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State intervention after World War II not only stabilized capitalism, that is, provided an external stimulus for growth, but also provided a guarantee that the system would function at a level of activity that touched “full employment.” The country took effective countercyclical measures: it increased spending (or imposed tax cuts) every time the economy began to slide into a recession and avoided a dangerous recession. This encouraged private investment and led to an increase in GDP growth rates and in labor and employment productivity, and significantly increased the growth rates of real wages.
It is no wonder that the 50s, 60s and early 70s were called “the golden age of capitalism”. However, with the rise of neoliberalism in the 1970s, which coincided with the dominance of globalized finance, the state withdrew from its role. Finance capital opposed the fiscal deficit and opposed the taxes imposed on the capitalists, while the neoliberal capitalist economy does not possess the tools that capitalism previously possessed to provide a bulwark against its slide into recession. The question is: Does (neoliberalism) have any tools? There is a response that indicates that neoliberalism has its share of “innovations” that constitute an external incentive that prevents the economy from positioning itself in a stable state and maintaining its positive growth. In reality, however, these innovations are not an external stimulus, they only theoretically affect the form of investment and not its value, which is what matters for aggregate demand (Steindl 1976). Economic historians have indicated that innovations were not used during the Great Depression of the 1930s due to low demand (Lewis 1979).
Angel Poligan – Mexico
Although public spending no longer plays a stabilizing role in the capitalist economy, most countries are now required by legislation to keep the fiscal deficit within 3% of GDP, and even the United States, which does not comply with the legislation of This way, you are working to keep the fiscal deficit under control. State intervention never ceases to exist. This intervention operates through a monetary policy that affects the evolution of the financial world and private spending decisions.
In fact, Keynes emphasized that monetary policy should play this role. Faced with the claims of another Cambridge economist, Dennis Robertson, who suggested that to avoid severe recessions, the interest rate must be raised when the boom begins, Keynes (1946) observed that such a policy would keep the economy in a permanent state close to the recession. Instead, Keynes suggested that the more the economy tends to slow down, the more the interest rate should be lowered to avoid a recession in the hope of higher activity and employment, although he was not very sure about the effectiveness of the interest rate policy. interest.
The interest rate is not the only tool a state can use. It was used, at least in the neoliberal era, albeit in a less obvious way, as a tool to maintain continued prosperity in order to socialize capitalist risks (that is, socialism for the rich who lose, thereby increase taxes on the poor to pay for losses Money in crisis We have socialism for capital and risk taking or a large part for taxes).
For any company, the investment and its duration are determined by the intersection between the efficiency of capital and the cost of interest. The risk is not assumed by the individual entrepreneur, because the other shareholders who contribute capital also share this risk; Creditors do not intend to share the risk, but are forced to do so. For example, banks are the direct creditors, and being just a financial intermediary means that there are a large number of depositors who do not know the risks to which they are exposed. They don’t want to increase their exposure to risk and they don’t want to share the risks of entrepreneurs; But they were forced to do so without their knowledge and because of their lack of knowledge about the economic world they are facing. Depositors do not know how banks lend their resources.
Thus, a similar situation arises with respect to loans granted by banks to consumers. The risks associated with default are unknown to depositors or those who have purchased the assets that make up such loans.
In fact, the increased risks will automatically outweigh the euphoria of the “boom” due to the increase in the debt ratio; However, what prevents such a conclusion is state interference or a deliberate effort by the state to induce risk reduction in various ways.
In the United States, the formation of bubbles contributed to the repeal of the Glass-Steagall Act by the Clinton administration, a measure that was implemented during the Great Depression to separate commercial and investment banking services so that the wealth of the depositors are not exposed to unknown risks. Similarly, Federal Reserve Chairman Alan Greenspan lowered interest rates when the internet bubble collapsed, sparking a new bubble that began as a housing bubble and created a new “boom.”
It is clear that state intervention in this way to prolong prosperity cannot continue indefinitely. The longer the boom lasts, the greater the threat to a fragile financial system. The greater vulnerability resulting from a prolonged boom indicates that the minor shock to the system in the form of loss of confidence and push towards a liquidity preference or “security preference” on the part of these economic agents has a domino effect. When such an impact occurs, the State must rescue the financial system by instilling confidence in it, and for this, budgetary resources are usually used.
The Obama administration in the United States had to commit $ 13 trillion in support to prevent the collapse of the American financial system (it is not clear that all of this should be used). In India, the recapitalization of public sector banks has been carried out with the help of budgetary resources due to the burden of distressed assets. This effort to stimulate prosperity cannot be duplicated any further.
Political tools that maintain the social legitimacy of capitalism cannot generate a positive trend, while tools that can convey a positive trend are not permissible under neoliberalism, because they undermine the social legitimacy of the system. Neoliberal capitalism is flawed at its core
Chandrasekhar (2016) believes that funding can provide an incentive that reminds us of what state spending did in the immediate postwar years or pre-capitalist markets earlier; This is true, but as he himself points out, the stimulus provided by finance is not quite the same as that provided by pre-capital markets or state spending. The euphoria that sustains and prolongs may be a matter of a single shot (or at best a two-shot relationship), but it cannot be a regular feature of the system that generates a positive trend.
This argument is similar to what Kalecki (1943) suggested regarding the interest rate (lowering it in a recession to start a new boom). In short, relying on monetary policy to generate a positive trend will eventually have to drive the interest rate into negative territory, which is impossible as long as the cash that produces a zero interest rate can be held in place of any yielding asset. negative.
Finance capital has always opposed state intervention by expanding spending, because state intervention in this way undermines the social legitimacy of capitalism. But capitalism has no objection to using interest rate policy to stimulate economic activity, since interest rate policy works by driving private spending. The use of interest rate policy does not undermine capitalism’s social legitimacy in the way that fiscal policy operates (except that which seeks to stimulate activity by reducing taxes on capitalists).
But monetary policy, as well as fiscal policy, which operates by reducing taxes on capitalists, cannot act as an external stimulus to introduce a positive trend in the way it could shape state spending.
Policy tools that maintain the social legitimacy of capitalism are tools that cannot serve to generate a positive trend, while tools that can convey a positive trend are not permissible under neoliberal capitalism because they undermine the social legitimacy of the system. Neoliberal capitalism is flawed at its core, in the sense that it has no external incentives for sustainable growth, a fact that is becoming increasingly apparent recently.
Public spending not only provides an external stimulus for growth, it is also a tool to counter cyclical fluctuations to maintain a high level of activity. Pre-capitalist markets were, as economic historian SB Sol (1960) pointed out, “markets on the tap” under the colonial system. However, facilitating financing is not only an external stimulus for growth, but precisely for that reason it is not a tool that can be manipulated to maintain a level of activity. Not surprisingly, neoliberal capitalism, lacking such manipulative external stimulus, suffers from a fundamental tendency to stagnate.
* Edited transcript of a lecture given by Prabhat Patnaik at the Tata Institute of Social Sciences – Mumbai – on February 11, 2019.
To see the full text, visit the following link:
https://www.networkideas.org/featured-articles/2019/05/finance-and-growth-under-neo-liberalism/
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