Review of Keynesian Economics

Symposium introduction: Capitalism and Crises

Hassan Bougrine *

Full Text

Recurring economic crises are more than just signals of market failures or passing disturbances. They are an indication that there is something inherently wrong with the system itself. However, given the resilience of capitalism to overcome the series of crises over the last century, several economists from various theoretical persuasions have argued that economic crises are nothing more than corrective measures taken by market forces to eliminate the slack in the system; a sort of creative destruction that gets rid of the inefficiencies and paves the way for a new beginning. The usual argument is that capitalism is a self-regulating system; that markets have their own reasons for going through downturns and that we should not interfere with them. This view is mockingly expressed by a cartoon that showed what looked like a devastating earthquake and a father comforting his scared daughter by telling her ‘don't worry, it's just the free-market economy correcting itself’. Others, while conceding that capitalism does indeed have a great capacity to reinvent itself, see in a crisis new opportunities for change and try to make the case for more equal societies.

Indeed, inequality in the distribution of income and wealth has become recently a much debated topic among academics, particularly those who are concerned with issues of social and economic justice. The general consensus among the critics of the current regime is that inequality in income and wealth was a major cause of the latest crisis; also dubbed the Great Recession. The topic gained such popularity after the publication of Piketty's (2014) book – arguing that high inequality is not compatible with democracy – that even less critical organizations such as the OECD (Cingano 2014) considered it opportune to announce that inequality is bad for economic growth. The often explicit diagnosis in these analyses is that the high levels of unemployment and poverty generated by inequality have led to a problem of low effective demand, which had been mitigated by an increase in households' debt over the last two decades or more. But as the repayment of debt depends in a crucial way on employment incomes, the solution proved to be unsustainable and so new polices are now proposed. They all suggest some form of redistribution of income and wealth in order to improve the welfare of the poor and the low-income working class. These policies range from a progressive taxation to higher minimum wages and guaranteed incomes for all citizens. Some more radical proposals suggest replacing private debt with public debt through sustained public deficit spending to finance new investments in public infrastructure and the provision of social services to every person who is in need.

Broader explanations of crises have focused on elements of what Polanyi (1944) called the ‘fiction on which the free-market economy is based’, namely the ‘commodification of man, nature and money’. Although the commodification of man is rarely contested and its dangers for work and labour as outlined by Polanyi are largely ignored, books and journal articles abound about the ills of an ecological crisis and the ravages of finance-dominated capitalism. Financialization, it appears, is a widely accepted explanation of how bubbles form and why they burst. A central theme in this analysis is the increasing separation between finance and the real side of the economy. Instead of investing their accumulated wealth in the real productive sector of the economy and creating jobs and incomes for people, the rich are more attracted by the rapid gains from speculation on financial instruments such as synthetic CDOs, CDOs squared and cubed, and so on, which have no connection with the real economy. The pricing and valuation of these extremely opaque financial products, the bets and counter-bets, the huge losses and gains, all increased the fragility of the financial sector and made it look more like a casino than a set of institutions at the service of the real economy – thus leading to a higher risk and instability of the entire system.

Keynes lived through the Great Depression and was dissatisfied with capitalism but he did not seek an alternative to it. Rather, he sought to improve it, to make it more egalitarian and perhaps more efficient. But capitalism today is as unequal and as prone to crises, if not even more so, as it was in the 1920s. Perhaps it is time for Keynesians to ask the deeper question: What is the future of capitalism? In his long and arduous study of the capitalist society, Karl Marx came to the conclusion that the system is based on the exploitation of one class by another and that this flagrant human contradiction is destined to disappear because, as Engels (1884 [1972], p. 165) put it, ‘what is good for the ruling class should be good for the whole of the society with which the ruling class identifies itself’. This is really the essence of democracy and of equality in the distribution of income and wealth, and all the studies preoccupied with this issue would provide a great service to humanity by pointing us at the means and the ways to get there. That is how we will prove that there is an alternative – that another world, a better world, is possible.

But in these neoliberal times, there is a disproportionate number of well-funded think tanks all over the world whose mission is to sell the virtues of a free-market economy, of individualism and selfishness and of austerity and sound finance. This is found on television, on the streets and in schools curricula from primary to graduate studies. There is indeed a cultural conditioning seeking to convince all those who suffer from neoliberalism to become its ardent supporters by making them believe in the illusion of becoming very rich, one day! Capitalism is in crisis but this should not kill people's creativity and thinking about alternatives. This should not become a crisis of imagination.

REFERENCES

  • Cingano, F. (2014), ‘Trends in Income Inequality and its Impact on Economic Growth’, OECD Social, Employment and Migration Working Papers, No 163, OECD Publishing

  • F. Engels, The Origin of the Family, Private Property and the State, (Pathfinder Press, New York 1884 [1972]).

  • T. Piketty, Capital in the Twenty-First Century, (Harvard University Press, Cambridge, MA 2014).

  • K. Polanyi, The Great Transformation: The Political and Economic Origins of Our Time, (Beacon Press, Boston 1944).

Affiliations

Hassan Bougrine - Laurentian University, Canada