Macroeconomic governance



The deep problems of the capitalist economy cannot be solved without structural reform

Mainstream macroeconomics does not want to be more than a toolbox to be used in the governance of capitalism. And that character is present in the way it has been presented. This is what, for example, shows a recent article in The Economist, entitled The covid-19 pandemic is forcing a rethink of macroeconomics.

As is known, knowledge about the functioning of the economic system took its name after John Maynard Keynes published his General theory of employment, interest and money, in 1936. If this author did not despise the performative character of the theoretical language created, one cannot accuse him of lacking scientific realism, of being unconcerned with understanding capitalism. Given the urgency of the historical moment, he judged that it was necessary to apprehend the real economic processes. Here we want to show, however, that contemporary macroeconomics, after the Second World War, acquired a centrally manipulative character: on the one hand, it intended to provide economic policy instruments for the governance of the system, on the other hand, it wanted to conform the minds of economists to make them think in an automatic way, adequate to the accomplishment of objectives that are prescribed to them. Some, few, resist!

But, after all, what is governance? “Governance is the automation of thinking, the automation of social existence. Governance is meaningless information, mastering the inescapable” (Franco Beraldi, in Asphyxia – Financial capitalism and the insurrection of language).

To understand the nature of macroeconomics and how it, in the form of technical and manipulative knowledge, has changed over the period from 1950 to the present, the three graphs above are essential: the first shows the evolution of a measure of the rate of inflation, the next presents the profit rate evolution and the third indicates the annual GDP growth rates. The variable rate of profit – it should be noted – does not usually appear in mainstream or orthodox macroeconomic analysis, but it is crucial.

The focus of this note will only be on the US economy as it remains, for the time being, the most important capitalist economy. As is also known, the United States is the main workshop in which the tools of macroeconomics are created, which are then spread to economics courses in the rest of the world.

Economic policy was guided by Keynesianism approximately between 1940 and 1978, but not based on its original formulation, but leaning in an important way on a theoretical rearrangement that was called “neoclassical synthesis”. Behold, the theses of this remarkable economist were rewritten in the form of a simplified general equilibrium model, with two markets – goods and currency –, which became known as the IS-LM model. In any case, the objective of economic policy in this period was to maintain a high level of employment mainly through expansive fiscal policies. Trusting in the countercyclical role of the State, there was no fear of running budget deficits because there was belief in the very capacity of this policy to create the conditions for economic growth.

However, Keynesian economic policy began to suffer attacks from neoliberal economists, as of the end of the 1960s. They would only be victorious at the end of the 1970s. In the 1960s, the rate of profit began to fall at the same time that the rate of inflation began to rise. Now, this result was not expected by the current macroeconomics that reasoned with the so-called Phillips Curve. Based on empirical observations, this curve showed an inverse relationship between the unemployment rate and the inflation rate. Thus, inflation would be higher in situations with low unemployment and lower when high unemployment rates were observed.

The phenomenon – called stagflation – showed that unemployment and inflation rates grew together, thus contradicting a formula of macroeconomic governance then used. This field, after Keynes' pertinent analyses, had started to be guided only by theoretical instrumentalism and, thus, even surpassed the canons of vulgar economics. It had become, in fact, a mathematical, technical and manipulative “knowledge” that was little concerned with constituting itself as a good representation of the real world. The “theoretical” structure of this method was built, as we know, by León Walras at the beginning of the last quarter of the XNUMXth century: for him, “pure political economy is a science similar in every way to the physical-mathematical sciences”.

Inherited macroeconomics thus became inconvenient as an instrument of economic policy: stubborn inflation denounced that there was a strong dispute between capitalists and workers for the appropriation of income. Well, this ratchet that pulled prices up was seen as a result of government action that insisted on raising the level of economic activity. Paul Vocker, having assumed the presidency of the US central bank in 1979, then resurrected Milton Friedman's monetarism, which, as is known, is based on the idea that inflation is caused by excess monetary issuance. Macroeconomics, therefore, stopped using Keynesian governance, starting to employ a new one, more adequate to stifle the distributive conflict between workers and capitalists, especially to the detriment of the interests of the former.

The economic policy implemented consisted of containing the expansion of money, thus provoking a recession and, consequently, rising unemployment and the failure of weaker, less competitive companies. Monetarist economists, already militant in the field of neoliberalism, argued in the period that it had become necessary to replace the concern with distributive equity by another one focused on economic efficiency, that is, for the restricted interests of the capitalists. Indeed, the break with Keynesianism involved both a fight against unionism and a persistent effort to drive down real wages. The unstated objective was to raise the profit rates obtained by the companies. As the graph above shows, this implicit goal was successful. Behold, the economic activity of capital can prosper for about a decade and a half.

Now, what explains stagflation is the sharp drop in the rate of profit that occurred in the period under the regime of purely fiduciary money. When profitability drops a lot, capitalist companies, instead of responding to the impulses of demand produced by the State, with more production, raise prices in an attempt to restore the previous rate of profit. As unions had strengthened in the Keynesian period, they demanded and got increases in nominal wages. Thus, they tried to prevent the fall in the purchasing power of their cash earnings. The result of this process was that inflation rates reached double-digit levels in the United States.

Strictly monetarist governance, however, proved inconvenient once it had done the dirty work of defeating the workers. It became necessary to replace it with a new one, more suited to the historical moment. From the mid-1980s until approximately 1997, with the average rate of profit remaining at higher levels, the US capitalist economy prospered through the so-called “great moderation”.

During a period of about twenty years or less, the main economic variables, such as the rate of increase in GDP, the rate of inflation, the rate of unemployment, etc. lost volatility. Now, this situation allowed the use of an eclectic combination of Keynesian and monetarist governance with the objective of keeping the inflation rate around 2% per year. Here, price and wage realignments become easier when the price level is rising moderately. For example, this is how eventual nominal gains in wages are systematically eroded by the rising prices of commodities that enter into working-class consumption.

Monetarism continued to have some influence on economic policy. He gave strength, for example, to the thesis that central banks should become independent. But Keynesianism also maintained a certain influence since the objective of keeping employment at a high level was not neglected, which is always of interest to capitalists when the rate of profit is high. The search for a flexible inflation target was carried out by managing the short-term interest rate, now considered the key variable in controlling investment and consumption. The impulse of aggregate demand and, therefore, the level of unemployment, could thus be controlled: by raising, for example, the interest rate, companies' profit margins were squeezed; credit became more expensive for both companies and consumers. Things were reversed when it was a question not of cooling down, but of heating up the functioning of the economic system.

In the period of the “great moderation”, as expected, the old belief in the market's ability to maintain a high level of economic activity with less government intervention prospered again. In fact, the belief – implicit or explicit – in Say's Law, according to which supply creates its own demand, has come out of the closet again. Such vulgarity is convenient in certain historical moments; it had already reappeared in the 1970s with the advent of “stagflation”. It consists of a convenient dogma for denying that government can influence the level of employment whenever it is in the interests of capitalists: it peremptorily asserts that markets produce full employment, spontaneously and more efficiently.

It was in this decade that the macroeconomics of rational expectations based on sophisticated equilibrium models was born. This mathematical apparatus, while hiding the anarchy inherent in the capitalist system, allows its manipulation. If Keynes had admitted that radical uncertainty affected the behavior of investors, the macroeconomists of the new classical school began to admit that they acted based on a fully calculable risk. To do so, they introduced into their models the hypothesis that these agents were capable of making extremely complex calculations of expectations, as improbable as the models themselves, models whose results the capitalists themselves had always known.

The revival of full confidence in the functioning of the system also gave rise to the school of real economic cycles. Instead of explaining economic fluctuations through demand or monetary shocks, the new instrument figured that the logic of cycles was endogenous; in its phases of rise or fall, the economy always remained in equilibrium. From this perspective, eventual corrective actions by the government would, in principle, become inappropriate and even harmful.

From 1997 onwards, the rate of profit began to fall, stabilizing at a much lower level thereafter. There was then a tendency to reduce the growth rate of production and, as a result, there was once again doubt about the future performance of the US economy. Aggregate demand began to grow less because companies did not find great incentives to invest since profitability expectations were depressed. Consumer credit, which compensated for the fall in real wages for a while, also found limits in the very increase in household indebtedness. As a consequence of the neoliberal policies implemented from 1980 onwards, there was a strong increase in the concentration of income and wealth in developed countries, in particular, in the United States. And this, as we know, does not favor consumption.

With the lack of opportunities for profitable investments in the sphere of production, the creation of fictitious capital in the financial sphere was accentuated already in the 1980s. As a result, the size of the debt of governments, companies and families almost did not stop growing . With the overaccumulation crisis of 2007-09, a tendency towards stagnation manifested itself again in the US economy. Orthodox economists, who ignore the logic of capital accumulation due to ideological blindness, then began to assert that the desire to save began to overcome the desire to spend, and that the US economy had therefore entered a phase of secular stagnation.

The economic policy response consisted of lowering the interest rate as much as possible and enormously expanding the mass of money in circulation – with a huge reduction in its speed. Thus, what became known as “monetary relaxation” was configured. From the point of view of equilibrium macroeconomics, which usually only see disturbances in this equilibrium due to eventual “external shocks”, a new anomaly became evident: the unemployment rate could decrease, but inflation would not grow again.

In fact, the reason for the conjunction explained in this “paradox” is simple, even if it is not recognized by orthodox currents: as the profit rate remained at low levels in the period, the stimulus for investment proved to be weak; faced with the weakness of effective demand, capitalists are forced to increase production levels, rather than raise prices, even if they can do so – even if they think that profit margins are depressed. If the government opted to strongly raise effective demand, stagnation would turn into stagflation.

The unresolved tensions in the US economy led to the election of Donald Trump, at the end of 2016, a right-wing extremist who decided to partially reverse the globalization process that began in the 1980s. and, therefore, clashed with the European Union, Mexico and Canada, started the current Sino-American conflict. And this conflict, as we already know, will mark geopolitics in the coming years, thus creating more difficulties for the expansion of capital. The struggle of each nation to expand its exports through commercial and financial restrictions diminishes the international market for all of them.

In 2020, as is known, the new coronavirus pandemic hit, which further lowered investment expectations, sharply reduced consumer demand due to confinement, and disrupted national and international production chains. With interest rates close to zero, above or below this level, monetary policy lost its supposed ability to influence the level of economic activity. Without economic theory having time to change, the Keynesian policy of increasing public spending came back into action. The income support programs for the poorest are not concerned, however, with either their survival or their suffering. Rather, it is an indirect way of preventing a very significant outage of companies in the face of the extraordinary drop in demand. If monetary easing was intended to save the financial system from collapse, expansive fiscal policy now proved necessary to save commodity-producing industries.

Faced with the prospect of a major disaster or a long depression, the system's macroeconomists are not sure what to do now and in the coming years. Some feel that we need to keep printing money to stimulate growth and boost inflation. But as the case of Japan has shown, this governance tactic is unlikely to work; it will just keep the “zombie companies” afloat.

Others feel that nation states should continue spending even if public debts have already exceeded 120% of GDP globally. Now, this will force the maintenance of interest rates close to zero indefinitely. As this is unlikely due to capital movements in search of remuneration, defaults or monetization of the public debt may appear on the horizon.

Still others believe it is possible to keep interest rates negative for a long time. There are pitfalls here too: central banks will be trapped by high liquidity, many savers will prefer to keep cash under cover, banks will not want to lend, etc.

The uncertainty is great: public debts are growing, cracks in the financial system are appearing, liquidity is increasing beyond measure, the number of zombie companies – which are barely able to service their debts – continues to rise. Now, the profit rate does not show signs that it can increase without a great destruction of the fictitious capital and the industrial capital accumulated in the last decades – intrinsic way through which the capitalist system overcomes its crises of overaccumulation.

It is because of this that the article quoted in the introduction to this paper ends by saying that a large number of economists suspect that the deep problems of the capitalist economy cannot be resolved without structural reform. A solution they do not want, but which would be good for the vast majority of the population, is to radicalize democracy, in such a way that it can progressively socialize the means of production, overcoming capitalism, which is already on its way out.

* Eleutério FS Prado is a full and senior professor at the Department of Economics at FEA/USP. Author, among other books, of Value excess: critique of post-big industry (Shaman).


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