Capital & full employment
Duncan has endorsed Keynes’ old proposal to maintain cheap and easy money, and so achieve “an increase in the volume of capital until it ceases to be scarce”. I’m not sure this will work. We’ve tried something like it twice, and on both occasions it proved unsustainable. In the 1960s, low real interest rates and tax breaks encouraged firms to invest. But this failed to secure lasting full employment because the high economic activity it engendered led to rising wages (and later oil prices) and so a profit squeeze so severe that firms could not make up in volumes what they didn't get in margins; Marglin and Bhaduri’s paper (pdf) provides the analysis.Then in the 00s, we had the savings glut and easy monetary policies. This should have encouraged non-financial firms to invest. But they didn’t do so to anything like the level required to achieve full employment; even at the peak of the boom, there were four million out of work. It was housing that boomed in response to easy money, not corporate investment.Quite why this should be is unclear. It just seems that, despite high observed profit rates on existing capital, firms couldn’t see profitable uses for further capital.Experiments, then, seem to suggest that Keynes was too optimistic. Flooding the economy with cheap finance capital - at least on the scale that’s been tried - is not enough to produce lasting full employment.I fear Keynes might have been misled by an ambiguity in the word “capital” when he wrote that “there are no intrinsic reasons for the scarcity of capital.”* Yes, there’s no good reason for the scarcity of finance capital - the cash available to firms to invest. But there might be good reasons for a scarcity of profitable (future) physical capital. It might be that a lack of innovative ideas or working class militancy does produce such a scarcity. In this sense, Kalecki was far more correct than Keynes. He pointed out that there was no inherent tendency for capitalism to generate lasting full employment, and that it was possible that declining innovations could lead to sustained under-investment in physical capital and hence lasting unemployment**.Its’ not obvious that Keynes’ proposal to socialize investment would overcome this. If capitalists can’t maintain sufficient innovations to maintain full employment, there’s no hope of the state doing so. And we know from looking at the Post Office today - or from many industries in the 70s and 80s - that mere state ownership does zilch to overcome the class conflict that Kalecki thought would prevent full employment. The only way state-controlled investment could secure full employment would be at the expense colossal allocative inefficiency.I mention all this to raise a possibility. Conventional discussion of macroeconomic policy falls into two camps. On the one hand, there are those who argue that such policies can be effective in creating jobs. On the other are those who see them as distorting a market mechanism that would, if left to itself, generate full employment. But what if there’s a third possibility - that both these views are half-right or half-wrong? It could be both that the economy isn’t a neatly self-righting mechanism tending towards full employment, and that macroeconomic policy interventions are insufficient to generate lasting full employment. * He might also have been misled by thinking of physical capital as an aggregate. But there’s no such thing. There’s only this particular project, that one, and so on. ** Kalecki’s works are scandalously hard to get. I’m thinking of his papers “The process of economic development”, “The development factors” and “Political aspects of full employment.” This paper (pdf) by Malcolm Sawyer is a nice discussion of Kalecki’s thinking.