Tuesday, June 22, 2010

The Prevailing Theories of Capitalism

The classical understanding of capitalism is defined as a system based on a J.B.Say's Law of Markets or supply and demand in the buying and selling of goods and services. Say's Law, or the Law of Markets, is an economic proposition developed by the French businessman and economist Jean-Baptiste Say (1767–1832). Say's Law is founded on the notion that commodities are produced as a means to acquire other commodities. It states that in a market economy, goods and services are produced for exchange with other goods and services, and in the process a sufficient level of real income is created in order to purchase the economy's entire output. That is to say, the total supply of goods and services in a market economy will equal the total demand during any given time period – in modern terms, "there will never be a general glut," though there may be local imbalances, with gluts in one market balanced by shortages in others.

Adam Smith (16 June 1723 – 17 July 1790) was a Scottish moral philosopher and a pioneer of political economics. Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity, a precursor to the modern concept of opportunity cost. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[60] Other classical economists presented competing theories to those of Smith, termed the "labour theory of value".[

The significance of these two theories is the labor theory of value which today remains a significant controversial issue developed further in a third classical economist, David Ricardo, his most famous work is his Principles of Political Economy and Taxation (1817). Ricardo opens the first chapter with a statement of the labour theory of value. Later in this chapter, he demonstrates that prices do not correspond to this value. He retained the theory, however, as an approximation. The labour theory of value states that the relative price of two goods is determined by the ratio of the quantities of labor required in their production. His labour theory of value, however, required several assumptions: 1- both sectors have the same wage rate and the same profit rate; 2- the capital employed in production is made up of wages only; 3- the period of production has the same length for both goods. Ricardo himself realized that the second and third assumptions were quite unrealistic and hence admitted two exceptions to his labor theory of value: 1- production periods may differ; 2- the two production processes may employ instruments and equipment as capital and not just wages, and in very different proportions.

The last of the line of great classical economists and philosophers of the 19th century to have developed the labor theory of value is Karl Marx. Marx argued that this alienation of human work (and resulting commodity fetishism) functions precisely as the defining feature of capitalism. Prior to capitalism, markets existed in Europe where producers and merchants bought and sold commodities. According to Marx, a capitalist mode of production developed in Europe when labor itself became a commodity—when peasants became free to sell their own labor-power, and needed to do so because they no longer possessed their own land. People sell their labor-power when they accept compensation in return for whatever work they do in a given period of time (in other words, they do not sell the product of their labor, but their capacity to work). In return for selling their labor-power they receive money, which allows them to survive. Those who must sell their labor-power are "proletarians". The person who buys the labor power, generally someone who does own the land and technology to produce, is a "capitalist" or "bourgeois". The proletarians inevitably outnumber the capitalists.Capitalism can stimulate considerable growth because the capitalist can, and has an incentive to, reinvest profits in new technologies and capital equipment. Marx considered the capitalist class to be the most revolutionary in history, because it constantly improved the means of production. But Marx argued that capitalism was prone to periodic crises. He suggested that over time, capitalists would invest more and more in new technologies, and less and less in labor. Since Marx believed that surplus value appropriated from labor is the source of profits, he concluded that the rate of profit would fall even as the economy grew. When the rate of profit falls below a certain point, the result would be a recession or depression in which certain sectors of the economy would collapse. Marx thought that during such an economic crisis the price of labor would also fall, and eventually make possible the investment in new technologies and the growth of new sectors of the economy.

Marx believed that increasingly severe crises would punctuate this cycle of growth, collapse, and more growth. Moreover, he believed that in the long-term this process would necessarily enrich and empower the capitalist class and impoverish the proletariat. He believed that if the proletariat were to seize the means of production, they would encourage social relations that would benefit everyone equally, and a system of production less vulnerable to periodic crises. He theorized that between capitalism and the establishment of a socialist system, a dictatorship of the proletariat—a period where the working class holds political power and forcibly socializes the means of production—would exist. As he wrote in his "Critique of the Gotha Program", "between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat." While he allowed for the possibility of peaceful transition in some countries with strong democratic institutional structures (such as Britain, the US and the Netherlands), he suggested that in other countries with strong centralized state-oriented traditions, like France and Germany, the "lever of our revolution must be force."

The Versailles peace conference
Main article: Heavenly Twins (Sumner and Cunliffe)
Keynes's friend Lloyd George. Keynes was initially wary of the "Welsh Wizard," preferring his rival Asquith, but was impressed with Lloyd George at Versailles; this did not prevent Keynes painting a scathing picture of the then-Prime Minister in his Economic Consequences of the Peace.

Keynes's experience at Versailles was influential in shaping his future outlook, yet it was not a successful one for him. Keynes's main interest had been in trying to prevent Germany's compensation payments being set so high it would traumatize innocent German people, damage the nation's ability to pay and sharply limit her ability to buy exports from other countries — thus hurting not just Germany's own economy but that of the wider world. Unfortunately for Keynes, conservative powers in the coalition that emerged from the 1918 coupon election were able to ensure both Keynes himself and the Treasury were largely excluded from formal high-level talks concerning reparations. Their place was taken by the Heavenly Twins - the Judge Lord Sumner and the Banker Lord Cunliffe whose nickname derived from the "astronomically" high war compensation they wanted to demand from Germany. Keynes was forced to try to exert influence mostly from behind the scenes.

The three principal players at Versailles were Britain's Lloyd George, France's Clemenceau and America's President Wilson. It was only Lloyd George to whom Keynes had much direct access; until the 1918 election he had some sympathy with Keynes's view but while campaigning had found his speeches were only well-received by the public if he promised to harshly punish Germany, and had therefore committed to extracting high payments. Lloyd George did however win some loyalty from Keynes with his actions at the Paris conference by intervening against the French to ensure the dispatch of much-needed food supplies to German civilians. Clemenceau also pushed for high reparations; generally France argued for an even more severe settlement than Britain. Wilson initially favored relatively lenient treatment of Germany – he feared too harsh conditions could foment the rise of extremism, and wanted Germany to be left sufficient capital to pay for imports. To Keynes's dismay, Lloyd George and Clemenceau were able to pressure Wilson to agree to very high repayments being imposed. Towards the end of the conference, Keynes came up with a plan that he argued would not only help Germany and other impoverished central European powers but also be good for the world economy as a whole. It involved the writing down of war debts which would have the effect of increasing international trade all round. Lloyd George agreed it might be acceptable to the British electorate. However America was against it, the US then being the largest creditor and by this time Wilson had started to believe in the merits of a harsh peace as a warning to future aggressors. So despite his best efforts, the end result of the conference was a treaty which disgusted Keynes both on moral and economic grounds, and led to his resignation from the Treasury.

Keynes's analysis on the predicted damaging effects of the treaty appeared in the highly influential book, The Economic Consequences of the Peace, published in 1919. This work has been described as Keynes's best book, where he was able to bring all his gifts to bear — his passion as well as his skill as an economist. In addition to economic analysis, the book contained pleas to the reader's sense of compassion:

"I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,--abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe."

Also present was striking imagery such as "...that year by year Germany must be kept impoverished and her children starved and crippled..." along with bold predictions which were later justified by events:

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.

Keynes's predictions of disaster were borne out when the German economy suffered the hyperinflation of 1923, and again by the collapse of the Weimar Republic and the outbreak of World War II. Only a fraction of reparations were ever paid. The Economic Consequences of the Peace gained Keynes international fame, but also caused him to be regarded as anti-establishment – it was not until after the outbreak of World War II that Keynes was offered a directorship of a major British Bank, or an acceptable offer to return to government with a formal job. Keynes was still able to influence policy making however – through his network of contacts, his published works and by serving on government committees, including attending high-level policy meetings as a consultant.

In the 1920s Keynes argued against a return to the gold standard after the war.

Keynes had completed his Treatise on Probability before the war, but published it in 1921. The work was a notable contribution to the philosophical and mathematical underpinnings of probability theory, championing the important view that probabilities were no more or less than truth values intermediate between simple truth and falsity. Keynes developed the first upper-lower probabilistic interval approach to probability in chapters 15 and 17 of this book, as well as having developed the first decision weight approach with his conventional coefficient of risk and weight, c, in chapter 26. In addition to his academic work, the 1920s saw Keynes active as a journalist selling his work internationally and working in London as a financial consultant. In 1924 Keynes wrote an obituary for his former tutor Alfred Marshall which Joseph Schumpeter called "the most brilliant life of a man of science I have ever read." Marshall's widow was "entranced" by the memorial, while Lytton Strachey rated it as one of Keynes's "best works".

In 1922 Keynes continued to advocate reduction of German reparations with A Revision of the Treaty. He attacked the post World War I deflation policies with A Tract on Monetary Reform in 1923 – a trenchant argument that countries should target stability of domestic prices, avoiding deflation even at the cost of allowing their currency to depreciate. The 1920s saw high unemployment in Britain even before the outbreak of the Great Depression — in addition to advocating depreciating the currency as a way to boost jobs by making British exports more affordable, Keynes was from 1924 to start recommending a fiscal response to unemployment by means of government spending on public works. During the 20's Keynes' pro stimulus views had only limited effect on policy makers and mainstream academic opinion — according to Minsky one reason was that at this time his theoretical justification was "muddled". The Tract had also called for an end to the gold standard. Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard, as it ran counter to the need for domestic policy autonomy. It could force countries to pursue deflationary policies at exactly the time when expansionary measures were called for to address rising unemployment. The Treasury and Bank of England were still in favor of the gold standard and in 1925 they were able to convince the then Chancellor Winston Churchill to re-establish it, which had a depressing effect on British industry. Keynes responded by writing The Economic Consequences of Mr. Churchill and continued to argue against the gold standard until Britain finally abandoned it in 1931.

During the Great Depression

Keynes had begun a theoretical work to examine the relationship between unemployment, money and prices back in the 1920s. The work, Treatise on Money, was published in 1930 in two volumes. A central idea of the work was that if the amount of money being saved exceeds the amount being invested – which can happen if interest rates are too high – then unemployment will rise. This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit. At the height of the Great Depression, in 1933, Keynes published The Means to Prosperity, which contained specific policy recommendations for tackling unemployment in a global recession, chiefly counter cyclical public spending. The Means to Prosperity contains one of the first mentions of the multiplier effect. While it was addressed chiefly to the British Government, it also contained advice for other nations affected by the global recession. A copy was sent to the newly elected President Roosevelt and other world leaders. The work was taken seriously by both the American and British governments, and according to Skidelsky, helped pave the way for the later acceptance of Keynesian ideas, though it had little immediate practical influence. In the 1933 London Economic Conference opinions remained too diverse for a unified course of action to be agreed upon.

The Great Depression with its periods of world wide economic hardship formed the backdrop against which Keynes's revolution took place. The image is Dorothea Lange's Migrant Mother depiction of destitute pea-pickers in California, taken in March 1936.

Keynesian-like policies were adopted by Sweden and Germany, but Sweden was seen as too small to command much attention, and Keynes was deliberately silent about the successful efforts of Germany as he was dismayed by their imperialist ambitions and their treatment of Jews. Apart from Great Britain, Keynes attention was primarily focused on the United States. In 1931, he received considerable support for his views on counter-cyclical public spending in Chicago, then America's foremost center for economic views alternative to the mainstream. However, orthodox economic opinion remained generally hostile regarding fiscal intervention to mitigate the depression, until just before the outbreak of war. In late 1933 Keynes was persuaded by Felix Frankfurter to address President Roosevelt directly, which he did by letters and face to face in 1934, after which the two men spoke highly of each other. However according to Skidelsky, the consensus is that Keynes's efforts only began to have a more than marginal influence on US economic policy after 1939.

Keynes's magnum opus, the General Theory of Employment, Interest and Money was published in 1936. It was researched and indexed by one of Keynes's favourite students, later the economist David Bensusan-Butt. The work served as a theoretical justification for the interventionist policies Keynes favored for tackling a recession. The General Theory challenged the earlier neo-classical economic paradigm, which had held that provided it was unfettered by government interference, the market would naturally establish full employment equilibrium. In doing so Keynes was partly setting himself against his former teachers Marshal and Pigou. Keynes believed the classical theory was a "special case" that applied only to the particular conditions present in the 19th century, his own theory being the general one. Classical economists had believed in Say's Law, which, simply put, states that "supply creates its own demand", and that in a free market workers would always be willing to lower their wages to a level where employers could profitably offer them jobs. An innovation from Keynes was the concept of price stickiness – the recognition that in reality workers often refuse to lower their wage demands even in cases where a classical economist might argue it is rational for them to do so. Due in part to price stickiness, it was established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria – and in those cases, it is the state, and not the market, that economies must depend on for their salvation.

The General Theory argues that demand, not supply, is the key variable governing the overall level of economic activity. Aggregate demand, which equals total un-hoarded income in a society, is defined by the sum of consumption and investment. In a state of unemployment and unused production capacity, one can only enhance employment and total income by first increasing expenditures for either consumption or investment. Without government intervention to increase expenditure, an economy can remain trapped in a low employment equilibrium – the demonstration of this possibility has been described as the revolutionary formal achievement of the work. The book advocated activist economic policy by government to stimulate demand in times of high unemployment, for example by spending on public works. The General Theory is often viewed as the foundation of modern macroeconomics. Historians agree that Keynes influenced U.S. president Roosevelt's New Deal, but disagree as to what extent. Deficit spending of the sort the New Deal began in 1938 had previously been called "pump priming" and had been endorsed by President Herbert Hoover. Few senior American economists agreed with Keynes through most of the 1930s. Yet his ideas were soon to achieve widespread acceptance, with eminent American professors such as Alvin Hansen agreeing with the General Theory before the outbreak of World War II.

Keynes's himself had only limited participation in the theoretical debates that followed the publication of the General Theory as he suffered a heart attack in 1937, requiring him to take long periods of rest. Hyman Minsky and other post-Keynesian economists have argued that as result of this, Keynes's ideas were diluted by those keen to compromise with classical economists or to render his concepts with mathematical models like the IS/LM model (which they argue, distort Keynes's ideas). Keynes began to recover in 1939, but for the rest of his life his professional energies were largely directed towards the practical side of economics – the problems of ensuring optimum allocation of resources for the War efforts, post-War negotiations with America, and the new international financial order that was presented at Bretton Woods, New Hampshire.

During World War II, Keynes argued in How to Pay for the War, published in 1940, that the war effort should be largely financed by higher taxation and especially by compulsory saving (essentially workers loaning money to the government), rather than deficit spending, in order to avoid inflation. Compulsory saving would act to dampen domestic demand, assist in channeling additional output towards the war efforts, would be fairer than punitive taxation and would have the advantage of helping to avoid a post war slump by boosting demand once workers were allowed to withdraw their savings. In September 1941 he was proposed to fill a vacancy in the Court of Directors of the Bank of England, and subsequently carried out a full term from the following April. In June 1942, Keynes was rewarded for his service with an hereditary peerage in the King's Birthday Honors. On 7 July his title was gazetted as Baron Keynes, of Tilton in the County of Sussex, and he took his seat in the House of Lords on the Liberal Party benches. As Allied victory began to look certain, Keynes was heavily involved, as leader of the British delegation and chairman of the World Bank commission, in the mid-1944 negotiations that established the Bretton Woods system. The Keynes-plan, concerning an international clearing-union argued for a radical system for the management of currencies. He proposed the creation of a common world unit of currency, the Bancor and of new global institutions — a world central bank and the International Clearing Union. Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the less radical plans of Harry Dexter White. According to US economist Brad Delong, on almost every point where he was overruled by the Americans, Keynes was later proved correct by events.

The two new institutions, later known as the World Bank and IMF, were founded as a compromise that primarily reflected the American vision. There would be no incentives for states to avoid a large trade surplus, instead the burden for correcting a trade imbalance would continue to fall just on the deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations. Yet Keynes was still pleased when accepting the final agreement, saying that if the institutions stayed true to their founding principles, "the brotherhood of man will have become more than a phrase."

After the war, Keynes led British negotiations with the Federal Reserve on the Anglo-American loan after the termination of lend-lease agreement in August 1945.

Legacy:

The Keynesian ascendancy 1939–1979
Main article: Keynesian Revolution

From the end of the Great Depression to the mid-1970s, Keynes provided the main inspiration for economic policy makers in Europe, America and much of the rest of the world. While economists and policy makers had become increasingly won over to Keynes's way of thinking in the mid and late 1930s, it was only after the outbreak of World War II that governments started to borrow money for spending on a scale sufficient to eliminate unemployment. According to economist John Kenneth Galbraith, then a US government official charged with controlling inflation, in the rebound of the economy from wartime spending, "one could not have had a better demonstration of the Keynesian ideas."

The Keynesian Revolution was associated with the rise of modern liberalism in the West during the post-war period. Keynesian ideas became so popular that some scholars point to Keynes as representing the ideals of modern liberalism, like Adam Smith represented the ideals of classical liberalism. After the war Winston Churchill attempted to check the rise of Keynesian policy making in Great Britain, and used rhetoric critical of the mixed economy in his 1945 election campaign. Despite his popularity as a war hero Churchill suffered a landslide defeat to Clement Attlee whose government's economic policy continued to be influenced by Keynes's ideas.

Neo-Keynesian economics

The IS-LM Model is used to analyze the effect of demand shocks on the economy.

In the late 1930s and 1940s, economists (notably John Hicks, Franco Modigliani, and Paul Samuelson), attempted to interpret and formalize Keynes' writings in terms of formal mathematical models. In a process termed "the neoclassical synthesis", they combined Keynesian analysis with neo-classical economics to produce Neo-Keynesian economics, which came to dominate mainstream macroeconomic thought for the next 40 years.

By the 1950s, Keynesian policies were adopted by almost the entire developed world and similar measures for a mixed economy were used by many developing nations. By then, Keynes's views on the economy had become mainstream in the world's universities. Throughout the 1950s and 1960s, the developed and emerging free capitalist economies enjoyed exceptionally high growth and low unemployment. [39] [40] Professor Gordon Fletcher has written that the fifties and sixties, when Keynes' influence was at its peak, appear in retrospect as a Golden Age of Capitalism.

In late 1965 Time magazine ran a cover article with the title inspired by a possibly tongue-in-cheek comment from Milton Friedman, a comment later echoed by U.S. President Richard Nixon, that "We are all Keynesians now". The article described the exceptionally favorable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists who ever lived, and that his General Theory was more influential than the magnus opus of other famous economists, like Smith's The Wealth of Nations and Karl Marx's Das Kapital.

Economics: out of favor 1979–2007
Main article: Post-war displacement of Keynesianism

Keynesian economics were officially discarded by the British Government in 1979, but forces had begun to gather against Keynes's ideas over 30 years earlier. Friedrich von Hayek had formed the Mont Pelerin Society in 1947, with the explicit intention of nurturing intellectual currents to one day displace Keynesianism and other collectivist influences. Its members included Austrian School founder Ludwig von Mises along with the then young Milton Friedman. Initially the society had little impact on the wider world — Hayek was to say it was as if Keynes had been raised to sainthood after his death and that people refused to allow his work to be questioned. Friedman however began to emerge as a formidable critic of Keynesian economics from the mid 1950s, and especially after his 1963 publication of A Monetary History of the United States. Milton Friedman was a leading critic of Keynesian economics. His ideas rose to prominence in the 1970s.

On the practical side of economic life, big government had appeared to be firmly entrenched in the 1950s but the balance began to shift towards private power in the sixties. Keynes had written against the folly of allowing "decadent and selfish" speculators and financiers the kind of influence they had enjoyed after World War I. For two decades after World War II public opinion was strongly against private speculators, the disparaging label Gnomes of Zürich being typical of how they were described during this period. International speculation was severely restricted by the capital controls in place after Bretton Woods. Journalists Larry Elliott and Dan Atkinson say 1968 was a pivotal year when power shifted in the favor of private agents such as currency speculators. They pick out a key 1968 event as being when America suspended the conversion of the dollar into gold except on request of foreign governments, which they identify as when the Bretton Woods system first began to break down.

Intellectually, attacks against Keynes's ideas had begun to gain significant acceptance from the early 1970s as they were able to make a credible case that Keynesian models no longer reflected economic reality. Keynes himself had included few formula and no explicit mathematical models in his General Theory. For commentators such as economist Hyman Minsky, Keynes's limited use of mathematics was partly the result of his skepticism about whether phenomena as inherently uncertain as economic activity could ever be adequately captured by mathematical models. Nevertheless, many models were developed by Keynesian economists, with a famous example being the Phillips curve which predicted an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus with a calculable cost to inflation. In 1968 Milton Friedman published a paper arguing that the fixed relationship implied by the Philips curve did not exist. Friedman suggested that sustained Keynesian policies could lead to both unemployment and inflation rising at once—a phenomenon that soon became known as stagflation. In the early 1970s stagflation appeared in both the US and Britain just as Friedman had predicted, with economic conditions deteriorating further after the 1973 oil crisis. Aided by the prestige gained from his successful forecast, Friedman led increasingly successful attacks against the Keynesian consensus, convincing not only academics and politicians but also much of the general public with his radio and television broadcasts. The academic credibility of Keynesian economics was further undermined by additional criticism from other Monetarists trained in the Chicago school of economics, by the Lucas Critique and by attacks from Hayek's Austrian School. So successful were these attacks that by 1980 Robert Lucas was saying economists would often take offense if described as Keynesians. Keynesian principles fared increasingly poorly on the practical side of economics—by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy. However many officials on both sides of the Atlantic retained a preference for Keynes, and in 1984 the Federal Reserve officially discarded monetarism, after which Keynesian principles made a partial comeback as an influence on policy making. Not all academics accepted the criticism against Keynes—Minsky has argued that Keynesian economics had been debased by excessive mixing with neo-classical ideas from the 1950s, and that it was unfortunate the branch of economics had even continued to be called "Keynesian". The American Prospect have argued it was not so much excessive Keynesian activism that caused the economic problems of the 1970s but the breakdown of the Bretton Woods system of capital controls, which allowed capital flight from countries the markets viewed as excessively Keynesian or socially progressive. Historian Peter Pugh has stated a key cause of the economic problems afflicting America in 1970s was the refusal to raise taxes to finance the Vietnam War , which was against Keynesian advice.

A more typical response was to accept some elements of the criticisms while refining Keynesian economic theories to defend them against arguments that would invalidate the whole Keynesian framework—the resulting body of work largely composing New Keynesian economics. In 1992 Alan Blinder was writing about a "Keynesian Restoration" as work based on Keynes's ideas had to some extent became fashionable once again in academia, though in the mainstream it was highly synthesized with Monetarism and other neo-classical thinking. In the world of policy making, free-market influences broadly sympathetic to Monetarism remained very strong at government level—in powerful normative institutions like the World Bank, IMF and US Treasury, and in prominent opinion-forming media such as the Financial Times and the Economist.

The Keynesian resurgence of 2008–2009:

Economist and current prime Minister of India Manmohan Singh spoke in favor of Keynesian fiscal stimuli at the 2008 G-20 Washington summit
Main article: 2008–2009 Keynesian resurgence

The Financial crisis of 2007–2010 led to public skepticism about the free market consensus even from some on the economic right. In March 2008, Martin Wolf, chief economics commentator at the Financial Times, announced the death of the dream of global free-market capitalism. In the same month macroeconomist James K. Galbraith used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises. Economist Robert Shiller had begun advocating robust government intervention to tackle the financial crises, specifically citing Keynes. Nobel laureate Paul Krugman also actively argued the case for vigorous Keynesian intervention in the economy in his columns for the New York Times. Other prominent economists arguing for Keynesian government intervention to mitigate the financial crisis include George Akerlof, Brad Delong, Robert Reich, and Joseph Stiglitz. Newspapers and other media have also cited work relating to Keynes by Hyman Minsky, Robert Skidelsky, Donald Markwell and Axel Leijonhufvud.

A series of major bail-outs were pursued during the financial crisis, starting on 7 September with the announcement that the U.S. government was to nationalize the two government-sponsored enterprises which oversaw most of the U.S. subprime mortgage market—Fannie Mae and Freddie Mac. In October, the British Chancellor of the Exchequer referred to Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in accordance with Keynesian economic thought. Similar policies have been adopted by other governments worldwide. This is in stark contrast to the action permitted to Indonesia during its financial crisis of 1997, when it was forced by the IMF to close 16 banks at the same time, prompting a bank run. Much of the recent discussion reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the International Monetary Fund and the World Bank, which many had argued should be reformed at a "new Bretton Woods" even before the crises broke out. IMF and United Nations economists advocated a coordinated international approach to fiscal stimulus. Donald Markwel argued that in the absence of such an international approach, there would be a risk of worsening international relations and possibly even world war arising from similar economic factors to those present during the depression of the 1930s.

By the end of December 2008, the Financial Times reported that "the sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades" In December 2008, Paul Krugman released his book, The Return of Depression Economics and the Crisis of 2008, arguing that economic conditions similar to that which existed during the earlier part of the century had returned, making Keynesian policy prescriptions more relevant than ever. In February 2009 Shiller and George Akerlof published Animal Spirits, a book where they argue the current US stimulus package is too small as it does not take into account Keynes's insight on the importance of confidence and expectations in determining the future behavior of businessmen and other economic agents.

In a March 2009 speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China came out in favor of Keynes's idea of a centrally managed global reserve currency. Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's Bancor. Zhou proposed a gradual move towards increased used of IMF Special Drawing Rights (SDRs). Although Zhou's ideas have not yet been broadly accepted, leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 Billion of Special Drawing Rights to be created by the IMF, to be distributed globally. Stimulus plans have been credited for contributing to a better than expected economic outlook by both the OECD and the IMF, in reports published in June and July 2009. Both organizations warned global leaders that recovery is likely to be slow, so counter recessionary measures ought not be rolled back too early.

While the need for stimulus measures has been broadly accepted among policy makers, there has been much debate over how to fund the spending. Some leaders and institutions such as Angela Merkel and the European Central Bank have expressed concern over the potential impact on inflation, national debt and the risk that a too large stimulus will create an unsustainable recovery. Among professional economists the revival of Keynesian economics has been even more divisive with over 300 economists signing a petition stating that they do not believe higher government spending will help the United States's economy and some senior figures such as Robert Lucas remaining skeptical whether stimulus packages can work at all.

Source: Wikipedia

Commentary to follow.

The Historical Record

The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, and transport had a profound effect on the socioeconomic and cultural conditions starting in the United Kingdom, then subsequently spreading throughout Europe, North America, and eventually the world.  The railroad was the child of the Industrial Revolution. The onset of the Industrial Revolution marked a major turning point in human history; almost every aspect of daily life was eventually influenced in some way. In 1834, President Andrew Jackson’s political world of his time during the Britain’s extension of markets through the Opium War with China was a boom and bust period for the American economy. Jackson distrusted banks, especially the Second Bank of the United States for printing worthless paper money in the economy. The Second Bank of the United States was authorized for a twenty year period during James Madison's tenure in 1816. As President, Jackson worked to rescind the bank's federal charter. In Jackson's veto message (written by George Bancroft), the bank needed to be abolished because: It concentrated the nation's financial strength in a single institution.It exposed the government to control by foreign interests.The spirit of Jacksonian Democracy animated the party from the early 1830s to the 1850s, shaping the Second Party System, with the Whig Party the main opposition. After the disappearance of the Federalists by 1820, there was a hiatus of weakly organized personal factions until about 1828-32, when the modern Democratic Party emerged along with its rival the new Whig Party. The new Democratic Party became a coalition of farmers, city-dwelling laborers, and Irish Catholics. It was weakest in New England, but strong everywhere else and won most national elections thanks to strength in New York, Pennsylvania, Virginia; (by far, the most populous states at the time), and the frontier. Democrats opposed elites and aristocrats, the Bank of the United States, and the whiggish modernizing programs that would build up industry at the expense of the yeoman or independent small farmer.At the same time, the history of rail transport in Great Britain 1830 - 1922  which covers the period between the opening of the Liverpool and Manchester Railway (L&MR), and the Grouping, the amalgamation of almost all of Britain's many railway companies into the Big Four by the Railways Act 1921. This coincides with the development of rail all over the globe that the 1700’s the world of Adam Smith was no longer at once much smaller and much larger than ours today. As populations using rail would become more increasingly mobile the mainstream dependence on maritime trade and transport was gone.

The sciences in every field were developed during the Industrial Revolution, the revolutions in the economy were companioned with the revolutions of thinking, perspectives and methodology took science out of the realm of alchemy and into the light of Nature’s physical world placing human societies at the center of a new power of harnessing natural forces. The Victorian society quintessentially identified with the Industrial Revolution became the model for countries undergoing the development of an industrial revolution. The path toward a bourgeois society and its customs and institutions of the Victorian age adopted the free movement of people to cities by rail connecting continents as had never before.

Slavery and serfdom formed the greater part of the type of work still being done for commercial trade in the Victorian age. Slavery was not abolished in England until 1834 and in 1865 for the US, in 1835 it took one year for Belgium and Western Europe to be connected by rail shows the raid pace of change in this period. A steady flow of destitute and impoverished hubs of immigrants concentrated in the work houses of England’s Manchester factories ubiquitously named; ‘Workshop of the World”, these factories were dependent on the cotton grown of the southern states of the US. The Southern Cotton plantations would produce for markets the British Navy secured for the Manchester capitalists was the set up. It is not unreasonable to assume that if markets were successfully generated by the British Navy the deleterious effect of a cotton famine on the working class of the northern states of the US population will persist. Cotton for the Northern US made it possible to finance a Civil War against the South was the catalytic event of the age eventually the chief cause for the outbreak of the Civil War.The Poor Laws of England made it a crime to be poor helped to give rise to the Chartist movement, as an anti-establishment movement with the following program for action:

1. A vote for every man twenty-one years of age, of sound mind, and not undergoing punishment for crime.
2. To protect the elector in the exercise of his vote.

3. No property qualification for members of Parliament - thus enabling the constituencies to return the man of their choice, be he rich or poor.

4. Payment of members, thus enabling an honest tradesman, working man, or other person, to serve a constituency, when taken from his business to attend to the interests of the Country.

5. Equal Constituencies, securing the same amount of representation for the same number of electors, instead of allowing small constituencies to swamp the votes of large ones.

6. Annual parliaments, thus presenting the most effectual check to bribery and intimidation, since though a constituency might be bought once in seven years (even with the ballot), no purse could buy a constituency (under a system of universal suffrage) in each ensuing twelve-month; and since members, when elected for a year only, would not be able to defy and betray their constituents as now.

The cotton famine in the northern states of the Union helped to enlist the working classes in the war.

The Corn Laws imposed high duties on imports of important grain, these protective tariffs brought down the national average for a living wage. The Corn Laws favored landlords because they were able to sell grain without the importation of grain from the competition. This increased profits for large scales farmers of grain who were not inclined to increase the rate of pay for labor.

The Panic of 1837 was a financial crisis in the United States built on a speculative fever.  The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in specie  (gold and silver coinage). The Panic was followed by a five-year depression, with the failure of banks and record-high unemployment levels. Crisis and the general wage reductions led to widespread impoverishment of the English Working Class.

The Panic of 1847 was started as a collapse of British financial markets associated with the end of the 1840s railroad boom. The Bank of England had to request a suspension of the Bank Charter Act to end the crisis. It was caused by excessive monetary inflation due to the Bank of England and fractional reserve banking.The panic of 1847 cleared away a vast number of unsound business houses, and trade generally became much more sound and healthy; this lasted until the year 1855.

A cotton famine breaks out because the American Civil War reduced the mass of product. This had the effect of lowering the price wage of the Working Class. The Civil War in America ends.

The American industrial revolution gets off the ground with the close of the Civil War. But the Panic of 1873 or Depression of 1873 marked a severe international economic depression in Europe and United States that lasted until 1879, and even longer in some countries. It began with financial failures in Vienna (capital of Austria–Hungary then) that spread to most of Europe and overextended American banking in late 1873. It was one of a series of economic crises in the 19th and early 20th centuries. In Britain, the result was two decades of stagnation known as the "Long Depression," during which Britain lost its world economic leadership. In the U.S. literature this global event is usually known as "Panic of 1873", while in the European is known as Long Depression or Great Depression.

The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was caused by railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value. The Gold Standard Act officially placed the United States on the gold standard and the abolition of slave states in the Union. The Philippine–American War, also known as the Philippine War of Independence or the Philippine Insurrection (1899–1902), was an armed military conflict between the Philippines and the United States which arose from the struggle of the First Philippine Republic to gain independence following annexation by the United States.The war was part of a series of conflicts in the Philippine struggle for independence, preceded by the Philippine Revolution and the Spanish-American War.

The Russian Revolution was the first wave of mass political unrest through vast areas of the Russian Empire. Some of it was directed against the government, while some was undirected. It included terrorism, worker strikes, peasant unrest, and military mutinies. It led to the establishment of the limited constitutional monarchy, the State Duma of the Russian Empire, the multi-party system and the Russian Constitution of 1906.

A financial panic began as the stock market began to fall. The market reached a low point on November 15, 1907 when the average was 39% lower than on March 13. The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.

World War I was a military conflict that lasted from 1914 to 1918 and involved most of the world's great powers, assembled in two opposing alliances: the Allies (centered around the Triple Entente) and the Central Powers. More than 70 million military personnel, including 60 million Europeans, were mobilized in one of the largest wars in history. More than 15 million people were killed, making it one of the deadliest conflicts in history. The war is also known as the First World War, the Great War, the World War (prior to the outbreak of World War II), the War to End All Wars, or an imperialist war of nation-states.

The Russian Revolution is the collective term for the series of revolutions in Russia in 1917, which destroyed the Tsarist autocracy and led to the creation of the Soviet Union. In the first revolution of February 1917 (March in the Gregorian calendar), the Tsar was deposed and replaced by a Provisional government. In the second revolution, during October, the Provisional Government was removed and replaced with a Bolshevik (Communist) government.

The Wall Street Crash of 1929 (October 1929), also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout. The crash began a 10-year economic slump that affected all the Western industrialized countries.

World War II, or the Second World War, was a global military conflict; lasting from 1939 to 1945 which involved most of the world's nations, including all of the great powers, organized into two opposing military alliances: the Allies and the Axis. It was the most widespread war in history, with more than 100 million military personnel mobilized. In a state of "total war," the major participants placed their entire economic, industrial, and scientific capabilities at the service of the war effort, erasing the distinction between civilian and military resources. Marked by significant action against civilians, including the Holocaust and the only use of nuclear weapons in warfare, it was the deadliest conflict in human history with over seventy million casualties.

The Chinese Civil War was a civil war fought between the Kuomintang (KMT or Chinese Nationalist Party), the governing party of the Republic of China and the Communist Party of China (CPC). The war began in April 1927, amidst the Northern Expedition. The war represented an ideological split between the Western-supported Nationalist KMT, and the Soviet-supported Communist CPC. In the People's Republic of China, the war is more commonly known as the "War of Liberation".Wage and salary controls that were instituted during World War II were ended by Executive Order 9801.

The Cuban Revolution and the Korean War: The Cuban revolution began when poorly armed rebels attacked the Moncada Barracks in Santiago and the barracks in Bayamo on 26 July 1953. The exact number of rebels killed is debatable, however in his autobiography, Fidel Castro claims that five were killed in the fighting, and an additional fifty-six were killed later by the Batista regime.Among the dead was Abel Santamaría, second-in-command of the assault on the Moncada Barracks, who was imprisoned, tortured, and executed the same day of the attack. The survivors, among them Fidel Castro and his brother Raúl Castro Ruz, were captured shortly afterwards. In a highly political trial, Fidel Castro spoke for nearly four hours in his defense, ending with the words; "Condemn me, it does not matter. History will absolve me." Fidel Castro was sentenced to 15 years in the presidio modelo prison, located on Isla de Pinos; Raúl was sentenced to 13 years.

The Korean War (1950–53) was a military conflict between the Republic of Korea, supported by the United Nations, and the Democratic People's Republic of Korea and People's Republic of China (PRC), with air support from the Soviet Union. The war began on 25 June 1950 and an armistice was signed on 27 July 1953. The war was a result of the political division of Korea by agreement of the victorious Allies at the conclusion of the Pacific War. The Korean peninsula had been ruled by Japan prior to the end of the war. In 1945, following the surrender of Japan, American administrators divided the peninsula along the 38th parallel, with United States troops occupying the southern part and Soviet troops occupying the northern part.  The failure to hold free elections throughout the Korean Peninsula in 1948 deepened the division between the two sides, and the North established a Communist government. The 38th Parallel increasingly became a political border between the two Koreas. Although reunification negotiations continued in the months preceding the war, tension intensified. Cross-border skirmishes and raids at the 38th Parallel persisted. The situation escalated into open warfare when North Korean forces invaded South Korea on 25 June 1950. It was the first significant armed conflict of the Cold War.The four minute mile is broken by Britain's Roger Bannister.

Long period of expansion in the economy defies previous theories of short term business cycles.

The Vietnam War and a 9 year period of recession in the American economy runs the course of the full length of the Vietnam War. The Vietnam War ends in 1974.

A ten year period of economic growth and the end of the Cold War marks the rise of the Evangelical Religious Right with the election of Ronald Reagan in 1980.
The American Gulf War. Increasing misery, poverty and material deprivation of the American Working Class through the extension of debt.

The US Fair Trade Act and the Gulf War produces an oil glut with the effect of sinking wages and, 9/11, a catalytic event marking the passage of the US Patriot Act by Congress ushers in a new conflict between the Islamic world and the West.
The US invasion of Iraq and the collapse of the housing market and the global financial system is precipitated by the extension of credit markets and the housing bust.

The Boran Class Struggle

Employed working people who do not have the time to follow how senatorial behavior is being played out in Congress are concerned with their jobs and livelihood. It would be fair to say they want resolution from their representatives more than they are concerned about ideological battles. It would also be fair to say that employed and non employed working people are unaware of the far reaching consequences of disenfranchisement from the political process, that to ensure their interests in the policies developed in Washington are not detrimental to their interests, that political action groups who pressure politicians do not design Laws to serve the interests of one group over another. It would be fair to say that working people are above ignorance and derision. That hindsight of the Reagan, Bush-Bush policies of the last thirty years is 20/20 have been one sided and, at this point to help the Democrats to push Bills curtailing corporate abuses which serve to disenfranchise organizations and unions fighting for them in Congress, working people need to take it to the streets in massive numbers! U.S. Bureau Labor

Statistics published on March 23, 2010:
In February, employers took 1,570 mass layoff actions involving 155,718 workers. The number of mass layoff events fell by 191 from the prior month; the number of associated initial claims decreased by 26,543. Manufacturing events and initial claims declined to their lowest levels since August 2007 is illusory of the reality. The shedding of workers since the financial meltdown appears to have fallen to levels satisfactory to corporations for the functioning of the economy but not for working families and communities. The loss of incomes represented in the lack of employment depresses communities and breeds crime destroying the fabric of communities in urban and suburban life. Town and municipal budgets get stressed and suburban every under the compelling drive for corporate sovereignty and profit accumulation. As the number of workers who have been laid off or fired increases the problem of social cohesion and order are too large for the society to handle presents a glaring failure of Congress to induce investment to put America to work, produce and function!

A fundamental problem arising from a conflict of from industries of non-strategic importance to the whole of the economy either gave up looking, or exhausted the dole, or found jobs for less pay, thereby, taking up two jobs or more hurled from one labor market to another. For these workers and families the republicans or democrats who stall or fail to extend UI and Cobra benefits before this April recess goes into effect demonstrated the political maneuvering on both sides over the economic downturn’s impact on working families.

These statistics do not track or identify and include struggles of working people that are embroiled in worker-employer conflicts and one of the first signs of the class struggles centered on the global economy in the American scene to pressure wages and earnings downward and remain competitive in the world market is in mining. Mine workers are the quintessential proletariat in extractive industries and if there are strikes or lock outs by one side or the other, the documentation of the event outside of journalism.

Rio Tintos, a global goliath is a producer of raw material. i.e., key products;including: alumina, aluminum and bauxite, borates, coal, copper, diamonds, gold and silver, gypsum, iron ore, molybdenum, salt, sulphuric acid, talc, titanium dioxide, uranium and other products. Rio Tinto's activities span the world in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa. The global competition induced Borax to reach a decision to lock employees blaming five months of union representatives damaging the business and refusing to engage in meaningful negotiations.

BORON, California – After five months of attempting to negotiate a new labor agreement with union representatives who have threatened customers, consorted with competitors and refused to engage in meaningful negotiations on key issues, U.S. Borax followed through on its commitment to lock all bargaining unit employees out of its Boron Operations at 7 am today, March 23, 2010.

This decision – the first time employees have been locked out in decades – could have been avoided if union leaders would have engaged in meaningful negotiations over the past five months, or agreed to seriously consider a company offer made on Thursday, January 28, which stipulated that employees would be locked out if they did not ratify the company’s offer by Sunday, January 31. Although a union rally was held on Saturday, January 30, the offer was not presented to members for a formal vote.

Company officials say they have run out of options to get leaders of the International Long shore & Warehouse Union, Local 30, to take the negotiations seriously despite having offered to negotiate 24 hours a day, seven days a week since September 15, and making numerous concessions on issues related to seniority, overtime and wages. Union leaders have refused to bargain for more than two days a week during those five months, and have refused to make any concessions. These same leaders wrote letters to Borax customers threatening product quality and supply reliability – which resulted in $6 million in lost business – and invited employees from Borax’s leading competitor to the bargaining table, potentially giving them access to sensitive company information.

The offer union leaders refused to consider included a 2% annual wage increase, an annual performance bonus, a $4,000 signing bonus, 80% coverage of health care insurance costs and an early retirement package worth $10,000 to $40,000 to eligible employees. In exchange, the company sought to introduce modern workplace practices that will allow it to base work assignments and promotions on experience, skills and performance rather than solely on years of service. These work practices are needed to keep Boron Operations viable in the face of heightened competition that has resulted in the company losing 20% of its workforce and 25% of its global share of sales in the last decade. Boron Operations pays an average of $26.00 per hour to its represented employees, compared to its primary competitor, Eti Maden, which the company believes pays workers $9.70 per hour.