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Published by Edward Elgar Publishing Company Limited Gower House Croft Road Aldershot Hants GU11 3HR England ISBN 1{85278{010{X 2 Keynesianism, Monetarism and the Crisis of the State Simon Clarke Senior Lecturer in Sociology, University of Warwick Contents 1 Introduction 1 The challenge of monetarism . 1 Money and the state . 11 2 The Hidden Hand and the Limits of the Capitalist State 21 State and economy in the eighteenth century . 21 The theory and practice of mercantilism . 23 The challenge to mercantilism . 26 The division of labour and the rationality of exchange . 28 Money and exchange . 31 The hidden hand and the accumulation of capital . 34 Capital, labour and the equality of exchange . 37 The market and the state . 38 The limits to the state . 43 The principles of public finance . 44 3 Political Economy and the Rise of the Capitalist State 47 Adam Smith and the crisis of mercantilism . 47 Classical political economy . 51 Ricardo and the problems of post-war reconstruction . 55 Political economy and constitutional reform . 61 The reformed state and economic regulation . 64 The administrative reform of the state . 68 The mid-Victorian boom . 79 i ii 4 Money, Credit and the Overaccumulation of Capital 85 The limits of liberalism and the critique of money . 85 Money and exchange in petty production. 87 Commercial capitalism and the development of money . 89 Commercial capital and the rise of capitalism . 93 The contradictions of political economy . 95 The social form of capitalist production . 98 Capitalist competition and the overaccumulation of capital . 101 Money, credit and the overaccumulation of capital . 107 Overaccumulation crises and the development of state money . 110 From the hidden hand to monetary policy . 113 5 The Form of the Capitalist State 120 Capital and the state . 120 Civil society and the state . 126 Capital and the development of the capitalist state form . 130 The limits of the liberal state form . 133 The working class and the state . 136 Overaccumulation, class struggle and the nation state . 143 Economics, politics and the ideology of the state . 151 6 Class Struggle and the State: the Limits of Social Reform 155 Capital, the state and the reproduction of the working class . 155 Pauperism and the state . 158 Political reform and social administration . 161 The crisis of 1873 and the Great Depression . 165 Depression, industrial relations and social insurance . 168 The limits of social reform . 171 7 Overaccumulation and the Limits of the Nation State 176 The national form of the capitalist state . 176 The international system of nation states . 178 The 1873 crisis, the nation state and the rise of imperialism . 182 Overaccumulation and imperialist war . 189 iii 8 War, Revolution and Depression: The Limits of Liberalism 193 The impact of war . 193 The post-war reconstruction of liberalism . 196 The reconstruction of the liberal world order . 203 The problem of the staple industries . 209 The 1929 crash and the collapse of the gold standard . 212 Money and credit in the crisis of overaccumulation . 215 9 Economists and the State: The Keynesian Revolution 221 The marginalist revolution in economics . 221 The economists and the depression of the 1920s . 226 The state and the depression of the 1930s . 229 The Keynesian Revolution . 234 The political impact of Keynesianism . 241 10 Post-War Reconstruction and The Keynesian Welfare State 244 Wartime planning and the budget . 244 Planning for post-war reconstruction . 246 Planning for a new international order . 249 The reconstruction of Anglo-American imperialism . 252 Marshall Aid and the rebuilding of Europe . 255 Planning and the budget . 259 The legacy of Labour . 263 The foundations of the post-war boom . 267 Welfare, wages and the working class . 271 Keynesianism and the boom . 275 The regulation of accumulation on a world scale . 277 The limits of liberal Keynesianism . 280 11 Keynesianism, Monetarism and the Crisis of the State 287 The brief triumph of Keynesianism . 287 The problem of productivity . 290 The rise of Keynesian interventionism . 294 The limits of Keynesian intervention . 298 The challenge to Keynesianism . 304 The turn to the market . 307 iv The class struggle and the crisis of Keynesianism . 311 The crisis of Keynesianism and the rise of monetarism . 316 The challenge of monetarism . 323 The triumph of monetarism . 329 Overaccumulation and the world crisis of Keynesianism . 341 12 Conclusion 352 Money, the market and the state . 352 The limits of monetarism . 356 The crisis of social democracy and the future of socialism 359 Index 366 Chapter 1 Introduction The challenge of monetarism Over the past decade Keynesian full employment policies have been abandoned in one country after another, to be replaced by mone- tarist policies that place a premium on price stability. The mon- etarist counter-revolution has not only abandoned the Keynesian commitment to full employment, but more fundamentally has chal- lenged the Keynesian conception of the role of the state in the regulation of capitalism, returning to the pre-Keynesian emphasis on the primary role of money and the market. How are we to understand this development, and what is its significance? Monetarists would claim that their triumph simply reflects the failure of Keynesianism and the correctness of their point of view: a new sense of realism has replaced the Keynesian fantasy of uni- versal plenty, a popular demand for freedom has arisen to challenge the tyranny of the state. Many Keynesians, by contrast, see mon- etarism as a reactionary throwback, a misguided academic theory that has been pressed by doctrinaire economists on bigoted and narrow-minded politicians. But to see monetarism as the triumph of either rationality or irrationality is to attribute too much coher- ence and too much power to theories that serve more to legitimate than to guide political practice. The ideas of monetarism are im- portant, but their importance is ideological, in giving coherence and direction to political forces which have deeper roots. The most popular explanations for the rise of monetarism look 1 2 Introduction for these roots in political developments. The triumph of mone- tarism is commonly explained by the political failures of the left, that opened the way for the populist ideology of the New Right, manifested most dramatically in the rise of `Thatcherism' and `Rea- ganism'.1 The appropriate response of the left is then supposed to be a political response, to regain the ideological initiative. The left has to develop a new politics and a new ideology, that will address the popular hopes and fears to which the New Right speaks, and rebuild a united movement that will win the hearts and minds of the people. The problem with this approach is that the rise of monetarism cannot be explained in terms of purely political developments. `Thatcherism' and `Reaganism' are only variations on a theme that has been played around the world. Moreover the rise of monetarism has not been specifically tied to the rise of the New Right. In Britain it was under a Labour government, and most particularly from 1976, that monetarist policies began to be pursued and Key- nesian objectives abandoned. Moreover the turn to monetarism under Labour did not only involve a turn to monetarist economic policies and objectives. The Callaghan government played all the New Right tunes, however off-key, attacking the trades unions, ex- tolling the virtues of the family, pandering to racism, tightening the administration of social security, stressing its commitment to `law and order', launching the `Great Debate' on education. Although in Britain Thatcher replaced Callaghan, in Southern Europe, Aus- tralia and New Zealand social democratic governments have taken it upon themselves to carry through the monetarist revolution, in the guise of a `politics of austerity', while social democratic parties around the world have capitulated to a `new realism'. Thus mon- etarist policies have been forced on governments of very different political and ideological persuasions, although policies that have in some cases been adopted only under the force of circumstances have in others been espoused enthusiastically. While social demo- cratic governments submit to the power of money in the name of realism, right-wing governments proclaim its power as that of a moral principle. These differences are important, but to stress the 1The most influential version of this explanation on the British left has been that proposed in the pages of Marxism Today, and particularly in Stuart Hall and Martin Jacques, eds. , The Politics of Thatcherism, Lawrence and Wishart, London, 1983. The challenge of monetarism 3 distinctiveness of the variations is to ignore the underlying theme. The rise of monetarism cannot be explained in terms of contin- gent political developments, in terms of personalities and political factions of the right and the left, for these developments are sys- tematic, to be observed throughout the capitalist world. These political developments express a deeper crisis, of which they are themselves a part. An alternative set of explanations looks to the economic crisis to explain the rise of monetarism, seeing monetarism as a capitalist response to the crisis. There are two very different interpretations of the significance of monetarism along these lines. The first in- terpretation rests on an identification of Keynesianism with the interests of `industrial capital' and monetarism with the interests of ‘financial capital'. Keynesian policies involve high levels of state expenditure in support of the productive sector of the economy, state intervention in financial markets to secure cheap credit for in- dustry, and demand-management to provide a growing market for industry, making possible a high and rising standard of living and of welfare provision for the mass of the population.