Keynesianism, Social Conflict and Political Economy

The conventional wisdom that has informed the economic policies of governments around the world over the last two decades is rooted in neoliberal ideology. This is the old laissez-faire idea that markets operate for the better when left on their own, now set in the context of increasingly integrated global markets (the result of the deregulation of financial markets and trade liberalization), and combined with modern political discourses that recognize a government role in promoting competition and facilitating standards of market deregulation. Basic old-style Keynesianism — the idea that government should intervene through manipulation of aggregate demand in order to reach “full employment” — seems a closed chapter in the history of economics.¹

The basic tenets of economic liberalism is that free enterprise and the free wheeling of the market are the solutions to all the economic problems of society. Laissez-faire, since its establishment as economic doctrine of the state starting from the beginning of the nineteenth century, took many forms, with different degrees of state involvement to provide a buffer for those social problems that the operation of free markets were originating. In Great Britain, for example, during the course of the nineteenth and early twentieth century, the state intervened to set a limit to the working day, regulate the work of children and women, to provide or regulate a minimum social security that, although miserly in comparison with the one established after 1945, was generous in comparison to the social provisions of earlier phases of industrialization (Checkland 1983). Also, as Karl Polanyi (1944) noted, markets did not grow out of a spontaneous process, but were the result of conscious policies and institutions set in place by states. Still, in the conventional wisdom of the time, state interventions represented detours from the main highway leading to prosperity, detours that even the father of economic liberalism, Adam Smith, was willing to acknowledge as an occasional necessity.¹ The hard core of the doctrine of economic liberalism preached that in the main highway towards prosperity there ought to be no speed limits, no government regulation, the market had to be sovereign.

In a 1937 article published in the Quarterly Review of Economics, after having summarized the content of The General Theory, Keynes concluded by defining two major areas in which his approach differs radically from the classical one. These two elements are, first, the introduction of expectations into economic discourse and, second, the use of aggregate variables. In Keynes’ opinion, classical economics lacks a “theory of the supply and demand of output as a whole,” and this also explains its failure to discuss expectations (Keynes 1937b: 223, my emphasis). The centrality of these two elements, aggregation and expectations, define the strategic terrain of modern macroeconomics.

In Chapters 2 and 3 I have critically discussed the theoretical apparatus of the Keynesianism of Keynes. In Chapter 2, dealing with the origin of Keynes’ “revolution,” it was shown a direct relation between working-class struggles and the development of economic theory. In Chapter 3, I have approached the matter in more abstract terms, because the task there was to uncover the political meaning of some fundamental economic categories informing the Keynesian revolution. Post-war Keynesianism as an economic strategy presupposed a “social deal” which allowed capital to regulate the class relation or, in other terms, the balance between surplus and necessary labor. In this and in Chapter 5, therefore, I will instead deal with the historical evolution of this social conflict and I will emphasize some key institutional forms which were created or adopted as part of the strategies for its handling. I call the “social microfoundations” of Keynesianism the set of institutions and strategies aimed at the management of this class conflict.

The Second World War provided the framework within which the social institutions of Keynesianism were shaped, together with state planning. This period also witnessed the development of working-class autonomy vis-à-vis the union (this development continued the wave of wild cat strikes of the late 1930s);¹ the legitimization of unions by the state aimed at an active use of their apparatus for the control of working-class autonomy; the implementation of systematic growth strategies for the satisfaction of war needs; and the development of economics as discipline for macroeconomic planning together with the strengthening of its empirical counterpart via the development of national accounting techniques and statistical methods. In this chapter, I explore these developments.

From the previous discussion it is evident that the social prerequisite of capitalist planning lies in the ability to control working-class autonomy; flows of commodities and resources for the material production of war requirements could be planned only if the living subjects who made these flows possible could somehow be “harmonized” and made to co-operate within the social division of labor. The key institution which enabled this was, paradoxically enough, the union. Certainly not the union understood as immediate expression of workers’ needs for an organization, rather, the union understood as a particular form of organization, a vertical hierarchical structure which could function as an instrument of mediation and co-optation of working-class autonomy within the requirements of capital accumulation. The point which needs to be explored now is the relation between the rise of Keynesianism as orthodoxy, as a general framework within which state policies are implemented, and working-class struggles.

It is now a matter of common sense to recognize a shift in the object, finalities, and tools of orthodox economic discourse after the Second World War. On a formal level, it is widely recognized that this shift has occurred in different areas, as is schematically illustrated in Table 7.1. In Chapter 6 it was shown that the war gave momentum to and legitimized the practices of state planning in the economy, especially demand management policies. After the war the “Keynesian Revolution” acquired a formal recognition through the official acknowledgment of government responsibility for a policy of full employment. This came in Britain with the publication of the White Paper on Employment policy in 1944 by the coalition government and in the United States with the Employment Act of 1946. These two pieces of legislation, although criticized by both the left- and right- wing,¹ represented the state’s formal acceptance of a new era of economic policy.

I regard the passage from Keynes to the Neo-classical Synthesis as a refinement of the theoretical tools provided by economics corresponding to a historical situation in which new institutions for the management of the class conflict were set up. The original theoretical apparatus of Keynes and the refined one of Keynesianism, or the Keynesian orthodoxy in the form of the Neo-classical Synthesis, differ because of the changing conditions of the class relations. Keynes was writing at a time in which the problem of working-class autonomy and its channeling was urgent and social experiments for its control such as the New Deal were relatively new. In the post-Second World War era, the practices of social regulation theorized and experienced earlier became a central feature of the capitalist regime. A gravity center for the class struggle was established through the productivity deals and the establishment of a reference point against which to measure the social proportion between surplus and necessary labor. Thus, whereas in the theoretical apparatus of Keynes, the subsumption of working-class autonomy is assumed as political project, in that of Keynesianism it is assumed as a fundamental institutional condition. This obviously had the limitation of any capitalist strategy of subsumption, founded on the belief that social conflict can indeed be frozen and the newly established institutions of capitalism are able to deal once and for all with the contradictions of the capitalist mode of production. The basic pillar of the Neoclassical Synthesis, the IS-LM model, assumes a concept of aggregate and a concept of time and equilibrium that corresponds to this new class situation.

If there is a correspondence between class relations and economic theory, are we able to see it? Can economic models reveal their class nature to the critical eye? Can economic modeling reveal its nature as a set of conceptual devices that represent class relations in a mystified way, and therefore help strategies for the enforcement of capitalist accumulation vis-à-vis various social patterns of resistance?¹ The difficulty resides in the fact that by its very nature economic modeling presents itself as a technical discourse. A “technical discourse” is one that is apparently free of value judgments about the object of investigation. The fetish-like character of technicism lies in the way it abstracts from the social nature of its object of inquiry, from the fact that capitalist society is pervaded with clashing oppositions. It is only through this abstraction, it is only by “forgetting” the character of the social roots of our condition, that one can claim to be able to embrace objectivity and impartiality in an economic discourse.

The basic assumption of the Neo-classical Synthesis in its simplest form was fixed wages and prices. This assumption allowed a simple method of aggregation and put emphasis on government policies to manage the level of accumulation for a given balance between necessary and surplus labor. However “the consequences of doing it were serious” (Hicks 1974: 60). The consequences Hicks is referring to are those related to the lack of a proper theory of inflation, or the relation between wages and inflation:

For when Keynes’ theory is set out in this text-book manner (as I shall call it) it is bound to give the impression that there are just two “states” of the economy: a “state of unemployment” in which money wages are constant, and a “state of full employment” in which pressure of demand causes wages to rise. So “full employment” is an “inflation barrier.” As long as employment is less than full, even if it is only marginally less than full, there should be no wage-inflation. So all we need do, in order to have “full employment without inflation,” is suitably to control demand. (Hicks 1974: 60–1)

This book has studied the relation between social conflict and the rise, establishment, and collapse of an economic paradigm. We have seen not only that the economic strategies proposed by this paradigm have a political meaning, but also that its own theoretical categories and analytical framework can be interpreted in a way that reveals the strategic character of the economic discourse vis-à-vis social movements. Indeed, a logically coherent link between theory and policy seems to have been a necessary requirement for the spread of the Keynesian orthodoxy since, as indicated, pre-Keynesian economists reached Keynes’ same policy conclusions in the midst of the Great Depression, thus contradicting their own theoretical framework. However, consistency between theory and policy is not a sufficient condition for the establishment of an economic paradigm. To serve as a consistent strategic tool and to be operational, Keynesianism required an institutional arrangement able to guarantee a relationship between classes that was stable, predictable, and under control. I have argued that, so far as the analytical apparatus of post-war Keynesianism was concerned, this stability was a given, an assumption that reflected the post-war institutionalization of trade unions and the recuperation of social conflict into a mechanism of accumulation.