Forstater Keynes for the Twenty-First Century [economics] (Palgrave, 2008)

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economy and allow the private sector to remain solvent, the government cannot run a surplus.

If, in addition, individuals choose to hold some government liabilities in the form of money balances for transaction, precautionary, or other purposes above and beyond those necessary to meet their tax liabilities, then even a balanced budget will drain more purchasing power from the economy than is added by government expenditure. Thus, whenever there is a positive demand for money, however it is caused, a neutral government budget policy requires the government to run a deficit equivalent to the size of the public’s demand for government debt in the form of money in addition to tax liabilities. This leads to the conclusion that, even at full employment, structural budgeting requires the government to run a deficit.

If the government recognizes that it has the ability to set the shortterm policy rate of interest in order to support employment, it is no longer available as a tool to fight inflation. In the period of the general application of Keynesian policies, this produced a policy dilemma that did much to discredit Keynesian demand management policies. In the late 1950s and again in the late 1960s and the 1970s, policymakers were faced with falling employment and rising prices—what came to be called “stagflation.” If rising prices were considered an expression of excess demand in goods markets, and rising unemployment an expression of excess supply in labor markets, Keynesian policy appeared to call for a reduction in aggregate demand through tighter fiscal policies to meet the inflation problem but an expansionary policy to meet the employment problem. An additional policy tool thus appeared to be required. Many proposed that this should be some form of incomes policy to link wages to inflation. Not only did this interfere with market forces determining wage differentials, but it did little to dampen inflationary pressures, leading the way to the monetarist counterrevolution in policymaking. This policy dilemma reflects the nature of aggregate demand management as, in Joan Robinson’s words, a “blunt instrument.”

Keynes had already referred to the problems of what he called “semiinflation” as the economy approached full employment. He also noted that the analysis of the variation in the level of employment in The General Theory assumed expansion at constant proportions. Professor Skidelsky (2006) has drawn attention to Keynes’s 1937 position, when unemployment was still over 10 percent, as, “We are in more need today of a rightly distributed demand than of a greater aggregate demand,”

THE POLICY RELEVANCE OF KEYNES’S GENERAL THEORY 141

warning against the dangers of inflation (Keynes 1937). Keynes here was clearly referring to the risks of the blunt instrument failing to provide demand in those industries that had the greatest levels of unemployment. The problem facing the UK was the collapse of export demand for Britain’s major export industries: textiles, coal-mining, iron and steel, machinery, and shipbuilding. These industries accounted for some 6 percent of the 9–10 percent unemployed in the 1920s. In particular sectors, such as iron and steel, shipbuilding, and coal, unemployment rates were 22 percent, 35 percent, and 16 percent in 1928. An increased government deficit in these conditions could provide support for the overall restructuring of the economy that was necessary, but it would do little to produce the shift of labor from the declining sectors to the expanding sectors.

In these 1937 articles, the question was whether debt finance of the war rearmament would be inflationary. Keynes argued that inflation could be avoided if demand were directed to the areas with labor surpluses and reduced in those with labor shortages. “Whether demand is or is not inflationary depends on whether it is directed towards trades and localities which have no surplus capacity. To organize output in the Special Areas is a means of obtaining rearmament without inflation.” Thus, Keynes is implicitly arguing that the assessment of the level of aggregate demand should be measured against the impact of the government deficit on inflation and its distribution across sectors. While the degree of government planning and directed intervention required for such sectorally differentiated demand management was possible in wartime, it has seldom been acceptable to governments in time of peace.

However, there is an answer to this problem of creating a sectorally differentiated fiscal policy in the proposal by the Center for Full Employment and Price Stability here at the University of Missouri at Kansas City. If deficits are like snowflakes, then it is imperative to choose the deficit that makes the maximum impact on the level of unemployment. As Warren Mosler has argued, the problem of unemployment can be eliminated if the government becomes the employer of last resort (ELR), offering employment to anyone who is willing and able to work. Such a policy would automatically absorb unemployment in those areas where it is greatest and provide the possibility of offering training to prepare workers for transfer to those sectors where labor is in short supply. In addition, it would have other advantages, such as preserving and improving the overall skill levels in the labor force to improve international

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competitiveness, and providing public social and economic infrastructure projects that might not otherwise be created because they were thought to be too expensive. In this way, it is possible to adapt the policy to support economic transformation and produce the perfect fiscal policy snowflake.

In addition, fixing the minimum employment wage paid within the ELR program would simultaneously provide an anchor for the overall level of effective demand and an anchor to prices. By offering unemployed labor the opportunity to work, fiscal policy returns to its role of being an automatic stabilizer as government expenditure increases when private-sector activity fall offs. It also acts as a buffer to prices, since there will be a supply of labor available at a wage just above the official program wage, avoiding the bidding up of wages in expanding sectors that might induce a wage-price spiral. Just as buffer stocks provide price stability by offsetting volatility in supply and demand over time, the ELR program would provide a buffer stock of labor to stabilize wages as the demand for labor rises and falls across different sectors. At the same time, it would not interfere with the operation of the market in setting relative wages. The failure to achieve growth and stability in capitalist economies may be found in their inability to combine full employment and price stability. Keynes’s objective was to provide the means of making them compatible. This is also the objective of the ELR program.

NOTES

1.Indeed, Keynes circulated privately a “Budget for National Resources,” dealing with national income accounting principles (Harrod 1951, 491).

2.Hayek (1943), among others such as Benjamin Graham, expanded this idea to propose an international reserve currency composed of a basket of commodities. This attracted the attention of Keynes, Kaldor, and others, primarily for its ability to stabilize demand by stabilizing commodity prices.

3.However, the remedy that Fisher proposed—reflation to provide a return of prices to their original levels—is different from Keynes’s proposal to provide sufficient liquidity to keep interest rates low and to use expenditure policy to support sales and expectations of future earnings.

REFERENCES

Bell, Stephanie. 2000. Do taxes and bonds finance government spending? Journal of Economic Issues 34:603–20.

———. 2001. The role of the state and the hierarchy of money. Cambridge Journal of Economics 25 (2): 149–63.

THE POLICY RELEVANCE OF KEYNES’S GENERAL THEORY 143

Bell, Stephanie, and L. Randall Wray. 2002. Fiscal impacts on reserves and the independence of the Fed. Journal of Post Keynesian Economics 25 (2): 263–71.

Davidson, Paul, and Eugene Smolensky. 1964. Aggregate supply and demand analysis. New York: Harper and Row.

Fisher, Irving. 1933. The debt-deflation theory of great depressions. Econometrica 1:337–57.

Forstater, Mathew. 1998. Flexible full employment: Structural implications of discretionary public sector employment. Journal of Economic Issues 32 (June): 557–64.

Harrod, Roy F. 1939. The trade cycle. Oxford: Oxford University Press.

———. 1951. The life of John Maynard Keynes. London: Macmillan.

Hayek, Friedrich. 1931. Prices and production. 2nd ed. London: Routledge and Kegan Paul, 1935.

———. 1943. A commodity reserve currency. Economic Journal 53 (210/211): 176–84.

Innes, A. Mitchell. 1913. What is money? Banking Law Journal 30 (5): 377–408. Repr. in Wray 2004.

———. 1914. The credit theory of money. Banking Law Journal 31 (2): 151–68. Repr. in Wray 2004.

Keynes, J. M. 1930. Treatise on money, 2 vols. London: Macmillan.

———.1936. The general theory of employment, interest and money. London: Macmillan.

———.1937. How to avoid the slump. In The (London) Times, January 12–14. Repr. in Keynes 1982.

———.1940. How to pay for the war: A radical plan for the Chancellor of the Exchequer. London: Macmillan.

———.1979. The General Theory and after: A supplement. Vol. 29 of The collected writings of John Maynard Keynes. Ed. D. E. Moggridge. London: Macmillan, for the Royal Economic Society.

———.1982. Activities 1931–39: World crises and policies in Britain and America. Vol. 21 of The collected writings of John Maynard Keynes. Ed. D. E. Moggridge. London: Macmillan, for the Royal Economic Society.

Knapp, Georg Friedrich. 1924. The state theory of money. Abridged edition translated by H. M. Lucas and J. Bonar. London: Macmillan.

Kregel, Jan. 2003. An alternative view of the Argentine crisis: Structural flaws in structural adjustment policy. Investigación Económica 243 (Enero-Marzo): 15–49.

Minsky, Hyman. 1986. Stabilizing an unstable economy. New Haven: Yale University Press.

Mosler, Warren. 1995. Soft currency economics. EPIC: A coalition of economic policy institutions. http://www.epicoalition.org/docs/soft0004.htm.

———. 1997–98. Full employment and price stability. Journal of Post Keynesian Economics 20 (2): 167–82.

Skidelsky, Robert. 2006. The origins of Keynesian economics and some applications to restructuring and globalization. Speech to the Ninth International Post Keynesian Conference, Kansas City, MO, September 18.

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Weintraub, Sidney. 1958. An approach to the theory of income distribution. Philadelphia: Chilton.

Wray, L. Randall. 1998. Understanding modern money: The key to full employment and price stability. Cheltenham, UK: Edward Elgar.

———, ed. 2004. Credit and state theories of money. Northampton, MA: Edward Elgar.

C H A P T E R 8

MACROECONOMICS OF

STAGNATION AND NEW

DEVELOPMENTALISM IN

LATIN AMERICA

LUIZ CARLOS BRESSER-PEREIRA

AFTER THE FAILURE OF CONVENTIONAL ORTHODOXY to promote macro-

economic stability and development, Latin America has become home to a clear movement for rejecting the “macroeconomics of stagnation” that it contains. Given that, the question is whether there is an alternative to the diagnoses and policies that the North offers to Latin America. In this chapter, after examining the crisis of the national development strategy that was old developmentalism, I compare the rising new developmentalism with its earlier version, as well as with the set of diagnoses and policies that rich nations have prescribed and pushed on developing countries since the neoliberal ideological wave became prevalent worldwide: conventional orthodoxy. In the first section, I discuss old developmentalism, its initial success, its obsolescence due to a series of new facts and distortions, and its replacement with conventional orthodoxy since the late 1980s. In the second section, I discuss the importance of the concept of the nation and of the “national development strategy” institution. In the third section, I discuss new developmentalism as a “third discourse” lying between the bureaucratic left wing’s populism and conventional orthodoxy’s macroeconomics of stagnation. In the fourth section, I compare new and old developmentalism. In the fifth section, I compare

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new developmentalism with conventional orthodoxy with regard to macroeconomic policies and growth strategies.

OLD DEVELOPMENTALISM AND ITS CRISIS

Between the 1930s and the 1970s, Brazil and other Latin American countries grew at an extraordinary pace. They took advantage of the weakening of the center to formulate national development strategies that, in essence, implied protection of the infant national industry and the forced promotion of savings through the state. This strategy was called “developmentalism,” or “national developmentalism.” The purpose of such a name was to emphasize that, first, the policy’s basic objective was to promote economic development, and, second, in order for this to happen, the nation—that is, businessmen, state bureaucracy, middle classes, and workers joined together in international competition— needed to define the means to reach this objective within the framework of the capitalist system, with the state as the principal collective action instrument. The notable economists who then studied development and made economic policy proposals, along with the politicians, government officials, and businessmen who were most directly involved in this process, were called “developmentalists” because they chose development as the ultimate goal for their economic analysis and political action. Latin American economists who, together with a group of international economists, took part in formulating “development economics” were affiliated with three complementary schools of thought: the classical economics of Smith and Marx, Keynesian macroeconomics, and the Latin American structuralist theory.1

Developmentalism was not an economic theory but a national development strategy. It employed economic theories to formulate, for each country in the capitalist periphery, a strategy capable of gradually leading to the development level attained by central countries: market-based theories, for there is no economic theory that does not spring from the markets, but also political economy theories that cast the state and its institutions in a leading role as auxiliary coordinator of the economy. Developmentalism faced opposition from neoclassical economists who practiced “conventional orthodoxy”—that is, the set of diagnoses and economic policies and institutional reforms that rich, or Northern, nations prescribed to developing, or Southern, countries. They were called “monetarists,” due to the emphasis placed on the money supply as a means of controlling inflation.

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Since Brazil was a peripheral, or dependent, country, whose industrial revolution was taking place 150 years after that of England and more than 100 years after that of the United States, the remarkable development between the 1930s and 1970s was only possible inasmuch as Brazil as a nation was able to use its state as an instrument to define and implement a national development strategy where the state’s intervention was significant. This was not about replacing the market with the state but, rather, about strengthening the state in order to enable it to create the required conditions for firms to invest so that their businessmen could innovate. All countries, beginning with England itself, required a national development strategy to bring about their industrial revolutions and continue to develop. The use of a national development strategy was particularly evident among late-development countries such as Germany and Japan, which, therefore, were never characterized by dependence. Peripheral countries, on the other hand, like Brazil and other Latin American countries that had lived through the colonial experience, remained ideologically dependent on the center after their formal independence. Both late-development central countries and former colonies needed to formulate national development strategies, but the task was easier for the former. For peripheral countries, there was the additional hurdle of facing their own “dependence,” that is, submission of the local elites to those in central countries, who were interested in nothing other than their own development. Developmentalism was the name given to the national strategy of dependent countries, those whose industrialization began no earlier than the 1930s, or during World War II. Their developmentalism was nationalist because, in order to become industrial, these countries needed to form their national state. The nationalism present in developmentalism was the ideology for forming a national state; it was the affirmation that, in order to develop, countries needed to define their own policies and institutions, their own national development strategy.2

Late central countries also used developmentalist strategies, although they were not given the same name. Since they were nationalistic, they always followed their own criteria rather than their competitors’ to formulate policies, and they used their states deliberately to promote development.

In the 1940s, 1950s, and 1960s, developmentalists and Keynesians prevailed in Latin America; they were the mainstream. Governments used their theories first and foremost in economic policymaking. From

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the 1970s, however, in the context of the great neoliberal, conservative wave that began to form, Keynesian theory, development economics, and Latin American structuralism were successfully challenged by neoclassical economists, most of whom adopted a neoliberal ideology. Since the 1980s, in the context of the great foreign debt crisis that added to the rich nations’ political power, these economists managed to redefine in neoliberal terms their prescriptions for developing countries. The neoliberal ideology targeting these countries became hegemonic, expressing itself through what became known as the Washington Consensus, which I prefer to call “conventional orthodoxy,” not only because this is a more general expression but because, if some “consensus” existed in the 1990s, in the 2000s it broke down. During the 1980s, the national development strategy—national developmentalism—faced a major crisis and was replaced with a foreign strategy: conventional orthodoxy.

Several factors help explain this. First, during the 1960s, the national alliance that served as the political foundation for developmentalism fell apart as a direct consequence of the military coup supported by Brazilian industrialists and the American government. The national-developmen- talist approach assumed the existence of a nation and, thus, of a national agreement involving industrialists, workers, and the state bureaucracy— a reasonable assumption insofar as, after a lengthy period of dependence that followed the independence movements of the early nineteenth century, these countries, since 1930, had taken advantage of the crisis up north to begin their national revolutions and form autonomous national states. Based on this fact, developmentalism proposed that each country’s new industrial businessmen should become a “national bourgeoisie,” as had been the case in developed countries, and associate itself with government officials and urban workers to bring about a national and industrial revolution. Therefore, in every country the sense of nation, of national society, was reinforced and the possibility dawned that this society might implement a national development strategy (developmentalism), using the state as its instrument for collective action. It was at once a proposal and an assessment of the reality represented by the accelerated industrialization process that Latin America was then experiencing. However, the Cuban revolution of 1959, by radicalizing the left wing, and the economic crisis of the early 1960s led to the dissolution of the national developmental alliance and set the stage for the establishment of military regimes in Brazil, Argentina, Uruguay, and Chile, with support from each country’s businessmen and from the United States. As a consequence, the national alliance that was so essential to the constitution of

MACROECONOMICS OF STAGNATION IN LATIN AMERICA 149

a nation broke up, and Latin America’s moderate left embraced the “theory of associated dependence,” which rejected the possibility of a “national bourgeoisie” (Bresser-Pereira 2005). In doing so, it rejected the very idea of nation and of national development strategy on which national developmentalism was based.

Second, because old developmentalism was based on import substitution, it carried the seed of its own demise. Protection of national industry, the focus on the market, and the reduction of an economy’s openness coefficient, even in a relatively large economy such as Brazil’s, are greatly constrained by economies of scale. For certain industries, protection becomes absurd. As a result, when the import-substitution model was maintained through the 1970s, it was leading Latin American economies to a deep distortion. On the other hand, as Furtado remarked as early as 1966, after the initial import-substitution phase of consumer-goods industries, continued industrialization implies a substantial increase of the capital-labor ratio, with two consequences: income concentration and reduced capital productivity, or product-capital ratio (Furtado 1966). The response to income concentration was to be an expanded production of luxury consumer goods, characterizing what I have termed the “industrial underdevelopment model,” which, besides being perverse, carries the seed of the dissolution of the national prodevelopment alliance.

Third, the great debt crisis of the 1980s, which was not directly related to the import-substitution model but already an outcome of the growth-cum-foreign-savings strategy, further weakened the national alliance that was behind national developmentalism. The debt crisis paved the way for the rise of high inertial inflation, which would be the scourge of the Brazilian economy for fourteen years. The military government had indexed prices since 1964, but it was only in the early 1980s that inflation topped 100 percent a year as a result of exchange-rate depreciations caused by the foreign debt crisis; from this moment up to 1994, inflation would be measured in monthly terms (5 percent, 10 percent, 20 percent a month), configuring high inertial inflation (BresserPereira and Nakano 1987). After that, developmentalism was supported by only a populist left wing, which, while in office in the second half of the 1980s, proved unable to manage the Brazilian economy. This became apparent in the Cruzado Plan—the 1986 attempt to control inertial infla- tion—that ended in a major disastrous populist episode (Sachs 1989).

The fourth reason for the replacement of developmentalism with conventional orthodoxy lies in the strength of this ideological wave that was