Austerity delusion​s

3 November, 2018 at 15:14 | Posted in Economics | 5 Comments

austerTo 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. If mainstream economists had not had such a debonair attitude to the ​ history of economic thought they would for sure have encountered Michal Kalecki’s classic 1943 article — basically giving the same answer to the questions posed as yours truly does seventy-five years later…

michal 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. 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. Michal Kalecki [bold added]

    Then why not a Citizen’s Dividend instead? Who’ll object to equal fiat distributions to all citizens?

    • @ Andrew
      He goes on to that later. He came back to this essay (my favorite, by far) several times, clarifying it, This is my favorite version.

      • Thanks. Great essay, as you say. So far this wrt Citizen’s Dividend:

        One might therefore expect business leaders and their experts to be more in favour of subsidising mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, etc.) than of public investment; for by subsidizing consumption the government would not be embarking on any sort of enterprise. In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ — unless you happen to have private means. [bold added]

        The Bible also says “Thou shall not steal” and what are government privileges for private credit creation but a means for the banks and the most so-called credit worthy, the rich, to steal from the rest of the citizens?

      • This!
        Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work. The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?

        Yeah, Michal Kalecki! And take that JG proponents!

        And thanks again for the link, userfrendlyyyy.

        • Well, honestly it wouldn’t be inaccurate to call Kalecki the grandfather of the JG. If you asked me which economist was most influential to the Post Keynesians I would have to go with Kalecki (more than Keynes), and PK is where the JG comes from. It wouldn’t be inaccurate to say that he wanted to ensure work was available for everyone. What he says here isn’t consistent with a JG either, if there is less things that need to get done than people that want to work JG suggests paying the same wages but shrinking the work week for everyone. The problem with just an UBI is that one of these conditions will have to be met:
          1. it’s small enough to not tempt a significant number of people out of the labor market.
          2. The 100 year old prophecy about robots coming for our jobs comes true at the same rate a high UBI pulls people out of the labor market.
          3. It pulls people out of the labor market and creates an inflation cycle until the real value of the UBI isn’t enough to live on and some people go back to work.

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