Keynesians and Monetarists Ruthless Criticism

[Translated excerpt from MSZ 3-1982]

Political Economy – Ideologies

Keynesians and Monetarists

The economic policy instruments being used in President Reagan’s “employment program,” including depreciation deductions and tax cuts, are quite normal components of “Keynesian” economic policy. Nowadays, however, when an economist – whether academic or journalistic – wants to tell a colleague, a trade union, or a politician what to do, he likes to speak of the “mistakes of Keynesian economic philosophy.” This goes so far as blaming current “economic problems” on the ideas of John Maynard Keynes, which are said to have had a grip on too many minds in the past. The “Keynesians” see themselves subject to suspicions about whether they advocate ideas that are inimical or even harmful to the “needs of the economy” today, provoking them to make very offensive declarations of belief.

Keynesianism once upon a time ...

On a Bavarian Broadcasting Corporation talk show, for example, among the top-class experts – Schiller, Emminger (Bundesbank), Sievert (Advisory Council) – a Professor Gerfin was invited to represent Keynesianism, obviously an eccentric or even left-wing position. It was almost embarrassing to witness the professor’s efforts to emphasize his full agreement with the government’s “anti-Keynesian” measures, not even shying away from a public renunciation:

“Across all camps, there is no disagreement that wage policy must adjust to costs.”

This is indeed a universal belief among economists, but it isn’t Keynesianism: in fact, old Keynes was radical enough to propose a program for “saving capitalism” which gave a first place role to “consumption” – in which the common people are included as part of the “aggregate” – even uncoupled from productive trends (“costs”). Keynes was even so radical as to criticize capitalism – in limiting “consumption” too much – for in effect possibly preparing its own doom. His point of reference was the war-torn economy and the great world economic crisis which had proved that the initially correct “laws” of capital had outlived their usefulness:

“Europe was so organized socially and economically as to secure the maximum accumulation of capital... The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System...

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably.... Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce...

In writing thus I do not necessarily disparage the practices of that generation. In the unconscious recesses of its being Society knew what it was about. The cake was really very small in proportion to the appetites of consumption, and no one, if it were shared all round, would be much the better off by the cutting of it. Society was working not for the small pleasures of today but for the future security and improvement of the race,—in fact for 'progress.'” (from The Economic Consequences of the Peace)

Keynes thus praises the capitalism of the 19th century for having very successfully developed the productive forces on the basis of a distribution which consisted in everyone sacrificing equally, something that resulted for some in growth and for others – according to its highest purpose – in unavoidable poverty, which in turn benefited growth. What disturbs Keynes about the interruption of this growth by the Great Depression is the idleness of the production factors capital and labor, which he in turn attributes to a lack of demand: The cake can no longer grow because it is not being consumed:

“The Western world has been taught by the collapse of the market economy that the cake was already big and that it will dry up and crumble if it is not cut.” (Keynes disciple Joan Robinson)

When Keynes talks about the “economic consequences of the peace” and considers these consequences alarming, he sees the state’s abundant spending activity in the previous war to have been at least a positive aspect, or else he blames the (allegedly!) all too abrupt slackening of this activity for the “slump.” He therefore does not assume that there is an existing “cake” that needs to be distributed differently, but introduces the state as a higher financial power which, independently of the “cake” and by maintaining the ratio of growth to poverty in accumulation, corrects the “stagnation” (lack of demand) that occurs in this ratio from the outside, stimulating the cake to grow with artificial demand, so to speak. (For this he also thinks up “multipliers”: inserting demand at a certain point will result in an avalanche-like expansion of production and investment). Demand, then, is not to be understood as a moment of mass consumption, but as an incentive for the state – which borrows beyond accumulation in confidence that its debts have a very different quality than those of a businessman – which puts the factors of production (back) to beneficial use:

“The prolonged unemployment of the 1930s had made the doctrine of laissez faire politically untenable. The essence of Keynes' new doctrine was that the state should not rely on the automatism of economic adjustment processes, but should contribute to full employment by means of targeted budgetary, fiscal and monetary policies.

“The task of increasing demand for goods and services and thus for labor, Keynes maintained, could only be triggered by the state – by increasing government spending, lowering taxes, and increasing the money in circulation; the prerequisite for such a policy was the willingness to accept larger deficits in the state budget. In his doctrine, Keynes placed more emphasis on variable tax and budgetary policies than on regulating the available money supply... In Keynes’ view, the available money supply is only one among several factors affecting the national economy, not the controlling factor. If consumers and entrepreneurs lose confidence in the future.... the expansion of the money supply fails to induce them to increase spending and decrease saving.” (Leonard Silk, Economic Theory and Economic Policy in the United States, in USA Perspective, 2/71)

In his construction of a model of the entire national economy, Keynes’ “achievement” consists of transforming phenomena such as investment, savings or consumption, which emerge from everyday capitalist life, into theoretical quantities. A category like “consumption,” for example, doesn’t have the slightest thing to do with actual shopping and consumption – which varies greatly between the classes and obeys very different purposes. Rather, it reduces a component of the economic “cake” to a pure quantity. Keynes now spends a lot of effort conceiving how this quantity influences other quantities by – as he postulates – getting bigger or smaller. This procedure, aside from any checks on plausibility, expresses its impartial character as a model by referring to real phenomena (not explaining them) when it holds “ceteris paribus clauses” (while one thing changes, the others have to keep still in the meantime) and “premises” that are quickly put forward as self-evident or “unfortunately” not yet fully explored.

The “description” of capitalism in the 19th century is a nice example of such a theoretical transformation: Who is supposed to have “organized” and “constructed” it? Of course, Keynes himself – one can see that he masters the basic theorem of sociology: “system.” Why did people know “what they had to know in the unconscious depths of their being”? Because Keynes imagines them that way – you see, even psychology is not alien to him. He attributes all this to the 19th century because he is passionate about accumulation, which he imagines to have been the work of a divine abstinence theorist (who endows some with more “love of power,” others with more “hunger for consumption”) – but at the same time, he is disappointed that it was “interrupted” by the world economic crisis, the “hard times” of that era. That is why he interprets accumulation in the past in such a way that, although it established the fundamentally correct relationship between the “parts,” it lopsidedly overdid it. This then requires a correction from the outside: the passion for accumulation is consistently supplemented with a passion for the state, because only force from above – which was supposedly lacking in accumulation up to this point – is capable of rearranging the “parts.”

This is what Keynesianism boils down to. The new thing about it was actually only the “advance” of having theoretically merged the model-building economist with his civic-minded soul. This is not a criticism of capitalism, but the birth of “macroeconomics,” an addendum criticizing “microeconomics” for its attachment (this is how it’s intended) to the “utility maximizer”; the introduction of a new “utility maximizer” which, with its very special “budget” and “willingness to accept larger deficits,” has to help others maximize. His macroeconomic spider’s web, in the center of which sits the state pulling all the strings, does not explain a single economic policy measure, nor can any “instrument” be “gained” from it – it solely affirms that economic policy, state budget and accumulation belong together.

At most, Keynes becomes a friend of labor through a rather unfair way of looking at things, which maliciously associates government spending with a welfare state which has first been denounced as the cause of all evil and then accuses Keynes, of all people, of having misled the state into such spending. In fact, Keynes drew up his theory against the background of a “learning process” on the part of the capitalist states (one can also say: it came to him at the right time to make an “advance” in economic science), when they had set out to take control of the consequences of a great war – which is really something other than “laissez faire” – and this manifested itself in, among other things, a worldwide non-use of existing capital in terms of economic policy. Keynes himself leaves no doubt that he took the masses “into account” in the “consumption” factor because he wants to use it as a variable for the benefit of economic growth, which is why it is no contradiction for a Keynesian to imagine “consumption” as a “flow variable” to be expanded cyclically (with a multiplier effect for capital) while at the same time exhorting the trade unions to moderate their wage demands. For him, too, the ongoing poverty of the masses is the indispensable prerequisite for a functioning capitalism: He wants to get accumulation going again on the basis of limited mass consumption through state demand and relies on the practical power of the state to take on debts which provide the means for accumulation with its loans. Or in the words of Keynes himself: “Inequality in the distribution of wealth” must exist – it just has to be guided differently. The alleged betterment of the masses comes down to the sum of wages that increases with higher employment becoming noticeable as growth-promoting demand (“purchasing power”).

In this respect, Keynes is the pro-capital alternative to the fascist “employment program” that relied on (American) economic power. Whereas the fascists kept the idle factors of production going by state decree, regardless of capitalist considerations of utility, Keynes’ theory called on the state to offer capital sufficient credit and orders, which it would then be able to use profitably of its own accord.

For decades, politicians made it their business to claim that their economic policy measures were legitimized by a recognized theory (or just to say they were now doing things differently), for there were enough reasons given the consequences of the next great war; and nobody ever accused them of ruining capital in favor of a carefree life for the proletariat – until today.

... and today

That’s why – to come back to Professor Gerfin – even today a Keynesians is not a leper, but a discussion partner who just has to find a different way of presenting his demand elements as highly compatible with the state’s “austerity policy” (which declares “spending” as such – falsely – to be the main evil), and indeed even promotes it. His objective shortcoming remains that a Keynesian (at least in appearance) has to first recommend spending by the state – which he knows has the reputation of being “indulgent,” so he provides detailed preambles to the effect that he really only has the well-being of economic growth in mind – which will then pay off in the form of increased revenues, even and especially under “difficult conditions.” But this ideological presentation of earlier, “normal” government debts – where the state supportively subordinated itself to the productive potentials of its society in order to bring in budgetary funds, but also indicated at the same time that it would not allow itself to be limited by this return flow, but would claim the (credit) trust of its citizens for the implementation of all the tasks it deemed necessary – must be accused of being unrealistic today, and indeed precisely because government debt expansion today is accompanied by counter-cyclical and sociopolitical austerity measures and rigorous restrictions of the “demand factor.” This is why the size of the debt – which far overshadows any Keynesian proposal – is not a counter-argument. After all, it is precisely the size of the debt that dictates “budget consolidation” and prohibits any deficit-spending – except for tornadoes, etc.

Friedman’s “simple recipe”

The militant alternative to Keynesian economic policy for the last 15 years, monetarism, now prevails and claims to have always called on the state to do what it is now supposedly doing: “less government.” Apparently, this is a “return” to the advantages – spoiled by Keynesian state intervention – of “laisser faire”; this doctrine emphasizes that it requires “only” one intervention from the state:

“Friedman's doctrine is in the main an updated and refined version of the old quantitative theory of money, which holds that changes in the available money supply produce predictable changes in aggregate spending on the part of business and consumers and, through them, in prices. If the quantity of money available increases more than the quantity of goods and services produced.... prices rise; but if the increase in the money supply is kept smaller than the potential output of the economy, unemployment falls while prices fall. To avoid both inflation and deflation and instead ensure relatively steady growth, Prof. Friedman suggested as a simple prescription that the central banking system limit the growth of the available money supply to the rate of increase in the output of goods and services.” (Silk, ibid.)

The theory fixates on one point in the magic square of “price stability” and claims that the realization of this ideal is the enforcement of a steady accumulation: the money supply determines growth, therefore it has to be determined by the rate of growth and prices have to be adjusted to the natural rate of growth. This is the basic dogma which confidently ignores the determination of prices, money circulation, credit, and its relation to real accumulation.

But here the message is more interesting, which is contradictory enough: If in the debate – which they raise! – about “more or less” government, these theorists take a position of “less,” then one can see by examining the “less” more closely that nothing is correct in this debate. The “withdrawal of the state” from the economy to unleash miraculous forces has the particularly miraculous magic wand of the “right amount of money” in its toolkit – according to the monetarists, the economic system completely depends on the correct definition and the correct use of this magic wand by the state.

So the monetarists don’t have anything true on their side, but have two facts behind them: (1) That they are the competing theory to the Keynesians; (2) that the state has changed its economic policy and is selling this, with reference to its rising debt, as an “anti-inflation program” and “austerity policy” and, in America, as a dismantling of “state dirigisme.” Their ideological suitability is that, as an alternative that has always been available, they provide the very massive interventions of the state in economic life with the opposite contention, which constitutes their theoretical “identity,” and celebrates this as a victory of theory. They do not take orders from the state to compose the most beautiful lies possible, but finally enjoy discovering themselves in the state’s conviction that one is really not allowed to know anything about the real course of events. In this way, all state hardships are given a completely different necessity, which is now branded as economic-theoretical reason. In this world of ideologies, it is not that (economic) policy makers have something very specific in mind, but the application of a false theory of the business cycle that has forced them to rethink. No commentator can ignore the triumph of the monetarists, so that all of them throw their former convictions – when the state did things differently and monetarism was considered an interesting but “impractical” doctrine – on the dung heap of history and proclaim in unison that the state has no choice but to renounce the former central error of “indebtedness” and to pursue “budget consolidation.”

Politics and economic theory

The first “logical” step in the argument is the claim that politicians are guided by theories. Usually, as in the quote from the Silk essay, it portrays American presidents from Kennedy to Nixon as followers of advisory councils from the universities who conclude from the “mistakes” of their predecessors that they now have to try a new, meaning updated, theory:

“An economic theory discussion these days is under very special auspices. Rarely before have the different models been so clearly compared side by side as is currently the case. While U.S. President Reagan gave priority to a rigorous supply-side policy when he took office, French President Mitterrand is clearly backing the demand-side management policy initiated by John Maynard Keynes. And in Great Britain, Thatcher is strongly inclined toward the monetarism of Milton Friedman. These are ideal conditions for a comparison of systems, even though in everyday life many a measure here and there dilutes the wine of pure theory.” (Hellmut Maier-Mannhart, SZ, May 13)

However, as the last sentence already indicates, the final responsibility can never be assigned to the theories, since politicians always make mistakes not foreseen in the models when trying them out, which then “force” them to try out new models again. An economic journalist has also mastered the economist’s logic of first setting up a model to explain reality and then blaming reality for not applying this model adequately enough.

“The decline in the authority of this doctrine, which for a long time seemed to promise economic salvation, is due on the one hand to the changed environment. Largely saturated markets for goods and downwardly inflexible wages and prices did not appear in the original Keynesian model. Keynes himself foresaw this problem and predicted that those in power would continue to apply his prescriptions even when they had actually become useless because of the changed constellations. On the other hand, the policy of demand-supporting government interventions has also been discredited by the misuse of these instruments in recent years. The credit-financed expansion of budget deficits in the years 1978 to 1980, i.e., at a time when government debt should actually have been reduced, not only reduced the state’s room for maneuver in fiscal policy to a minimum, but also discredited the entire demand-oriented economic policy, which by all means also provides for the other side of the coin, namely the reduction of government debt.” (ibid.)

In summary, this means that although the politicians brought a theory into disrepute by applying it for too long and by incurring too much debt – something that Keynes himself already knew! – theories are always successful in principle – about this, scientists still agree, despite any disputes about “aspects” still needing to be included or having been insufficiently recognized – but the politicians are always preventing them from succeeding. The politicians have thus produced their own economic mess; they are faced with this and now have to look for new means to manage it.

then the unified decision of the western leading powers on an arms buildup policy is the personalized attempt, dependent on the mentality of the politician, to repeatedly tackle undesirable developments of their own making.

The current accusation by the monetarists of the politicians for not having heeded the predictive voice of science soon enough is at the same time an excuse, since there is “only” a theoretical error, which is now being eradicated on top of that – unfortunately with unavoidable “frictions.” It is in the logic of the matter that – politicians not being economic experts – the next accusations must come. Mrs. Thatcher says she had kept exactly to the monetarist concept – whereupon Milton Friedman, in view of the growing unemployment and bankruptcies in Great Britain (which was interpreted as a lack of success), immediately declared that Mrs. Thatcher had (1) chosen the wrong definition of the quantity of money and then (2) not pursued it decisively enough. Although even the master could not have told her otherwise:

“The valid formula had been laid down by Friedman: ‘I would instruct the central banking system to see to it that the total money supply.... month by month and possibly even day by day at an annual rate of x percent, where x would be between three and five percent.’ This phrase was chosen by Friedman because it corresponds to the long-term annual growth rate of the U.S. economy, (and this although quite different, quite fluctuating percentages always prevailed!). However, the difficult question was ignored as to which definition of the money supply – according to Prof. Wallich, there are at least ten of them – and which growth index should be decisive. Friedman stated in this regard that ‘this is far less important than resolutely (!) selecting a particular (!) definition or growth rate’.” (Silk, ibid.)

And President Reagan has had to listen to criticism that his Reagonomics could hardly work since he himself did not adhere to them:

“The economic and financial policies of the Reagan administration are now admittedly becoming an irritant even to someone who approves of the basic conception of Reagan’s policy. But what is currently going on there is actually a disavowal of ‘supply side economics’ and has certainly nothing to do with ‘supply-side’ policies.” (FAZ, Feb. 19)

(FAZ’s America correspondent noted 4 days earlier anyway that President Reagan simply doesn’t want to stick to his theories:

“Reagan could have corrected his plans a year after taking office and eliminated most of the expected budget deficits if he had felt like it.... The fact that he did not choose this path can certainly not only be explained by the fact that his confidence in his own forecasts is unshakable. Reagan never thought only in the cyclical categories of his predecessor in office.”

Of course, once again, it is only due to the peculiar way of thinking of a Reagan...)

Reagan – a monetarist?

To conquer the commanding heights, the monetarists needed a slightly comic scam, which was expressed in the fact that for a few months they didn’t know whether they were monetarists or representatives of the “supply-side theory.” As it happens, they were quite surprised by President Reagan’s economic measures: There was really not much talk about the primacy of money supply control; rather, the President promised his capitalists plenty of relief on the cost side, in taxes and wages, in return for the high interest rate policy. Tax cuts, however, are now a classic tool – which is an irritant – just as it is obvious that President Reagan – relying on his credit market – is taking a rather hands-off approach to the “government debt reduction” ideology. On the other hand, observers could be reassured by the fact that the tax cuts are quite deliberately very one-sided (that is, that the “consumer” no longer appears as an economic stimulant), that the President also resolutely wants to cut any “superfluous” government spending, and that, finally, the complementary side to “cutting back” “consumption” is in fact a bet on the economic strength of the American nation (with all the up-front benefits on the wage side and with an aggressive abandonment of “demand-side” stimulation of a domestic economy). So it was clear that he was in any case against the demand theorists and for “less government” – and must automatically have listened to the monetarists.

Opportunists that they are, they have now mostly forgotten their money supply dogma and shifted entirely to propagating that states heal themselves and thus the economy through “abstinence.” Pathetically, under the name of “supply,” they repeat the Keynesian talk about “saving capitalism,” which Keynes allegedly put in jeopardy in league with incompetent politicians, and fully back the pretense of a state wanting to serve economic growth, of all things, where the state demands the services of capitalism for the final victory. Quite correctly, they perceive state “restraint” as an aggravation of poverty, which can be very useful for capital. From the other side, because the state’s decisions also affect capital, they starightforwardly make a demand on the state – so that the announced benefit on the cost side really materializes. Since it has “taken the right path,” it must not stand still and no longer make “demand-oriented” concessions. The “still” existing impairments are treated ex negativo: It is not that the state imposes some new and partly harsh conditions on accumulation (the prominent peak of which is the permanently high interest rates), but that it has not yet provided it with sufficient freedom.