Prosperity and Public Spending (Routledge Revivals)

Transformational growth and the role of government

Edward Nell

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9780415571043
• eBook ISBN: 9781135156350
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

In a dramatic and well-argued challenge to the prevailing wisdom, Prosperity and Public Spending, first published in 1988, contends that the failure of Keynesian economics has been due to its timidity. Far from contracting, the government must expand its powers and activities, in order to achieve and maintain economic prosperity. The need for such expansion arises from the fact that the system has developed from a craft-based economy to a mass-production network with sophisticated international finance. This "transformational growth" brings about irreversible and sometimes devastating changes, requiring government action. Professor Nell argues that a lack of government action in the decade prior to the book's initial publication was responsible for the stagnation of the economy and he asserts that this could only be overcome by a determined policy intervention and the political will to achieve dominance over private capital.

PART I
The Retreat from
Prosperity

1
The Slowdown of the 1970s

In the mid 1960s things looked pretty good, economically, for the US. There had been twenty years of prosperity, of near full employment, with little or no inflation. Growth had been rapid, so that the standard of living of a large and expanding middle class had risen steadily, and a new automobile-centered lifestyle, which became the envy of the world, blossomed in the suburbs. First, a car in every garage, then, for the prosperous, two cars—and a radio in each; one television for the house, then two, one color and one black and white; radios, hi-fis, dishwashers, washer-dryers, blenders, appliances of all sorts became normal equipment, as electronic wizardry advanced by leaps and bounds. The standard equipment of the middle-class household of the 1960s was almost unimaginable to even the richest of the flappers and Great Gatsbys. And things kept getting better and better; ‘new and improved’ was the order of the day. Then poverty was discovered; in the richest country in the world, there were people going hungry, people who, it emerged, were not only relatively poor, but absolutely so. Such poverty was intolerable to the liberal conscience, as intolerable as communism in Vietnam; so war was declared on both. Guns for Saigon, and butter for the inner cities; Lyndon Johnson thought the richest country in the world could surely afford both.

Something went badly wrong. Within a few years the economy found itself plagued by both unemployment and inflation. Worse, the conventional remedies no longer seemed to work. Policy-induced unemployment, which was supposed to cure inflation, sometimes seemed to exacerbate it. Growth slowed down, the dollar, the basis of world trade, turned shaky, and for the first time the US began to import as much or more than it exported. And things then began, not to improve, but steadily to get worse. Inflation intensified, reaching double-digit figures; recessions got deeper and deeper, with unemployment eventually reaching double digits, too. And new problems emerged; productivity, which had grown rapidly and reliably for over twenty years, began to slow down, until by the late 1970s it was no longer growing at all. Manufacturing slumped. What growth there was took place in services. Real wages stagnated, and class divisions widened; migration from the countryside to the cities trickled to a halt, and even reversed one year in the mid-1970s. Construction in the suburbs slowed and housing starts stagnated, while costs soared. The American Dream, owning your own home, began to fade.

Why? What had gone wrong? For most economists and economic journalists, the answer was plain—bad policy decisions (starting with Johnson’s misguided attempt to have both guns and butter) came on top of bad luck, a streak of ‘supply shocks’. The Vietnam War should have been financed by a tax increase; the failure to impose the necessary taxes, by an administration fearful of making an already unpopular war intolerable, led to inflation, which eroded the US’s international position. In this weakened condition, the US found it harder to deal with external shocks, such as bad harvests, the oil increase, and so on. Moreover, each of these external jolts was then followed by a succession of mistakes. Conservatives and liberals disagree about just which policies were mistaken, but both agree that the stagflation of the 1970s was caused at bottom by policy errors, following supply shocks. Monetarists blamed deficit spending and monetary laxity for the inflation, and held that the rising unemployment was the result of ‘natural’ factors. The decline in the effectiveness of Keynesian policies, on the other hand, was due to the fact that those policies had only worked in the first place by fooling people—and now everyone had caught on. By contrast, Keynesians held a mixed bag of views that ascribed the origin of either the unemployment or the inflation to some external shock or other, and then explained the other member of the unwanted pair by the misguided policies undertaken to control the first. Most Keynesians believed that correct fiscal and monetary policies would rectify the situation, though they frequently disagreed about the exact mix; a small but influential group of ‘post-Keynesians’ maintained that incomes policies—tying money wage increases to increases in productivity—were necessary to prevent inflation and thus make room for an expansionary fiscal stance. Either way, policy errors were at the root of the matter.¹

Radicals disagreed. Policy mistakes may well have been made, but problematical policies were nothing new. The question was not whether policy mistakes were made, or even which policies were mistaken; rather, it was why mistakes mattered so much. What had changed in the way the economy worked? Why did mistakes now have such a major impact, and why was it so difficult for correct policies to set things right again? Radicals gave two different kinds of answers. One group argued that the long period of post war prosperity was basically the result of a set of accommodations (somewhat grandly termed a ‘social structure of accumulation’) between US capital—the major corporations—and US labor—the big unions—on the one hand, and between capital and the citizenry, on the other. These accords, unspoken yet detailed, and arranged through informal channels, provided the foundation for corporate profitability. Oversimplifying a complex argument, the claim is that workers agreed to mitigate labor disputes in return for wage increases that kept pace with rising productivity. Citizens agreed to let the market rule, and to minimize regulation, in return for social security and a full-employment policy. A third accord, the Pax Americana, supplemented the other two, providing US corporations maximum scope for their operations world-wide in return for US military protection against indigenous socialist movements. Many other elements were involved in each of these accords, but the central point was simple—the accords permitted profits to expand, so capital could accumulate. And the crises of the 1970s developed, not because of external shocks, or as the consequence of policy mistakes, but because these accords eroded and then broke down.²

The great weakness in this story is that it explains the economic crisis by the breakdown of the accords, but it offers no adequate reason why the accords should have broken down. In fact the most plausible reasons, indeed the ones the authors themselves mention, are all economic—tightening labor and raw material markets, environmental destruction, widening income differentials, slackening sales, and intensifying international competition. However, the breakdown of the social structure of accumulation was supposed to explain the economic crisis; it won’t do then to turn around and explain the erosion of that structure by the onset of economic troubles.

The other radical approach faced no such difficulties. It explained both the breakdown of such postwar accords and the onset of economic troubles by the tendency of the rate of profit to fall, which in turn is brought about by the working of competition. So this tendency, noted by both Ricardo and Marx, and also (although interpreted differently) by mainstream economics, must be considered inherent in the system. As the rate of profit falls, the tendency to invest weakens; hence, on the one hand, unemployment emerges, while, on the other, monetary relaxation and other Keynesian measures will have less impact. Moreover, faced with sagging profitability, governments will try with increasing fervor to stimulate the economy; the result will be deficits and excessive monetary growth. Businesses meanwhile will try to raise prices wherever possible. Thus unemployment and inflation will develop together, and will appear to be the results of mistaken or excessively lax Keynesian policies, while Keynesians will complain over the economy’s unexpected lack of responsiveness to their normal policy tools.³

The difficulty here is quite different, but no less serious. There is no generally accepted theoretical explanation for a persistent tendency of the rate of profit to fall, and the main ones offered all seem to contain flaws. The capital theory controversy of the 1960s revealed serious inconsistencies in the mainstream approach, which held that higher levels of capital per worker would bring about lower rates of return. This was a version of the scarcity principle: abundance of capital reduces its value. The controversy showed that no such regular relationship existed: once business invested in new methods of production, chosen in response, say, to a change in the wage, a new set of prices would (eventually) be established, whereupon capital would have to be revalued. For the mainstream story to hold, the revalued stock of capital would have to be consistent with the ‘scarcity’ story: a rise in wages, bringing down the rate of profits and causing changes in methods of production, would have to mean a larger invested capital. But it was found that no general rules could be stated, and, worse, that any number of perverse and surprising cases could be devised. Moreover, this critique also applies to the radical theory, which holds that competition will force firms to substitute capital for workers, even when the new methods are less profitable overall. However, when the new methods are installed, new prices will eventually be established, and both capital and output will have to be revalued. Capital may be increased—but the rate of profit may be higher, not lower! The simple parables, derived from the microeconomics of the craft economy, don’t work when applied to the problems of an industrial economy.⁴ In short, if the rate of profit fell in the manner indicated, then the results described by the radical theory would almost certainly follow. But, while profits and the rate of profits have in fact fallen, this fall may well have been caused by, rather than causing, the economic difficulties in question.

The radicals have an excellent point: the issue is not policy mistakes, but why they have mattered so much. Although the economy is working differently, more sluggishly, the fundamental change is not on the supply side. What has changed is that the growth of demand has slowed. Crucial markets have matured and new ones have not opened at the same rate.

As long as growth consisted of the opening of new territories there was no reason to worry about the growth of demand. The development of the new region could be expected to create new demands right along with the new productive capacity. But once growth comes to mean the more intensive development of the existing economy, as it does in the modern economy, the expansion of markets can no longer be taken for granted: markets must be cultivated, demand stimulated. For example, a major redistribution of income, such as happened after World War II with the provision of veterans’ benefits by the G.I.Bill of Rights, can create a massive new consumer market.⁵ So can a major shift in population, e.g. from rural to urban areas. But if new productive capacity is to be constructed, there must be some reason to believe that new markets will emerge or old ones expand. Up to the mid-1960s, this seemed reasonable; by the beginning of the 1970s the outlook had become bleak.

Twenty Years of Stagnation

These issues cannot be assessed properly until we have a better idea of what took place in the economy after the late 1960s. Nor will it do to confine our discussion to a few sets of numbers representing inflation and unemployment. The economy is a complex of interrelated institutions, involving at least employment and production, finance, marketing and sales, consumption, investment and growth, the payment and distribution of incomes, international relations, and technological innovation. To see how the economy works, we shall have to look at all of these, comparing the way the economy worked in the 1950s and early 1960s with the way it worked later, in the 1970s. It would be nice if it were simpler, but it isn’t.

Overall real economic growth

Economic growth overall slowed significantly, from nearly 4 per cent per year in the period 1950–65, to just over 3 per cent per year in the period 1965–80. Hard-to-measure services production rose rapidly in the 1960s and 1970s. If we look only at goods and structures, the slowdown in growth is somewhat sharper—from 3.4 per cent in 1950–65 to 2.5 per cent in 1965–80.

Not only was growth slower in 1965–80 than it had been earlier, it was also more undependable. Between 1969 and 1980, real economic activity declined in four out of eleven years, whereas the record for the 1950s and 1960s showed only two years of decline in a twenty-year period. There was a comparable variability in income and employment growth, and these presented the same problem for households and for business: uncertainty. With real sales falling almost as often as they rose, planning the expansion of businesses became a much more risky proposition. So the slumps of the 1970s seem to have reflected justified uncertainty about the future development of key consumer markets.

Unfortunately, the resultant instability made conservative planning rational for the individual business, reinforcing the trend: when investment falls off, the reduced employment means that household incomes in the aggregate are down, and hence consumer spending also weakens. When the consensus of planning turns risk-averse, then growth falters and, ironically, planners are vindicated. Boom and bust are self-reinforcing. In other words, the degree of optimism or pessimism (the ‘animal spirits’, to use a Keynesian phrase) of planners will determine the long-term growth of the economy. But these ‘animal spirits’ are not simply based on crowd psychology and subjective reactions to the news of the day. The consensus of corporate planners on investment is based on good research and hard facts about what will sell and what won’t, what markets will grow and how fast, and which ones will slow down or stagnate. We shall come to this in a moment. First, let’s consider the rest of the record, starting with the effect of inflation on the prosperity of the majority of people, then turning to consumption and the balance of trade. ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• Introduction
• Part I: The Retreat from Prosperity
• Part II: From Kinship Capitalism to Corporate Industry
• Part III: Free Markets or Planned Prosperity?
• Bibliography