Saturday, June 19, 2010

The Spectre of the 30s

The lessons from the 30s seem to be forgotten. In 1937, when F.Roosevelt sought to balance the budget, the economy plunged again into a severe recession. And here in Germany, the financial orthodoxy pursued by the finance minister, Heinrich BrĂ¼ning, from 1930 to 1932, led to the end of the Weimar Republic.
There are no sanctions for those- the experts who preach financial rigour and budget balance- who repeat the mistakes of the past. Since the 80s, the dominant economic view repeats the same discourse which led to the depression of the 30s. At that time, J.M. Keynes rejected vigorously what he called the 'Treasury view'. The main argument is that an economy with rising unemployment is badly managed and that mass unemployment should not be tolerated in any economy . The famous British economist made that point in the Mac Millan Committee*, putting forward a set of principles defining a full employment economy: full employment is the primary objective for economic policy; wage flexibility is not a remedy to unemployment; the currency in a country with high unemployment could not be strong unless depreciation of assets is compensated by high interest rates; the State can contribute to restore full employment via an active policy increasing public investment financed through a budget deficit; the Central Bank should help financing spending which will generate wealth in the future.

In recent times, President Barack Obama urged other G20 countries to boost domestic demand and increase exchange rate flexibility to encourage global growth and rebalance the world economy.He said in a letter : “I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses.”**

This warning seems to be largely ignored by the deficit hawks, which are now prevailing in Europe, Canada and other countries. The myth of 'sound finance' - which is related to a blind faith in free markets- is based on a 'classical' vision of capitalism driven by the search for more savings. As opposed to it, Keynes and other post-Keynesian economists such as Kalecki and Minsky demonstrated that the engine of capitalism is the debt which generates the 'quantum' of money necessary to finance investments.

As in the 30s, the danger of unemployment should deserve greater attention. Trade unions have understood it, not our political leaders.

* See P.Clarke, The Keynesian Revolution in the Making 1924-1936, Oxford University Press, 1988

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