Defenders of the "Treasury View", Part CXIV: David Harvey Speaks! And Claims to Know More About Keynesian Economics than Joan Robinson
Some guy once said that Hegel said somewhere that the World-Spirit leads all things to happen, as it were, twice--but that Hegel forgot to add that the first time it happens is tragedy, the second time farce.
When Rudolf Hilferding endorsed the "Treasury View" and vetoed Wladimir Woytinsky's plans for the German Socialist Party to propose a deficit spending-based "New Deal" in 1931 that was tragedy.
When David Harvey adopts the "Treasury View" and gives it as a reason that the Obama fiscal boost cannot work, that is farce.
Mr. Harvey, you will remember, claims like the other devotees of the "Treasury View" that the Obama fiscal boost plan cannot work if financed through domestic savings because government deficits then crowd out domestically-financed investment to such an extent that they do not boost employment or production, and further claims that the Obama fiscal boost cannot be financed via foreign sources:
David Harvey: In the United States... Keynesian solution[s are]... doomed at the start.... [T]he United States... starts from a position of chronic indebtedness... [that] poses an economic limitation upon the size of the extra deficit that can now be incurred.... [T]he funding of any extra deficit is contingent upon the willingness of other powers (principally from East Asia and the Gulf States) to lend...
I, you will remember, suggested that Mr. Harvey read (and understand) Hicks's "Mr. Keynes and the Classics." He reacted very badly to my plea, calling it "the usual technocratic hubris deployed by economists when they have nothing to say..." Harvey went on: "I don’t see why I should go back to... Hicks rather than Joan Robinson," and "I don't see why... [DeLong] presumes... neoclassical economics is a God-given truth beyond contestation..."
Harvey doesn't want to study John Hicks. Fine. He would rather go study Joan Robinson. Fine. Let him go study Joan Robinson. Let him go study Joan Robinson by all means, for Robinson had no doubt that the "Treasury View" that Harvey espouses was an erroneous humbug of finance:
Amit Bhaduri: [A]gainst the Treasury view, Richard Kahn had argued in... 1931... that an increase in the fiscal deficit... generated... a larger output and employment in the economy, such that private savings at this larger output exceeds private investment by an amount exactly equal to the fiscal deficit.... [I]n a demand constrained system a larger fiscal deficit causes neither any inflation nor any "crowding out."... To perpetuate poverty and unemployment in this situation in deference to an absurd and erroneous theory (which Joan Robinson had called the "humbug of finance") is totally unacceptable...
Indeed, Joan Robinson had true and now very timely things to say about objectively-reactionary Marxist theologians--like David Harvey--who say that Keynesian policies must not work because if they did work they would delay the Revolution.
What Joan Robinson wrote then of Paul Baran (on page 95 of her Economic Philosophy) is true now of David Harvey:
[Keynesian success provides] the strongest argument against socialist critics. "You used to complain... with... justification, that a capitalist system that permits heavy and chronic unemployment is indefensible. Now we offer you capitalism with a high and stable level of employment."... Marxist critics have understood that Keynes' theory leads to conclusions which from their point of view are reactionary. They therefore deny the logic of [Keynes's] analysis... [make] alliance with the protagonists of the humbug of finance.... Professor Baran... bring[s] in the quantity theory to show that [Keynesian fiscal polices] cannot work because government expenditure causes inflation. This is another example of confusion between logic and ideology. Because Keynes has shown a way for the capitalist system to remove its most obvious defect, he is a reactionary and therefore his theory is false. But if [Keynes's] theory were false it would be quite harmless.... [It is that] the diagnosis was correct, the treatment... work[s], and the life of the patient is being prolonged [that is so] disconcerting [to the Marxist] would-be heirs...
Here's Harvey, hoisted from comments:
Grasping Reality with Both Hands: Department of "Huh?": In Praise of Neoclassical Economics: The real mystery here is the arrogance of the economists in the face of a catastrophic situation. I would have thought that in a profession dominated by neoclassical and increasingly neoliberal theory these last thirty years, that there might have appeared at least some sliver of humility. They have collectively provided us with no guidance on how to avoid the current mess and now, when faced with a crisis, they can only say, as Marx long ago presciently noted, that things would not be so if the economy only performed according to their textbooks. Maybe it is time to revise if not change the textbooks.
The charge that I have neither read nor understood DeLong’s canonical writings is the usual technocratic hubris deployed by economists when they have nothing to say. I might as well reply that DeLong has neither read nor understood his Marx (I have a remedial course on line) and in any case I don’t see why I should go back to Friedman rather than to Galbraith, Hicks rather than Joan Robinson and why it is that he presumes that Dobb, Sweezy, Glyn, Itoh and Morishima have nothing to say of relevance to our current difficulties because neoclassical economics is a God-given truth beyond contestation?
I did once upon a time make the mistake of studying Sraffa somewhat carefully. His sophisticated mathematical proof (as yet never refuted, in spite of the best efforts of people like Peter Newman) that all of neoclassical theory is based on a tautology I found all too persuasive. Why bother with a theory that proves what it assumes to be true? At the heart of the controversy lies the question of how to value capital assets independently of market prices and since our contemporary difficulties rest on the problem of how to value paper claims to capital assets held by banks in the absence of a market, I would have thought some re-visitation of the so-called “capital controversy” of the 1970s is in order. At the time I concluded (possibly erroneously) that Joan Robinson had the better of the argument against Samuelson but that the Cambridge (Mass) neoclassicals then merely decided to ignore the problem and go on with their theorizing as if nothing had happened. But now look at the mess!
Of course, when theory is not invoked then a bit of casual empiricism about the current low and seemingly stable rate of return on long-term treasuries is thrown into the hopper as proof of my economic ignorance. I did tacitly address the problem of what happens down the road if the Chinese and other Asian countries turn inwards and find better things to do with their money than lend to the United States. A run on the dollar would indeed imply some of the dire consequences that DeLong outlines and the question then arises as to the likelihood of that.
The United States has the power of seigneurage over the world’s reserve currency and is using that power up to the hilt right now and the rest of the world has little choice except to go along. The last time the US did this in the late 1960s, to fund a war and to deal with domestic unrest, this led to collapse of the Bretton Woods system and the grand stagflation of the 1970s. I am not saying this history will be repeated but I do want to emphasize that short-run moves have longer-term consequences (well before that long term in which “we are all dead” as Keynes famously remarked).
What I was concerned about, a topic which DeLong totally ignores, is the likely uneven geographical impacts and responses to the crisis conditions and the degree to which this accelerates the scenario depicted in the NIC report. The export oriented development model that has dominated in East Asia is in deep trouble. Exports are falling dramatically and unemployment rates are soaring in South Korea, Taiwan, Indonesia and China and the likelihood of massive movements of class struggle (a category that neoclassicals will have nothing to do with but which has been demonstrably and empirically of huge historical importance even in the United States) is very much on the cards. Maoist movements are rife in India, the unrest throughout Latin America is promoting all manner of political adjustments and reports of widespread unrest in China are proliferating.
If the Chinese and other East Asian powers find themselves forced to abandon the Export-Industrialization model (which is now failing catastrophically) and to go to something like an Import-Substitution strategy (which was by no means as unsuccessful as it is usually depicted when practiced in the 1960s in Latin America) and a development of their internal markets (almost certainly coupled with internal repression of dissidence), then they will not have the money to lend to the US. The track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).
My main point about the current US stimulus package is that it is too small to do the job (I am surely not alone in saying that) and that it is poorly targeted towards tax cuts rather than real stimuli for political and ideological reasons. The distinction between white elephants and real stimuli is also important and unless coupled with a real strategy (e.g. a radical transformation in urbanization patterns and ways of life) the stimuli will merely cover deferred maintenance on infrastructures rather than point to anything new. The result is a policy blockage that prevents the US from taking advantage of what may be a brief window of continued financial hegemony to bring its own economy around. I am not the only one to say our situation is all too reminiscent of Japan in the 1990s. But in our case we cannot afford a lost decade precisely because the rest of the world is bound to adjust rapidly in ways that are unlikely to be advantageous to the United States. An internal Keynesian project is far more feasible in China but this then entails a radical re-orientation of the Chinese economy towards the rest of the world.
To this must be added that a turn to protectionism is politically very much on the cards. Even some economists now recognize that the Ricardian doctrine of comparative advantage does not work and that gains from free trade are inevitably asymmetrical. Theoretically and politically the attempt of states to protect themselves at the expense of others becomes more likely. The break up of global capitalism into competing and warring factions is entirely possible and while the horrible history of the 1930s won’t necessarily be repeated either, we should at least be cognizant of the dangers. I may not be an expert neoclassical economist but I am a first rate student of geopolitics and geoeconomics, fields of study totally foreign, apparently to DeLong.
These are dangerous times and I would have thought the definition of fair and unbiased to which DeLong subscribes might go somewhat further than that given by Bill O’Reilly. What is needed is generous critique, the taking of whatever is positive in competing accounts and a real struggle to come to terms with ways we might better proceed. It will be hard enough to save capitalism from the capitalists but the real tragedy here is that the real message from DeLong’s commentary is that we need also to save capitalism from the economists.