Thursday, August 2, 2012

An Explanation For Capitalist Opposition To A Full Employment Economy

Many have been puzzled by the strong opposition to government efforts to stimulate an economy in recession.  This occurred during the Great Depression and also during the Great Recession.  Most economists believe that government has the tools to encourage full employment, but some economists have aligned with those who oppose government intervention in the economy.  This 1943 article by Michal Kalecki provides an explanation.

Kalecki describes the tools available to government that can establish an economy with permanent full-employment.  He then describes the opposition that capitalists would have to a full employment economy.  They only support full employment during an economic boom and they can accept unemployment during mild and short lived slumps.  The strongly oppose a permanent full employment economy.

Government deficits that are used to maintain full employment are opposed by the doctrine of "sound finance".  Government deficits and borrowing erode business confidence, and it is claimed that business will not invest in the economy when government programs affect business confidence.  Capitalists also don't like the idea that the state might be used to maintain full employment.  They would rather be in control of employment levels themselves.  Apparently, the "confidence fairy" was alive and well in 1943.

Government spending that is used to maintain full-employment creates another problem for capitalists.  They may accept programs that increase their tendency to invest, but they strongly oppose government spending that maintains consumption and the standard of living.  They will not support government investments that encroach upon private enterprise, and they don't like any government spending programs that might affect the work ethic.  The standard of living should be earned by hard work and investment.  That is how they got their living standard and others should be held to the same standard.  They like to be in the position of disciplining the work force by controlling employment and wages.  Efforts by government to weaken their monopoly over worker discipline are not welcome.

In summary, business leaders like the idea of a political business cycle.  They oppose the the idea of permanent full-employment, and they accept the idea that government might lower the interest rate, or do other things to stimulate business investment during a slump.  Unfortunately, this does not work in deep recession.  Low interest rates will not induce business investment when there is slack demand, and interest rates can reach the zero bound which may not be low enough to encourage investment.  This leaves government with the option of stimulating consumption to stimulate the economy, but business would rather cut government programs that maintain the standard of living during a downturn by invoking the doctrine of "sound finance".

Kalecki also offers an explanation for how National Socialism worked in Germany to provide full employment during the Great Depression.  A partnership between big business and the state made this possible. Government spending was directed towards a military build up that stimulated the economy, but did not compete with private enterprise.  The state disciplined the labor force by using political pressure.  It was not necessary for business to discipline the workforce.  There were no elections under National Socialism so business did not have to worry about the replacement of its partner through the electoral process.  Unfortunately, one of the consequences of military build up, and the desire for conquest, is war. The ability of the state to do whatever it wanted in a one party political environment also created problems. The failure of the democratic process to fix the economic situation made this possible.

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