British austerity delusion

30 Apr, 2015 at 13:15 | Posted in Economics | 3 Comments

Why does big business love austerity and hate Keynesian economics? After all, you might expect corporate leaders to want policies that produce strong sales and hence strong profits.

I’ve already suggested one answer: scare talk about debt and deficits is often used as a cover for a very different agenda, namely an attempt to reduce the overall size of government and especially spending on social insurance. This has been transparently obvious in the United States, where many supposed deficit-reduction plans just happen to include sharp cuts in tax rates on corporations and the wealthy even as they take away healthcare and nutritional aid for the poor. But it’s also a fairly obvious motivation in the UK, if not so crudely expressed. The “primary purpose” of austerity, the Telegraph admitted in 2013, “is to shrink the size of government spending” – or, as Cameron put it in a speech later that year, to make the state “leaner … not just now, but permanently” …

Business leaders love the idea that the health of the economy depends on confidence, which in turn – or so they argue – requires making them happy. In the US there were, until the recent takeoff in job growth, many speeches and opinion pieces arguing that President Obama’s anti-business rhetoric – which only existed in the right’s imagination, but never mind – was holding back recovery. The message was clear: don’t criticise big business, or the economy will suffer.

Paul Krugman

I definitely recommend everyone to read this well-argued Krugman article.

To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’

Is this witless crusade against economic reason new? Not at all. And had Krugman not had such a debonair attitude to history of economic thought he would for sure have encountered Michal Kalecki’s classic 1943 article — basically giving the same answer to the questions posed as Krugman does seventy-two years later…

kale It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives …

Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article …

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Michal Kalecki Political aspects of full employment


  1. To his great credit, Brad DeLong (fully capable as Krugman of striking superior and debonair attitudes) was unambiguous about who had been right and wrong in this regard way back in November 2009.

    “For thirty years, ever since I got into this business, I have been mocking Michel Kalecki. I have been pointing out that recessions see a much sharper fall in profits than in wages. I have been saying that the pace of work slows in recessions–that employers are more concerned with keeping valuable employees in their value chains than using a temporary high level of unemployment to squeeze greater work effort out of their workers.
    I don’t think that I can mock Michel Kalecki any more, ever again.”

    ( )

    Around that same time, I remember that Krugman would qualify his “Night They Re-Read Minsky” slides at an LSE talk by warning against adopting that Minsky’s business cycle theory, since it included, “esoteric stuff like Kaleckian income distribution theory… yeah, Greek to most people here.”

  2. Krugman has acknowledged Kalecki, approvinlgy:

    • Fair’s fair–he did and I missed it, tho’ can his knowledge of Kalecki (member in good standing of the Cambridge that lost the capital controversy against the one that housed Krugman’s MIT) really have come only from the fact that “two and a half years ago [2011] Mike Konczal reminded us”?
      Doesn’t matter, he now respects and no longer dismisses doesn’t make fun of Kalecki–point’s true and well taken.

      What I’d still note is that, unlike DeLong’s mea culpa, Krugman never seems to get around to mentioning how he himself in the past might have been mockingly dismissive of the people he now states were correct.
      See, e.g., James Galbraith’s “Who Are These Economists, Anyway”, , JKG being someone Krugman was quite cavalier about in the 90s, both inside and outside of Slate.

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