 (March 1984): 3–14.”32 Notes 1. the “time for new fashions cannot be far away. economy in the 2000s—both the average annual growth rate of output and investment was lower in that decade than in the 1990s31—may have been the result of this financialization of industry. perhaps arguing that the full effects of the stagnation it caused were warded off by the housing market bubble and accompanying increase in household debt.S.
The General Theory of Employment.S. 101. 1985). See his paper on “Risk and Uncertainty in Economics. 16.. 2011. “J. M. “The Role of Household Saving in the Modern Economy.” 69. 11.and Longer-Term Prospects for the U. 113.” delivered at the Federal Reserve Bank of Kansas City Economic Symposium. 14. 100. M.utk.edu. M. ↩ Josef Steindl. Keynes: Society and the Economist. 2009. http://econ. no. ↩ This. Keynes: Society and the Economist.” presented at the conference on “The Economic Recession and the State of Economics.blogs. ed. “Stagnation Theory and Stagnation Policy. Wyoming. ↩ Ibid. 13.” 15. Keynes’s Relevance Today (London: Macmillan. “J. ↩ Steindl.. 1952). 17..nytimes. 18. ↩ Ibid. 7.” New York Times blogs. ↩ This is emphasized in Paul Davidson’s writings. 6. http:/federalreserve. ↩ Steindl. Keynes: Society and the Economist. ↩ This is argued in a number of Steindl’s works. with the fullest discussion in Maturity and
. Jackson Hole.gov.” 101. 4. 8. “J. 99. ↩ Steindl. 320. according Robert Hall. Economy. “Austerity Games.bus. ↩ Ibid.. ↩ Josef Steindl. restoring the “inter-temporal equilibrium” between saving and investment. 10.” American Economic Review 101. Keynes: Society and the Economist. “Stagnation Theory and Stagnation Policy. no.” House of Lords. 20. and ending the slump. This was reprinted with a new introduction by the author by Monthly Review Press in 1976. ↩ Steindl. ↩ See Steindl’s discussion of “The Role of Household Saving in the Modern Economy. 19. 195. “J.1 (March 1979): 1–14. 5.” 109.” Cambridge Journal of Economics 3. Here and Now.com. London. Westminster. ↩ Josef Steindl. 1936). For a review of these see Paul Krugman.” Keynes. and Money (London: Macmillan. Interest. 2011. 12. 2 (April 2011): 431–69. ↩ Steindl. ↩ See his speech on “The Near. ↩ Though there have been a number of econometric studies that have attempted to show the opposite.” in Fausto Vicarelli. http://krugman. August 26. is the reason that they cannot reduce interest rates enough today.3. See his essay on “The Long Slump. February 6. 140 (March 1982): 69–88.” 101. 9. no. M. March 30. ↩ This is the reason Keynes argued that “the duty of ordering the current volume of investment cannot be safely left in private hands.” Banca Nazionale del Lavoro 35. Maturity and Stagnation in American Capitalism (Oxford: Basil Blackwell.
Maturity and Stagnation in American Capitalism. 1 (1985): 53–68. “A Feeble Recovery. ↩ See Steindl. ↩ Steindl. ↩ Josef Steindl. “The Rise of Monetarism as a Social Doctrine. ↩ Amit Bhaduri and Joseph Steindl. Trieste. 23. The Fundamental Economic Weaknesses of the 2001-07 Expansion. 24. Political Economy in the Twentieth Century (Savage. 29. 62–63. 2008.” 30. ↩ See. 1985). ↩ Steindl. 22. 27. ↩ They will have to be paid out of income eventually in that the debt cannot increase indefinitely—creditors will not allow it. when new firms enter an industry. See Steindl. as Steindl notes. 31.” EPI Briefing Paper. 1990). MD: Barnes and Noble Books. ↩ See Josh Bivens and John Irons. no. 32. ↩ It happens most often. “From Stagnation in the 1930s to Slow Growth in the 1970s..” Studies in the Surplus Approach 1. “Reflections on the Present State of Economics. Steindl’s “Effective Demand in the Short and in the Long Run. though their executives or traders might. Italy. ↩ Ibid. 25.E. the financial firms do not spend any on consumption. overcoming its entry barriers through radical changes in its products or technologies. 21.” paper presented to the 1990 Summer School of Centro Internazionale Di Studi Di Economia Politica.org. “From Stagnation in the 1930s to Slow Growth in the 1970s. in particular. http://epi. ↩ See his classic work on the subject. “Distribution and Growth. 26.” in Philip Arestis and Thanos Skouras. Sharpe. Post Keynesian Economic Theory (New York: M. 28. Maturity and Stagnation in American Capitalism. ↩ Indeed..” in Maxine Berg. ed. eds. 66.”
. December 9. especially in the case of consumer debt where there are no income-earning assets to “cover” it.Stagnation in American Capitalism.