With an election expected in May, there will be one name voters are likely to hear more often: John Maynard Keynes.
Keynesian economics was the predominant economic theory before the rise of neoliberalism during the Thatcher/Reagan years. It helped end the Great Depression, and in the post-war West, created the modern middle class.
All that Boomer entitlement we bitch about? Yeah, Keynesianism did that, and neoliberalism is what destroyed it for the later generations.
A Brief History of Everything
The free-market ideological pursuits of neoliberal capitalists didn’t come from nowhere, it was developed in response to years of stagflation – which happened as a result of the oil shocks, when OAPEC (Organisation of Arab Petroleum Exporting Countries) raised the price of oil four times in a matter of months, taking it from $3 a barrel to $12 a barrel; brought on by the opposition of the Arab nations to the support for Israel during the Yom Kippur War of 1973.
The Arabs took advantage of the stagflation that they had to work with global banking firms to create a new form of finance, the petrodollar.
The petrodollar was the standardisation of oil against the US dollar, creating huge capital for the OAPEC nations, which was reinvested in US banks, providing them with the opportunity to lend huge amounts of money by creating mass credit systems.
As the banks started issuing these new lines of credit, to businesses and individuals, the global economy started to recover from the stagflation, because there was suddenly all this new cash flow being injected into the financial markets. This growth, built on the petrodollar credits, gave some semblance of credence to the ideology of neo-liberalism – reducing restrictions on banks lending practices; cutting regulations and red tape to allow businesses to move faster; and cutting taxes on large scale institutions and corporations to allow them to grow their wealth faster and create new jobs in the process.
The banks began to assume new roles through this, no longer was it the simple It’s A Wonderful Life notion of community banking and small scale operations, suddenly banks were becoming these international monoliths, buying up, and shoring up, entire economies.
The cost of living across the Global North went up as living standards improved for the great glut of the Baby Boomer Middle Class, consumerism reached new highs as individuals demanded more bang for their buck, this new wealth for the middle class created a bizarre form of frugality as they examined how their money was spent.
Neoliberalism made them rich, and so neoliberalism would decide how governments funded services.
The wealth of those at the top began to grow exponentially, the rich became the very rich, millionaires became billionaires, and all the while, the capital they were creating allowed banks to extend new lines of credit to whole new sections of society. First the existing middle class grew richer, they bought bigger houses and faster cars, then the working classes joined the middle class through the same principles of borrowing. No one seemed to realise that as the borrowing continued, eventually the banks would run out of people to lend to, and would seek out new clients. Clients who could not afford to repay their debts.
Those in casual employment, cash-in-hand workers, shift workers, those whom society would prefer to ignore; the people looking for scraps at the table; they became new targets for lenders, as consumer capitalism continued to sell the idea of middle class aspiration.
Of course, this all came crashing down in the Global Financial Crisis, when the banks’ greed finally reaped what it had been sowing for the last few decades. Instead of stimulating the economy, as the economists had been claiming, all the banks had managed to do was build these gigantic mountains of debt and consumers had no way to repay what they owed. Loans started to default, jobs started to be lost, people started pulling out of the economy as they couldn’t afford to keep spending as they had, on and on until everything finally ground to a halt, and global economies were standing at the brink of collapse.
This should have been the great test of the neoliberal economy, when the free market rejected flawed business practices for failing to allow capital to trickle down.
Instead some very rich people decided that the most sound solution was to prop up these failing institutions, because their wealth could be affected if the banks collapsed; after all, a few hundred million extra poor people won’t mean too much…
Trickle-up vs Trickle-down
The basic idea behind trickle-down economics is that by providing tax cuts to businesses and top earners it will allow them the freedom to reinvest their surplus of capital into the market to create jobs through new infrastructure and investment in the working classes – which would work fine, if that wealth did trickle down to the working classes; instead, it usually winds up growing their personal portfolios or going offshore.
This is what happened when the banks were bailed out in the wake of the GFC, the bailout money was kept by those running the banks, to secure their personal wealth. Unemployment shot up, because instead of creating new jobs, they simply pulled out of the market for their own security.
In this time, the Keynesian notion of trickle-up economics was repeatedly floated as a preferable solution. Providing financial relief to those at the bottom, the working and underemployed classes, because they don’t have the luxury of pulling out of the market.
The effect of creating wealth from the bottom actually does stimulate the economy, because when people are struggling to survive day-to-day on their meagre income, even a short-term boost will deliver an economic stimulus.
This is what Australia saw in 2008/2009 when Kevin Rudd and Wayne Swan delivered their stimulus packages.
In the midst of a global recession, the Australian economy grew because Swan, a Keynesian, saw the need for responsible fiscal policy to stave off a downturn. It was Keynesian economics, government investment in nation building, that ended the last Great Depression, and here it was again, popping up when the rest of the world failed to grasp the inherent flaws of neo-liberalism.
Australians responded in kind, spending when the economy desperately needed it. Some paid down their mortgages; others bought big ticket items like TVs; but by spending the economic surplus that had come from a decade of John Howard selling off public works and failing to capitalise on a mining boom, Rudd and Swan saved the Australian economy.
For his efforts, Swan was named International Finance Minister of the Year, the first time this had been awarded to an Australian since Paul Keating floated the dollar.
The idea that investing in infrastructure; providing relief to those on low-incomes; and reducing taxes on small businesses can grow an economy shouldn’t be revolutionary, but ten years later, the nation is still fighting an uphill battle on the economic front.
The Abbott/Turnbull/Morrison government has spent 6 years demanding tax relief for big business; slashing infrastructure investment – best represented in the shambolic NBN rollout; increasing punishing measures against anyone reliant on welfare; attacking students; defunding health; alternately attacking or ignoring Indigenous Australians; and chasing countless other unnecessary austerity measures.
The lie they tried to sell about the deficit and the debt being the only thing that should matter to the economy is what has set Australia up to be staring down the barrel of another neoliberal induced recession. The housing affordability crisis is reaching breaking point as an entire generation bought into the idea of “investment properties”, sold to them by banks promising that the market would remain stable, even after the US market collapsed for doing the same thing; the early effects of climate change are ravaging the country with heat waves, fires, floods, and cyclones reaching new intensities not previously considered possible; and new public services are privatised even before they are set up – My Aged Care and the NDIS exist almost entirely within the private sector, even the call centres are private companies.
Many pundits describe Malcolm Turnbull as a classical liberal, because of his espoused views. He claims to be a social progressive, he couldn’t be a neoliberalist. Except, he spent his entire political career selling aspiration and growth. He attacked the poorest in society for “wanting to live outside their means”, even as he continued to push for the middle class to keep spending and buying up property. He spent half of his Prime Ministership denying that he believed in trickle-down economics, even as he claimed his policy of tax cuts to the rich would result in the wealth being passed onto those on lower incomes.
A kind of, trickle-down effect, if you would.
The Labor Landslide
Keynesian/trickle-up economics are effective in the short-to-medium term because they grow the middle class, and a healthy middle class is required for capitalism to be successful, as an ideology. Even the most avowed socialist will still believe in some basic capitalist super-structure, (except for the futurist techno-socialists, but they’re just Star Trek fans).
Incoming Labor Treasurer Chris Bowen identifies himself as a Keynesian, and in the broadest sense, he could be right. He supports some regulations on housing, wants to close certain tax loopholes for the rich, and he supports certain nation-building projects.
But any true Keynesian would look at the present state of Australian economic policy and demand a Whitlam-esque overhaul of all facets of society. And while that may seem like fallacious reasoning, we’ve been stuck in a policy feedback loop for the last 25 years – with no action on global warming and climate change, ongoing tax cuts for big business, incessant privatisation of public services, and welfare stagnation.
Bowen only seems to want to provide relief for the middle class, he doesn’t want to grow it. Labor is terrified of being torn to shreds by conservatives media if they were to suggest policies that would favour Australia’s growing underemployed.
Labor will hold their National Conference in just over two weeks, the policies they announce for the election will be illuminating.
The Marxist Solution
The fact that socialism is popular with kids again should be the biggest indicator that free market capitalism is failing. As a generation, Baby Boomers seemed to adore capitalism, because they never realised how it was built on low-key socialism.
Theirs was the generation of the Red Scare, all socialism was bad socialism because commies were hiding under your bed and kidnapped a Prime Minister and something about the USSR being evil.
This has led to notions of them being out of touch when Millennials are derided as being entitled, spoiled, or otherwise bad with money. They swallowed everything they were fed about leftist ideologies and US Imperialism being good for the planet, but can’t see how later generations might want some of the benefits afforded to them.
Plus, capitalism made them rich, never mind all the socialism (health, education, welfare, nationalised industries and employment) that kept them alive.
There is an absolute need for us to question the ramifications of economic theories that rely on producing infinite growth on a finite planet, and both neo-liberal and Keynesian approaches to the market have elements of that as an underpinning philosophy.
Without establishing limits on growth, without an absolute overhaul of how society is structured, without addressing the rise and development of the Global South, we cannot develop economic policies that will actually be for the people.
But Keynes’ model will do for now.