For years now, subscribers to the Financial Times and the Economist have been reading about secular stagnation, a condition in which there are not enough investment opportunities to absorb all of the money in search of an outlet. Larry Summers, who has done much to revive the term, defines secular stagnation as a state where “desired levels of saving exceed desired levels of investment, leading to shortfalls in demand and stunted growth.” A business considering expanding their productive capacities will compare the possible returns on investment spending to the rate of interest (the return they can expect from simply saving the money). As a result, economists expect that lower rates of interest can encourage investment. But secular stagnation obtains even when interest rates approach zero, as they have in recent times. Successive rounds of quantitative easing, an “unconventional monetary policy” in which central banks went beyond interest rate policy to expand liquidity by purchasing trillions of dollars of financial assets, likewise failed to restore business investment to its historical levels.
What this means is that, even given a cheap and plentiful supply of credit, businesses do not see profitable opportunities for investment. This would not be a problem except that in the world we live in, investment is a means of private accumulation. If employment and growth are to be achieved through private investment, and investment must be coaxed out by the promise of an adequate return, then employment and growth become hostages to the rate of return. This may seem to have a Marxist ring to it, but it is in fact common sense across our society. The United States Chamber of Commerce, a major business lobby, declared during the debates around the 1945 Full Employment Act that “The job making process depends on the maintenance of profit expectations and this in turn rests on a vast complex of forces and factors.” For the Chamber of Commerce, this was a reason not even to bother with a full employment commitment: the goal itself was either quixotic or would be achieved only through the abrogation of private control of the economy. At the other end of the mainstream political spectrum, liberals insisted full employment was possible but, agreeing with business on the necessity of private control, promised that the state could ensure the profits necessary to coax forth an adequate level of investment. In early 2009, Obama affirmed this principle, telling a TV News reporter that “[as Americans] we want to retain a strong sense of private capital fulfilling the core investment needs of this country.”
The entire post-1945 history of American capitalism is a string of such attempts to promote private investment. The private investment strategy reached a climax in the record-breaking economic expansion of 1961 to 1969. In his best-selling introductory economics textbook, the liberal Keynesian Paul Samuelson (approvingly) called the Kennedy administration’s investment tax credit of 1962 what it was: “a bribe to capital formation.” But the strategy was self-undermining. In December 1965, the long-dead Keynes finally appeared on the cover of Time magazine, a testament to the roaring success of the Kennedy-Johnson tax cuts. But by 1966, the same economic advisers who had engineered the tax cuts worried that “the capital boom, in fact, was proving too vigorous.” The unprecedented level of investment demand was now causing inflation in the capital goods and raw materials sectors, shortages of skilled labor, and pressure on credit markets that led to the first major financial disruption since the 1930s.
Beyond these immediate problems, former Council of Economic Advisors chair Walter Heller warned that the all the new investment risked the “creation of future excess capacity to bedevil a post-Vietnam economy.” The onset of excess capacity would mean lower profit rates, exacerbating the decline in profitability that had already begun in 1966. But despite the clear problems with endlessly subsidizing capacity-expanding investment, state economic managers could think of no other way of securing full employment and growth. So the pattern continued, with strong investment performance in 1968-9 and 1971-3 alternating with recessionary periods of idle capacity and financial instability once the boom got out of hand.
Even after the devastating global downturn of 1973-5, which saw capacity utilization in manufacturing fall below 70 percent, the Carter administration returned to the same playbook. The results are documented in successive editions of the Economic Report of the President issued early each year by the Council of Economic Advisers (CEA). In 1977, the report declared that “the creation of permanent, meaningful, and productive jobs for our growing labor force requires a higher level of private investment,” and called for the usual cuts in corporate taxation and investment tax credits. In 1979, the CEA boasted of the preceding year’s rises in capacity utilization, investments, and profits: “For the year  as a whole investment rose to 10 percent of GNP, close to its share in the high investment periods of the 1960s and early 1970s.” But the 1980 report noted that “last year’s slowdown in the rise of business fixed investment [in 1979] was partly caused by the gradual increase in excess capacity and the squeeze on profit margins.” In short, the response to a crisis of profitability and overcapacity was to push more investment, which is both an immediate source of aggregate demand and a future source of supply. The success of investment qua demand stimulus was quickly succeeded by the crisis of investment qua capacity expansion.
This is the story told in Robert Brenner’s Economics of Global Turbulence, a crucial source for Aaron Benanav in his new book, Automation and the Future of Work. Though he titles one chapter “The Failure of Keynesianism, 1973-79,” Brenner is clear that Keynesian state responses “staved off depression.” But in preventing collapse, they also sustained unprofitable firms, providing no resolution to the underlying problems of profits and productivity. It was only the radical turn towards austerity after 1979 (the “Volcker shock”) that “destroy[ed] that ledge of high-cost, low-profit firms that had been maintained by the Keynesian-based explosion of credit in the 1970s, and which stood in the way of the restoration of average aggregate profitability.” A similar story can be found in the work of Hyman Minsky. Minsky also thought that countercyclical spending like that of the 1970s “sustains instability even as it prevents the deep depressions of the past.” In his careful reconstruction of Minsky’s worldview, Perry Mehrling elaborates: “Deficit spending prevented debt-deflation, but it could not prevent stagnation. Paradoxically, the system of investment subsidies that had been put in place as part of the Kennedy–Johnson strategy of emphasizing economic growth only made matters worse.” This was because of the difference between “investment undertaken from a genuine profit motive” and “investment undertaken from a tax-subsidized profit motive.” Like Brenner, Minsky stresses both the success of Keynesian interventions and their failure to resolve more fundamental questions of systemic robustness and dynamism.
A word here about the difference between Keynes and the Keynesians. The shabby record of private investment-led political economy would not have surprised Keynes. He wrote in the General Theory that “the duty of ordering the current volume of investment cannot safely be left in private hands.” The public control of investment for which he called would, in fairly short order, reduce the rate of return on capital “approximately to zero” and initiate a “quasi-stationary community.” As the history sketched above suggests, these commitments were not carried on by the American Keynesians who ran the Council of Economic Advisers and wrote bestselling textbooks. This transformation was less a misreading or betrayal than an adjustment to the realities of midcentury capitalist societies and the U.S.-dominated world order in which they were embedded. What’s more, this “bastard Keynesianism” still descended obviously from Keynes’s theory, which is why I continue to refer to certain government initiatives as “Keynesian.” But we should remember that in some sense Keynes’s ideas have remained untested. There is an analogy with the history of 20th century state socialism, which contemporary socialists must neither take to be exhaustive of socialist possibility nor dismiss as completely bereft of lessons (mostly negative) about the problems of planning and revolution.[book-strip index="1" style="buy"]
The discrepancy between Keynes and the Keynesians of the 1960s and 1970s is one thing. I would make the same point more strongly about the relationship between Keynes and government interventions since the Volcker shock, and especially since 2008. Benanav suggests that the booming postwar industrial economy had needed little or no public stimulus, and that “the era of counter-cyclical spending began in earnest in the 1970s, precisely in response to capital’s disinvestment from the economy”. As he puts it, “policymakers abandoned full employment as their goal, but facing ever more anemic economies, governments continued to take on large quantities of debt during downturns, only to find it difficult to raise additional tax revenue during the weak upturns that followed.” Debt-to-GDP ratios are now as high as they have ever been outside of the total war conditions of the 1940s, he observes, yet growth rates remain anemic.
In considering the present impasse, it is important to bear in mind the difference between fiscal and monetary policy. The most dramatic government rescue operations have come from the “big bazookas” of monetary policy. Through low interest rates and massive purchases of financial assets, central banks like the U.S. Federal Reserve or the European Central Bank increase the supply of money and credit. But nothing guarantees that the new funds are actually put to productive use, especially if quicker profits can be found in financial speculation. As Keynes’s biographer Robert Skidelsky explains: “Most of the money pumped into the economy by quantitative easing leaked out into the financial and real estate sectors rather than stimulating the real economy.” Thus the failure of QE cannot be taken as evidence of the failure of stimulus tout court. A real test would require that the easy money be matched by government spending on a massive scale. But by historical standards, governments since the 1980s have actually often adopted a contractionary fiscal stance. The Eurozone’s austerity measures and the weakness of the U.S. fiscal stimulus following 2008 suggest the endurance of the pre-Keynesian idea that the best response to a downturn is for the government to spend less rather than more. As Barack Obama said in September 2010, with U.S. unemployment around ten percent: “just as families and businesses across the nation have tightened their belts, so must the federal government.” This fiscal discipline can cause debt-GDP ratios to rise, not because Keynesian measures are taken but because the economy shrinks in response to fiscal contraction. When Greece’s debt-GDP ratio peaked in 2018, it was not because the government was spending wildly but the opposite. The need for more than central banking is increasingly recognized by the central bankers themselves. As Fed chairman Jerome Powell keeps reminding Congress, with increasing urgency, “The power of fiscal policy is really unequaled by anything else."
Perry Anderson has recently insisted that any treatment of the macroeconomics of contemporary capitalism must reckon with Japan’s “lost decade” and its aftermath. Benanav likewise cites Matthew Klein and Michael Pettis’s Trade Wars Are Class Wars for neglecting the Japanese experience. According to Anderson and many others, the outstanding analyst of recent Japanese economic history is Richard Koo, the Taiwanese-American economist who currently resides in Japan. Koo characterizes Japan’s Great Recession in Keynesian terms. The basic problem was “adequate supply but not enough demand.” Though the slump was devastating, he notes also that “Japan's GDP continued to grow even after the bubble burst” because “fiscal stimulus supported Japan’s economy.” Without this stimulus, Koo estimates that GDP would have fallen by between one-half and two-thirds.
The innovation of Koo’s analysis is his focus on the crippling effect of private debt obligations. In an experience which foreshadowed the limitations of quantitative easing, the Japanese found that rock-bottom interest rates could still not generate a recovery in investment. Firms and households had become increasingly leveraged during the boom. The bursting bubble led to a collapse in asset prices, dramatically eroding the value of assets while the magnitude of liabilities remained unchanged. Faced with this deterioration of their balance sheets, economic agents shifted from profit maximization to debt minimization, plowing their available funds into paying down debt instead of investment. Since the demand for investment would remain low until solvency was reestablished, no cheapening of money and credit could resolve the crisis. After 2008, the same problems emerged on a world scale. As recently as 2018, Koo continued to propose fiscal stimulus in response to economic stagnation, crediting fiscal policy with the difference between U.S. and Eurozone recoveries while regretting that the U.S. stimulus was not larger and longer-term.
The problem remains: no capitalist country (perhaps excluding China) seems able to maintain the level of public spending indicated by Koo’s analysis. This is a question not of the demonstrated impotence of fiscal policy but rather of the obstacles that evidently stand in the way of a real attempt. These are fundamentally political questions, to which the writings of Keynes’s contemporary Michal Kalecki remains the best starting point. But unravelling the class politics of fiscal reticence will also require concrete analyses of the current impasse.
Keynes’s objection to private control over investment was clear enough. But he notoriously declined to outline the “somewhat comprehensive socialisation of investment” that would take its place. Yet something fitting this description remains indispensable to any image of a better world. If investment remains guided by profit, and governments (even when they try their hardest) cannot guarantee profitability, then our resources will remain underutilized, depriving people of the jobs they need to survive under capitalism and, more fundamentally, depriving us of our capacity to produce things that we want and need. Minsky had this in mind when he went beyond Keynes to call for a society “in which leading sectors are socialised, [and] in which communal consumption satisfies a large proportion of private needs.” Robert Brenner also takes political control of investment as his immediate political horizon, calling recently for “focused state support and supervision of investment, immediately designed to bring a specific outcome,” namely the decarbonization of the economy.
What separates Brenner from many liberal Keynesians is his insistence that this kind of “state policy of investment” would run “against the natural tendency of the private capitalist economy today.” The extent to which this is true will be clarified in the next four years. But it is safe to discard Keynes’s dream of an effortless euthanasia of the rentier as wishful thinking. The socialization of investment will need a struggle, and every struggle needs protagonists. But no one today can say what social forces could possibly have an interest in and a capacity to transcend capitalism, or even push through the fundamental reforms necessary to save the planet. The major ambition of Endnotes, the journal where Benanav is an editor, has been to “fashion tools with which to talk about present-day struggles — in their own terms, with all their contradictions and paradoxes brought to light, rather than buried.” The spirit here is not incompatible with Keynes’s own call for a “new set of convictions which spring naturally from a candid examination of our own inner feelings in relation to the outside facts.” Those words were written in 1926, amidst crippling unemployment in the United Kingdom and the failure of the general strike. No one then, not even Keynes, could have said what the 1930s and 1940s would bring. In 2020, this basic unpredictability can be one of the most frightening things one can think about, but I have also found it to be my only source of social hope.
Tim Barker is a historian of political economy. His work has appeared in New Left Review, the London Review of Books, n+1, and Dissent.
This article is part of the November Verso Roundtable on Automation and the Future of Work. You can find the rest of the series here.