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Life-Sustaining, Life-Enhancing Employment
Public Service as the Center-Piece of a Humanistic Post Keynesian Economic Policy Program
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Working Paper No. 15
Aug 2001
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Mathew Forstater (info)
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KEYNES'S LEGACY: THE TROUBLE WITH CAPITALISM AND THE CHALLENGE FOR
POLICY
In The General Theory of Employment, Interest, and Money, Keynes begins
with the warning that although the basic ideas he will put forward are simple,
because they are a radical departure from the orthodoxy of neoclassical
economics, they will not be easy to accept. "The difficulty lies," he writes
in the "Preface" to The General Theory, "not in the new ideas, but in
escaping the old ones, which ramify, for those brought up as most of us have
been, into every corner of our minds" (1936, p. viii). Those aspects of the
neoclassical theory on which Keynes's critique focused were its neglect of
aggregate analysis and inability to comprehend the operative role of monetary
variables; its adherence to Say's Law and thus its analysis of the
savings-investment relationship; and its abstraction from the role of the
uncertainty of investor expectations. When these problems are considered the
free market is transformed from a harmonious self-adjusting full-employment
equilibrium system into an under-employment (and therefore socially
undesirable) demand-constrained system, latent with crisis and
instability.
With Keynes, a conception of capitalism emerges which stands in stark contrast
to the neoclassical view. Modern capitalism is a 'monetary production economy'
with advanced credit instruments, where money is a store of value and
production is for profit and the accumulation of wealth, where there have
developed highly organized markets for investment, and firms are characterized
by the separation of ownership and management. In such an economy, aggregate
investment in no way depends on a pool of savings. It is ruled by the complex
of expectations of both investors and lenders, may be highly volatile, and is
very unstable. Investment is the independent variable determining aggregate
demand and thus aggregate output and employment via the relatively stable
propensity to consume and the multiplier's feedback effects. The economy will
be at full-employment only by a fluke; most likely, its demand-constrained
character will cause it to operate well below full capacity, with significant
involuntary unemployment.
Keynes considers the major problems of modern capitalism to be involuntary
unemployment and "its arbitrary and inequitable distribution of wealth and
incomes" (1936, p. 372), but it is clear that he believes that the social
irrationalities stemming from laissez-faire pervade virtually all
aspects of capitalist society. The alleviation of these requires foremost a
transformation in the role of government from a minimalist one to that of the
interventionist State. Since the system absolutely cannot guarantee the
full-employment level of private investment, it is up to the State to ensure
that this is accomplished. Moreover, if capitalism "cannot ensure a
satisfactory volume of investment, who is to say that the composition
of investment will accord with social objectives? Within Keynes's critique lay
the potential rationale for ... guiding the structural development of the economy"
(Eatwell, 1985, p. 65).
Keynes believed that the nature of the capitalist economy demanded "much more
central planning than we have at present" (1982, p. 492) and "that a somewhat
comprehensive socialisation of investment will prove the only means of
securing an approximation to full employment (1936, p. 378). But while Keynes
saw the solutions to nearly all the ills of the free market to be found in
some form of State intervention, and fought for such policies throughout his
life (often referring to the need for 'semi-socialism', 'liberal socialism',
'nationalisation', etc.), he equally if not more harshly opposed 'doctrinaire
State Socialism.' Much of this opposition to socialism was expressed in moral
or philosophical terms, but he had specifically economic concerns as well.
Keynes believed that State intervention was necessary in some areas, but that
in others it was unnecessary and even inefficient (1936, pp. 380-81). This
then points to the task that Keynes believed faced the modern world:
The true socialism of the future will emerge, I think, from an endless variety
of experiments directed toward discovering the respective appropriate spheres
of the individual and the social, and the terms of fruitful alliance between
these sister instincts. (1981, 222).
From such experimentation, he hoped, it would become possible to identify
those parts of socio-economic life "which are technically social from
those which are technically individual (1926, pp. 66-67). What Keynes
was not arguing for was complete socialization either of production decisions
at the level of the firm or of individual consumption:
Leave individuals to go on doing what they are doing more or less
satisfactorily, even though individual action is not perfect—where it exists
and is functioning, leave it alone—but do from the centre those things which,
if not done from the centre, will not be done at all. (1981, p.
647).
What emerges from Keynes is a vision of capitalism that is crisis-ridden, but
one that is in many respects reformable. So we need to distinguish Keynes's
vision from that of Marx, but also from that of the neoclassical economics
that he rejected—including the watered-down 'neoclassical synthesis'
Keynesianism that just doesn't 'get it': aggregate analysis reveals that the
logic of the whole is not the same as the logic of the part; historical time
means that money serves an important institutional function where individuals
can hedge in the face of an uncertain future, so 'barter' models are
unacceptable; involuntary unemployment is not due to 'sticky wages' but to
deficiencies of aggregate demand. For every borrower there must be a lender,
and basic National Income Accounts demonstrate that if the consolidated
government budget is in deficit, that must come up as net wealth on the other
side of the ledger. If we want to decrease the public sector deficit, we are
going to have to live with a reduction in the private sector surplus, and if
you want to run a public sector surplus, you are going to have to accept a
private sector deficit; the national debt is national wealth, and reduction of
the national debt is destruction of national wealth. This kind of Keynesian
'common-sense' is today all too uncommon. Instead we have sound money, sound
finance nonsense, which presently amounts to something of a mass psychological
disorder, that could easily ruin our economic system and cause real hardship
for average working families struggling to get by.
FUNCTIONAL AND DYSFUNCTIONAL PUBLIC FINANCE: SOME FISCAL
SOCIOLOGY
Or fiscal political history. What Keynes showed is that there is never any
financial constraint to aggregate economic activity. This view was
perhaps understood best by Abba Lerner, who dubbed the alternative conception
and the policy implications that followed "functional finance" (Lerner,
1943):
The central idea is that government fiscal policy, its spending and taxing,
its borrowing and repayment of loans, its issue of new money and its
withdrawal of money, shall all be undertaken with an eye only to the
results of these actions on the economy and not to any established
traditional doctrine about what is sound and what is unsound ... Government should
adjust its rates of expenditure and taxation such that total spending in the
economy is neither more nor less than that which is sufficient to purchase the
full employment level of output at current prices. If this means there is a
deficit, greater borrowing, "printing money," etc., then these things in
themselves are neither good nor bad, they are simply the means to the desired
ends of full employment and price stability. (1943, p. 354)
The principle is so simple, yet apparently so difficult to understand. If one
wants to argue that a balanced budget, a budget surplus, or paying down the
national debt are means to some economic goal(s), then that is perfectly
consistent with the principle of functional finance. It is not the
balanced budget that is 'sacred,' it is simply the means to the ends that are
desired. Anyone so arguing should thus agree, in principle, that if some other
relation between government expenditure and tax receipts is the best means to
attaining those ends, the balanced budget should be abandoned and those other
means instituted. But if one promotes a balanced budget or a budget surplus in
and of itself, irrespective of economic conditions—that it is the "right thing
to do," it would be "irresponsible to do otherwise"—without regard to the
potential effects, then this is not consistent with the principle of
functional finance, this is in fact best referred to as dysfunctional
finance (see Forstater, 1999).
When the fiscal sociology or fiscal political history of the late
20th century is written, it will begin with Nixon's remark: "we're
all Keynesians now." It will then proceed to the inability of Keynes's
followers to articulate a response to the decline of the 'Keynesian consensus'
in the face of stagflation. Ronald Reagan will then appear as the last great
Keynesian, with massive deficits explaining the so-called "Reagan recovery."
This will mark the end of any semblance of reasonable debate about budgetary
policy in the political mainstream, but due to something even David Stockman
or Marty Feldstein did not anticipate: Democrats made the strategic political
decision to use the Reagan deficits as an opportunity to call the Republicans
'fiscally irresponsible.' Thus by the early 1990s, "it's the economy stupid"
economics included deficit reduction as an end in itself, removing from
the mainstream political discussion any supporters of common-sense budgetary
policy, with both Repubs and Dems trying to out-fiscally-responsible each
other at every turn. Rising incomes and thus tax receipts coinciding with
austerity rates of government spending relative to GDP during the Clinton
expansion by the end of the century give us Gore running on budget surpluses
and paying down the debt, and President-elect W. 'talking down' the economy to
justify his tax cut, while continuing to predict a $256 billion budget surplus
in 2001, and $1.3 trillion in surpluses over the next decade! That would be a
$1.3 trillion reduction in private wealth, only the surpluses will never
materialize, because the recessionary, deflationary impact of such
dysfunctional budgetary policies will, absent a change in priorities, result
in a fall in output, income, and employment causing tax revenues to decline
and government spending on the direct and indirect costs of unemployment to
increase, moving the budget back into deficit, but at huge economic and social
costs.
THE POST KEYNESIAN ALTERNATIVE: PUBLIC SERVICE EMPLOYMENT AS A
POWERFUL AUTOMATIC STABILIZER
Is there no alternative? There is an economic alternative, and we cannot allow
politics to stop us from developing and articulating it. Traditional Keynesian
policies based on demand management might help some, but they will be unlikely
to produce true full employment, and to the extent that they succeed in
providing higher levels of employment in the private sector, they may be
inflationary. An alternative to demand management that is consistent with a
Keynesian analysis of the macroeconomy and the principles of functional
finance (as well as an institutionalist analysis of structural and
technological change), and that also provides the basis for progressive social
policy, is a government-sponsored Public Service Employment program (see Wray,
1998; Forstater, 1998a, 1998b).
Under a Public Service Employment Program, the federal government offers a
WPA-style public service job to anyone ready and willing to work, no means
tests, no time limits. In some versions of the proposal, federal government
pays the basic Public Service wage, but community service groups employ the
labor. Those who cannot find work in the private sector thus can always find
work in the public service sector. There is never any job shortage in the
economy as a whole, as government guarantees an infinitely-elastic demand for
labor. As long as there are any unemployed workers, this is evidence that
aggregate demand is too low. As workers get hired into public service,
government spending increases, and continues to increase until full
employment. Such a program thus serves as a powerful automatic stabilizer
ensuring that aggregate demand is always at the full employment level. As
private sector demand declines (rises), the public service sector grows
(shrinks), with full employment a constant and only the ratio of private to
public employment varying. Inflationary pressures, production bottlenecks, and
other rigidities associated with high levels of private sector employment are
avoided, as spending is always kept at just that rate noted by Lerner, with
traditional fiscal and monetary policies available for 'fine-tuning' the size
of the Public Service sector. The Greenspan-Marx reserve army of unemployed
approach to maintaining price stability is no longer justifiable, with the
huge economic, social, and real human costs that entails.
TOWARDS A HUMANISTIC POST KEYNESIANISM: PUBLIC SERVICE EMPLOYMENT AND
HUMANISTIC SOCIAL POLICY
The Public Service employment approach to full employment and price stability
can also serve as the basis for humanistic social policies. Under such a
program, a wide variety of social policies may be introduced that otherwise
wouldn't fare a chance. To understand how this might work, consider that
workers will always have the option to take a Public Service job. Now imagine
what might happen if the Public Service wage-benefits package included health
insurance. Employers in the private sector would have to match the Public
Service wage-benefits, either line by line, or in some other compensating way.
Private businesses would be encouraged by 'market' pressures to either offer
health insurance or compensate in some alternative way (higher salary, more
chance for advancement, other benefits, or some other attractive part of the
offer). Likewise, since the Public Sector wage would be the de facto
minimum wage (remember that the real minimum wage in an economic society with
a semi-permanent pool of unemployed is zero), increases in the Public Sector
wage could also be used to pressure businesses to raise wages (or some other
compensating feature of their offer). Consider what might happen if the Public
Sector job came with child-care. Likewise, worker health and safety issues,
and general job environment. The list of ways in which Public Sector
employment might be used as a 'benchmark' to increase the quality of private
sector jobs is limited only by the imagination.
Next, consider the possibilities offered by millions of new workers available
to do Public Service. Suddenly, there is no longer any financial or labor
constraint to the provision of public and community services (other than the
'real' constraints of population size, skills and education, etc.). Habitat
for Humanity and Meals on Wheels are never wanting for labor, public libraries
and community centers are open every night, additional helping hands on
playgrounds, at subway stations, in nursing homes, and recycling centers. The
environment benefits are numerous, from clean-up to parks and recreation to
tree-planting to new hiking trails. We know from the history of the WPA and
other successful Public Service programs just how productive the contributions
can be (we can also learn from the mistakes of such programs—e.g., race and
gender discrimination must not be tolerated).
A Public Service jobs program could also be used to redefine just what
constitutes valuable work in our society. Presently, the market is used as the
measuring rod, so if you can't make your way in the private sector, your
life-calling must not be valuable. Under the Public Service Employment
program, society is free to decide what qualifies as a Public Service job.
Musicians and artists might be free to follow their calling. Oral histories
can be documented and preserved through interviews with the elderly. Community
gardens can thrive, with Public Service chefs preparing meals. Addressing the
historical legacy of patriarchy and gender exploitation, care for one's own
children and one's own home can be considered valid Public Service work. Even
getting additional education or training may be considered a Public Service.
It follows that individuals that stay employed rather than unemployed, and
that are able to take advantage of education and training opportunities, will
likely boost productivity in the private sector when the demand for labor
rises during an economic upturn.
THE RIGHT TO LIFE-SUSTAINING, LIFE-ENHANCING EMPLOYMENT
A Public Service Employment program based on the principles of functional
finance can guarantee full employment without the rigidities associated with
very high levels of private sector employment, can provide public and
community services that are in short supply, and may be used as the basis for
humanistic social policy. The huge economic and social costs associated with
unemployment can be eliminated, and the national economy can be managed in a
sensible way that is consistent with the idea, formalized in the United
Nations Declaration of Human Rights that every individual has the right to
earn a livelihood in a self-respecting way.
The choices for the future are clear: functional finance or dysfunctional
finance? A pool of unemployed to hold prices down or a flexible system of
public service to maintain stability? Exploding prison systems and
deteriorating skills or increased community services and more social cohesion?
Poverty wages, no health care, no child care or living wages and universal
care? Fallacy of composition or sensible macroeconomic common-sense?
Technocratic individualism or humanistic social policy? Involuntary part-time,
involuntary flex-time labor market treadmill or life-sustaining,
life-enhancing employment? 
REFERENCES
Eatwell, John, 1985, "Keynes, Keynesians, and British Economic Policy," in H.
L. Wattell (ed.): The Policy Consequences of John Maynard Keynes,
Armonk, N.Y.: M. E. Sharpe.
Forstater, Mathew, 1998a, "Flexible Full Employment: Structural Implications
of Discretionary Public Sector Employment," Journal of Economics
Issues, Vol. 32, June-July.
Forstater, Mathew, 1998b, "Institutionalist Approaches to Full Employment
Policies," Journal of Economics Issues, Vol. 32, December.
Forstater, Mathew, 1999, "Functional Finance and Full Employment: Lessons from
Lerner for Today," Journal of Economic Issues, Vol. 33,
June-July.
Keynes, John Maynard, 1926, Laissez-Faire and Communism, New York: New
Republic.
Keynes, John Maynard, 1936, The General Theory of Employment, Interest, and
Money, New York: Harcourt Brace.
Keynes, John Maynard, 1981, The Collected Writings of John Maynard Keynes,
Volume XIX, Activities, 1922-1929: The Return to Gold and Industrial Policy,
Part 1, London: Macmillan.
Keynes, John Maynard, 1982, The Collected Writings of John Maynard Keynes,
Volume XXI, Activities, 1931-1939: The World Crisis and
Policies in Britain and America, London: Macmillan.
Wray, L. Randall, 1998, Understanding Modern Money: The Key to Full
Employment and Price Stability, Cheltenham, U.K.: Edward
Elgar.
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