Forget the ‘golden age’ of capitalism: there’s no return, and our future can be better

Talk on the British left of a return to a Keynesian, pre-monetarist system is historically untenable. Aaron Peters argues that the solution to the current crisis resides not in statist capitalism but through a greater correspondence between the mechanisation of labour and a respect for human agency.

Aaron Bastani
6 March 2012

One writing collective recently referred to the ongoing global financial crisis, with notable acuity, as akin to a ‘dull explosion’. Into this vacuum, whose intellectual environment can only be characterized as one of inert propulsion, the interpretative tools of policy makers and the majority of academic economists alike simply no longer make sense. Subsequently we have seen the unsurprising resort to orthodox ‘supply-side’ solutions and yet more neo-liberalism, namely reducing deficits through the contraction of state spending, lowering corporation tax to attract foreign investment, extending the market in educating the labour force and systematically attempting to repress labour costs.

One need only look at Herbert Hoover’s misguided attempts to balance a budget amid a slump in 1930-1 or the dozens of failed ‘austerity’ programs in the developing world since the mid-1970s to know how misguided such solutions can be. Where they have occasionally worked, such as in the aftermath of the Asian financial crisis of 1997, it was thanks to strong demand from elsewhere in the global economy. This is not the case for the zombie economies of the OECD in 2012, nor will it be anytime soon. Put quite simply, the whole world cannot have export-oriented growth.

As policy experts come to realise that such solutions will not work, one can anticipate the recapitulation of a debate that was initiated in 2008 but which subsequently ebbed. Namely the debate on how to ‘save capitalism’ as seen within the disputation between Keynes and Hayek. Here we see differences over appropriate medicine for the patient: demand-side solutions or supply side ones; more active state participation in the economy or less.

In short, ‘Keynesians’ can be understood as ‘underconsumptionists’ in terms of their analysis of the current crisis. Their solution would be to increase final demand by increasing wages and household income as a share of national product, increasing the pay particularly of those who are low income earners (as they are most likely to spend it). This would occur through increasing earnings, ensuring full employment and increasing state benefits such as pensions.

As Andrew Kliman points out, it is strange to hear ‘anti-capitalists’ advance essentially such ‘trickle-up’ theories of economic growth (see this review of Kilman's book 'The Failure of Capitalist Production). To do so is to admit that labour and capital are not in contention (which even Ricardo and Hayek would accept). One does not only hear this from the Labour party members but also from Greens, independent activists and revolutionary socialists. In short, such underconsumptionist advocates sincerely believe that the best interests of cleaners on minimum wage are identifiably the same as FTSE 250 corporations.

We have indeed come to a strange juncture: Liberal Democrats are championing Friedman and parts of the radical left can at times sound no different to Paul Krugman.

Kliman’s concern is that the ‘left’ will over time adopt an underconsumptionist position. For those passionate about ecological sustainability and not simply reducing human beings to units capable of economic maximisation this is of grave concern.

Not only are high levels of growth an undesirable goal  and an utterly insufficient rubric for assessing the ‘common wealth’, it is also simply not possible to return to the annualized GDP growth of the post-war ‘golden age’. Full-employment and high growth idylls in the developed world (be they the ‘wirtschaftswunder’ of Germany, ‘Les Trente Glorieuses’ of France, the ‘rekordaren’ of Sweden or the ‘Japanese Miracle’) were a historical one-off, which can only be compared to the ‘Great Doubling’ witnessed more recently in the developing world.

The world economy saw far higher growth in the period 1950-73 then it did either before or after, with a recorded annual global growth rate of 2.9%. For the period from 1973-2008 that average fell to 1.8% - even with the success of China, India and the Great Doubling. Growth during this ‘pre-crash’ period, increasingly informed by the logics of the ‘Chicago school’, was only 62% of what it was for the period immediately preceding, which was broadly ‘Keynesian’ in design.

After 2008 it seems that a new period of even lower growth has been initiated globally. Rates of European growth in particular look similar to Japan’s since the early 1990’s. Indeed, once one takes away the financial and housing bubbles in the US and the UK since 2000, both countries have already seen annualised average levels of growth in the last ten years comparable to those seen in Japan during its ‘Lost decade’. Subsequently, to speak of our own impending ‘Lost Decade’ is in a way incorrect, in so much as we have already had one, even if another one is impending. In 2001 to 2002 for instance, equity withdrawal from homes was so great in the US that it stopped the country going back into recession through facilitating increased consumer spending. Equity withdrawal played as significant a role in the United Kingdom during the same period: this is indicative of the role of credit, housing and the finance sector in the mirage of growth for much of the OECD after the Dot-com crash of the early 00’s.

Growth in the period 1950-73 was also much higher then it had ever been before. The highest annualized growth in any country recorded for 1913-50 was 2.1% per annum, in Switzerland and Norway. In that period, growth in Europe and North American was severely below that of the post-war era; this is likewise the case in the period directly before, from 1870 to 1913.

So why can’t we return to that ‘golden age’ of post-war economic expansion? Listed below are five reasons, drawn from a much longer list, setting out why the kinds of growth rates seen between 1945-73 are not replicable among the nations of the OECD today.

1. High levels of debt

Developed countries now have massive levels of both public and private debt. The Eurozone average stands at 87.7% of GDP and the US has a debt-to-GDP ratio that has just passed 100%. It is not only states that are highly indebted but also private households. Here British excess is among the very worst in the world with UK total external debt running at 492% of GDP according to one McKinsey report - elsewhere Morgan Stanley claims it is nearer 950% of GDP when one includes all liabilities from the financial sector.

Consequently while China, India and other countries with large budget surpluses are able to run large counter-cyclical spending programmes as and when necessary (as indeed China has done in the last three years), many of the highly indebted countries of the OECD are simply unable to run current account deficits of the magnitude required without bond markets getting scared and making the costs of borrowing for these ‘debtor’ countries prohibitively expensive.

As James MacDonald writes, “...the markets have highlighted a fundamental shortcoming in Keynes's ideas: He assumed that governments would always be able to borrow. If they cannot, then Keynesian economics is dead in the water.” This means that a debt-driven, counter-cyclical solution would appear to be an impossibility, “...the great debt experiment has left the Western world with a problem that has no easy solution.The outcome is hard to predict, but in the end it is likely to involve the reduction of both private and public debts to levels that the markets consider sustainable, whether by debt write-offs or through inflation. One thing seems clear: For the first time in decades, borrowing will not form part of the solution.”

2. Urbanisation: you only get it once

Urbanisation is THE phenomenon that is singly most crucial to economic growth, observable primarily in Western Europe and Japan after 1945, and now most in evidence in the developing world.

Throughout the OECD it represented a one-off shift of a factor of production, labour, that depended on a transfer of population from agriculture to industry and from country to city. This is likewise the case with the ‘Great Doubling’ and the massive and ongoing urbanisation of not only China and India, but also Pakistan, Nigeria, Indonesia, Iran, Turkey, Brazil and the rest of the ‘developing’ world. Such a transfer is a potent weapon for growth as it provides a cheap source of labour for industrialisation. The problem is, you only get it once. In 1950, 23% of the German workforce was employed in agriculture, in France 31%, in Italy 44% and in Japan 49%  - by 2000, all had agricultural populations of under 5%. This was a huge contributing factor to growth during the period, particularly in Japan and Italy (two of the best global economic performers during the three decades) and for obvious reasons cannot be repeated.

3. US growth even in the ‘Golden Era’ was dependent upon ‘easy credit’ in the domestic mortgage market

The assumption that it is only growth within the Thatcher/ Reagan complex that is dependent on ‘easy credit’ and a certain relationship to property speculation is one that is fundamentally flawed. Instead such a phenomenon should be understood as a central fundiment of post-war economic expansion in the United States and consequently, the global economy.

As Maya Gonzalez points out in Endnotes 2 it is the GI bill of 1945 that initiates the phenomenon of a mass housing market in the US as a cornerstone of economic growth. The selective credit initiatives that were essential for this new housing market to function were the Federal Housing Association (FHA) mortgage insurance programs established by the National Housing Act of 1934, and the Veterans Administration mortgage guarantee programs, established in 1944. By insuring private lenders against loss, and rendering the use of long-term amortizing mortgages increasingly popular, the FHA and VA revivified and expanded the markets for home improvement and for privately-owned homes, eventually making these markets the bedrock of the post-war consumer economy. Thus the state did not simply ‘revive’ existing markets but in fact created new supply and new demand. These programs amounted to some $120 billion in housing equity loans and accounted for nearly one-half of new single-family home purchases from 1947 to 1964, an astonishing figure. Such credit facilitated not only the purchase of 12 million mostly suburban housing units, but also helped secure debt financing for billions of dollars of home-repair work. Furthermore less then 2% of this equity was given to non-whites and the explicitly racist regulations around mortgages within the FHA and VA exacerbated the already existing economic disparity between white and black America.

4. New technologies: once a booster of growth for the developed world, now destroying value

Much post-war growth was generated on the supply-side of the economy by technological catch-up. According to Moses Abramowitz, “...the countries of the industrialized west were able to bring into production a large backlog of unexploited technology ...the principal part of this backlog ...consisted of methods of production and of commercial and industrial organisation already in use in the United States.” This was most obviously the case for Italy, France and Japan and is now abundantly evident for the BRICS (except Russia) and the tailing ‘Next 11’.

The opportunities for technological catch up gave capital a high marginal productivity, leading to high levels of private-investment demand. As well as this, there were of course new technologies that were available for a new mass consumer market, the automobile and the refrigerator, both in existence since the 1920s but never truly popular until the 1950s onwards being two examples.

Such private-investment demand in catch-up technologies was, once more, most notable in Italy and Japan - two of the countries with the world’s highest recorded economic growth between 1950-73. More recently, however, it seems that private investment in fixed capital assets is increasingly undermining profits, not catalysing them. The major variable is what Marx called ‘moral depreciation’, addition to the material wear and tear, a machine also undergoes what we might call a moral depreciation. It loses exchange-value, either because machines of the same sort are being produced more cheaply than it was or because better machines are entering into competition with it.”

Between 1990 and 2009 the costs of moral depreciation averaged 27 percent of after-tax profits in the US, up from less then 5% in 1961 and 10% in the mid-70’s. This means that very large shares of surplus value have not been realised as profit because of losses stemming from moral deterioration in the last three decades. This is an increasing trend for corporations in advanced economies that does not seem to be stopping anytime soon.

While many see the IT revolution as both a product and a catalyst of capitalism and post-war growth, there is evidence that IT and its rapid pace of obsolescence is contributing to the destruction of value (and subsequently profits) through ‘moral depreciation’. A paper published in 2003 by Tevlin and Whelan argued that the IT revolution is constantly depreciating the value of existing fixed assets through the speed of technical innovation. This helps the profits of no-one but corporations in the IT industry and a clutch of venture capitalists. Unlike the period 1950-73 the costs of private investment demand in new technologies will increasingly destroy not catalyse profits.

5. Petroleum…

The ‘catch-up’ technologies in the manufacturing process as well as those that informed the new consumer market after 1945 were based upon hydrocarbon fuels that were cheap and abundant. The Fordist production plant, containerization and the automobile - all in different ways at the heart of the new economy - depended on a source of energy that was a historical one-off: petroleum.

Unexploited, cheap and abundant energy is central to the rates of growth seen between 1950-73. As with urbanisation, this seems like a genuine historical ‘one-off’ with regards to inputs to growth. While we may discover a replacement fuel or new sources of petroleum, it seems safe to say that the cost and accessibility of petroleum for the economies of Western Europe and North America between 1945-73 will in all probability never be repeated. Nor will the requisite US military hegemony required to safeguard and maximize such levels of production, primarily in the Arabian peninsula and Persian Gulf, last forever. Oil production has possibly already peaked, demand is set to massively rise in coming decades and the security arrangements overseeing global supply chains have never looked so precarious.


Listed above are only a few of the reasons why the demand for a Keynesian ‘return’ to before Thatcher and Reagan is not tenable. From current levels of debt, to variables such as urbanisation, energy scarcity and housing, the world today is a very different one to 1929. Those such as Paul Krugman and Robert Skidelsky are turning to Keynes because he is the only economist (except Marx) who seems to make any sense in the current crisis. What is more, technocratically-minded Keynesianism, with its focus on macroeconomics, provides elites with a comfortable set of solutions that allows them to remain in control.

But such a choice would lead to the continued degradation of social life, the planet and the reduction of the ‘good life’ to that of consumption and work, a pastel-shaded Stakhanovism.

We are living in conditions of unparalleled global material abundance: a result of the mechanisation and automation of what was previously human labour, huge improvements in agriculture and JIT distribution systems and of course the presence of new non-market, non-state actors that allow us to share information and culture and much more besides. Within this context, we are quite capable of providing housing, education and healthcare for all while working only 21 hours a week (time on top of that could obviously be allocated as individuals see personally fit).

Yet it increasingly seems that the role of the state is to defend enforced scarcity and therefore, value. This is true with regards to changes in intellectual property rights, the criminalisation of squatting despite nearly one million empty homes and the truculence of government in failing to accept the inevitability of sharing digital content within the new paradigm. Instead, labour and capital is deployed to those areas where it can get returns such as the industrial-advertising complex (to tell us we need things that we don’t), built-in obsolesence of consumer goods and affective labour. All of this is ‘growth’ built on waste, not efficiency. Such an inhumane system increasingly will permit neither individuals nor culture to flourish.

Indeed Keynes himself may not have proscribed his own ‘underconsumptionist’ model as a solution for our  contemporary malaise. As he wrote in 1930:

“I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race...(instead it will be) how to use his freedom from pressing economic cares, how to ... live wisely and agreeably and well. The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”

While it may be tempting for the left to champion a Krugman-like Keynesianism and ‘go for growth’, given contemporary levels of abundance, combined with unprecedented levels of education, technical knowledge and new forms of non-state, non-market production, we should not be looking at the period of 1945-73 as an idyll to be repeated. It is not possible, neither is it – I would argue – desirable.

So what is the alternative?

The solution to the current crisis cannot be a return to a statist capitalism. Instead must be built on new forms of common production, stewardship, localised production and manufacture and social reproduction beyond work. It must be about making the mechanisation of labour conducive to human flourishing, as opposed to private profit.

Working less would be a first step towards this goal. The recent 21-hour week proposal by the new economics foundation coheres with my own belief that such a proposition would do much to deal with unemployment, social and family breakdown and alienation more generally. The danger of the full employment utopias historically favoured by the left is that we reduce people’s needs to those relating to work, rather than the needs of their life. Andre Gorz argued that a 10-20 hour week could permit social reproduction and produce necessities for all - such as shelter, food, computers and clothes. His hope was that as technology progressed, efficiencies would mean less work, not higher profits.

This coheres with the stance of the Luddites, who were not opposed to technology per se, but rather opposed technology that deprived people of ‘commonality’, seeking instead to harness it in a fashion conducive to the common interest. This would require the socialisation of certain industries, and also the active facilitation of new kinds of ownership and a challenge to the notion of intellectual property rights. There also needs to be a massive redistribution of land and resources and any republican movement in the United Kingdom necessarily also needs to be a land movement.

To propose any concrete alternative economic model at this juncture would smack of hubris. Right now no-one has the answers and that is precisely what characterizes a crisis. But one thing is certain: by embracing the underconsumptionist critique and the Keynesian solutions of those such as Skidelsky, Baran and Krugman, we will not only be failing to think outside the box, we will be reaching for a branch that simply isn’t there anymore.

There will be no second act for Roosevelt’s New Deal. Instead we must answer the question that Keynes posed in his 1930 essay: how, after growth, can we ‘live wisely, agreeably and well’?


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