Re: [gang8] Ideology and Economics

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Gunnar Tomasson wrote:
> The following may be of interest to PKT.
>
> A fellow Gang8 member raised the question why it is not transparently
> wrong-headed to suggest that Government Deficit incurred in financing
> useful projects is 'bad' while Private Sector borrowing for the
> self-same projects is 'good'.
>
> Here is my response:
>
> As I see it, the problem is not ordinary stupidity, but the kind whereby
> economic "scholars" peddle ideology disguised as economic "science".


I agree.



> In the early postwar period U.S., the Keynesian Revolution was hijacked
> by do-gooder "scholars" exemplified by Samuelson and Klein, for whom it
> represented a means of back-door socialization of the U.S. economy.


This view is historically problematic.  The early post war-years was a
transition period from a command war economy back to a market economy.
Whatever socialization that did survive was to strengthen the capitalist
system rather than to co-opt it.



> In this respect, here are two extracts from Klein's Ph. D. thesis on
> 'The Keynesian Revolution' written under Samuelson at MIT during World
> War II:
>
> "The application of the Keynesian model to the working of a socialist
> economy is ironic because Keynes was quite outspoken in his distaste for
> socialism, especially the Soviet system.  In fact, while Keynes has been
> an accurate predictor of many economic events, he has made very poor
> predictions in the case of Russia. For example, he predicted, "...if
> Communism achieves a certain success, it will achieve it, not as an
> improved economic technique, but as a religion."  This statement shows a
> complete lack of understanding of the political, technological and
> economic basis of the Soviet system.  Keynes, glorifier of the bourgeois
> life, little knew that the arguments why the Russian economy has been
> and may continue to be one of uninterrupted full employment under
> socialism follow directly from his own simple model."
> (pp. 77-78)


There is no inaccuracy in the above exerpt.  Klein was correct that
Keynes disliked socialism.  But there is nothing ironic about Keynes's
distaste for socialism, even if such sentiments were based on a biased
view of the war time Soviet system, and Keynesianism.  Keynes co-opted
certain socialist measures to save capitalsim, not to destroy it.
Essentially, Keynes thought, correctly, that a controlled dose of
socialism would cure the business cycle curse.  In a socialist system,
there is no need for Keynesianism.

> "Again, as in the Treatise, Keynes did not really understand what he had
> written...." (p. 83)
>
> In the U.S. political arena, it turned out that left-wing economic
> ideologues "did not really understand" that, if successful, their
> program of back-door socialization would in turn be hijacked by their
> right-wing counterparts.

I think this observation is not supported by facts.  Whereas Keynes saw
full employment as a way to cure the business cycles curse, the
rightwing saw unemployment as a cure for the business cycle curse.  Both
the left and the right in the US agree on the undesirability of the
business cycle as a structural byproduct of market capitalism.  The left
and the right disagree only on how this curse can be cured.

> Nor did it take long, as indicated by President Eisenhower's warnings
> against the "military-industrial complex" having its government-financed
> way.


Yet defense spending as a percentage of GDP has been declining over the
decades.



> As late as the 1976 edition of his Economics, Samuelson cited Richard
> Nixon ("I am now a Keynesian") and Milton Friedman ("We are all
> Keynesians now.") without any apparent realization that the tables were
> being turned, with the "military-industrial complex" claiming an
> ever-increasing share of the Keynesian Pie while successive U.S.
> Administrations from Reagan through Clinton to Bush II have cut back the
> social-welfare component from its Great Society heights of the late 1960s.


When Nixon and Friedman said "we are all Keynesian now", they had a
misunderstanding of Keynesainism.  They used Keynesianism to rationalize
a budget deficit in boom times. Whereas the Vietnam War did syphon off
resources from the Great Society, and passed it off Japan and the Asian
tigers as reward for their loyal support of US containment policy on
Communism, post-Cold War spending on defense fell under both Bush I and
Clinton.  Clinton's error was to allow, no encourage a debt bubble while
at the same time allowing a budget surplus from privatising of social
programs.  The economy would have been a lot healthier, if Clinton had
continued the Reagan deficit, shifting it from defense to social
programs, but contain the orivate debt bubble.  This was the fault of
Rubin and Greenspan. Rubin engineered the financing of the trade deficit
through the capital account surplus through dollar hegemony, and he was
able to do this only with Greenspan's support for the liberalization and
globalization of finance, with the creative destruction of government
credit worldwide through the invention of sophisticated private debt
instruments through structured finance.

> The advent of post-Bretton Woods world monetary arrangements accelerated
> the turn-around both in the U.S. and across the globe.
>
> Ideology and economics is a dangerous mix.

Ideology with economics is a dream come true.  But if the ideology is a
nightmare, economics will also make the nightmare come true.  The
trouble is that when the necessity of unemployment is an ideolgical
fixation, unemployment will occur.  Unemployment, undesirable in an
undercapacity environment, is deadly in an overcapaicity environment.


Henry