Too Late To Change Capitalism’s Flightpath?

Collision Course? In conditions of ideological white-out, the international bankers’ “Woop-Woop! Pull Up!” warning may have come too late to save global capitalism.

WHAT DOES IT MEAN when international bankers are more willing to embrace radical solutions than our politicians and their electors? At both the International Monetary Fund and the World Bank, Keynesianism is back in fashion. The economic doctrine which underpinned the thirty golden years of rising prosperity and declining inequality between 1950 and 1980 has risen from the grave – much to the horror of its erstwhile undertaker, Monetarism.

The monetarists and their guru, Milton Friedman, insisted that the problem of inflation was always and everywhere a monetary problem. Deficits, they insisted, were evil. Expanding the money supply to kick-start the economy would only produce a further inflationary surge. Moreover, increased government spending, by crowding out the private sector, was inimical to capitalist profit. The inevitable upshot of John Maynard Keynes’ pernicious doctrines, Friedman’s followers predicted, would be an economy forever engaged in chasing its own tail.

Unfortunately for the monetarists, the experience of the past ten years has left their theory in tatters. Since the Global Financial Crisis of 2008-09, the global money supply has undergone an unprecedented expansion. In theory, innovations such as Quantitative Easing and negative interest rates should have generated runaway inflation. In reality, prices have stubbornly refused to spike. Monetarism has been weighed in the balance and found wanting. For the monetarists, the writing should be on the wall.

But it isn’t. At least, not on the walls that matter at Treasury and in the caucus-rooms of our parliamentary parties. In those places monetarism continues to be treated as Holy Writ. Regardless of whether the call for a major, state-led, fiscal stimulus comes from the IMF or New Zealand’s own Reserve Bank Governor, our political class remains unmoved. Deficits are for getting down. Surpluses are for building up. The Government must take great care not to crowd out the private sector by intervening too actively in the economy.

Never mind that it was massive state spending (necessitated by a succession of destructive earthquakes) that pulled New Zealand through the Great Recession with so little in the way of serious economic and social damage; the political class remains unconvinced. In their minds, the superiority of the free market as an allocator of scarce resources is indisputable. Large-scale state intervention is absolutely the wrong way to go.

Nor is it the political class, alone, which responds to social and economic need in this way. Four years ago, a senior lecturer at AUT, Peter Skilling, published an article in which he revealed the extraordinary tenacity of the idea that the “market” is best left to decide who gets what in our society.

In the focus groups he’d convened to study people’s attitudes towards inequality he found that:

“In keeping with survey results, most focus group participants – when asked individually – expressed a preference for a more equal distribution of incomes (better wages for the low-paid; restraint in executive compensation). In the subsequent group discussion, however, these preferences were marginalised by the view that, while a more equal distribution might sound nice, it was likely not feasible given the ‘realities of the market’.”

Even more interestingly, Skilling discovered that: “while this ‘market reality’ trope was typically advanced by only one person in each group, it seemed able to over-ride a majority preference for greater equality.”

Seldom has the Italian communist, Antonio Gramsci’s concept of “hegemony” – formulated in the 1920s – been vindicated so convincingly. Except in extremis, Gramsci argued, ruling classes maintain their position not by physical force, but by the force of ideas which the overwhelming majority of citizens have been persuaded to accept as “common sense”.

This is the extraordinary irony of the present situation. Forty years ago, the ruling classes of Western capitalist societies convinced their citizens that the Keynesianism which had so improved their lives was a flawed and deficient economic doctrine which needed to be abandoned in favour of a new doctrine that elevated and privileged the role of “market forces”. Forty years later, with a substantial portion of those same ruling elites now convinced that monetarism has failed, and that Keynesianism is, indeed, the doctrine which offers the best hope of economic, social and political stability, the political class – and we, the people – remain firmly wedded to our “common sense”.

In conditions of ideological white-out, the bankers’ “Woop-Woop! Pull Up!” warning may have come too late.

This essay was originally published in The Otago Daily Times and The Greymouth Star of Friday, 8 November 2019.