In the final part of our series, Dominic Alexander looks at how working class advancement means moving beyond the confines of reformism

The Limits of Keynesianism series:

Part One: John Maynard Keynes and Orthodox Economics
Part Two: The Assumptions Keynes Makes
Part Three: Marx, Keynes and the Analysis of the Trade Cycle
Part Four: The Keynesian Attack on the Labour Theory of Value
Part Five: can the working class advance within capitalism?

Also, come and discuss these ideas at The Limits Of Keynesianism, in London on 31 May.

Electing a government which will pursue a Keynesian programme of economic stimulus, instead of austerity for people and public services, can appear as an overriding goal for the immediate interests of the working class. While such a government would undeniably be preferred, the problems begin precisely at the point where reformist politicians attempt to manage capitalism and an historically capitalist state. Keynesianism is constructed around an intention to stabilise capitalism rather than liberate the working class, and that makes the historically determined requirements of particular ruling classes a priority for any government, left to itself. Keynesian economic policy is therefore part of a broader picture of the reasons why reformist governments tend to fail. And yet, the pursuit of reforms within capitalism is not merely a vain endeavour, and the history of the struggles of the labour movement clarifies how and why this is so.

The principle which dominated policy in the early decades of industrial capitalism was laissez-faire, the notion that everyone was best served if there were no limits on the market, and the government restrained itself from intervening. This is the free-market orthodoxy which in various guises has re-appeared in mainstream economics ever since. Of course, laissez-faire was never adhered to at all strictly whenever wider capitalist interests required government intervention, not least, for example, in the building of the railways. In Britain, free-market dogma faced a significant defeat almost as soon as the interests of industrialists were given full political recognition through the parliamentary Reform Act of 1832. It was partly in revenge for this political setback that Tory landowners faced down liberal economic orthodoxy to pass the Factory Act of 1833, which made minimal efforts to restrict child labour in certain parts of the textile industry.

The reactionary country party, which the Tories were then, would not have seized on this issue with which to embarrass their liberal opponents, if there had not been already a prominent workers’ movement demanding both social and political reform. In various moments, working-class discontent threatened revolutionary consequences, as in the Merthyr Tydfil rising of 1831 or the Chartist inspired General Strike of 1842, to name just two.[1] The Chartist agitation, and the events of 1842 in particular, certainly motivated parliament to pass the Ten Hours Act of 1847, which, while not itself achieving the titular promise, paved the way for a ten-hour day to become the norm not too long afterwards. Piecemeal reforms such as these eventually gave the lie to the plaintive cries of classical economists such as Nassau Senior that restrictions on hours would ruin industry, as all profit was made in the last hour of the day. In so far as breaches in the principle of laissez-faire were made in Britain during the nineteenth century, they were driven by the strength of extra-parliamentary workers’ movements, and in the teeth of orthodox economic theory.

The first industrial state where a significant advance towards a welfare state was made, was also ruled by one of the most reactionary of ruling classes. In the second decade of the newly unified Germany, the 1880s, the chancellor Otto von Bismarck, then the dominant political figure, tried to rally patriotic feeling around the Emperor and cast the socialist movement as a threat to the Reich. A united and formally Marxist workers’ party had been founded in 1875, and was rapidly growing in the breadth and depth of its support. Bismarck’s attempts to repress it, however, merely strengthened the organisation.

It was clearly in response to this problem that Bismarck introduced a series of social insurance measures, for illness, accidents, and then in 1889, for old age. Britain did not follow suit in this sphere until 1908. Germany was significantly behind Britain in industrial terms during the 1880s, although it was to catch up rapidly thereafter. Nonetheless, the chronology of welfare reforms indicate that it was not economics, but politics, which led the way. Bismarck would not have introduced these measures unless he feared the potential of the growing workers’ movement, with its political wing being far in advance of anything in Britain at the time.

The real foundations of the welfare state were put in place in Britain by the radical Liberal government of 1906-14, under pressure from a growing labour movement and the newly formed Labour Party. The significance of this is that the beginnings of the amelioration of capitalism began well before Keynesian economic theory. Indeed, ‘Keynesian’ economic policies were first employed in Sweden during the 1930s, before Keynes himself had developed justifications for them.[2] The reasons for that lie in the balance of class forces in Sweden at the time. It is therefore the context of class struggles and mass movements through which economic policy can be bent away from the interests of capital, and towards that of labour. Yet, there is no recognition of this pattern in Keynesian theory itself, which is resolutely abstracted from historical social relations.

Reforms and reversals

The high point of reformism in Britain came with the Attlee government of 1945-51, and its signal achievements of National Insurance, a state education system, the council housing programme, and above all the National Health Service. These were collectivist policies that derived not from economic theory, but from pressure from below in the labour movement itself:

These policies were anathema to the Tory and Liberal parties. They were thrashed out and championed not so much by Labour Party leaders as by rank-and-file members who wanted to change the world in which they worked.[3]

The Attlee government was far less radical when it came to economic policy, retreating from progressive Keynesian policies rather quickly after some initial signs of boldness. Despite the nationalisations of some industries, which were largely acceptable to capital at the time, the most serious inroad into the autonomy of the market was legislation which enabled the government to step in to ‘redistribute and reorganise industry’, shifting production to depressed areas.[4] Otherwise, the Labour government quickly bowed to the pressures of economic orthodoxy in the difficult post-war conditions; faced with a balance of payments crisis, the choice was made to impose austerity through cuts in rationing, increases in indirect taxes, and severe wage restraints. And yet, industry was doing well, with production 30% above the level of 1938, while exports had risen 55% above the pre-war level from a very low base, and were the highest in Europe.[5]

These policies were not Keynesian in any sense, being directly deflationary, but do highlight the vulnerability of governments to the pressures of capital. Keynesian theory assumes that the state is neutral, and can intervene in a rational way, above the competing interests of capital and labour. The post-war Attlee government was one of the best opportunities to pursue a radical Keynesian strategy. There was the legacy of war-time planning, at a time when the legitimacy of free-market capitalism was at a particularly low ebb. Additionally, the government had a gigantic parliamentary majority. And yet, a radical, reformist economic policy was not pursued. It should be remembered that Keynesianism itself fundamentally revolves around the confidence of capital, and this was precisely the problem that Labour ministers perceived.

As Tony Cliff put it, even the left-wing Aneurine Bevan ‘was anxious to reassure private capitalists that their interests were being looked after, so as to gain financial stability for the economy as a whole.’[6] Even a minister with a pre-war reputation for radical anti-capitalism, Stafford Cripps, as Chancellor ‘associated himself with slightly messianic ideas of self-sacrifice and austerity’.[7] As a result, in 1949, the government, in response to the devaluation crisis, and in order to restore capital confidence, removed a host of wartime controls over industry. The Minister responsible, Harold Wilson, according to Paul Foot, ‘basked in the praise of Tory MPs, and started to believe that his own political aims were not very different from theirs.’[8] The result of all this was that a demoralised Conservative Party was able to start to regain its sense of confidence and purpose.

The attacks on the working-class standard of living by a reformist government had some serious political consequences for the labour movement as well. The demands of wage restraint sparked opposition that compliant union leaders struggled to contain. The relatively low level of actual strikes was nevertheless met with draconian war-time legislation, such as Order 1305, which made strikes illegal, and even the use of the military for strike breaking. An atmosphere of red-baiting was encouraged by this, the most revered of Labour governments:

The minister for labour regularly attributed strikes to Communist agitation. An enormous weight of vilification was heaped on the heads of shop stewards who during the war had been described as loyal patriots, but were now “extremists” and “subversives”. Labour set the tone for what was to be a long-running witch-hunt of industrial militants.[9]

Labour ministers were doing the ideological work of capital here, and preparing the ground for the return of a Tory government in 1951. An austerity enforcing, strike breaking government, which was attempting to tame the movement which brought it into power, was hardly likely to maintain the electoral momentum of 1945. Conflict between the government and rank-and-file trade unionists could not have any other result than disorientation and disillusionment in the movement. The result was thirteen years of Tory government, before the next, more technocratic Labour government of Harold Wilson, where the drift away from radicalism was more than confirmed.

The poison of imperialism

The degree towards which the Attlee government conformed to the requirements of a capitalist state was particularly pronounced in the realm of imperialism. A peacetime conscription policy was introduced for the first time, and the length of service was maintained at eighteen months, despite opposition in the parliamentary Labour Party, because the whole body of the military leadership threatened to resign if the compromise of twelve months service was introduced.[10] Friendship with apartheid South Africa was maintained for the sake of the uranium needed for the nuclear-weapons programme, and for Cold War reasons.[11] Britain played a vicious and bloody role in restoring colonial possessions to imperial control, not only for its own, but for French and Dutch imperialisms as well.[12]

For the Labour government to be accepted as legitimate, it had to show itself committed both to British capital’s own imperialist interests, and to the new post-war hierarchy of imperialism, with the US now firmly in the lead. The American Marshall Aid programme was a powerful instrument in forcing western European states to follow the US lead, and Britain was no exception in this. The end result was Britain’s commitment to the Korean War, which required a great expansion in military spending. There was never a question who was going to pay for it; austerity and cuts in public spending ensued, most symbolically with the introduction of charges relating to dentistry and for spectacles.[13]

This was all a far cry from Denis Healey’s 1945 commitment to a distinct foreign policy which would ‘protect, assist, encourage and aid in every way the Socialist revolution wherever it appears,’ and which would avoid Labour ‘running with the Red Flag in front of the armoured car of Tory imperialism and counter-revolution.’[14] Yet this is precisely what they did. The realm of the military, war and foreign policy, that is to say imperialism, is not a side-issue for any reformist government, on which it can make compromises in order to further its own economic strategy and goals. The requirements of imperialism directly contradict all progressive economic policy, and impose austerity for the working class, in order to pay for the military needs of capital.

A radical Keynesian policy could not be adopted precisely because of British capital’s historical interests and investments. It could be argued in the abstract that capital does not require this imperial dimension. In practice, however, the embedded interests of particular capitals, and institutions like the civil service and the military which exist to defend the interests of capital, will not surrender on these issues merely to an argument from abstract reason. The only power capable of shifting the agenda is the organised power of the working class. Unfortunately, in the immediate post-war period, the labour movement was largely entwined with and committed to a Labour leadership, which soon turned against its interests in so many ways.

The permanent arms economy

In fact, the whole post-war period, which is often vaguely remembered as a golden-age of Keynesianism, was nothing of the sort. What drove the Western economies was not a radical policy devoted to planned investment in the social good and expanded consumption, but a military Keynesianism which prioritised capital-intensive arms spending. Military spending did act as a stimulus to the economy, and even Ronald Reagan can be considered a kind of ‘Keynesian’ in that respect.[15] Galbraith emphasised the cost to the American economy of the emphasis on military production from the start of the post-war period, with such expenditures being ‘approximately 26.5% of all federal government expenditure’, alongside the share in employment with ‘as much as a third of all American engineering and scientific talent’ employed for military purposes.[16]

This contrasts with Germany and Japan, whose restricted military spending meant that they ‘were clear economic beneficiaries of their own defeat’.[17] This is true, but only through a narrow view, a point of which Galbraith ought to have been well aware, as the success of the German and Japanese export regimes depended upon the draw of US markets in particular. German economic recovery post-war had a great deal to do with the demand created by the Korean War in particular. Effectively, in this analysis, Galbraith was acknowledging the phenomenon that some Marxists started calling the ‘permanent arms economy’ in the 1960s.

The problem which underpins the drive towards this, and away from a more socially productive form of Keynesianism, is historically complex, but one crucial aspect is the overaccumulation of capital. With increasing quantities of capital seeking profitable investment, capital does not become cheaper with less leverage upon society, as Keynes had envisaged. Instead, because capital is embedded in institutions and social power, it is able to distort economies towards its own interests; imperialism is a necessary means of controlling access to opportunities for the reproduction and accumulation of capital. It is also a powerful means of destroying, or at least subordinating, rival capitals.

Moreover, military spending is an ideal form of investment in a situation where capital has over-accumulated ‘for it has involved a systematic destruction of values, not a relocation of their use, and it has acted in integrating the system far more effectively than any other form of expenditure.’[18] Keynesians cannot just wish away this drive within post-war capitalism. The end of the Cold War only underlined the centrality of arms spending, since far from there being a ‘peace dividend’ as many expected, spending on the military in the US remained as great as it ever had been.

Keynesian reforms and the class struggle

There could therefore be an argument, following Galbraith, that Keynesianism in its true form has not been tested and found wanting, but that it has never been tried. The reasons for that however lie in the weaknesses of the theory. The crisis of the 1970s, where standard Keynesian demand management broke down in the face of the new phenomenon of ‘stagflation’, or simultaneous rising prices and low growth, was at base a problem of the falling rate of profit.

Keynesian theory never really explained the problem of stagflation, or the reasons for the shift in elite thinking towards neoliberalism by the end of the 1970s. Galbraith, for example, simply nods towards the context of the international economy reducing the space for demand management.[19] The freedom of capital under ‘globalisation’ certainly provides the mechanisms by which national governments can be disciplined by capital, but does not explain why elite interests were so determined to drive this process forward; it was a political agenda after all. Keynesian theory neither addresses the fundamental and complex drives within capital accumulation, nor does it allow that economic policy is subject to the balance of forces in the class struggle.

Should Keynesianism therefore be rejected altogether by those who wish a radical transformation of society? After all, it can also be questioned whether reformist governments are necessary. It is true that post-war West Germany, France and even Spain developed more generous welfare regimes than Britain without social-democratic governments.[20] Certainly, it is important not to underestimate what can be achieved even without reformist electoral victories, but social-democratic governments do achieve important advances, despite their inherent limitations.

The Attlee government created the NHS, which no Tory government would have done. Other state health programmes are fundamentally insurance systems, whereas the original NHS structure was based on collective provision through central funding out of state taxation. That it emerged from the socialist movement, and was driven by rank-and-file activists, rather than the Labour Party leadership as such, is also crucial to an understanding of the role of reformist government. The latter opens a window, but the strength and assertiveness of social movements are essential to real victories.

There is a danger also on the other side, that an absolute rejection of Keynesian policy can lead revolutionaries into a sectarian cul-de-sac. It can be argued that since the cause of capitalist crisis comes down to the problem of profitability, then there is no solution to crisis short of revolution. This kind of argument can risk aligning Marxists with a right-wing prescription that only cuts to wages and social spending, for example, can restore the rate of profit, and therefore the prosperity of the economy.

It is important that Marxist analysis does not lead to a counsel of despair in the circumstances of the present. To begin with, Marx showed that there are in fact a number of mechanisms which can restore profitability to a capitalist economy, even though a squeeze on workers’ living standards appears as the most obvious to employers. Keynesian policies provide a practical antidote to the kneejerk of austerity. State-led infrastructure investments, for example, provide employment immediately, and through the multiplier effect, act as a stimulus to the whole economy. This kind of investment can provide the basis for a rise in productivity, supporting a new wave of investment and growth, or accumulation from capital’s point of view. It is also the case that state investment, which requires only a return upon interest, acts to restore the average rate of profit in the rest of the economy.[21]

For Keynesians, the problems end there, and the prospects of harmonious economic growth open up, but Marx showed that the contradictory movements of capital accumulation will produce a new crisis out of the solutions to the old crisis. Countervailing pressures will already be at work, even as the rate of profit is restored, and the very remedies that stabilised the system beforehand, will now appear to capital as impediments to further growth. The confidence of capital will fall, and strident demands will be made on any government to improve conditions for profitability.

Moreover, many forms of investment, such as advancements in technology, particularly in the present, may lead to downward pressures on employment, with consequent deflationary effects on demand. It has become increasingly difficult in the post-war period to make progressive Keynesian policies effective in restoring capitalist growth. As a result, the pressure to reverse a reformist government’s progressive direction in economic policy in the present will be immense. An understanding of the contradictions of capitalism, going beyond Keynesian prescriptions, will be essential to defending the interests of the working class at this point.

Yet again, despite the inherent difficulties, to disdain the pursuit of reformist governments, which would necessarily rely to an extent on some form of Keynesian policy programme, would be to fall into sectarianism, and the pursuit of revolutionary purity for its own sake. Equally, however, to imagine that electing a reformist government, however principled its party leaders appear to be, will provide a platform of power over capital, would be naïve. Time and again, reformist leaderships retreat or even collapse in the face of pressure from the institutions of the state, and the representatives of capital in industry and finance. The objective pressures of international markets provide reasons to bow to the interests of capital; armed only with Keynesian theory, the confidence of capital will always weigh heavily on reformist ministers.

This is not to say that nothing can be accomplished outside an actually revolutionary situation. The only force that can provide a counterbalance to the power of capital is that of an organised working class. If, however, the organisations of the proletariat lack autonomy from, or are overly dependent upon, the reformist project, then retreat, compromise and eventual defeat are the likely outcomes, even during the historically most favourable situations, such as 1945 in Britain. The pressure of the movement is absolutely necessary to push back against capital so that a reformist government can make advances. The election of such a government is the easiest part of the process; ensuring it carries out meaningful reforms to the system is the real fight.

The movement therefore needs an independent, revolutionary core, that understands the limitations of Keynesian policy and the nature of the enemies within the state, who will struggle tooth and nail against any measures which limit capital. This means not only the necessity of building the widest possible mass movement, independently of the reformist party, but also a self-consciously revolutionary organisation. This must be capable of both acting within the wider movement in the most constructive ways possible, and maintaining an outlook and strategy that lie beyond the reformist agenda. A reformist government will either end in defeat, and a generational retreat for the cause of labour, or be pushed forward by an independently acting socialist movement. At that point, it would have to move beyond the limits of Keynesian policy and therefore, necessarily, the limits of capitalism. Only then would more permanent advances come within our grasp.