On the road again

How swiftly taboos have been broken in Britain. In the space of a year banned ideas of socialism, revolution and radical state intervention in the economy have forced themselves into the public imagination and the media. Jeremy Corbyn, leader of the Labour Party,  has put full-employment back on the agenda and the political class and the academy cannot dodge the issue.

Against this background it is useful to attract attention to the claim made by public economist Pavlina Tcherneva. She says that what John Maynard Keynes -perhaps the most influential economist of the 20th century – really thought about full employment has been systematically suppressed. In the world of economic theory that’s like hiding the Bible.

It is common knowledge that John Maynard Keynes advocated bold government action to deal with recessions and unemployment. What is not commonly known is that modern “Keynesian policies” bear little, if any, resemblance to the policy measures Keynes himself believed… that is, the long-term program for full employment found in Keynes’s writings and elaborated on by others in works that are missing from mainstream textbooks and policy initiatives.

Instead Keynes has been used to justify a default position that suffocates thinking about economics.

It is understood in mainstream economics that true full employment is neither possible nor desirable. It is not possible due to automation, outsourcing, and other structural shifts in the economy that prevent the market from creating jobs for all who want them. It is undesirable because, even if the government tried to create an adequate number of jobs when the market failed, a pesky inflation problem would cause more harm to the economy than the good those extra jobs would bring.

As Michael Perelman has shown in the US “the Federal Reserve System sadistically wields monetary policy to keep wages low”. Unemployment rather than full employment is the real objective.

The Federal Reserve serves the needs of the powerful. Its role is to protect capital against the interests of labor. In order to maintain labor discipline, the Federal Reserve Board is entrusted with the task of maintaining a level of unemployment high enough to keep workers fearful of losing their jobs.

Perelman’s account of how Paul Volcker – who took over the reins at the Fed in 1979 – operated is illustrative.

[Volcker] carried in his pocket a little card on which he kept track of the latest wage settlements by major labour unions. From time to time, he called various people around the country and took soundings on the status of current contract negotiations. What is the UAW asking for? What does organized labour think? Volcker wanted wages to fall, the faster the better. In crude terms, the Fed was determined to break labour.Volcker tightened the money supply to such an extreme degree that the United States experienced what was then the worst economic downturn since the Great Depression. Volcker only let up when the collateral damage became too great. Mexico, which owed a great deal of money to U.S. banks, seemed to be on the brink of bankruptcy, thereby threatening the U.S. banking system. Citibank was effectively bankrupt.

Clearly a fatalistic view of full employment as an impossible dream is convenient for maximising profit. Misrepresenting Keynes is also useful says Tcherneva.

“Priming the pump” is the catchall phrase for what is popularly but inaccurately referred to as the “Keynesian” solution to joblessness. All that is required in recessions, according to the conventional view, is for the government to spend more when the private sector spends less and unemployment would recover… But because unemployment has remained stubbornly high five years after the 2008 Global Financial Crisis, and despite aggressive government action, faith in the effectiveness of Keynesian policies even during recessions has once again waned.

Tcherneva says there is however a road to full-employment not yet taken that is firmly rooted in Keynes original contributions rather than the conventional pump priming delusion.

Though governments ought to design policies that ensure a strong and resilient private sector, when full employment was concerned, Keynes argued, it was the job of the public sector to provide work opportunities for those whom the private sector left behind. In other words, it was the task of the public sector to provide jobs for all and, to this end, the direction of spending mattered.  The solution was not fine-tuning or pump-priming, but direct job creation for those who wished to work. And while many think of public works as the Keynesian solution to depressions, Keynes was steadfast—direct employment is to be undertaken in good times as well…It is more appropriate to think of Keynes’s full employment policy as one of “on-the spot” or direct employment of the unemployed at any stage of the business cycle…His blueprint for full employment over the long run was “to take the contract to the worker and distressed areas and regions.” This was to be done in good times or bad.  Public works are not to be undertaken as stop-gap measures, but as preventative solutions: “the problem of bringing the work to the men (sic) should be regarded as a continuing one”

Perhaps the institutions best placed to respond creatively are Britain’s local authorities and their network of civic organisations. It has been a profound mistake to gut their resources and demoralise their talent. But there is growing awareness that what the political class call the economy is really a crime scene.

By way of example here is a note that has just dropped into my inbox.

Dear Devan,The Bank of England has announced that it will create £70bn of new money through its quantitative easing (QE) programme. Governor Mark Carney says that the aim is to support growth in the face of a potential recession. If that’s his objective, you might think that the new money will go towards productive, job-creating areas of the economy like infrastructure or housebuilding. But it won’t. Instead, the new money will be pumped into financial markets. We’re calling on the Chancellor, to give the Bank the means to target the money at people, not financial markets. Please add your name.

It’s quite remarkable how rapidly thinking about the money creation process has become part of a national dialogue and led to the realisation that money is not the problem. How we choose to use money is the issue.


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