What follows is a brief diary (inspired by my recent reading of political philosopher David Schweickart's book After Capitalism) about something in which I can claim no expertise: economics. I post it not because I think that, as a general rule, non-experts ought to muddy the waters of important topics with half-understanding (as I'm sure I'm about to do), but, instead, because I agree with Schweickart that an important part of the leftist identity is the articulation of a positive, alternative vision for the economic future, and because, in my limited browsing of DailyKos, I didn't notice any review of Schweickart's book (which is, in my opinion, quite good). I ask anyone with the requisite knowledge to explain where I have made mistakes – what is not supported enough, what is just flat-out-wrong, what doesn't follow, etc. – to please be vicious in the comments section.
I propose, first, to outline what I take to be the Keynesian prescription for dealing with a recession and then, briefly, to explain why (following Schweickart's analysis) Keynesianism won't work (or at least won't work as well as it used to) in the contemporary economic environment.
I then propose to do the same thing with what I take to be the opposite side of the economic coin – Neoliberalism (i.e. provide a rough summary and then a critique).
This accomplished, I will provide an exposition of an alternative model of economic organization (Schweickart's Economic Democracy) and explain why I think that this model would prevent future recessions (and, moreover, would be an at least similarly efficient and decidedly more humane economic system than our current capitalism).
I encourage everyone interested in economic reform on the basis of justice to read Schweickart's book (http://www.amazon.com/After-Capitalism-New-Critical-Theory/dp/0742512991/ref=sr_1_1?s=books&ie= UTF8&qid=1294378369&sr=1-1) – which is both lucid and convincing. If something in my summary of it strikes the reader as particularly wrongheaded or dubious the reason is probably my own ineptitude (as opposed to a glaring weakness in Schweickart's proposal). In the interest of full disclosure I'll also mention that I've had Professor Schweickart for class once at Loyola.
What I take to be Keynes' fundamental insight about recessions is that they are caused by diminished efficient demand (i.e. demand backed up by purchasing power).
In our case efficient demand was stifled by the housing market crash.
Banks, because they had lots of bad assets on their books, stopped lending money to individual consumers and businesses (and home prices in neighborhoods with foreclosures declined). As a result consumers/businesses couldn't purchase as much as they had previously. Consumers stopped buying non-necessities. Businesses stopped expanding and then started to contract. There was insufficient efficient demand – so a downward spiral began:
Newly out of work consumers cut back even further on consumption. This led to further lay-offs. This led to even less consumption. And then to even more lay-offs. An on, ad nauseum.
Keynes' solution when private investment doesn't step up to increase efficient demand is for government to do the job. Government goes into debt to bolster efficient demand. The reason this works is the multiplier effect.
To wit: Government money creates a job. The previously unemployed person who gets that job is then able to spend money on consumption. The money he spends (say at a restaurant) either creates a new job or keeps someone in their job. The money that the restaurant and the employee (say the cook) now have and spend does the same thing (albeit to a lesser degree since some money is lost in savings along the way). So government spends some amount of money (say $100) on creating a job, and, by so doing, pumps more than that amount of money (say $150) into the economy. Unemployment goes down. The recession ends.
The problem today, according to Schweickart at least, is that the multiplier effect has been somewhat diminished:
“Keynesian deficit spending depends on a “multiplier effect.” The government spends $X more than it has, putting Y people to work. These people now have money, so demand for goods goes up, which generates more employment, which generates more demand, and so on – a virtuous upward spiral. Hence, the deficit does not have to be excessive.
However, if an economy is wide open to imports, which contemporary capitalist economies increasingly are, then the multiplier effect is attenuated. A significant portion of those $X buys imported goods – which may increase employment abroad, but not at home. Hence, to reinflate the economy, a government must go much deeper into debt than in the past.” (After Capitalism, 97)
So the problem with a Keynesian approach to ending the recession is that the economy is global today. If I go out and spend the money from my government-financed job on products which are made overseas (which, as we all know, is a much more likely proposition today than it was when Keynes was writing in the 1930s), I increase domestic effective demand much less than I would have if the company which benefitted from my purchase had been American. So more stimulus is needed than before.
Moreover, even if Keynesian spending works, there is the problem of stagflation.
“To the extent that the government engages in deficit spending to boost aggregate demand, and thereby succeeds in reducing the unemployment rate, the economy tends to “overheat.” If labor markets become tight, workers demand higher wages. These extra costs are passed onto consumers, and inflation ensues. Workers, feeling cheated, demand still more, and so inflation accelerates – until the capitalist class decides enough is enough and slams on the brakes.” (97)
So, if Schweickart is right, it is unclear that Keynesianism, even if it does eventually bring down unemployment, is a good long-term solution. By decreasing unemployment it emboldens workers to push for higher wages. But these higher wages don't come out of the capitalists' bottom line. They are, instead, passed on to the consumer. But, since the consumer is also the laborer, laborers now demand more money so they can keep up with the cost of inflation.
By neoliberalism I mean something like 'market fundamentalism' or 'Reaganomics'. For the sake of simplicity I'll use David Harvey's definition, from his book, A Brief History of Neoliberalism:
"Neoliberalism is in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade. The role of the state is to create and preserve an institutional framework appropriate to such practices. The state has to guarantee, for example, the quality and integrity of money. It must also set up those military, defense, police, and legal structures and functions required to secure private property rights and to guarantee, by force if need be, the proper functioning of markets. Furthermore, if markets do not exist (in areas such as land, water, education, health care, social security, or environmental pollution) then they must be created, by state action if necessary. But beyond these tasks the state should not venture. State interventions in markets (once created) must be kept to a bare minimum because, according to the theory, the state cannot possibly possess enough information to second-guess market signals (prices) and because powerful interest groups will inevitably distort and bias state interventions (particularly in democracies) for their own benefit." (A Brief History of Neoliberalism, 2, emphasis mine)
On what I take to be the neoliberal economic conception the job of the government in a recession is to make pro-business changes to the taxation policies and regulatory apparatus of the state (and, thus, to make it more attractive to potential investors). Republicans pretty much adhere to this perspective en masse. They say so explicitly in their Pledge to America:
“A plan to create jobs, end economic uncertainty, and make America more competitive must be the first and most urgent domestic priority of our government. So first, we offer a plan to get people working again. We will end the attack on free enterprise by repealing job-killing policies and taking steps to assure current businesses and future entrepreneurs that the government will not stifle their ability to compete in the global marketplace.
By permanently stopping job-killing tax hikes, families will be able to keep more of their hard-earned money and small businesses will have the stability they need to invest in our economy and help grow our workforce. We will further encourage small business to create jobs by allowing them to take a tax deduction equal to 20 percent of their income.
We will rein in the red tape factory in Washington, DC by requiring congressional approval of any new federal regulation that may add to our deficit and make it harder to create jobs. In addition, we will repeal the costly small business mandates contained in the new health care law.
If we've learned anything over the last two years, it's that we cannot spend our way to prosperity. We offer a plan to stop out-of-control spending and reduce the size of government.
With common-sense exceptions for seniors, veterans, and our troops, we will roll back government spending to pre-stimulus, pre-bailout levels, saving us at least $100 billion in the first year alone and putting us on a path to balance the budget and pay down the debt. We will also establish strict budget caps to limit federal spending from this point forward...” (see, http://pledge.gop.gov/... emphasis mine).
The obvious problem with attempting to end a recession through remaking the state in a pro-business mold is that it cedes too much control over the viability of the state to private investors. Say, for instance, that we took the Republican's advice and cut business taxes and reigned in regulation. Further say that, for a time, this was enough to coax businesses into hiring American workers again. Even if this strategy worked, the precedent set by such a move makes establishing any sort of social safety net, or, for that matter, any program opposed to business interests whatsoever (like an ecological program designed to combat global warming), extremely difficult (at least if the programs in question require that businesses take on any additional costs).
Put simply – remaking the state so that it is more attractive to business is essentially competing in a race to the bottom. It is in the interest of business to reduce labor costs. So if we want to attract business we will do things to make labor less costly – cut the minimum wage, make it more difficult for workers to unionize. But even if this attracts investment initially, what will we do when some other, more desperate country offers up a pool of equally skilled labor at an even lesser cost? Will we cut even more?
All told, the neoliberal/pro-business model adopted lately by the Republican Party seems far too prone to the possibility of an investment strike – solving a recession by catering to business interests essentially replaces the will of the people with the will of the capitalist.
- Economic Democracy
David Schweickart's alternative economic proposal, which he terms Economic Democracy, would solve the problem of periodic recessions by democratizing investment and instituting a humane tariff on goods imported from countries with low wages or poor environmental standards. I'll first sketch out Schweickart's proposal generally and then suggest directly how it would mitigate the threat of recession.
Economic Democracy refers to an economy with three main characteristics:
- Workplace Democracy (as opposed to investor control of the workplace)
- Public Investment (as opposed to private investment)
- The use of markets to coordinate consumer desire and economic production.
These features result in an economy that would have (relative to something like our current capitalism) less unemployment, less overwork, less economic inequality (thus more chance at genuine democracy), and fewer recessions.
3.1 Workplace Democracy
Under Economic Democracy businesses are run by the workers. Workers make decisions and elect their managers (if the business is so big that representative democracy is necessary) on a one-person, one-vote basis.
Through the democratic process workers decide how to split profits. Economic inequality is therefore reduced (insofar as worker-run firms are less likely than their investor-managed counterparts to pay an excessive amount to upper-level management). Moreover, since workers are no longer thought of as costs of production (which it is otherwise in the interest of business to minimize) unemployment and overwork are both reduced (unemployment because workers will not find it in their interest to eliminate their own jobs in order to save money, overwork because workers will be more likely to take on new employees in order to relieve the burden of excessive intensity and duration of work).
3.2 Public Investment
The second feature of Economic Democracy, public control over social investment, is the crucial characteristic of the system which makes it practically immune to the periodic recessions which plague capitalism.
Under Economic Democracy a network of public banks (as opposed to private investors under capitalism) fund new businesses and expansion of production for existing businesses. These banks are funded by a capital assets tax which all companies in the country pay. The proceeds of this tax are distributed by the banks (in the form of grants) to companies which seek to expand their productive capacity. The banks use a rubric of profitability and job-creation to decide which companies will receive the grants. If a bank routinely makes bad investments (read: investments which do not result in increased profitability or employment) then it is shut down.
The great advantage of Schweickart's use of public banks is the impossibility of an investment strike. Private interests cannot, under his system, refuse to invest in the economy because they think that it is a “bad business environment” (read: taxes are too high, regulation is too strict, or workers are too strong a constituency). Instead, investment is guaranteed. The banks will invest every year. Thus new jobs are regularly created and efficient demand is regularly bolstered. Economic Democracy is, then, essentially recession-proof.
The use of public banks as opposed to private investment also reduces inequality insofar as it brings an end to the process of capital accumulation. Whereas, under capitalism, private investors (who make no real contribution to the process of production) appropriate the profits of a business and then re-invest them (making compounding interest on their original investment); and workers, who are treated as a cost of production, make a bare subsistence wage (their going-price being driven down by competition with other workers); under Economic Democracy the investor is replaced by the public bank. The chief consequence of this change is a general reduction in income disparity insofar as the compounding interest of capitalist investment is eliminated and workers gain control over the distribution of profits.
Public banks, because they incentivize hiring when they decide which companies will receive grants to start up or expand production, also reduce unemployment and over-work.
3.3 Market Economy
The third characteristic of Economic Democracy is the use of the marketplace in order to coordinate consumer desire and social production. Companies under Economic Democracy compete with one another as they do under capitalism. Thus they have incentives to be efficient and innovative. Workers, since they are directly in control of profits, are directly rewarded for both of these characteristics. Schweickart's proposal, therefore – although consciously socialist – is no centralized planning disaster waiting to happen. Indeed, it could be understood as a set of thoughtful reforms (from the standpoint of justice) for contemporary market economies.
3.4 Economic Democracy and Recessions
Schweickart's system is essentially recession proof insofar as it insures regular social investment (see section 3.2). Given the nature of the global economy, however, a fourth component is necessary in order to insure the viability of the domestic economy under Economic Democracy.
This fourth element is a humane tariff on imports from countries which can offer cheap commodities by taking advantage of desperate labor (in developing countries) or refusing to abide by ecological best-practices. Such a tariff is necessary in order to insure that businesses under Economic Democracy are not constantly being undercut by foreign companies which exploit cheap labor or lax regulations.
Schweickart's tariff is humane, however, because the proceeds generated by it are rebated to the countries penalized under it in the form of aid (distributed by whatever means is most efficient – NGOs, direct aid... etc.).
Given the evidence offered above, I believe that leftists who are truly committed to the ideal of the social contract have good reason to support the reforms that Schweickart proposes in After Capitalism because they would both make the state fairer, and, unlike other forms of socialism, they would work. As an ultimate goal for the left, an ultimate dream, then, Economic Democracy more than passes muster. Its achievement would be the inauguration of the better world that we are all striving for.
That said, criticize away. Does (my presentation of) Schweickart's proposal seem likely to address the problem of periodic recessions? Does it seem a more humane/fairer system? Does it seem practicable?