Why Keynesianism won’t Work Today. By: Yanis Iqbal

With the dislocation of the neoliberal normality by the COVID-19 pandemic, one has witnessed attempts by influential organizations and specific sections of the intellectual elite to resuscitate dormant ideas. A sudden support for Keynesianism is a good example of this. The 2020 “Trade and Development” report by the United Nations Conference on Trade and Development (UNCTAD) says that the problem is, “The world largely abandoned the imperative of demand management with the turn to neoliberal policies in the 1980s and an exclusive focus on measures to boost growth from the supply-side.” In the end of the same year, the Financial Times of London - one of the leading bourgeois newspapers of the world - ran an editorial entitled “A better form of capitalism is possible”. It praised John Maynard Keynes, among others, “for realizing that capitalism’s political acceptability requires its adherents to polish off its rougher edges.”
​
Instead of wholeheartedly accepting the post-pandemic plans being relayed by powerful groups, the Left needs to critically evaluate them. In the case of Keynesianism, there has remained fundamental ambiguity regarding the utility of those ideas. With the onset of neoliberalism, many leftists have preferred returning to the Keynesian policy regime, characterized by countercyclical macroeconomic management by an interventionist, regulatory state committed to achieving full employment and higher incomes for everyone. These confusions stem primarily from how one understands the demise of Keynesianism as a hegemonic project of global capitalism. Inaccuracies related to these issues motivate leftists to think that Keynesian policies can always be replicated successfully. Therefore, one needs to explore the death of Keynesianism to show how the project of seeking greater benefits within capitalism is doomed to failure.

The Death of Keynesianism

Economists agree on the point that profit rates fell from the late 1960s until the early 1980s. According to Edwin N Wolff, the rate of profit fell by 5.4% from 1966 to 1979. However, there is disagreement on the reasons behind this fall. There is the widely held view this drop resulted from a wave of international workers’ struggle which supposedly forced up workers’ share of total income and cut into the share going to capital. This theory defies empirical data and fails to understand the objective laws of capitalism. First, there had been no increase in the share of wages in the Keynesian era when tax, capital depreciation and various other factors are taken into account. Second, no crisis can simply be explained by a wage-squeeze on profits due to the simple fact that capital accumulation inexorably tends towards the revolutionization of the means of production - and thus the augmentation of productivity and the rate of exploitation.
​
The continuous enhancement of productivity is driven by the dynamics of competition. The capitalist does not respond to competitive pressure by passively cutting prices or curtailing production, and accepting a lower rate of profit, but by increasing the exploitation of workers, or by installing new methods of production, in order to cut costs. Meanwhile, the capitalist with a competitive advantage does not sit back and enjoy his share of the market, but expands production in order to capture the market of others. In this process, a reserve army of the unemployed is also created by technological and other means, so as to undermine the position of labor.

Third - and related to the second - there exists what Rosa Luxemburg called “the law of the falling tendency of the relative wage”. The relative wage is defined by Luxemburg as “the share that the worker’s wage makes up out of the total product of his labor”. According to Luxemburg, in the capitalist mode of production the absolute wage (both nominal and real) can rise, but the relative wage can only decline, because of “the progress of technology that steadily and relentlessly reduces the share of the worker.” In her opinion, the fall in the relative wage is “a simple mechanical effect of competition and commodity production that seizes from the worker an ever greater portion of his product and leaves him an ever smaller one, a power that has its effects silently and unnoticeably behind the back of the workers.” Therefore, the absolute wage can rise at the same moment that the relative wage falls. 

Before looking at the actual causes behind the decline in the rate of profit, it is important to note that the workers did experience political potentiation during the concerned period in the form of trade union militancy. Welfare measures and the maintenance of near-full employment conditions improved the bargaining power of the proletariat. The provision of unemployment assistance likewise stiffened the resistance of the workers. As Prabhat Patnaik wrote: “The ‘sack’ which is the weapon dangled by the ‘bosses’ over the heads of the workers loses its effectiveness in an economy which is both close to full employment and has a system of reasonable unemployment allowances and other forms of social security.”
​
The primary reason behind declining profits lay in the rising “organic composition of capital”, defined as the ratio of constant capital and variable capital. It represents the ratio in which the capital outlay - the sum of money that starts the circuit of capital - is divided between purchasing non-labour and labour inputs to production. Thus, it approximately denotes what contemporary economists call the capital intensity of production, i.e., how much non-labour inputs are used by each unit of labour-power. It has an intimate relationship with the rate of profit. If the total capital turned over in one year is composed of a constant component, C, which corresponds to the raw materials and means of production used, and V, which corresponds to the amount of capital laid out to buy labour power, the rate of profit is defined as the ratio of the surplus produced in one year, S, to the total capital turned over, C + V i.e. S/ (C+V).

The ratio expressing the rate of profit represents the income of the whole capitalist class as a proportion of its total capital outlay. From the perspective of the capitalist class, there is no difference between the two components of capital outlay, constant capital and variable capital, as far as the return on capital outlay is concerned. The capitalist only focuses on the return on the total investment, the sum of constant and variable capital. This is the structural reason for the inability of capitalists to recognize profit income as the unpaid labour time of workers i.e. to accept the existence of exploitation in capitalist economies. To highlight these aspects in the rate of profit, Karl Marx divided both the numerator and denominator in the expression for the rate of profit with variable capital, to get a useful expression: rate of profit = (S/V)/ (1+C/V) where S/V is the rate of surplus value, and C/V is the organic composition of capital. From this, it is immediately obvious that the rate of profit varies inversely with the organic composition of capital.

A study of the US economy showed a rapid growth in the ratio of capital investment to workers employed in manufacturing by over 40% between 1 957-68 and 1968-73. One study of the UK showed a rise in the capital-output ratio of 50% between 1960 and the mid- 1970s. Increasing organic composition did not independently precipitate the crisis of the Keynesian regime; it was the intervention of the overlapping contradictions of a permanent arms economy and growing international competition that completed the downfall of Keynesianism. The huge arms spending during the Cold War had the effect of stabilizing the system economically by counteracting the rate of profit to fall. The reason: enormous investments in armaments that didn’t flow back into the economy, either as commodities for workers’ consumption or as investment into new plant and equipment. As a result, the organic composition of capital rose much more slowly than it otherwise would have. That, in turn, helped sustain profit rates in the US. This effect weakened by the early 1970s as new competitors without the same burden of arms spending - namely, Japan, Germany, and newly industrializing countries - asserted themselves in global markets. 

The US - burdened by high military spending -became less competitive on the world market against the freshly rebuilt economic powers in West Germany and Japan. Neither Japan nor Germany had been permitted to engage in military spending, leaving their respective capitalist’s to engage in a frantic level of accumulation. This undoubtedly increased the organic compositions of their national capitals but it also reduced the prices of their output. Starting from such a low base, capitalist production remained viable and with cheaper goods than their militarized counterparts, the logic of economic competition began to overwhelm the logic of military competition.

The Japanese and West Germans, by engaging in capital intensive forms of investment, cut world profit rates, while raising their own national share of world profits. Their increased competitiveness in export markets forced other capitalist states to pay, with falling rates of profit, for the increased Japanese and German organic compositions of capital. But this, in turn, put pressure on these other capitalists to increase their competitiveness by raising their own organic compositions. The falling profit rates of the 1970s were the result. By 1973, the rates were so low that the upsurge in raw material and food prices caused by the boom of the previous two years was sufficient to push the advanced Western economies into recession. When governments reacted by trying to boost demand with budgetary deficits, firms did not immediately respond by increasing investment and output. State-sponsored spending merely increased the levels of existing prices without stimulating economic activity. Stagflation soon set in, heralding the defeat of Keynesian policies.

Lessons​

We can draw important lessons from the demise of Keynesianism. The failure of government spending in the 1970s to prevent a recession highlights the fact that in a capitalist economy, it is profitability that drives investment and when profitability drops, investment in the means of production and in labour will contract, leading to unemployment and loss of consumer incomes and demand. Hence, Keynesianism will work in the contemporary world only if it will increase the rate of profit. This is clearly not the case. Today, we have financialized capitalism, dominated by internationally mobile finance which constrains the ability of nation states to engage in demand management policies that would mitigate slumps. Financial markets can punish most effectively any economic policies they do not like, by causing capital flight that creates external and internal economic crises. So governments find it much more difficult to intervene to shore up domestic demand or to put in place policies that would lead to more equal distribution of income and assets. Since finance capital is perceived by governments to abhor fiscal deficits and resent higher rates of taxation, it constrains public expenditure that could directly and indirectly increase employment and economic activity in the system as a whole.

Financial interests are against deficit-financed spending by the state for a number of reasons. First, deficit financing is seen to increase the liquidity overhang in the system, and therefore as being potentially inflationary. Inflation is anathema to finance since it erodes the value of financial assets. Second, financial markets fear that the introduction of debt-financed spending - which is driven by goals other than profit-making - will render interest rate differentials that determine financial profits more unpredictable. Third, if deficit spending leads to a substantial build-up of the state’s debt, it may intervene in financial markets to lower interest rates with implications for financial returns. Financial interests wanting to guard against that possibility tend to oppose deficit spending.

Given finance capital’s aversion to an expansionary fiscal policy, Keynesianism is unlikely to be workable in the current context. As long as the big banks and capitalist monopolies rule over the state, full employment, a welfare state and so on are only dreams. What is needed is to openly confront the neoliberal state to fundamentally change the laws under which the economy operates: to systematically carry out a process aimed at eliminating the anarchy of capital accumulation; to take over the banks and big businesses and put them under a rational plan of production; in short, to carry out the socialist transformation of society. This is the only viable alternative.

---

Author

​​Yanis Iqbal is an independent researcher and freelance writer based in Aligarh, India and can be contacted at [email protected]. His articles have been published in the USA, UK, Canada, Australia, New Zealand, India and several countries of Latin America.

---

​​Midwestern Marx's Editorial Board does not necessarily endorse the views of all articles shared on the Midwestern Marx website. Our goal is to provide a healthy space for multilateral discourse on advancing the class struggle. - Editorial Board