By Kumar David –

Prof Kumar David

Keynes and Hayek in an incongruous embrace! Anarchy of economic stratagems

The New Depression (ND) is driving governments, central bankers and economic gurus up the wall. They tear out their own and each others hair and wade in a swamp; no not wade, drown. It is try-anything empiricism, in the US, EU and Britain, when one decoction fails have a fling at any other; three blind mice. ND is not unfolding like the Great Depression taking society down into the depths of poverty, social breakdown and eventually war, but it is turning out to be more complex, global, and resistant to medication. Economic physicians are mixing two prescriptions that capitalism kept separate and tried out, one at a time, during different periods in the Twentieth Century.

The towering figures of bourgeois economics in the Twentieth Century were the Englishman John Maynard Keynes and the Austro-Hungarian Friedrich Hayek. They represent opposed schools of thought of how to sustain capitalism. Keynes believed capitalism, left to itself, would run into crisis from time to time and it was the responsibility of the state to intervene and engineer recovery. Hayek was of the opposite view; the state must never interfere in the economy, the market and the market alone would engender growth and cleanse dross through downturns. The free market, Hayek said, would also ensure freedom in the political sphere (Schizophrenically he reconciled it with his support for Pinochet). The Cambridge School (Keynes) and the London School (Hayek joined LSE in 1930) clashed. There was a celebrated debate between the giants in 1931 at the LSE in London.

Keynesianism is engraved on the escutcheon of Roosevelt’s New Deal and interventionist policies employed in the Great Depression. Keynes was also an architect of the Breton Woods agreement which defined the post-WW2 economic landscape (IMF, IBRD, and gold standard based fixed exchange rates). Hayek was the guiding star of neo-liberalism that flourished in the 1970s and 1980s. Among his devotees were the Chilean ogre Agusto Pinochet (he visited and advised twice, and justified the monstrous crimes) and Britain’s Margaret Thatcher. Hayek and Milton Friedman (also a neo-liberal, but intellectually inferior to Hayek) were the lodestar of Reaganomics. Hayek was a guru of privatisation and a bitter opponent of welfare economics.

Achcharu prescriptions for the New Depression

What is distinctive in economic theory about the way global capitalism is dealing with the catastrophe of the post-2007 New Depression (also called Financial Crisis, which moniker only denotes surface phenomena) is that it’s an anything goes approach. Keynesian medications here, Hayek brand decoctions there, and a deadly mix in a poisoned chalice rammed down the throats of the hapless Greeks and Spanish. Nothing seems to work; temporary upturns are followed by noxious downturns (Britain and the EU are in a double-dip), a new outbreak of the disease occurs elsewhere (India and China), and in the US heartland, there is suicidal Congressional gridlock.

Fundamentalists say the ND had to happen, when and where one cannot precisely say, but the pieces were all in place and fall was unavoidable. If one comes down from these Olympian heights of generality and searches for immediate causes, the culprit is neo-liberalism. Falling profitability drove capital out of the real economy in America transforming it into phantasmal finance capital. Free trade scuttled manufacturing in the West and ushered it in, in China, South Korea, Taiwan and Mexico. Huge reserves from there came back to the metropolis forcing interest rates down to the floor. Falling rates of profit, fictitious finance capital, and production-consumption unbalances, led to huge debts, asset bubbles, and a housing crash. This is all now well understood and not only by Marxists.

Now captains of state and capital, unlike in the 1930s cannot agree on the correct medicine to administer. The US, China and Japan have chosen Keynesianism – actually bastard Keynesianism in the US, as more money is pumped into saving banks, financial houses and gutted enterprises than into infrastructure building and employment creation. China thinks in classical Keynesian strategies. In the upcoming elections Japan’s LDP is calling for “unlimited money printing and negative nominal interest rates”. As these three pump billions (two trillion in the US) into quantitative easing (electronic money printing), or hold real interest rates negative (US and Japan), Europe is taking off in quite a different direction
Britain and Germany are on a very different track from the US, a market track; Hayek will approve. Austerity implies the state does not to come to the rescue; it is also implicit that it is not the state but private capital which will invest and pull the world out of recession. Actually even in the US this is precisely the position of the Republicans. None of this is working in Europe. The UK is in dire double dip recession with no sign of recovery. Germany a robust economy has jammed and growth fallen off to 0.2% in the third quarter of 2012.

What is fascinating about the Eurozone is the unabashed mixing of Hayek and Keynes. The prescription forced down the throat of individual countries is austerity and market discipline. At the European level the Eurozone has opted for supranational state-capitalism on scale that would have taken Keynes’s breadth away. All key policies for Greece and nearly all for Spain are made in Brussels by the European Central Bank, other EU institutions and the governments of Germany and France. This is trans-national state-capitalism on whose head Hayek would have visited every imprecation and curse in his vocabulary. Europe is all confused, pointing this way and that; a consummation of adultery between Maynard and Friedrich. But the European effort is failing badly. This is not me speaking; it is what the bigwigs of bourgeois economics say.

What next?

That’s an easy question. The present describes the future for the foreseeable period whatever prescription or decoction of mixes is tried. Enterprises will close leading to employment loss and misery, material life in the US and the West will have to decline till disparity with the rest of the world is less obtrusive (in economic terms, wage rates must correspond to productivity differentials) and within societies the obscene gap in incomes and wealth will have to be bridged. The first two are economic imperatives if capitalism is to survive, the third will be politically driven.

I do not believe that capitalist market economics will achieve any of this. The future of capitalism will be, increasing and globalised state-capitalism and regulatory controls. It will take long for all this to evolve, maybe a decade or more. There is the other alternative, a breakdown of the structures themselves as in the Arab Spring. But the nature of the replacement economic systems that will issue in the countries of the Arab Spring is not certain, nor will they be the same everywhere. The Occupy chaps trace their own origin to Arab uprisings; but the story is more complex and the future more unpredictable than that.