Keynes’ missing piece

by Dr Tristan Learoyd

There is evidence to suggest that Keynesian interaction with today’s private markets is destined to fail. Following the introduction of the joint philosophy of macro and microeconomic planning in the form of Co-operative Keynesianism, I aim to highlight why co-operative microeconomics is the perfect partner for Keynesian macroeconomic policy and can avert such failure. Here my focus is primarily on the New Economics Foundation’s Green Deal as the modern variant of Keynesian promotion.

A Green Deal

NEF’s Green Deal has largely emerged as the left’s answer to the current economic crisis and impending climatic doom. The deal focuses on Keynesian-style public expenditure on infrastructure and the resurrection of a war economy to fight climate change. Central to the macroeconomic plan is the reinstatement of a legal framework to control the financial sector.

There is a great flaw in the Keynesian NEF Green Deal, however. A flaw that bears great similarity to the neoliberal doctrine it seeks to oppose. It relates to a faith in private microeconomy; a faith in firms, that whether controlled through regulation (as with the Green Deal) or not (as with suicidal conservative policy) private firms are in some way capable of serving the public interest as a collective. Such faith represents a catastrophic gamble of epic proportions. By being hoodwinked by this blind neoliberal faith in private microeconomics the Green Deal will enshrine private finance, preserving the very institutions that created the ensuing climatic catastrophe and the current debt crisis.

The Keynesian Green Deal overlooks the mechanism that makes Adam Smith’s free marketeering faithful so deluded – the mechanism that ended the first and only Keynesian ‘golden age’ so far. 20th century history tells us power will concentrate in capitalism – no matter whether it is regulated or not. This has led to the monopolistic model – not the fanciful competitive free market model up on which neoliberals worship – being in operation today. Pure Keynesians are blind to an extent, as they fail to recognise the relationship of such monopolies with government.

As Galbraith illustrated throughout his career, monopoly comes with influence over government: over policy, over all of the intricate details of society and human life, over price, over supply and demand – and importantly over regulation. The influence of the monopolist should not be overlooked: there is a revolving door of executives in and out of multinational giants and Whitehall, and there is a door out of Keynesian regulation for private microeconomics when it coalesces. It is thus far better to have ethical firms that benefit from Keynesian planning than have to regulate the unethical and the largely unwanted.

Does size matter?

The state has worked to protect market economics, the protection of private property being the major case in point. The Green Deal protects the same institutions that laissez faire capitalism does – by legislating for them and around them. In a world seemingly obsessed with size, whether it government or banks, it is form that should take priority. NEFs Green Deal seeks to reduce bank size but the Co-operative Bank, cited in the Green Deal, is an ethical bank due to its business composition – not its size.

Far better to be asking “does this bank have social values?” than “is this bank now small enough to not do us so much damage the next time it goes bust?”.

Pure microeconomic individualism

The Green Deal in allowing a collaborative hegemonic private microeconomy is subscribing to a neoliberal mentality which has its roots in a hypothesis of Jeremy Bentham. The right’s beloved Adam Smith made an approximation of Bentham in the Wealth of Nations, that the individual is only motivated by pecuniary interest. This 18th century diagnosis has been proven incorrect on many occasions, including the advent of the club, association, guild, union, co-operative, and of communitarianism. The right’s obsession with pecuniary interest has led us riot and war. The human mind cannot and should not be simplified to the extent of Bentham or Smith’s thinking – no matter how small the collective and collaborative tendency in any particular human it still exists and cannot be erased from history or economics.

One feels justified to state once again that the co-operative’s potent business model of collective and individualistic motivations is compatible with human psychology at this stage in our evolution. And, in providing macroeconomists with a stable microeconomy, the Co-operative movement is John M. Keynes’ – and the Green Deal’s – missing piece.

Keynes and the co-operative microeconomy

Keynes saw that shifting domestic policy to full employment, rather than export led employment creation, would prevent circles of unemployment between the trading nations. Undoubtedly Keynesian policy is required to get the UK out of the cycle of depression it has entered. However, evidence emerged as far back as 1958 that the Keynesian system of financial regulation was undermined by the financial sector. Keynesianism must therefore be regarded as an incomplete doctrine, there for further development as our knowledge of economic expands.* Thus, the proposed Co-operative Keynesianism alternative to the neo-liberal agenda.

Co-operatives don’t rely on the same economic variants as private capital, such variants being a limitation of the Green Deal. Co-ops show higher employment capital ratios, enhancing Keynes’ employment multiplier, and distinct employment-capital elasticity compared to private firms, enhancing Keynesian macroeconomic control through interest rates.

The co-operative firm’s behaviour in a downturn and their response to macroeconomic leavers, such as interest rates makes them highly applicable to Keynesian macroeconomics. For example, when the price of capital increases private firms show no change in their demands for capital, however, co-ops do. Co-ops will reduce capital demand in downturns, and paradoxically show significantly increased employment vis a vis private firms when interest rates are low. When capital costs increase with an increase in interest rates, worker co-ops in particular will reduce their demand for capital by reducing wages, therefore controlling inflation. The private firm’s demand for capital, however, will remain stationary irrespective of the macroeconomic outlook with cost reduction taking place in the form of unemployment – increasing the welfare bill of the nation at the most disadvantageous points. The reality of the current private hegemony of the microeconomy of monopoly price fixing, surplus capital and inequality means mass unemployment must occur to give a reduction in inflation.**

Furthermore, co-operatives show reduced income gradients and broader consumptive classes. With the subsequent distribution of money in sufficiently co-operative countervailed secondary markets, the consumption rate increase and thus Keynes’ employment multiplier would be higher still.

In conclusion, this article points to various weaknesses in the Green Deal and the strengths of Cooperative Keynesianism as a hybrid of two tried and tested compatible concepts that together can provide lasting stability and debt solution. If Keynesians continue their attempt to dictate to private firms without though of instigating democratic reforms in the microeconomy, it may ultimately lead to the failure of the macroeconomic policy. Why risk giving the right further ammunition when there is a viable left alternative in Co-operative Keynesianism?

* While the NEF Green Deal does have passing mention to mutualisation of the banking sector, immediate Co-operative action has to take place under a Keynesian plan if it is to survive in the long run. The inflationary pressures from increased consumer credit that eventually ended the golden age would not have occurred if Keynesian reforms had extended to the full co-operation of the financial sector.

** The NEF Green Deal focuses on reducing the export leak of capital through various legal means. In itself, the sheer scale of tax avoidance and evasion in the UK shows potential to cause a significant imbalance in payments. A substantive co-operative microeconomy would aid the Green Deal’s aim of dramatically reducing capital flight (through co-operative collective ownership) and tax avoidance and evasion (through the transparent operation and ethical direction of co-ops). Significant co-operative countervailance of markets could mean the endless inefficient battle of creative accountants and government legislators could be brought to an end.

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