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Economists against Democracy
A recent article by Will Hutton on the dire state of the UK economy made me realize, yet again, how shockingly reaction the economics profession has become (even Hutton, who ended the article by denouncing trade unions). Pseudo-analytical mathematical incantations disguise the reactionary and anti-democratic nature of mainstream economics, rather like the cabalistic symbols used by devil worshippers to call forth their master (a singular appropriate analogy if you think about a bit).
In terms of formal analysis, mainstream macroeconomics divides into two broad theoretical frameworks, one that considers economies to be demand constrained and the other treats them as price constrained. A price determined economy is either in a unique full employment general equilibrium, or prevented from achieving that general equilibrium by private or public price "distortions". An economy is demand determined when its level of output is limited by one or all of the components of aggregate demand: consumption, private investment, government expenditure, or exports.
One would not suspect that with this superficially arcane distinction lurks the conflict between democracy and dictatorship, yet such is the case. The price controlled framework is the sine qua non of neoclassical economics, while the introduction of an aggregate demand constraint was the contribution and remains the legacy of John Maynard Keynes.
Even the most superficial knowledge of mainstream economics makes it obvious that price constrained (full employment) analysis provides the theoretical basis for arguments in defense of private markets and against public intervention. It is equally obvious that whatever else Keynes may have intended, the central message of his demand constrained analysis was and is that markets are unstable and public intervention is essential to the effective functioning of a capitalist economy.
The formal similarity of the two categories disguises the profound ideological division, which sets the limits to the permissible debate over the role of the public sector in advanced capitalist societies. The price constrained framework is the policy ideology of the tiny minority that controls production and finance. The demand constrained framework provides the defense of public intervention that is analytical foundation of social democracy. In the former analysis, unemployment is voluntary and any public sector intervention in markets is a threat to efficiency and social welfare. In the latter, unemployment is an inherent curse of capitalism and in the absence of public intervention markets are unstable and dysfunctional.
The price determined framework is non-credible to the point of absurdity and beyond. In no other intellectual discipline would such a chaotic collection of logical inconsistencies and arbitrary assumptions be taken seriously. The price constrained framework is based on an unambiguously false premise: that the normal condition of capitalist economies is full employment. Yet, today, unlike in the immediate post-WW II years, the price constrained framework dominates mainstream economics, the media and political debate. The demand constrained framework, as obviously sensible as its opposite is absurd, has been relegated to the margins of the discipline.
This inversion, in which the absurd is embraced as sensible and the sensible is dismissed as absurd, reflects the great political victory of the minority over the majority during the final decades of the twentieth century, after a brief interruption during the middle of the century. For almost sixty years, 1870-1930, a relatively primitive form of the price constrained framework dominated the emerging economics profession. During the early stages of development of this framework, the undisguised purpose of leading economists was to refute Karl Marx and justify capitalism.
Two great human disasters prompted a mainstream rebellion against the free market doctrine, the Great Depression and the Second World War. It was obvious to all that the first resulted from the excesses of a capitalism unconstrained by public regulation. The second was the consequence of the first. Denying this chain of causally requires considerable intellectual invention. By the end of the war a broad consensus emerged in Europe and North America that the excesses of capitalism demanded strict regulation of markets, and especially of the financial sector. This consensus could be found in the most prestigious journal of the profession, the Economic Journal, where social democrat K. W. Rothschild asserted that fascism was the fruit of unregulated markets:
…[W]hen we enter the field of rivalry between [corporate] giants, the traditional separation of the political from the economic can no longer be maintained. Once we have recognised that the desire for a strong position ranks equally with the desire for immediate maximum profits we must follow this new dual approach to its logical end.
Fascism…has been largely brought into power by this very struggle in an attempt of the most powerful oligopolists to strengthen, through political action, their position in the labour market and vis-à-vis their smaller competitors, and finally to strike out in order to change the world market situation in their favour. (Rothschild, Economic Journal, 1946: 317)
The minority that controlled production and finance considered this consensus a temporary arrangement to be destroyed as soon as possible, because its main economic consequence was to limit the freedom of capital. Those who judged post war regulated capitalism as a new norm would be quickly proved wrong. The system of international regulation of exchange rates ended in 1970, deregulation of the financial sector in the United States and parts of Europe began in the 1980s, and the decline of the political base for a managed capitalism, the trade unions, fell into secular decline in most advanced countries. The collapse of the Soviet Union complemented these trends, eliminating the global rival to unmanaged capitalism.
The destruction the post war regulatory consensus liberated capital from civilizing constraints. The macroeconomics of Keynes and those he influenced provided both the theoretical explanation for why these constraints were needed and the practical policy tools to manage an economy within those constraints. The "Keynesian revolution" briefly institutionalized the singularly sensible principle that governments have policy tools that they can use to pursue the welfare of the populations they were elected to serve.
The most important of the tools are fiscal policy, monetary policy and management of the exchange rate. The active use of all these tools was implied by another sensible proposition, the Tinbergen Rule, that achieving several policy goals requires an equal number of policy instruments. For example, a government seeking internal and external stability would use fiscal policy to reach a desired unemployment rate, monetary policy to make that unemployment rate consistent with a target inflation rate, and adjustment of the exchange rate to maintain a sustainable balance of payments.
The obviously sensible proposition that governments should use the tools available to them to pursue the public welfare, while enforcing constraints on the excesses of capitalism, has been discredited in public debate by repeated ideological attacks beginning in the 1970s. The constraints have been dismantled and tools de-commissioned by increasingly reactionary governments.
Against weak internal opposition the mainstream of the economics profession has provide the ideology for the de-commissioning of the policy tools to support those constraints. This decommissioning has the purpose of removing economic policy from public control, and rendering it supportive of capital by placing it in the hands of unaccountable "experts" in central banks and ministries of finance (the Treasury in the United States). All available measures must be take to prevent public control of economic policy, because that would weaken the control by capital. That is the politics of mainstream economists.
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