In my last post on the politics of the left I questioned proposals on state investment as the answer to unemployment. In this post I want to look at this further. The Nevin Economic Research Institute (NERI), an economic think-tank affiliated to the Irish Congress of Trade Unions has published a similar proposal to that of the United Left Alliance (ULA).
Its paper is entitled ‘An Examination of the Effects of an Investment Stimulus’ and its research shows that an investment stimulus of €1 billion would create about 16,750 short term jobs and between 675 and 850 long term jobs. In the longer term the competitiveness of the economy is increased so that the economy grows, which increases taxation, which more than offsets the interest cost of any loan to fund the investment in the first place. This means that “overall there is a long-term permanent decrease in the government deficit as a result of an investment stimulus.” This is what has been referred to often as growing our way out of the crisis and debt problem. NERI therefore proposes a phased investment stimulus of €15 billion over 5 years.
The net cost per job created, at around €34,500, is nearly the same for both the NERI and ULA proposals. The paper by NERI sets out more fully its assumptions so it is fair to assume that these are not dissimilar to those of the ULA, which in any case we can also fairly adduce from the ULA proposals themselves.
In order to arrive at its estimates the NERI researchers use an economic model. Like all models these require assumptions as to how the economy works and therefore how the parameters of various economic variables interact, e.g. how imports will increase given a certain increase in income as employment increases. This is calculated from historic data from the Irish economy. The HERMIN model used “combines Keynesian short term features with neoclassical longer term features.”
This is a problem, or rather there are two problems, not perhaps so much for the presumably Keynesian researchers at NERI but for the ULA, whose biggest components claim to be Marxists. The Marxist analysis of the way capitalism works is very different from the Keynesian or neoclassical one. Unfortunately, through the budget proposals of the ULA and their similarity to those of NERI, the policy proposals of the ULA display much affinity to Keynesian economics. We have noted this already in their definition of the problem as being one of insufficient demand, which is also the view of Keynesian economists.
For Marxists this is indeed a feature of the current crisis, indeed of all crises. Where the difference lies is that Keynesians think that this problem can be put right by state-led investment while for Marxists the lack of sufficient demand is really just one expression of deeper problems but not the fundamental cause of the crisis, which will not be put right by expansion of state expenditure. This fundamental difference is invisible when the proposals of the ULA and NERI are compared.
For Keynesians the capitalist economy can reach equilibrium, where demand for investment funds and its supply are equal, in a situation where there is nevertheless massive unemployment, both of people and resources. The autonomous action of the state in increasing investment can solve this problem and bring the system back into an equilibrium that resolves the unemployment problem. For Marxists state investment can at most postpone the crisis but is not itself an answer. By contrast the ULA present it as part of the answer.
For Keynesians the autonomous action of the state can provide a solution because the system can reach equilibrium and investment can be the driver of the economy to this equilibrium. As the Keynesian Minsky puts it –“Investment and government spending call the tune for our economy because they are not determined by how the economy is now working.” That a model shows state investment to be self-financing when that model contains Keynesian assumptions can hardly be called convincing. Keynesianism believes that “if entrepreneurs can only screw themselves up to do enough investment, it will eventually justify itself, since the income generated will absorb the excess capacity.” (Robin Mathews in ‘The Trade Cycle’)[i]
On the other hand Marxists see this type of statement as an example of bourgeois economists overwhelming tendency to assume that the capitalist economy works like a socialist one; that all production will more or less fulfil a useful role. After a crisis based on massive construction expenditure that powered a phenomenal boom and then bust, this is just an incredible assumption. The NERI and ULA proposals are based on further infrastructure spending by the same state that encouraged the last ‘stimulus’. That NERI believes this will lead to long term growth is again built into the neoclassical assumptions of the model. Neoclassical economics assumes that capitalist markets are totally free and efficient. A model built on such long term assumptions could hardly show anything else.
Neoclassical economics assumes that production is efficient and finds a market and that growth is the result. Marxism makes no such assumptions but instead demonstrates the contradiction at the heart of an economy determined, not by autonomous investment, but by the pursuit of profit. The recent massive overproduction of infrastructure was massively profitable, which is why it continued for so long. The contradiction between this profitability and real need; the contradiction between the limitless expansion of capital and the limit of the market, was suspended temporarily and resolved temporarily by the expansion of credit. When this expansion of credit can no longer continue the limits of the market are exposed and massive overproduction , which inevitably involves massive over-accumulation of capital, is revealed. Keynesianism’s answer is to continue the accumulation because investment will find its own market and in any case can be autonomous within the system, as we have seen. Marxists believe on the contrary that the accumulation of capital is determined by profit and lack of it may see accumulation shudder to a halt and collapse.
In a contest of economic ideas, between neoclassical economics where crisis are not supposed to happen and are self-correcting when they do, and Marxism, in which overaccumulation driven by super-profits is periodically inevitable, the real world has given a decisive confirmation of the latter. In a contest in which Keynesianism can assume investment creates its own demand and is self-financing and Marxism which points out the contradiction in production between use and profit, the empty office blocks and ghost estates are again striking confirmation of the truthfulness of the latter. So why oh why would the left want to promote Keynesian solutions?
There is absolutely no reason to believe that a renewed burst of construction spend would not create new imbalances. Perhaps the left believes that because the state carries out the spend it does not have to earn a profit but this is false for a number of reasons.
First it has to pay for the investment. If it takes out a loan it will have to pay it back and if the investment does not create tax revenue by promoting further private capitalist investment it will not raise the necessary tax. In these circumstances taxation would have to come instead from workers or business, which would remove the stimulus that has been created. If the investment does stimulate or facilitate private investment then this only confirms ULA reliance on the state promoting capitalism as the way out of crisis.
Although the ULA does call for €5.3 billion of state investment in modern industry it calls for much more, €26 billion, to be invested in infrastructural investment. In fact even some of the modern industry investment is in infrastructure. Such infrastructural investment is normally not competitive with the main private capitalist industries but complimentary to it, facilitating it to make profits. By making such spend central to its economic alternative the left, subconsciously no doubt, evidences the inadequacy of its alternative and subservience to capitalism.
An alternative is that state investment is directed to the production of goods and services that people actually need and want and are prepared to pay for. This would indeed be competitive with private capitalist owned industry but this is not what is proposed by NERI or the ULA. Instead either taxes or the promotion of private capitalist production through helpful infrastructure is proposed.
In our last post on this we questioned the policy of reliance on state investment given its history of incompetence, even in areas of no great complexity or requiring no great innovation. The left sometimes excuses this (why?) as the result of subordination of the public sector to private capitalism. And the answer to this is yes, that is what the capitalist state is for. It is not for creating competition to private capitalism so why would the left demand that it does?
Even if the specific proposals of the left, in the particular circumstances that Irish workers face, are not practical this is not the main objection to them. The main objection to them has possibly more force where they actually to work. For if they worked, even if only temporarily, they would be both a diversion from creation of a socialist alternative and some evidence that this alternative is not needed. The success of state industry would be the success (temporarily) of state capitalism.
The successful development of capitalism has been facilitated by the state many times and it may be argued that the more recent, and quicker, that development the more it has relied on the state. This may be true going back through the development of every new major capitalist power from Holland in the 17th century, to Britain in the 18th, Germany and America in the 19th and 20th, the Asian Tiger economies of the late twentieth century and the Chinese of the 21st century.
The socialist alternative is something very, very different from this but the left’s fixation on the power of the capitalist state is strong and we shall look at the question some more.
[i] The quotations above are taken from a new paper that compares the Marxist explanation that the capitalist economy is driven by profit with the Keynesian alternative of the role of investment – ‘Does investment call the tune? Empirical evidence and endogenous theories of the business cycle’ See link.