Wednesday, 10 June 2015

Is Osborne Preparing for a Low Growth Capitalism by Legislating against Public Debt?

George Osborne is probably right about UK public spending - albeit for all the wrong reasons. He wants to lock the UK into more or less permanent budget surpluses, with deficits allowed in only extreme circumstances. It is a policy that amounts to enshrining the theory of austerity in law. It is also, from the perspective of the wealthiest and also of the UK state, the only pro-capitalist response available to long-run evolutionary changes between the capitalist state and the market it helps constitute. It may also have one eye on the consistently low rates of growth of the world economy since the 1970s, especially in the western world. It is only possible to run rising public deficits, after all, in a world of reliably high investment and rapid growth.

Despite the moralising, penny-pinching philosophy that has brought the Conservative Party to the conclusion that growth of public debt must be permanently constrained, they have very much "tuned in", not to social needs but to the long-term evolutionary path of capitalist society. The two, of course, are not identical, though the government's power rests partly on its ability to identify them with each other.

Before I am accused of "doing a Hitchens" and going all weak at the knees over capitalism  ("oh, that dynamic force!"), allow me to explain. The standard liberal and left-of-centre critique of austerity is Keynesian. It states that when fiscal contraction reduces demand, it causes a general deepening of recession unless "supported by external demand, devaluations, and cooperative labour organisations." (Blyth, Austerity: History of a Dangerous Idea). Paul Krugman dismissed the neoclassical theory that rational expectations of investors would fill the space of the retreating state and make use of declining wage costs as faith in a "confidence fairy." Austerity was, they argued, just bad economics fuelled by political myopia or worse vicious ideology.

Austerity is a faith - but insofar as it meets a profound need of the political elites of cash-strapped western states, it is an efficacious one. We misunderstand belief if we think for a moment it must accord with the facts to do its job.

Detailed micro-level analysis of the historical evolution of capitalist social institutions, undertaken by Wolfgang Streeck in his book Re-Forming German Capitalism, tells a story that, while very different to Osborne's neoclassical and neoliberal fiscal moralism, nevertheless contradicts the Keynesian belief that state fiscal constraints can be simply shrugged off under capitalist market conditions. 

In Streeck's analysis, the cost of the postwar social state became increasingly burdensome for a previously domesticated capitalism, as unemployment grew and the German federal state, along with workers' organisations turned to early retirement to shield the workforce from the effects of unemployment. "Internal accumulation of tensions and dysfunctions... coincide with external political and technological developments [resulting in] a wave of liberalisation... In the form of further advancement of economic internationalization in new directions and in new forms." (P.202) 

Meanwhile, both capital and the German national state turned to internationalisation of capital and goods markets, as well as deepening the role of transnational institutions (like those of the EU), to relieve these social costs and the fiscal burden on the state. Streeck has since introduced two key concepts into the language of this kind of analysis: first, the "debt" state which results from the rising burdens of the old soci settlement; then, its evolutionary successor, the "consolidation" state, which seeks to re-form the old social contract, significantly curtailing those burdensome social costs.

Streeck significantly makes time a factor of his analysis, and he does so at two levels: on the one hand, chronological time allows the different institutional paths to be registered at different moments  of development. On the other, historical time allows him to conceptualise periods of temporary and provisional equilibrium, which always precede breakdown and transformation. Streeck argues for a tipping point, wherein one period of historical-institutional development is tangibly succeeded by another, even though the rate of institutional change is constant and gradual. Developments in German large and small firms, in organised labour and capital institutions, industrial sectors and the federal state, and so on all fed this change. The key difference between Streeck and the neoclassicals is that he does not view change as "efficiency-enhancing" or tending towards "equilibrium." As he says: "The liberalisation of the postwar German political economy was not an act of strategic institution-building governed by business in alliance with a competition-conscious nation-state. Rather it took place in a steady process of disorganisation... in the form of a gradual decomposition... from below." (p255)

Though the institutions of British capital were never "organised" in the same way as the German, their contemporary "disorganisation" is no less complete. Paradoxically, as the LSE economist Anke Hassel has observed, more coordinated capitalism is better at liberalisation than other, less coordinated kinds. "Liberalisation was accepted as a precondition for sustained coordination." The German market was liberalised to sustain jobs at lower wage growth, not to destroy them.

All of this creeping gradualism suggests that Keynesian-style, counter-cyclical measures cannot be revived because the institutional capacities of the postwar era no longer exist. It would take much more than political voluntarism to put something like that unique coagulation together again. 

Though far from a flawless account of capitalist dynamics (attributing change to a Schumpeterian "restlessness " of the generic entrepreneurial type, rather than it stemming from dependence of social actors on the coercive power of the market), Streeck's analysis  is highly beneficial for understanding the historical interactions of capitalist institutions. As he points out, these processes of liberalisation are universal, present in different forms and in different combinations and stages of development in all capitalist political economies today.

Streeck makes it clear that the postwar settlement was a historical stage of capitalist development, which has now been visibly overcome by a distinctive new period. After the war embedded capitalism and the social state were the means by which elites ensured domestic social peace. Today they use liberalisation to insure themselves against the breakdown of that social peace, in the wake of capital's increased unwillingness to pay for it (either directly through taxes or indirectly through the losses sustained on long-term lending to "inflation-biased", low-interest paying governments).

From a very different perspective, the American economist James Galbraith finds that, since the 2000s, "public provision of credit has been stymied, while the private provision of demand via new credit has not occurred." Against both Keynesians and neoclassicals he argues: "There will be no full recovery of demand. And even if there were, price volatility in the resource markets and the development of yet more labor- and capital-saving technology would soon choke it off." (Galbraith, 'The End of Normal', p.241) Like Streeck Galbraith introduces periodisation, though he dates it and determines it differently. Liberalisation retains its key role, however - especially in terms of internationalisation of financial markets. But where Streeck prefers a "thick" institutional description of overlapping, internal changes from one type of system to another, Galbraith does not shy away from naming the directions of causality. To be specific, these are growing resource cost volatility and the exhaustion of the job creating potential of waves of capitalist technological innovation. It is easy how the exhaustion of the key pillars of postwar embedded capitalism - the domestication of financial markets, the era of high employment and cheap oil - would likewise lead to the bankruptcy of the postwar social state. 

If the capitalist state is to survive it must continue on a path of "consolidation", in which it curtails its indebtedness and significantly shrinks its activities. This will not come without significant threats to its legitimacy and indeed its unity. The Conservative government is increasingly confronted with a breakdown of the social and political postwar "regime" of the British state. The party and electoral systems are fast eroding, while nationalist forces increasingly reject the centre. For George Osbourne, then, the era of low growth and fiscal consolidation will be less a Conservative honeymoon than a race against time.

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