We Forgot Everything Keynes Taught Us
By Robert Skidelsky
Sunday, October 19, 2008; B03
No one can complain of a shortage of information about the Great Financial Meltdown. The biggest growth industry today is words: A whole new vocabulary has spread from board tables to kitchen tables. Superannuated whiz kids planting cabbages to offset their newly straitened means can blame their troubles on collateralized debt obligations, special investment vehicles, credit default swaps. Subprime mortgage holders find themselves censured for a new and virulent disease called toxic debt.
But what is in even shorter supply than credit is an economic theory to explain why this financial tsunami occurred, and what its consequences might be. Over the past 30 years, economists have devoted great intellectual energy to proving that such disasters cannot happen. The market system accurately prices all trades at each moment in time. Greed, ignorance, euphoria, panic, herd behavior, predation, financial skulduggery and politics -- the forces that drive boom-bust cycles -- only exist offstage in their models.
The Great Financial Meltdown would not have surprised the British economist John Maynard Keynes, who died in 1946, for he thought that this was exactly how unregulated markets would behave. The New Economics, as Keynesian economics was known in the United States until it became the Obsolete Economics, was designed to prevent such turbulence. It held that governments should vary taxes and spending to offset any tendency for inflation to rise or output to fall.
The New Economics generated its own problems, causing it to collapse into stagflation in the 1970s. But for most Americans and Europeans, the years from 1950 to 1975 were a golden age. The developed world grew at an average annual rate of 3.2 percent with very moderate inflation, and without the benefit of the huge rewards now deemed necessary to keep executives properly incentivized. Above all, growth was stable. The business cycle was severely dampened.
Keynes first became convinced of the instability of unregulated economies in the boom years of the "Roaring '20s." In many ways, the 1920s were like the last 15 years in their technological dynamism, the extravagant lifestyles of the very rich and in their "irrational exuberance." But they were especially like the recent past in their belief that prosperity would continue without interruption.
The magical formula for success was supposed to be the new "science" of monetary management. From the fact that depressions were associated with falling prices and booms with rising prices, the economist Irving Fisher concluded that economic cycles could be eliminated by keeping prices stable. Under his influence, the Federal Reserve Board set itself the goal of price stability. And the price level did stay remarkably stable for most of the 1920s.
Fisher's views were discredited by the stock market crash of 1929, but his doctrines were revived by Milton Friedman in the 1970s. Plagued by inflation, governments around the world took up Friedman's monetarism, which maintained that inflation was due to governments' printing too much money. Central banks were made independent (the Fed already was) and were given the single task of keeping prices stable. Moreover, financial innovation in increasingly deregulated markets was said to make investment less and less risky. The formula seemed to work. Not only did inflation stay low -- not once did it exceed 4 percent between 1991 and 2006 -- with very little price volatility from the 1990s onward, but the U.S. economy showed strong, though not particularly steady, growth of 3.22 percent on average. Once again, perpetual prosperity beckoned.
So what went wrong?
What was wrong was the theory. The price level is not a leading, but a lagging, indicator. Asset bubbles can coexist with a stable price level, even while the rest of the economy is starting to slide into depression. And this, in essence, is what Keynes believed was happening in the late 1920s. Money, he argued, was being switched from production to speculation. The rich were getting very much richer, while the incomes of the rest were stagnating. "Profit inflation," fueled by collateralized debt, went together with an "income deflation." Share prices were being driven up to dizzying heights even as farmers were finding it harder to service agricultural mortgages. Every financial crash is different in detail -- today's started in the banking system, not the stock market -- but the anatomy of all is surprisingly similar: A speculative frenzy, triggered by some technical innovation such as mortgage-backed securities, that collapses when reality -- in the form of more sober valuations -- kicks in.
No one has bettered Keynes in his understanding of the psychology of financial markets. "Most . . . of our decisions to do something positive . . . can only be taken as a result of animal spirits . . . If animal spirits are dimmed . . . enterprise will fade and die" is one famous remark. "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done" is another. Professional investment, he wrote, is like "a game of Snap, of Old Maid, of Musical Chairs," whose object is to pass on the Old Maid -- the toxic debt -- to one's neighbor before the music stops. What makes the game toxic is not greed, which is universal, but uncertainty masquerading as certainty.
"The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made," Keynes wrote in his great book "The General Theory of Employment, Interest, and Money" in 1936. We disguise this uncertainty from ourselves by assuming that the future will be like the past, that existing opinion correctly sums up future prospects, and by copying what everyone else is doing. But any view of the future based on "so flimsy a foundation" is liable to "sudden and violent changes. The practice of calmness and immobility, of certainty and security suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct . . . the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning yet in a sense legitimate where no solid basis exists for a reasonable calculation." Keynes accused economics of being itself "one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future."
One must bear in mind that Keynes's aphorisms, which seem so apposite today, were for years dismissed with a pitying smile as the product of a primitive state of economic thinking that had been rendered obsolete by powerful desktop computers and Ph.D. math unavailable to economists of Keynes's generation.
The second strand of Keynes's economics was formed by the depressed 1930s, rather than the booming '20s. His main insight was that a wounded economy would not simply bounce back but might take years to recover. In his language, it might remain a long time in a state of "underemployment equilibrium," from which it could be rescued only by a massive external shock. As we know, this proved to be the case. It was not the New Deal that brought the U.S. economy back to full employment, but the huge increase in government spending caused by World War II.
The long Japanese stagnation of the 1990s is another example of how long it can take for toxic debt to work itself off the balance sheet of banks, and how relatively powerless governments are to produce recovery in the face of flight into cash. This may or may not be our fate today. We all hope that the new Nobel laureate Paul Krugman is right that the rescue operations taken in the past couple of weeks may be enough to stem the financial crisis. But the wreckage may be with us for a long time to come.
Of course the problem of what a government can or should do to prevent or mitigate these financial storms is not disposed of by pointing out that economies don't behave in the way economists claim that they do. Keynesians want to create financial corridors to limit "the flight of the butterfly," in Paul Davidson's graphic phrase. Free-marketers argue that the cost of periodic crashes and massive rescue operations is worth paying to preserve freedom of capital movements and technological dynamism. Today, as the costs of the bailout mount up, this argument is heard much less.
We know now that we know very little. But Keynes's insights should not be tossed away as old garbage. At the very least we can say that we have no warrant for basing economics on assumptions that are so often discredited by events. Suitable perhaps for professors and students, such economics are likely to be especially toxic for policymakers.
Robert Skidelsky is the author of "John Maynard Keynes: Economist, Philosopher, Statesman."
Capitalism versus socialism: The great debate revisited
by James Petras
- Rebelion June 2004
- www.globalresearch.ca 28 June 2004
The URL of this article is: http://globalresearch.ca/articles/PET406B.html
The debate between socialism and capitalism is far from over. In fact the battle of ideas is intensifying. International agencies, including the United Nations, the International Labor Organization (ILO), the Food and Agricultural Organization, the World Health Organization and reports from NGO's, UNESCO and independent experts and regional and national economic experts provide hard evidence to discuss the merits of capitalism and socialism.
Comparisons between countries and regions before and after the advent of capitalism in Eastern Europe, Russia and Central Europe as well as a comparison of Cuba and the ex-communist countries provide us with an adequate basis to draw some definitive conclusions. Fifteen years of "transition to capitalism" is more than adequate time to judge the performance and impact of capitalist politicians, privatizations, free market policies and other restoration measures on the economy, society and general welfare of the population.
Economic Performance: Growth, Employment and Poverty
Under communism the economic decisions and property were national and publicly owned. Over the past 15 years of the transition to capitalism almost all basic industries, energy, mining, communications, infrastructure and wholesale trade industries have been taken over by European and US multi-national corporations and by mafia billionaires or they have been shut down. This has led to massive unemployment and temporary employment, relative stagnation, vast out-migration and the de-capitalization of the economy via illegal transfers, money laundering and pillage of resources.
In Poland, the former Gdansk Shipyard, point of origin of the Solidarity Trade Union, is closed and now a museum piece. Over 20% of the labor force is officially unemployed (Financial Times, Feb. 21/22, 2004) and has been for the better part of the decade. Another 30% is "employed" in marginal, low paid jobs (prostitution, contraband, drugs, flea markets, street venders and the underground economy). In Bulgaria, Rumania, Latvia, and East Germany similar or worse conditions prevail: The average real per capita growth over the past 15 years is far below the preceding 15 years under communism (especially if we include the benefits of health care, education, subsidized housing and pensions). Moreover economic inequalities have grown geometrically with 1% of the top income bracket controlling 80% of private assets and more than 50% of income while poverty levels exceed 50% or even higher. In the former USSR, especially south-central Asian republics like Armenia, Georgia, and Uzbekistan, living standards have fallen by 80%, almost one fourth of the population has out-migrated or become destitute and industries, public treasuries and energy sources have been pillaged. The scientific, health and educational systems have been all but destroyed. In Armenia, the number of scientific researchers declined from 20,000 in 1990 to 5,000 in 1995, and continues on a downward slide (National Geographic, March 2004). From being a center of Soviet high technology, Armenia today is a country run by criminal gangs in which most people live without central heat and electricity.
In Russia the pillage was even worse and the economic decline was if anything more severe. By the mid 1990's, over 50% of the population (and even more outside of Moscow and St. Peterburg - formerly Leningrad) lived in poverty, homelessness increased and universal comprehensive health and education services collapsed. Never in peace-time modern history has a country fallen so quickly and profoundly as is the case of capitalist Russia. The economy was "privatized" - that is, it was taken over by Russian gangsters led by the eight billionaire oligarchs who shipped over $200 billion dollars out of the country, mainly to banks in New York, Tel Aviv, London and Switzerland. Murder and terror was the chosen weapon of "economic competitiveness" as every sector of the economy and science was decimated and most highly trained world class scientists were starved of resources, basic facilities and income. The principal beneficiaries were former Soviet bureaucrats, mafia bosses, US and Israeli banks, European land speculators, US empire-builders, militarists and multinational corporations. Presidents Bush (father) and Clinton provided the political and economic backing to the Gorbachov and Yeltsin regimes which oversaw the pillage of Russia, aided and abetted by the European Union and Israel. The result of massive pillage, unemployment and the subsequent poverty and desperation was a huge increase in suicide, psychological disorders, alcoholism, drug addiction and diseases rarely seen in Soviet times. Life expectancy among Russian males fell from 64 years in the last year of socialism to 58 years in 2003 ( Wall Street Journal, 2/4/2004), below the level of Bangladesh and 16 years below Cuba's 74 years (Cuban National Statistics 2002). The transition to capitalism in Russia alone led to over 15 million premature deaths (deaths which would not have occurred if life expectancy rates had remained at the levels under socialism). These socially induced deaths under emerging capitalism are comparable to the worst period of the purges of the 1930's. Demographic experts predict Russia's population will decline by 30% over the next decades (WSJ Feb 4, 2004).
The worst consequences of Western supported "transition" to capitalism are still to come over the next few years. The introduction of capitalism has totally undermined the system of public health, leading to an explosion of deadly but previously well-controlled infectious diseases. The Joint United Nations Program on HIV/AIDS (UNAIDS) published a comprehensive empirical report which found that in Eastern Europe and Central Asia…"infection levels are growing faster than anywhere else, more than 1.5 million people in the region are infected today (2004) compared to 30,000 in 1995" (and less than 10,000 in the socialist period). The infection rates are even higher in the Russian Federation, where the rate of increase in HIV infection among young people who came of age under the Western-backed 'capitalist' regimes between 1998-2004 is among the highest in the world.
A big contributor to the AIDS epidemic are the criminal gangs of Russia, Eastern Europe, the Balkans and Baltic countries, who trade in heroin and each year deliver over 200,000 'sex-slaves' to brothels throughout the world. The violent Albanian mafia operating out of the newly "liberated" Kosova controls a significant part of the heroin trade and trafficking in sex-slaves throughout Western Europe and North America. Huge amounts of heroin produced by the US allied war lords of "liberated" Afghanistan pass through the mini-states of former Yugoslavia flooding Western European countries. The newly 'emancipated' Russian Jewish mafia oligarchs have a major stake in the trafficking of drugs, illegal arms, women and girls bound for the sex- industry and in money-laundering throughout the US, Europe and Canada (Robert Friedman, Red Mafiya ,2000). Mafia billionaires have bought and sold practically all major electoral politicians and political parties in the self-styled "Eastern democracies", always in informal or formal alliance with US and European intelligence services.
Economic and social indicators conclusively document that "real existing capitalism" is substantially worse than the full employment, moderate growth, welfare states that existed during the previous socialist period. On personal grounds -in terms of public and private security of life, employment, retirement, and savings -the socialist system represented a far safer place to live than the gang-controlled capitalist societies that replaced them. Politically, the communist states were far more responsive to the social demands of workers, provided some limits on income inequalities, and, while accommodating Russian foreign policies interests, diversified, industrialized and owned all the major sectors of the economy. Under capitalism, the electoral politicians of the ex-communist states sold, at bargain prices, all major industries to foreign or local monopolies, fostering monstrous inequalities and ignore worker health and employment interests. With regard to ownership of the mass media, the state monopoly has been replaced by foreign or domestic monopolies with the same homogenous effects. There is little question that an objective analysis of comparative data between 15 years of capitalist 'transition' and the previous 15 years of socialism, the socialist period is superior on almost all quality of life indicators.
Let us turn now to compare Cuban socialism to the newly emerging capitalist countries of Russia, Easter Europe and south-central Asia.
Cuban socialism was badly hit by the turn to capitalism in the USSR and Eastern Europe. Industrial production and trade fell by 60% and the daily caloric intake of individual Cubans fell by half. Nevertheless infant mortality in Cuba continued to decline from 11per 1000 live births in 1989 to 6 in 2003 (comparing favorably to the U.S.). While Russia spends only 3.8% of its GNP on public healthcare and 1.5% on private care, the Cubans spend 16.7%. While life expectancy among males declined to 58 years in capitalist Russia, it rose to 74 years in socialist Cuba. While unemployment rose to 21% in capitalist Poland, it declined to 3% in Cuba. While drugs and criminal gangs are rampant among the emerging capitalist countries, Cuba has initiated educational and training programs for unemployed youth, paying them salaries to learn a skill and providing job placement. Cuba's continued scientific advances in biotechnology and medicine are world-class while the scientific infrastructure of the former communist countries has collapsed and their scientists have emigrated or are without resources. Cuba retains its political and economic independence while the emerging capitalist countries have become military clients of the US, providing mercenaries to service the US empire in the Balkans, Afghanistan and Iraq. In contrast to Eastern Europeans working as mercenary soldiers for the US in the Third World, 14,000 Cuban medical workers serve some of the poorest regions in Latin America and Africa in cooperation with various national governments that have requested their skills. There are more than 500 Cuban medical workers in Haiti. In Cuba, most industries are national and public with enclaves of private markets and joint ventures with foreign capital. In ex-communist countries, almost all basics industries are foreign-owned, as are most of the mass media and "culture industries". While Cuba retains a social safety net for basic foodstuff, housing, health, education and sports, in the emerging capitalist countries the "market" excludes substantial sectors of the unemployed and underpaid from access to many of those goods and services.
Comparative data on economy and society demonstrate that "reformed socialism" in Cuba has greatly surpassed the performance of the emerging capitalist countries of Eastern Europe and Russia, not to speak of Central Asia. Even with the negative fall-out from the crisis of the early 1990's, and the growing tourist sector, Cuba's moral and cultural climate is far healthier than any and all of the corrupt mafia- ridden electoral regimes with their complicity in drugs, sex slavery and subordination to U.S. empire building. Equally important while AIDS infects millions in Eastern Europe and Russia, Cuba has the best preventive and most humane treatment facilities in the world for dealing with HIV. Free anti-viral drugs, humane cost-free treatment and well-organized, extensive public health programs and health education explains why Cuba has the lowest incidence of HIV in the developing world despite the presence of small-scale prostitution related to tourism and low incomes.
The debate over the superiority of socialism and capitalism continues because what has replaced socialism after the collapse of the USSR is far worse on every significant indictor. The debate continues because the achievements of Cuba far surpass those of the emerging capitalist countries and because in Latin America the emerging social movements have realized changes in self-government (Zapatistas), in democratizing land ownership (MST Brazil) and natural resource control (Bolivia) which are far superior to anything US imperialism and local capitalism has to offer.
The emerging socialism is a new configuration which combines the welfare state of the past, the humane social programs and security measure of Cuba and the self-government experiments of the EZLN and MST. Wish us well!
The Difference Between Socialism and Communism and the cognitive dissonance created by Lenin and Reagan
Recap from previous column: Liberals are people who are under the only partially mistaken impression that altering the structure of government is the best way to influence people and resources. Conservatives are people who are under the only partially mistaken impression that altering the people in power is the best way to influence other people and their culture.
To put it more simply: Liberals want the decision to be spread out among more people, preferably everyone; conservatives want the decision to be made by as few people as possible, preferably just one.
Socialism, as envisioned by Marx and Engels was, ideally, a where everyone would share the benefits of industrialization. Workers would do better than in the English system at the time (The Communist Manifesto was published in 1848) because there were more workers than bosses and the majority would rule. As a purely economic system, socialism is a lousy way to run a large scale economy. Socialism is not a political system, it's a way of distributing goods and services. At their ideal implementation, socialism and laissez faire capitalism will be identical as everyone will produce exactly what's needed for exactly who needs it. In practice, both work sometimes in microeconomic conditions but fail miserably when applied to national and international economies. And they fail for the same reason: Human pervserity. Too many people don't like to play fair, and both systems only work when everyone follow the same rules.
Socialism is liberal. More people (preferably everyone) have some say in how the economy works. Democracy is liberal. More people (preferably everyone) have some say in how the government works. "Democracy," said Marx, "is the road to socialism." He was wrong about how economics and politics interact, but he did see their similar underpinnings.
Communism is conservative. Fewer and fewer people (preferably just the Party Secretary) have any say in how the economy works. Republicans are conservative. Fewer and fewer people (preferably just people controlling the Party figurehead) have any say in how the government works. The conservatives in the US are in the same position as the communists in the 30s, and for the same reason: Their revolutions failed spectacularly but they refuse to admit what went wrong.
A common mistake is to confuse Socialism, the economic system, with Communism, the political system. Communists are "socialist" in the same way that Republicans are "compassionate conservatives". That is, they give lip service to ideals they have no intention of practicing.
Communism, or "scientific socialism", has very little to do with Marx. Communism was originally envisioned by Marx and Engels as the last stages of their socialist revolution. "The meaning of the word communism shifted after 1917, when Vladimir Lenin and his Bolshevik Party seized power in Russia. The Bolsheviks changed their name to the Communist Party and installed a repressive, single-party regime devoted to the implementation of socialist policies." (quote from Encarta.). Those socialist policies were never implemented.
Whereas Marx saw industrialized workers rising up to take over control of their means of production, the exact opposite happened. Most countries that have gone Communist have been agrarian underdeveloped nations. The prime example is the Soviet Union. The best thing to be said about the October Revolution in 1917 is that the new government was better than the Tsars. The worst thing is that they trusted the wrong people, notably Lenin, to lead this upheaval. The Soviet Union officially abandoned socialism in 1921 when Lenin instituted the New Economic Policy allowing for taxation, local trade, some state capitalism... and extreme profiteering. Later that year, he purged 259,000 from the party membership and therefore purged them from voting (shades of the US election of 2000!) and fewer and fewer people were involved in making decisions.
Marxism became Marxist-Leninism which became Stalinism. The Wikipedia entry for Stalinism: "The term Stalinism was used by anti-Soviet Marxists, particularly Trotskyists, to distinguish the policies of the Soviet Union from those they regard as more true to Marxism. Trotskyists argue that the Stalinist USSR was not socialist, but a bureaucratized degenerated workers state that is, a state in which exploitation is controlled by a ruling caste which, while it did not own the means of production and was not a social class in its own right, accrued benefits and privileges at the expense of the working class."
Communists defending Stalin were driven by Cognitive Dissonance. "The existence of dissonance, being psychologically uncomfortable, motivates the person to reduce the dissonance and leads to avoidance of information likely to increase the dissonance." They didn't want to hear any criticism, and would go out of their way to deny facts. The abrupt betrayal of ideals by Lenin and Marx left many socialists clinging to the Soviet Union even though they knew Stalin was a disaster. They called themselves Communist even though they espoused none of Stalin's viewpoints and very few of Lenin's revisionism. In Russia, Lenin remains a Hero of the Revolution. Despite having screwed things up in the first place, Stalin is revered by Communists for toppling the Third Reich.
Conservatives defending George W. Bush are in the same situation as Communists defending Stalin. Stalin was never a "socialist" and Bush was never a "compassionate conservative", but the conservatives just don't want to hear any criticism and will go out of their way to deny facts. The current construction of the conservative movement in the US descends through the anti-Communists during and after WWII, the George Wallace "America First" blue-collar workers, the racists that Wallace picked up that switched parties during Nixon's Southern Strategy, and the nascent libertarian movement championed by Barry Goldwater. Ronald Reagan's acceptance speech for Goldwater during the 1964 Republican National Convention laid out the insistence of a balanced budget: "There can be no security anywhere in the free world if there is no fiscal and economic stability within the United States." And yet, like Lenin revising Marx, when Reagan was governor of California he didn't practice fiscal restraint. And when he was elected president in 1980 he did the exact opposite of his campaign promise and triple the deficit and there has been "no fiscal and economic stability" since his flip-flop. Fiscal restraint was never implemented.
Abrupt betrayal of ideals of Reagan when he got into power left many conservatives clinging to the Republican party even though they espoused none of Reagan's new policies. Despite screwing things up in the first place, Reagan remains a Hero of the Revolution and is revered by conservatives for toppling the Soviet Union.
Reagan isn't Lenin and Bush isn't Stalin, but the parallels are notable. George W. Bush, like Stalin, inherits a failed revolution that relies on a cult-like worship of his predecessors and a complete denial of the facts.
Let me repeat Wikipedia's quote. "Stalinism is a state in which exploitation is controlled by a ruling caste.... at the expense of the working class." This is the exact opposite of what Marx and Engels were trying to accomplish, and is precisely what George W. Bush and the Republicans are working so hard for.
Most of the Republicans/conservatives/dittoheads I know are basically good people, but they're gullible fools who have spent more than 20 years burying themselves in lies needed to resolve the cognitive dissonance created by Reagan's betrayal. Reagan called the Soviet Union an "evil empire", but as we've seen it wasn't much of an empire and most of the people in it aren't particularly evil. Khrushchev repudiated Stalin after he died in 1953, but wasn't strong enough to change the system or the cult worship that kept the dictatorship alive. Republicans need to repudiate Reagan, but there is no one out there who has the guts to tell the truth. The GOP is reduced to whining, flag-waving and outright lying. The shame of being a conservative has never been greater.
Despite Nader's protestation, John Kerry and the Democrats do represent a return to American values. It took the Soviet Union 40 years to rot from within before democracy took hold. Let us not wait 40 years before the Republican-controlled US rots from within. The choice is clear. To complete the circle, let me quote the last line of Reagan's 1964 speech, which has greater meaning when talking about the need to vote Democrat in 2004: "You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on earth, or we will sentence them to take the first step into a thousand years of darkness. If we fail, at least let our children and our children's children say of us we justified our brief moment here. We did all that could be done."
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