[Marxism] Harry Magdoff on the "Keynesian state"

Louis Proyect lnp3 at panix.com
Thu Nov 10 07:30:46 MST 2005



(The substance of what follows is contained in a letter to the author of an
article we will be publishing in a later issue. The editors, who were shown
copies of the letter, thought that the content would interest MR readers
and they asked me to fix it up for publication. In doing so, some points
were expanded to support the argument and footnotes were added.)

Dear Chris,

As mentioned over the phone, we like your article very much. It needs to be
shortened, and we will be suggesting some editorial changes. Meanwhile, I
would like to get your thinking about my disagreement with this statement
in your conclusion: "Today's neo-liberal state is a different kind of
capitalist class than the social-democratic, Keynesian interventionist
state of the previous period." I can't see any significant difference in
either the state or its relation to the ruling class, even though clearly
there is a considerable difference between the functioning of the
capitalist economy during the so-called golden age and the subsequent long
stretch of stagnation. I do not mean the absence of any change at all in
the capitalist class. Thus, the growing influence of the financial sector
(not necessarily a separate sector) is noteworthy. But that is hardly a
measure of a major change in the state.

The term "Keynesian state" has become a catchword that covers a variety of
concepts and is usually misleading. It may have some meaning for the
Scandinavian countries and elsewhere. But the United States? Although the
concept is often applied to the New Deal, the deficit spending of the New
Deal had nothing to do with Keynes (nor did Hitler's recovery via military
expenditures). It's true Washington economists were delighted with the
appearance of Keynes's The General Theory of Employment, Interest, and
Money because it gave them theoretical handles for analysis and policy
thinking (e.g., the offset to savings concept and a framework for gross
national product accounts). Nevertheless, despite a promise of heavy
government spending, and Keynes's theoretical support, the New Dealers were
stumped by the 1937-38 recession, which interrupted what looked like a
strong recovery. There was then as there is now an underlying faith that
capitalism is a self-generating mechanism. If it slowed down or got into
trouble, all that was needed was a jolt to get back on track. In those
days, when farm life supplied useful metaphors, the needed boost was
referred to as priming the pump. The onset of a marked recession after
years of pump-priming startled Washington. Questions began to be raised
about the possibility of stagnation in a mature capitalism, the retarding
effect of monopolistic corporations, and other possible drags on business.
These concerns faded as war orders flowed in from Europe, and eventually
they disappeared when the United States went to war. The notion of the
"Keynesian Welfare State" has tended to disgnise the fact that what really
turned the tide was not social welfare, Keynesian or otherwise, but war. In
that sense, the whole concept of Keynesianism can be mystification.

Although fear of a return of depression existed for a while after the end
of the war, it was not long before a new spirit of optimism took over. By
and large, economists began to believe that they had a handle on how to
achieve permanent prosperity. They claimed scientific validity for their
mixture of neoclassical economics and Keynes. With this blend, potential
economic fluctuations presumably could be anticipated and avoided or at
least minimized. The Second World War awoke a renewed confidence in
capitalism's potential. In addition, economists began once more to believe
that they knew it all. The strong growth in the early postwar decades gave
rise to optimistic myths. Even Nixon declared himself a Keynesian. The
prosperity of the 1950s and 1960s was widely attributed to the wisdom and
advice of the new economics. Let us, however, look at the record.

There are two aspects to the faith in what Keynesian interventionism can
accomplish. One has to do with moderating or eliminating the business
cycle. For this, there has to be confidence in the ability to foretell
where and how far the economy is likely to turn. With this knowledge,
followed by the requisite changes in monetary and fiscal policies, the
business cycle can be tamed and economic insecurity overcome. As it turned
out neither of these claims have substance. Forecasting is at best an art,
not science, and even as an art, untrustworthy. Moreover, the tinkering
with money, interest rates, and federal finance are more often than not
lesser influences among the gale-force winds that tear through the economy.
I don't mean that money and fiscal policy are totally unimportant. Money
has to be centrally managed for the economy to work. And at times the
actions of the monetary authorities can make a real difference. For
example, in a society which lives on credit, a sharp rise in the interest
rate for the sake of controlling inflation may be able to hold back an
inflationary wave, while at the same time causing heavy unemployment and
many business failures. In general, the Fed's fiddling with the money
supply and interest rates is mostly a response to the needs of the
financial community and has little, if anything, to do with creating jobs
and promoting economic growth. The simple refutation about the claims for
Keynesian intervention, however, is that there were three recessions during
the "golden age."

The second great achievement of Keynesianism (not claimed by Keynes
himself, incidentally) is that it holds the secret of long and presumably
endless, strong economic growth. Truly astonishing is the claim that,
recessions or no recessions, so-called Keynesian intervention created the
great wave of postwar prosperity. Just listen to Paul Samuelson, the first
recipient of the so-called Nobel Prize in economics, Without a trace of
shame or reservation, he proclaimed loudly and clearly in a 1968 Newsweek

"Our economic system has far surpassed the prophecies of even the most
optimistic experts. The New Economics really does work. Wall Street knows
it. Main Street, which has been enjoying 92 months of advancing sales,
knows it. The accountants who chalk up record corporate profits know it."

Believe it or not, a lot of people think that this was really the case,
even those who do not ignore the coexisting poverty and misery of masses of
people. But was it in truth the doctrine of the new economics, or as you
note, social-democratic policies that brought forth the golden age? Yes,
but only if wars, imperialism, and militarism are included under the rubric
of social democracy and Keynesianism.

Consider the government budget, the most relevant area of government
intervention. There are two categories in the budget that lie outside the
normal appropriation decisions. The first is the Social Security Trust
Funds. These are accumulated from specific payroll taxes which have been
producing a surplus over what is needed for current social security
payments. The only effect this surplus has on year-to-year expenditures is
a cosmetic one, since it helps disguise the size of the government deficit.
The trust funds are, by law, sacrosanct, and the surplus may only be used
to buy U.S. bonds. The second "rigidity" in the budget is the money spent
to pay interest on U.S. bonds. That amount is set by the size of the
government debt and the interest rates which prevailed at the time the
bonds were initially issued. Now, if we deduct these two non-discretionary
items from federal government expenditures, we find that in the golden
1950s seventy percent of discretionary government spending went for what is
euphemistically called national defense! Welfare spending began to rise in
the 1960s--the Good Society, which can arguably be seen, in large measure,
as an attempt to calm the virulent civil rights struggle and the widespread
anti-Vietnam War militancy. But even then, with a rise in welfare spending,
sixty percent of the adjusted government spending was used for militarism.

Spending on war goods has a special relevance to the current discussion.
Much of the thinking about government spending in support of the economy
assumes that increasing consumer demand will start the ball rolling. But
that is not the case if there is plenty of excess production capacity or if
the increase in demand is not large and reliable enough to prompt
capitalists to invest in additional capacity. And yet, a sustainable
expanding market economy needs active investment as well as plenty of
consumer demand. Now the beauty part of militarism for the vested interests
is that it stimulates and supports investment in capital goods as well as
research and development of products to create new industries. Imagine what
would have happened to the enormous wartime buildup of airplane factories
had it not been for the Korean War and the pathology of the Cold War. The
latter kept the airplane companies busy and highly profitable, meanwhile
providing a base for the spread of civilian aircraft and the sprouting of
passenger air travel. Military orders made significant and sometimes
decisive difference in the shipbuilding, machine tools and other machinery
industries, communication equipment, and much more. In short, apart from
other matters, the explosion of war material orders gave aid and comfort to
the investment goods industries. (As late as 1985, the military bought 66
percent of aircraft manufactures, 93 percent of shipbuilding, and 50
percent of communication equipment.)  Moreover, it needs to be noted that
spending for the Korean War was a major lever in the rise of Germany and
Japan from the rubble. Further boosts to their economies came from U.S.
spending abroad for the Vietnamese War.

The United States had still more in its favor as the kingpin of
imperialism: not only predominance of military strength but also
preeminence of the dollar. The latter, enshrined "as good as gold" by the
Bretton Woods Agreement, gave the United States pretty much of a free hand
to spend wildly as it spread its wings over foreign lands. Normally,
countries which spend more in foreign lands than they earn abroad have to
pay for the difference, either from reserves of gold and international
money, or by borrowing on the international market. The United States was
unique to the extent that it had no such restraint. Dollars flowed abroad
for imports, for maintaining military bases around the world, for economic
and military aid to real or wished-for allies, and for the rise of its
multinational industrial and financial firms. This resulted in a persistent
deficit in the current balance of payments. But in contrast with other
countries, especially those of the third world, whose balance-of- payments
difficulties cast them into debt peonage, the United States became richer
and richer. The U.S. deficits get paid with U.S. dollars-- either by direct
increase of the money supply or the expansion of credit. This isn't the
time or place to explain the ins an outs of this subject; I thought it
worth bringing up in light of common illusions about Keynesian techniques
to use control of the money supply and interest rate adjustment as
regulators of the business cycle. Whatever merit this belief may have, it
pales into insignificance compared with the tides that buffet the Fed and
the Treasury faced with the problems of keeping the dollar afloat as an
international currency and as a means of coping with this country's
international debt. This was so in the earlier so-called Keynesian period,
when the Fed had enough gold to back the dollar, and continues to be so
after the United States unilaterally abandoned the promise made in Bretton
Woods to exchange gold for dollars submitted by foreign central banks. In
other words, what has allowed the United States to face these problems in
ways that other countries can't has not been Keynesianism but U.S. hegemony
and its legacies.

As a footnote, let me add that the spirit and substance of neoliberalism
was very much alive in Washington and the financial community in "the age
of Keynesian social democracy." Washington didn't need inspiration from
Maggie Thatcher to initiate an offensive against labor unions. The tide
against labor began in 1947 with the passing of the Taft-Hartley Act, and
continued with subsequent legislation, court decisions, and the practice of
the National Labor Relations Board. Furthermore, the entire apparatus of
neoliberalism was pushed, and, where possible, enforced for the sake of the
open door in the third world for U.S. corporations. The road to NAJTA began
early on in the postwar period. At a 1948 conference in Bogota, twenty
American nations signed agreements to facilitate foreign investment.
Bilateral Treaties of Friendship, Commerce, and Navigation, were negotiated
with countries on other continents to pave the way for the unrestricted
investment of U.S. capital. Enlargements of markets and private investment
opportunities were key objectives of the World Bank and the IMF from day
one. The IMF in particular assumed the robes of the colonial overseer,
enforcing the rules of the game, including the discipline of austerity for
the masses, in order to assure an uninterrupted flow of profits and debt
service to the centers of the capitalist world. The difference between the
so-called Keynesian period and today is that in earlier days there was a
hush-hush aspect to the discipline imposed on the third world, whereas now
neoliberal principles are loudly proclaimed as the true faith.

There are two sides to the misconception that the state has fundamentally
changed. Not only was neoliberalism alive and well in the Keynesian era,
state intervention is an essential feature of the neoliberal era.
Samuelson's nonsensical boast was made just when the prosperity phase was
coming to an end and the whirlwinds of financial fragility were beginning
to appear. The changeover is well described by Henry Kaufman, an especially
discerning Wall Streeter:

"It seemed that modem economics had found ways to prevent the crisis and
panic that had hit most generations at least once in their lifetime. There
was much that was reassuring besides the reasonable economic performance of
the 1950s and early 1960s.... Even the language of economists contained
great assurance. More economists spoke convincingly about objectives and
made bold predictions about future stability."

When a financial crisis finally struck it was not the old-fashioned kind.
It was very mild. It was called the credit crunch of 1966. "Crunch" was too
harsh a label, but like any crisis it was a surprise to the postwar
generation, and for a while it laid siege to the savings deposits
institutions. The subsequent crises, however, were of increasing intensity.
During their most intensive moments, they contained all the ingredients
that had fueled the financial debacles of old. How close we came to
disaster in 1970, and then again in 1974 and early 1975, no one will ever
accurately record. It was a frightening period with rapidly rising interest
rates. Some spectacular business failures, spiraling preferences for high
credit quality and liquidity and doubt about strength of the largest and
most prominent financial institutions.

This was written before the third world debt crisis (threatening bankruptcy
of some if not all of the top nine commercial banks), the Savings and Loan
disaster, the impending failure of the Continental Illinois Bank and other
pitfalls for the economy. What was the nature of these crises?

Panic and, in some instances, the collapse of the financial house of cards,
were circumvented by major government rescues. The rescues took on
different forms, for example: giant loans by the government directly or via
the Fed; takeover of Continental Illinois until its affairs were
straightened out; and outright expenditures such as the $200 billion
obligated to rescue the savings and loan banks. One of the outstanding
features of the neoliberal period is supposed to be a reduction of state
involvement in the economy. In fact, though, direct interventions by the
U.S. government during recent decades were the underpinning of the economy.

By now it should be obvious why I think that there has been no decisive
change in either state or ruling class. The United States is the same
imperialist power, formerly the hegemon and now striving to remain the
predominant country among the imperialist powers. I am not saying that all
that happened was predetermined and inevitable. There are usually a range
of strategic and tactical policies to consider and fight over. But as long
as the fundamentals of capitalism and imperialism are inviolable, the
debate over policy and the choice of policy will fall within a narrow
range, the more important ones buffeted by changes in the economic tides.

It is not the state or ruling class that has changed, but the economy.
M-C-M' was in full bloom for a couple of decades but began to slow down in
the late 1960s. [The formula was Marx's way of summarizing a fundamental
attribute of capitalism. M(oney) is used to buy labor, machinery and raw
materials to produce (C)ommodities, which when sold yield a greater amount
of money (M') I As stagnation began to take over, the opportunities to make
money in the "old-fashioned" way diminished. However, as the hart panteth
after water, money panteth for more money. If M-C-M' didn't produce enough
profit growth, then by hook or by crook other means were explored.The
business world turned increasingly to financial schemes, to outwitting the
constraining regulations over financial institutions, and to the spiraling
of speculation to dizzying heights. But with this came an increase in
fragility, at times signaling potential collapse of the whole temple.

What should a responsible business-promoting state then do? Clearly
intervene with subsidies, loans, and an easing of regulations. Seeking M',
the financial folk spread their wings ever wider, defying the remaining
regulations and also moving closer to the brink. What then? Once again, the
government enters the fray. The more the economy depends on finance the
more deregulation becomes the order of the day. And with the upsurge of
international finance came the drive for deregulation in all the leading
markets. To back this up, an ideology is needed: the ideal of a hands-off
government (especially when social justice is at stake), except when rescue
operations of business firms are called for. Other novelties of these days
include the privatization fetish, which is in the aid of M-C-M'
opportunities. (Something like 20 to 30 percent of foreign investment in
the third world in recent years has been used to buy up privatized

You may be surprised at my going on at such length to dispute a simple
sentence in your piece. My excuse is that the mythology of a possibly
endless Keynesian welfare state is deeply rooted on the left as elsewhere.
If the belief isn't engraved at the conscious level, it is well preserved
at the unconscious. Reform proposals by progressives tend to seek ways to
reestablish a Keynesian "harmony," when what we should be working for are
changes that challenge capitalism and the ideology of the market system.
The educators among us have a huge educating job ahead; to explain why
challenging capitalism at every opportunity is in the best interest of the
working classes of the world.

Perhaps in writing to you this way I am preaching to the converted. I look
forward to learning your reactions to this diatribe.

With best wishes,




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