Social liberalism, rather than neo-liberalism, at the very core of EU

Michael Gowland

7 hrs ·

In this post, following up on my post about recruiting the elite, I want to address the question of why markets need regulation and to provide a very quick sketch of why the EU is the best chance we currently have of establishing the required regulation. My views are very strongly shaped by the work of the economist John Maynard Keynes, and though I am sure that many of you are already familiar with his work, I want to start by rehearsing the core of his theory:

Consider a very simple model of a closed economy; in this model we have producers manufacturing goods, we have a population, who are the consumers of those goods and who make their living selling their labour to the producers, we also have banks and a government, and the markets for goods and labour in this economy follow the “law” of supply and demand. We imagine that under normal conditions the demand for goods in this economy fluctuates for diverse reasons, and the situation we are interested in is one where demand begins to fall off significantly; which could happen for a number of reasons, not all of which would be directly economic, for example a fear of a possible war or of some form of political instability, it could even simply be the result of random fluctuations. If it is a short term fluctuation, then there is no real problem, but what if it lasts long enough for the producers to have to start factoring it into their plans?

If they are acting unilaterally, then there are essentially two things they can do to respond to the fall in demand: One is to reduce prices; the other is reduce production. In either case, they will almost inevitably have to cut their labour costs. The problem with doing this is that the money that the population have with which to purchase goods ultimately comes from selling their labour to the producers, so when the producers start to cut their labour costs, the population immediately have less money available to make purchases, and they also start to lose confidence in the economic outlook, both of which place a new, strong, downward pressure on demand. This will in turn reduce demand and, If nothing else happens, it will force to producers to strive even harder to cut back on their labour costs. Thus, you end up with a vicious feedback loop that drives the economy down until it has reached a base level where peoples’ inescapable need for at least some goods prevents demand falling any further.

Of course, some producers will recognise the impact that cutting labour costs will have, but does that mean that they will altruistically decide to improve wages or up levels of employment in order to boost demand and prevent the collapse? If they do so unilaterally, and any other producer instead opts to cut costs and reduce prices, what will happen is that the altruistic producer will start to lose market share and will, if they persist, be rendered bankrupt. Thus, the very structure of a completely free market can, at times, place producers under a great deal of pressure to behave in a way that will damage the economy and their long term interests, and it can make them do so even when they know it is a bad strategy.

What Keynes asked was whether there was an alternative to what amounts to austerity and a ruthless drive to economic efficiency. The answer he came up was a simple one: The basic problem preventing producers acting to boost demand was that they could only act unilaterally, and it would only take one short sighted or greedy opportunist producer to break ranks to undermine the whole program. There is, however, one agent in a closed economy capable of acting without having to contend with being undermined by any competitor, that being the government. There were a number of mechanisms Keynes identified that a government could use to intervene to support a failing market, two of the primary ones being interest rates and investment in infrastructure and other government projects. A government could stimulate demand by reducing interest rates and investing in projects, what is called, “increasing the fluidity of the money supply”; and if demand began to outstrip the productive capability of the producers (resulting in full employment and inflation) then the government could reduce the fluidity of the money supply by raising interest rates and cutting back on state funded projects.

Obviously, the model I have used here is gross simplification of the real economy, none the less the British economy was run on these lines, very successfully, from 1939 until sometime in the 1970’s. Then things began to change. The Keynesian model predicts that, when demand fails inflation will reduce and unemployment will start to rise. At this point, if you increase the fluidity of the money supply, Keynes predicts that demand will rise and unemployment will start to fall. Eventually the economy will reach full capacity, at which point unemployment will be insignificant and inflation will start to rise; at this point you ease up on the fluidity of the money supply until inflation stops rising.

In the 1970’s, however, we started to see the emergence of stagflation, that is a situation of rising unemployment combined with inflation, where all that increasing the fluidity of the money supply does is to generate more inflation and draw in imports from external producers.

Why did this happen? The real answer is that it happened because of the rise in globalisation. In the 1930’s, treating the British economy as an isolated economy was more or less justified, most of our imports were raw materials and part finished goods, we did not face much competition at home or within the Empire for our finished goods. By the 1970’s that was no longer true.

How then should we react to this? Historically, the reaction was to focus on the conditions created by the emerging unregulated global market place and to argue that the only way for an individual to respond to the competition this exposed producers and nations to, was to embrace the drive for efficiency and competitiveness. Interventionism because a dirty word because it was believed that political intervention in markets only served to damage business by making it less competitive, and essentially did the same thing to the national economy by making it less flexible, that is able to react quickly to market forces.

So what we saw was the emergence of Monetarism, which only lasted for a short while, but was rapidly followed by what many people call neo-liberalism, but I prefer to think of as economic realism, that is, the idea that market forces are driven by objective laws, comparable to the laws of physics, which cannot be bucked, only adapted to. Thus, the dominant response to globalisation in the UK, and in every other nation that embraced economic realism, was a massive project of rolling back the state, removing as many forms of economic regulation and intervention as possible, trying to break the power of organised labour and promoting economic realism as the new dominant paradigm in economics.

It has to be admitted that here was some truth in the criticisms that monetarists levelled against the interventionism that was being practised by the 1970’s. Keynes had never argued that all interventions were good, or that every regulation is desirable. Yes, politicians and trades unionists did rise to power making unrealistic promises that could only be met by economically damaging interventions that undermined the competitiveness of British industry. It was even true that there was a Marxist current in the Labour movement whose real aim was not to advance the interests of the workers within any form of capitalist business, but rather to bring capitalism to its knees.

None the less, if you really understand the point of Keynes as illustrated by my simple model, you will see that what the monetarists and economic realists are really doing is recognising that not even a nation state cannot unilaterally regulate a global market place, and that as individual nations, we must therefore adopt what Keynes himself had clearly recognised was the only viable strategy open to an individual agent acting unilaterally in the face of unrestricted competition; that is the ruthless drive for efficiency, flexibility and competitiveness, no matter how starkly that drags down the overall health of a market.

In short, neither practical failure of Keynesian style interventions in the 1970’s, nor the validity of some of the monetarist criticisms of interventionism, refute the basic Keynesian argument for the desirability of having an agent capable of actin across the whole of a market to regulate it. On the contrary, since the demise of Keynesianism, what we have witnessed in the global economy are the very cycles of boom and bust Keynes predicts will characterise an unregulated economy, and we have also seen more than enough confirmation of his proof that, although an individual facing competition may have little option but to seek ever increasing efficiency, the overall effect of this strategy is in fact to drag down the overall economy, not regenerate it.

So how could we modify Keynesian theory to deal with the new global economy? The key answer is that, as no agent currently exists capable of acting unilaterally across the entire global economy, we must create one. Can we? My answer is that we have already taken the first steps towards that, it is the EU. The EU is the agency in the world that is big enough to start applying neo-Keynesian style interventionism in a way that could work in the global marketplace; and it is the one international organisation that has social liberalism, rather than neo-liberalism, at the very core of its being, that it could have the sill to do so.

In my next post I will try and look at how this could work in practice, but before going there I want link back to my earlier themes and emphasise several important points about this:

Firstly, this is not pie in the sky Utopianism. Keynesian style interventions worked very well from 1939 to about 1970, it did successfully prevent the cycles of boom and bust that characterised the British economy from the Victorian era, through to the 1930’s, and that have plagued us since the late 1970’s. It is a tried and tested economic approach that needs to be developed, yes, but none the less has a proven track record.

Secondly, I have not talked about social justice at all in this post. In practice, Keynesian interventionism can be structured to deliver increasing levels of social justice, in particular the government projects used to support demand can consist in supporting the very institutions, such as the NHS, that social justice require. None the less, this is not a matter of social justice verses economic interests; I have shown the need for Keynesian style interventionism based only on the interest of business in having stable markets in which to operate. Good regulation is not a fetter on business; it facilitates steady, stable and predictable growth as well as supporting social justice/.

Thirdly, this is not something that is alien to the EU. Yes, the EU, like every other political and economic institution, has been heavily pressured by the dominant economic realist paradigm underpinning neo-liberalism, but at its heart it is a social liberal institution naturally sympathetic to the goal of achieving social justice and economic growth delivered by well-regulated markets.

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