Altered States

Keynes's economic thought recast the Anglo-American political economy in the light of the evolution from the ruthless but dynamic Victorian economy of the nineteenth century to the more accommodating but flaccid administrative economy of his own era. Keynes believed that the slowdown in growth that afflicted most Western countries between the world wars was a return from the aberrant dynamism of the Victorian period to a normal condition of slack economic growth. In modern British history he saw a persistent economic bias toward stagnation and deflation offset only by relatively short periods of growth; Keynesian economic policy was an attempt to overcome the deflationary tendencies of capitalism and to accelerate the progress of technology and living standards.

As Keynes so famously said, "In the long run, we are all dead." In the half century since Keynes attained that long run, the world has changed considerably. Whatever the truth of Keynes's beliefs about long-term economic performance, it is clear that the administrative capitalism for which he prescribed is also as dead as the Victorian capitalism that preceded it. The "mid-century model" of stable industrial oligopolies, strong unions, and closed national economies that dominated Keynesian economics has dissolved. The new era of fierce global competition between firms based in Europe, North America, and Japan, combined with ruthless pressures on labor and costs, is very different. In some respects— its dynamism and ruthlessness—the new form of capitalism is almost Victorian. In other respects—its concentrations of capital, scale of enterprise, sophisticated financial base—it resembles a further development of the structures of administrative capitalism. In its "globalized" system of production, the rise of East Asian markets and methods, its emphasis on flexibility, and its shift away from the production and distribution of raw materials and commodities to the production and dissemination of "information," the contemporary economy is distinctively different from anything that preceded it.

Global Keynesianism attempts to adapt the Keynesian vision to new conditions and to develop prescriptions from a Keynesian standpoint that can accelerate economic growth and development in the emerging economy. As such it confronts three problems: the problem of scale, the problem of demand, and the problem of change.


The problem of scale arises because national economies are no longer closed. The growth of international capital markets, the globalization of major corporations, and the integration of international trade have produced a new situation. States today exist within an international economic system that limits their freedom to act and affects their internal economic health to an unprecedented degree. One can almost compare the contemporary state to firms in classical economic theory. Within limits that vary from state to state, they must adapt their domestic policies to international conditions or face disastrous consequences.

The new global economy has not been investigated very seriously from a theoretical point of view. Global Keynesians argue that it is a fundamentally different thing from the national and local economies that compose it. One might say that megaeconomics, the study of the new international economy, is to macroeconomics as macroeconomics is to microeconomics. In particular, sound macroeconomic policy by national governments does not necessarily create a sound megaeconomic climate. In the present condition of glutted markets and persistent downward pressure on wages and prices, national governments are tempted to respond with restrictive macroeconomic policies aimed at controlling domestic demand and generating trade surpluses.

Subscribe to The American Prospect

This is similar to the well-known problem analyzed by Keynes and others by which "sound" policy by microeconomic actors like households and firms can have adverse macroeconomic consequences that then redound on the microeconomic actors. If, for example, firms respond to recessionary conditions by laying off workers and cutting production, while households respond by retrenching on expenditures and increasing savings, the recession will deepen—cutting the incomes of both house holds and firms even further.

This fallacy of composition—what is good for the parts is not always good for the whole—operates at the megaeconomic level as well. If the European Community, Japan, the United States, and the world's developing economies are all trying to limit their demand and improve their trade balances, the global economy will decelerate and all its members will be worse off. As a result of the Keynesian revolution in macroeconomics, national governments acquired mandates to act for the benefit of the whole. Through fiscal and monetary policies they act to encourage consumption and investment in bad times and to rein them in when booms threaten to get out of control. They attempt to create a climate in which the decisions of microeconomic actors reinforce rather than detract from the general good.

Global Keynesians would like to see similar policies at the international level. They would, for example, like to see the International Monetary Fund and the World Bank given more resources and revised mandates so that they—working with national central banks and other authorities in much closer cooperation than is now practiced—could help ensure that megaeconomic conditions promote macroeconomic prosperity.



The second problem of global Keynesianism is the problem of demand. A key feature of the Keynesian economic revolution was the overthrow of Say's Law: supply creates demand. The investments, wages, and payments to suppliers create a market large enough to purchase the goods produced, according to Say. Keynes disagreed, noting that people put some of their incomes aside as savings. Say and his successors believed that savings would necessarily be equal to investment and that the cycle would balance. Keynes claimed there was no necessary connection between savings and investment. A recession might make households save more of their current income because of their fears for the future. Those same fears would act on entrepreneurs, reducing their desire to make new investments even as the supply of savings increased and interest rates fell.

The problem of effective demand remains central to Keynesian thinking, and global Keynesians are interested in the problem of demand at the megaeconomic level. In the shift of manufacturing jobs from high-wage countries to low-wage countries, and in the rapid relative growth of high-savings economies in East Asia, they see the potential origin of glutted markets and slowing growth worldwide. They fear that attempts by Western nations to become more competitive by reducing production costs will only worsen the global economic situation.

Global Keynesians would like to see initiatives calculated to ensure that global demand rises pari passu with global production. This leads to a set of policy prescriptions that are somewhat different from those of mainstream economists. In the current context, for example, the global Keynesian approach to trade with Pacific Rim nations would not place its primary focus on liberalization of East Asian markets. It is the size of those markets, not the national origin of the products sold there, that disturbs the global Keynesian.

According to World Bank data, Japan spends about 5 percent of gross domestic product on social programs and has a domestic savings rate of about 30 percent. Most Western economies spend more than 20 percent of GDP on social programs and have savings rates close to 20 percent of GDP. If Japan increased its consumption by 10 percent of GDP, a new market of $210 billion a year would be created. This would enhance the living standards of the Japanese and increase profits for both Japanese and foreign producers. By contrast, most estimates of the effects of trade liberalization in Japan suggest much smaller benefits.

Even if the Japanese market remained protected, the results would be beneficial. Imports now amount to 11.2 percent of Japan's GDP; assuming an unchanged propen sity to consume imported goods, foreign producers would capture $23.6 billion in new orders from Japan. But the Japanese would meanwhile purchase $186.4 more goods produced at home. Assuming a classically Keynesian multiplier effect, the wave of domestic purchases would generate new income and this, in turn, would generate more purchases and more income. The final effect on the global economy would be substantial and beneficial regardless of whether Japan liberalized its markets.

Increasing government spending on pensions would effectively stimulate the consumer economy in Japan and East Asia. Pension income would give elderly people purchasing power and reduce the pressure on individuals to save for retirement.

There are other initiatives that could increase global demand and therefore prosperity. A shift in agricultural policies away from subsidies for production toward subsidies for consumption could feed hungry people in developing countries while liberalizing agricultural trade and allowing Western farmers to compete on equal terms for new markets. If governments transferred the money they now spend on agricultural subsidies and export programs to programs that enabled poor families in developing countries to buy more food, more hungry people would be fed and more farmers enriched—even as market distortions decreased and efficient producers were rewarded. Other initiatives would see international organizations, from the IMF to the World Health Organization, providing assistance to developing countries seeking to increase domestic consumption. Child vaccination programs and public works programs to improve water supplies create markets in poor countries and jobs in rich ones; in the current state of the world economy even relatively small outlays on these programs would have a substantial effect on the economic problems of western Europe and North America.

Further, global Keynesians look to raise wages in developing countries rather than to drive them down in advanced economies. Conventional economists seem comfortable with the present tendency of unit labor costs in advanced countries to fall toward the levels of the developing world. The need for wages to fall is an ideé fixe for conventional economic policy prescriptions, but this is dangerous. Falling wages can mean shrinking markets; the result can be a long-term downward economic spiral with producers continually attempting to cut costs to sell into a shrinking market.

Global Keynesians think that the continued erosion of consumer markets in the EC and North America will ultimately have disastrous effects not only in those countries but in the developing world as well. Without healthy consumer markets in the West, Asia cannot grow. Politically, unemployment and/or falling wages in the West also mean trouble in the East. The pressures for protection become stronger when workers believe that foreign competition is reducing their standard of living.

The solution appears to lie partly in the demand-enhancing ideas outlined above and partly in changes in labor-market regimes in the developing world—especially in East Asia. Restrictions on trade union activities in these countries often violate international human rights law; a more permissive stance toward free trade unions would encourage wages to reach an equilibrium level similar to that in the West.

Global Keynesian policy would focus almost exclusively on supporting increases in low wages rather than bringing down high wages. It would seek international solutions; acting together, all or most of the East Asian nations could make beneficial changes that none of them could carry out alone. A Keynesian approach to East Asia would not rule out certain initiatives to make labor markets more flexible in the EC and the United States. Legislation to remove tax burdens from employers to the general community, establishing special training wages and programs for young workers, and—within the context of an overall improvement in labor markets—allowing European employers more flexibility in hiring and firing could improve the employment situation in the West without reducing purchasing power.



The third problem facing global Keynesianism is that of change. The shift from the administrative economy of the mid-century period to the global economy now emerging requires fundamental shifts in the Keynesian economic program. The easy synthesis of Keynesian ideas and the aspirations of social democracy in the middle of the twentieth century is no longer simple.


Take government investment policy. Keynesian economics calls for public investment when private investment is insufficient; nationalization of key industries was high on the agenda of social democracy earlier in this century. It was easy enough for Keynesians to support that as part of an investment policy and for governments to carry out counter-cyclical economic stimulus through wage and investment policies in the nationalized industries. This is a false step in many if not all cases.

The import-substitution model of development—an adaptation of Keynesian ideas to the special conditions of developing and postcolonial economies—is no longer viable. Furthermore, the implicit social model of mid-century Keynesianism—a disinterested meritocratic priesthood of social engineers administering a depoliticized society in the name of the general interest—is no longer appealing in many countries.

The administrative Keynesians of the past seem to have made the unKeynesian error of assuming that the social, political, and economic conditions with which they had to deal were immutable. They were economic uniformitarians, believing that economic change came gradually and non-disruptively. The telling image of a "mature" capitalism that they used to describe the realities of their day—a capitalism that had settled down into a responsible middle age, with the follies and excesses of its youthful exuberance safely behind it—was at best premature.

A revived Keynesianism capable of serving as the economic basis for a contemporary philosophy of governance must address these realities. Fortunately, the spirit of flexible and humane response to changing social conditions is at the heart of the Keynesian vision. In pressing beyond the limits of mid-century Keynesianism, global Keynesians are true to the spirit of the Cambridge economist however much they violate the letter of the counsels of his heirs.

You may also like