Reality Check

The word “crisis” contains the Greek core krinein, meaning “to separate, to decide, to judge.” A crisis is a moment of judgment whereby our world—our society, administration, economy but also our theories and notions about the world— is subjected to a ruthless verification. It happened in 2008: The breakdown of the financial system and the resultant economic perturbations led to a number of significant and real changes both in the functioning and the description of our social reality. Public discourse changed, enriched with ideas, terms and beliefs, which before 2008 were present only on the radical fringe of social and economic debates.

An excellent illustration of that was a Senate committee hearing of the last president of the Lehman Brothers bank, Richard Fuld, in October 2009. Fuld, who headed the bank since 1994 up to its bankruptcy in 2008, pocketed in that period almost half a billion dollars (sic!) in salary, bonuses and perks. Chairman of the committee, Republican Henry Waxman, asked him if he thought that such a remuneration for someone who presided over the ruin of the fourth largest financial institution in the United States was fair. This kind of question addressed by a government representative to a person who had earned the money “honestly,” in the sense that he did not steal it but received it legally as payment from his employer, some time ago was unthinkable, especially in the United States, where making money is never something to be ashamed of and criticizing the rich has never been part of mainstream public discourse. Against the (neo)liberal belief that a private company may pay as much as it wishes to anyone it wishes and its mistakes will be verified by the market, the Republican (which makes the whole matter even more astonishing) Senator Henry Waxman decided to invoke a moral category of fairness, in fact defining Fuld as an individual lacking moral integrity.

Equally significant transformations were brought about by the 2008 crisis in the community of economists. It is very difficult to understand how it was possible that the greatest collapse of the world economy since 1929 had not been predicted by academic and market-based experts on the economy. All three main rating agencies— Fitch, Moody’s and Standard & Poor’s—gave Lehman Brothers the highest marks up to the day of bankruptcy. In 2006, Richard Fuld was honored with the CEO of the Year title by the journal Institutional Investor and in 2006 and 2007 he enjoyed his highest earnings: 40 and 36 million dollars respectively. No warning had come from the community of academic economists either. It seemed that things could not be any better. This kind of failure of both economic theory and practice must have resulted in a judgment and change—krinein—in the discourse of economic sciences.

Since the economists like to pretend that their discipline is almost as exact as mathematics (in my opinion this is one of the reasons for their failures), most people think that just as there is only one physics, chemistry, biology and mathematics, there is only one economics and that controversies within it regard a small group of claims describing not fully comprehended and researched areas of reality. But this is not true. There is no single economics but a multiplicity of rival ways of economic thinking and the controversies between them regard a set of fundamental axioms. The lines of division are defined by such issues as the approach to values (what is their source), the impact of supply and demand on the general economic situation (which one of them is it more profitable to stimulate?), self-regulating market mechanisms (do they exist and if yes, in what conditions do they appear) or anthropological concepts describing human behavior (individualism vs. collectivism). The dominant economics is now the neoclassical economics belonging to the group of marginalist approaches (the name comes from the assumption of changing marginal value of services, goods, means of production). Those schools of economic thought, which disagree with the basics assumptions of neoclassical economics, are sometimes called heterodox. They include Marxism, feminist economy, institutionalism, evolutionism and all kinds of ecological economics.

The 2008 crisis proved a twofold challenge for the mainstream economics: not only the greatest economic minds did not predict its arrival and scale but also—which is perhaps even worse— mainstream economists seem to have few ideas as to how its consequences should be effectively combated. This failure led to a renewed interest in heterodox economies. From the Polish perspective it is worth noting a return to the ideas of Michał Kalecki, a slightly forgotten figure although regarded by many as one of the best minds of 20th-century economics. Kalecki developed— in more or less the same time than Keynes and in similar terms, although independently—a theory of employment, demand and price. He differed from Keynes in a more heterodox approach to the laws of economics and questioning the principles of marginalism (in many respects Kalecki, was closer to another great 20th-century economist, Keynes’s associate Joan Robinson).

But it was not Kalecki’s microeconomics but his reflections on employment which seem the most interesting from today’s perspective. He argues that with an adequate economic policy it is possible to achieve—and maintain—almost full employment. He additionally believed that it had never happened in the past and probably would never happen in the future for political reasons: full employment would change the balance of power between employers and employees, decreasing the control over labor, which could lead to revolutionary social and political changes.

Similarly to Keynes, Kalecki was an advocate of state interventions and believed they could improve the functioning of the market. He also shared Keynes’s view that the government should reduce its debt in periods of economic upturn and increase it in the times of crisis in order to counteract breakdowns of internal demand. This is the exact opposite of the neoliberal austerity policy, recommended today by international financial institutions.

Can a heterodox economics of this kind be an inspiration in fighting economic problems today? Both yes and no. Post/neo/semi-Keynesian ideas are mistaken in detail but absolutely correct in their general assumption. Their mistake consists in a no longer adequate model of circulation of money between capital and labor. This model is well expressed by Kalecki’s formula: “Workers spend what they have earned and capitalists earn what they have spent.” By the way, a similar but less general claim was made by Henry Ford: Workers should make enough money to be able to buy cars produced by themselves. If they will be poor, nobody will buy what is produced and capitalists will not make their profits. This commonsensical principle found support in formalized models proposed by Kalecki, Keynes and other economists of the Ford era.

But post-Fordian capitalism does not work according to such a model. In the 1970s or so, great capitalists came to a perverse idea: aiming to increase profits through reducing costs of production, they started moving their factories to these parts of the world where labor cost several or several dozen times less than in the advanced countries of the capitalist core. They decided to earn something they had not spent. In this situation, there was just one way of maintaining consumption: workers had to spend something they had not earned. Where would they get the money? From loans. The progress of delocalization of production in the last four decades is strongly correlated with an increase of debt, which gathered momentum in the 1980s, just like moving factories to the peripheries (for example, in the USA until 1985 the ratio of household debt to disposable income had never crossed the 65% barrier; in 2000 it stood at about 100% and in 2008 it surpassed 130%). This fact makes it impossible to apply the rules of thinking typical for Keynes or Kalecki, for the model they are based on no longer works. Wages increasingly cease to be a means of financing consumption.

But Keynes and Kalecki are right on a higher level of abstraction. The fundamental question which economic policy should resolve today is the problem of demand. In this respect, Keynesianism radically differs from neoliberalism. The latter is an example of supply-side economics, assuming that government policy should aim at increasing demand through stimulating production. Neoliberalism being the dominant doctrine in the mainstream of public discourse, we all know the recommendations of this approach: to make the life of businesspeople easier, to reduce the costs of economic activity (especially the costs of labor), liquidate trade barriers, and so on. Such a policy is perhaps reasonable for business but its reasonableness for the rest of society remains at least doubtful. Its efficiency in boosting GDP is rather small (three or four decades ago it would be difficult to believe that a 0.5–1% growth could make anyone proud). What is worse, neoliberalism leads to a systematic increase of material inequalities. It is a very important phenomenon, which is not seen in basic macroeconomic statistics (such as GDP growth, average earnings, the level of public debt, etc.) but it affects the population.

The key problem to be solved today by good economic policy is stimulating aggregated demand. Monetarism advocated by neoliberals as the most adequate method of achieving that ceased to work: in developed countries (that is those which recently suffered the biggest losses due to the delocalization of jobs) bringing interest rates to historical lows has not resulted in a significant economic revival. This supports the argument of monetarism’s opponents, which says that when making decisions about debt, companies are less concerned with its costs and more with the prospective possibility of repaying it. If they predict that what they could produce would not find buyers, they do not borrow money even at zero interest.

What are the practical implications of this contradiction between the general correctness and particular mistakenness of post/neo/semi -Keynesian economic theories? There is no doubt that something should be done to stimulate demand but it cannot take the form of increasing government deficits. Public debt is huge enough as it is and moreover, relations between labor and capital determined by delocalization of production do not create long-term conditions for maintaining demand. The government would have to increase public debt indefinitely, filling the gap in aggregated demand caused by the disappearance of highly paid and stable jobs and replacing them with low-paid precarious jobs.

In the frames of the capitalist economy there is no easy solution to this problem, for it is created by one of the inner contradictions of this system (aiming at maximizing profit, that is the cheapest possible producing and the dearest possible selling). If there is a rescue, it must come against the current of neoliberal logic and according to the logic of social and economic development. One such solution would be to introduce the so-called guaranteed minimum income. It would consist in paying every citizen a small salary sufficient for survival and independent of having a job or not.

Where to get the necessary money? Well, from some form of taxation. Kalecki rightly believed that pro-development taxes should not be imposed on wages (their effect is nil) but on capital profits, for they prevent thesaurization (that is withdrawing value from economic circulation, which means that it benefits nobody, neither its owner nor the economy as a whole. In the current situation it seems a good idea, for capital is more and more concentrated, meaning also locked up and unproductive. An excellent illustration of that is Apple, with its cash savings of about 150 billion dollars. It is about 50% more than savings of all Polish companies taken together and 10% of American companies’ savings. Such a huge sum cannot be sensibly invested by a single company. This money is literally wasted on Apple’s account while other companies are struggling because of low internal demand. In Poland, toutes proportions gardées, we have a similar problem. About 300 billion złoty of private companies’ savings is more than a dozen percent of the GDP. Their distribution would help everybody, including the companies preferring to keep the money on their accounts, as Henry Ford would instantly realize (unfortunately, contemporary capitalists seem to lack his acumen).

Minimal guaranteed income is an experimental solution and all consequences of its introduction are difficult to predict. It would definitely raise the cost of labor but we should not fear that. Low wages is just another name for weak internal demand, which in the long term is beneficial to no one. And one more thing is certain: the current neoliberal model of thinking about the economy and society exhausted its potential and nobody will benefit from the inequalities generated by it. After all, Apple cannot buy phones from itself. If we do not receive bigger salaries, businesspeople will not earn more either. Besides, inequalities always mean social instability. Do company managements and owners want to live in a post- apocalyptic dystopia where they would have to enclose themselves in gated communities fenced with barbed wire? Such a reality emerges from the scenario dictated by neoliberal economic theory. The world as we know it is receding into the past and continued application of worn-our recipes will not save it. Sooner or later, another reality check will come.