Is Global Keynesianism Possible? 10 April 2009 Beijing China

Significance of growth For labour: determines scope for expansion of employment For capital: determines scope for re-investment of corporate profits Therefore if growth is too slow it means the rate of profit will fall Under capitalism this is periodically inevitable (business cycle) Result: fall in stock prices, leading to destruction of capital / unemployment

The Keynesian answer Use of government policy to offset cyclical decline in growth through: – Fiscal expansion (deficit financing) – Monetary expansion (low interest rates and easy access to credit) This will encourage business to maintain output and investment and consumers to consume – thus reversing the downward cycle

Problems Danger: liable to result in inflation if money supply is expanded too fast or if markets lose faith in value of the currency because of high budget deficit Not clear if it will work in any case unless there is high level of effective demand

Background to present crisis Follows 35 years of declining global growth Rising productivity of capital and labour Corresponding decline in growth of demand for investment capital and labour Financial liberalisation since 1980s has facilitated speculative investment Very lax monetary policy since 2001, leading to unsustainable credit expansion Resulting exceptional growth from 2003 to 2007 (4- 5% a year)

Prospects Households in US and other western countries hugely in debt; need to rebuild balance sheets Same applies to many businesses Hence they need to reduce rather than expand borrowing and consumption in the short term Cyclical contraction therefore unavoidable Rise in fiscal deficits and monetary easing now occurring only likely to cause inflation

Implications for policy Growth maximisation must cease to be policy goal (at least in industrialised countries), because – growth rates high enough to satisfy needs of the profits machine are unattainable – growth above very low levels is more and more unsustainable environmentally Immediate: governments must intervene to minimise economic disruption and social distress, taking over private assets where necessary) Longer term: new economic model must be developed based on more rational principles

Return to first principles I The essentially Ricardian theoretical basis of conventional economics, which has predominated since the Industrial Revolution, is fundamentally flawed and designed primarily to serve the interests of owners of capital in that –it focuses on bringing effective demand into line with productive capacity rather than adjusting capacity to the actual or potential level of need / effective demand, and –it assumes that more or less free competition will always tend to equilibrium at levels consistent with the full employment of productive factors.

Return to first principles II Give priority to meetings needs / wants of consumers, workers and taxpayers Extension of welfare economics (now more clearly in conflict with capitalist priorities)

Alternative vision for the future Give priority to stability and security (economic and social) consistent with equity and maximum economic efficiency (long-term lowest economic cost) Subject the corporate sector to proper public accountability (public support and protection to be conditional on respecting public priorities) Abandon the unattainable fantasy of full employment in favour of a radically different system of income distribution based on a) universal entitlement to a basic / citizen's income (at a flat survival level) regardless of means or employment status and b) more regulated labour (and product) markets