Lies, Damn Lies and Economics – Black Flag

Joan Robinson once said that the point of studying economics was to be able to work out when economists were lying. Being a left-wing Keynesian, she was immune to the usual ideological (if not religious) biases of mainstream economics. Her point is both correct, and usually ignored because economics has far more to do with ideology than facts, belief than science.

Submitted by Fozzie on August 1, 2020

This is why the books reviewed here are so important. In one way or another they all burst the bubble of an "economic miracle" created by 20 years of free market magic. A 'miracle' whose basis lies rather in hype than in reality - as we shall see.

Our first book is John Gray's False Dawn: The Delusions of Global Capitalism (Granta Books 1998). Gray is an ex-Thatcherite and his book feels like an extended "Oops, I got it wrong" essay. It takes a strong man to admit being wrong and his book is well worth reading. Drawing from the work of Karl Polanyi (in particular, his classic The Great Transformation), Gray argues that laissez faire capitalism, rather than being a natural product of evolution (as claimed by the right), was in fact a creation of the State.

Drawing parallels between the 1980s and the rise of capitalism, he indicates the disastrous effects of market forces on society. Taking New Zealand, the US and the UK in turn. he shows how crap neo-liberalism, in practice, proved to be. Indeed the new right's ideology actually created some of its major bugbears such as 'welfare dependency'. The ”percentage of British (non pensioner) households that are wholly workless... increased from 6.5% in 1975 to 16.4% in 1985 and 19.1% in 1994". Furthermore "this dramatic growth of an underclass occurred as a direct consequence of neo-liberal welfare reforms".

While this may surprise the economist, it should not surprise an anarchist. After all, a "free exchange" between the powerful and the powerless in the market will benefit the former at the expense of the latter. Hence anarchist support for unions, solidarity and collective resistance to make us more powerful than our exploiters. The benefits of neo-liberal labour market reforms are equally unimpressive. Gray quotes the Financial Times to refute claims that 'Labour force flexibility' is the key to job creation:

''Open unemployment is, of course, lower in the US. But once we allow for all forms of non-employment, there is little difference between Europe and the US: be-tween 1988 and 1994, 11% of men aged 25-55 were not in work in France, compared with 13% in the UK, 14% in the US and 15% in Germany."

And, as Gray correctly stresses, all estimates of US unemployment must take into account America's jail population. Over a million more people would be seeking work if American penal policies resembled those of any other Western country. He also notes that Britain is following in America's footsteps in terms of crime, the penal system and the causes of crime, causes (such as the atomisation of society) which he thinks flow directly from our ruling class's embrace of free market ideology and policy. And if we look at unemployment, more people were unemployed when Blair took office than when Callaghan left power in 1979 - so much for 18 years of labour market reforms and "flexibility".

Gray's book concentrates on globalisation, showing how national neo-liberalism fits into a global neo-liberal agenda. Overall, and despite the flaws you'd expect from an ex-Thatcherite, Gray's book is useful for exposing much of the hype of the "free market".

The same can be said of Larry Elliot and Dan Atkinson's The Age of Insecurity (Verso). Both the authors work for The Guardian and their book (or at least a fair proportion of it) is an excellent source of facts refuting claims that Thatcherism was good for the economy. They state "thus far, [the] actual performance [of free market capitalism] has not lived up to the propaganda" and present ample evidence to back this up.

For example, as market reforms have taken hold, growth has fallen. The UK growth rate in the 'bad old days' of the 1970s was 2.4%, in the '80s 2% and in the 90s 1.2% (a similar fall occurred in the US). Given that the standard response of the new right to calls for redistribution of wealth was to say that it would harm growth (and growth would allow us all to take a slice from a bigger cake) - the figures are ironic.

Elliot and Atkinson argue that the "performance of the world economy since capital was liberalised has been worse than when it was tightly controlled", New Labour are promising more of the same.

The Age of Insecurity also acknowledges the social authoritarianism that is associated with market reforms. After all, a free market needs a strong state to keep the proles in their place. Elliot and Atkinson provide a long list of examples of state interference in our lives. Money may be free. but humans are not.

Unfortunately, their critique of authoritarianism does not really extend to the workplace. While seeking to protect the worker from excess social controls (drugs tests etc.) they express no interest in abolishing wage slavery, the selling of our labour and liberty to a boss. They may be disturbed by the state's interference in people's lives after they have clocked off, but people managing their own work time goes unmentioned.

There is a refreshing short discussion on Tory "Euro-sceptism" in the book. They note that Euro-sceptism did not exist prior to the Labour Party's adoption of free-market policies in the aftermath of the 1987 election. Before then, Europe was seen by the right as a way to undercut Labour's reformism by lifting key economic issues (such as the freedom of capital, control of labour, laissez-faire competition) out of the domestic arena, an area the right feared it would lose in a popular vote.

However the discussions on Europe also show the limitations of Elliot and Atkinson's analysis. Whilst clearly understanding that the "left in Britain and elsewhere seem to believe these organs [such as the EU and the WTO] act on be-half of big business only because the left has failed to press the case for change and because, in the right hands, they would become mighty engines for progress" they fail to see that this argument is just as applicable to the nation state! If the EU is institutionally set up to favour capital, then so is the nation state, being subject to the same forces and interests.

Indeed, it could be argued that those in New Labour who want to "capture" the EU are on stronger ground, historically, than Elliot and Atkinson. After all, the British left did "capture" the nation state (most recently by Blair). In the process they forgot about socialism and even social democracy. As anar-chists predicted, the parties involved were corrupted by electoralism and socialism was abandoned.

True, there have been reforms in the past, but only due to fear of what would happen without them. It is here that the key to social change lies - in our communities and our workplaces. Unsurprisingly, Elliot and Atkinson do not mention class struggle, nor its role in social change.

This brings us to Robert Brenner's "special report" on the post war world economy in issue #229 of the New Left Review. While the report is a serious piece of scholarship, its whole raison d'être appears to be to refute all attempts to place the dynamic of capitalism in the class struggle. This should be of interest to anarchists and other libertarian socialists because it attempts to refute an analysis which has its roots in libertarian theory. In the 1950s/60s Cornelius Castoriadis argued that the real problem for capitalism was the human beings within it subjugated to wage slavery - i.e. the subjective element associated with people rather than the objective forces associated with capital, commodities, things. He argued that Marx, in Capital, took a step back from the class struggle and assumed labour power to be like any other commodity. This is not the case, as labour power cannot be separated from workers who resist their bosses' demands (something machines and raw materials cannot do). Since then a number of libertarian Marxists have taken up this "subjectivist" analysis of capitalism, including Tony Negri, Harry Cleaver and other Autonomists. Cleaver wrote an excellent essay linking Kropotkin's revolutionary analysis of social struggle to that of the Autonomists. Moreover, Bakunin, in passing, presented a rough and ready understanding of class struggle being the basis for capitalist dynamics.

As far as facts and figures go, Brenner does explode mainstream claims that the 1980s marked a new dawn for (deregulated) capitalism. He uses hard facts to expose the capitalist hype, ideology and economics for the nonsense they are:

"as the neo-classical medicine has been administered in even stronger doses, the economy has performed steadily worse. The 1970s were worse than the 1960s, the 1980s were worse than the 1970s and the 1990s have been worse than the 1980s"

Taking the specific example of the current American "economic miracle" which New Labour emulates, he quotes the Financial Times (1997):

"Conventional wisdom is that the US economy has been motoring along in the 1990s, while Europe and Japan have been left behind in its dust. Not so, US performance has been mediocre at best, while the difference between it and the other two has been largely cyclical."

Useful as these facts are, does Brenner's central thesis hold true? He argues that the logic of competition between capitalist firms, rather than class struggle, rules the deeper rhythms of growth and recession. Objective factors - not social struggle - led to crisis in the 1970s - essentially a restatement of the "over-investment causing crisis" school of thought associated with the Marxism of the Second International and Leninism.

Is this return to orthodoxy successful? Not quite. The crux of his case against a class struggle analysis is that, firstly, real wage growth fell during the so-called "profits squeeze" of the late 1960s and, secondly, the length of the economic downturn (30 years, of which 20 were under explicitly anti-labour regimes). These points do appear to undermine claims that workers' power was the source of the crisis. But Brenner gets it wrong.

Firstly, it's hard to believe that as unemployment fell during the 1960s, so did the price and economic/social power of workers. As supply decreases or demand increases, prices go up - and why should labour be the exception to this rule? This paradox can be overcome by realising that it is not real wage growth that counts in assessing workers' power in the modern economy. Rather it is nominal growth. As the German anarchist Gustav Landauer argued over 80 years ago, "capitalism always has the advantage as long as the workers can influence only wages but not also prices". Thus rising prices, or inflation, is the means by which capitalists recoup the rising wage costs associated with approaching full employment. So a period of rising workers' power can be marked by a fall in growth of real wages.

Was this the case in the late 1960s? According to Brenner's account this seems likely. As he notes (in respect of the US) "the inability of US manufacturers to sufficiently mark up over costs accounts for almost all of the fall in manufacturing profitability". This inability to pass on costs was due to the increased international trade and competition. In addition, "inflation accelerated" after 1965, a clear indication of rising labour costs. Similarly his acknowledgement that, "in the absence of pressure from labour, real wage growth would certainly have fallen faster than it did" in the early 1970s, suggests that workers' power was greater than he gives credit for.

So, by looking at real wage growth as a "rough and ready indicator of workers' influence" he fails to understand the dynamic of class struggle in the Keynesian age. Inflation is a key way to undercut workers' power and pressure on profits.

Moving on to the length of the crisis, Brenner is correct in arguing that "worker resistance" cannot be the cause of the continuance of the downturn. The working class has suffered major defeats over the last 20 odd years. But, ironically, these defeats have been the major source of capitalism's problems. As labour lost power, inequality grew. In the words of Elliot and Atkinson:

"Back in the early 1960s, the heaviest concentration of incomes fell at 80-90% of the mean... But by the early 1990s there had been a dramatic change, with the peak of the distribution falling at just 40-50% of the mean. One quarter of the population had incomes below half the average by the early 1990s as against 7% in 1977 and 11% in 1961. Where then is the evidence that trickle-down has enriched Britain from top-to-bottom? There is none."

So, with the shift of wealth to the rich, aggregate demand has fallen, as has investment, leading to increasing economic stagnation. While labour resistance to exploitation helped start the crisis, the capitalist counter-offensive made it worse. Capitalism is stuck between the Scylla of full employment increasing workers' power and the Charybdis of unemployment disciplining the workforce but reducing demand.

So, if Brenner gets the dynamic of the crisis wrong, what does he get right? Firstly, his contention that international competition forces down prices, although this only served to accelerate the outbreak of the crisis. Secondly his argument that investment in fixed capital is "sunk" and so not instantly reversible. In the real world, unlike in capitalist economics, capital which has been invested in the actual means of production cannot, by its very nature, be 100% mobile. These physical barriers do cause obstacles to adjustment, extending crisis. But this leads to another problem for Brenner's over-investment argument. If over-investment was the problem, you would expect the numerous re-cessions since 1979 to have helped some-what by destroying fixed capital. It obviously has not, although declining aggregate demand would increase relative over-investment.

As noted above, Brenner's argument is truly within the "objectivist" school of crisis theory. Its supporters usually attack the "subjectivist" approach as being too close to the analysis of the right - and therefore dangerous. And indeed, capitalist economic theory is based on "blame the workers" (or the state, never capital-ism itself). Bourgeois economists are fond of blaming our class for capitalism's problems. We are denounced for being "greedy" or "union thugs" or "ignorant" (of economics and other forms of witchcraft). In the end, capitalist ideologues hate the fact that people act as people and not things, that they don't accept their role as economic inputs and don't follow their bosses' orders.

So unemployment is caused by workers being paid too much, rather than the bosses' need for a slack labour market to maintain their profits and power. Inflation is caused by unions, not companies refusing to accept labour market forces, as expressed by decreasing unemployment, and increasing their prices to maintain their profits.

Given this viewpoint, it is understandable that many socialists take an "objectivist" position - namely that crisis is caused by the system, not workers. But workers are part of the system and supporters of this approach implicitly assume that workers are commodities and their behaviour can be predicted by capitalist economic ideology. Moreover, if workers do resist attacks on them, then using this logic, they will make any crisis worse by acting as people, not things. It is ironic that these Marxists argue that workers can change the worid, but not the workings of the economy.

Our hopes, dreams, interests, aspirations and actions are missing from "objectivist" accounts, and so is any desire for a free, just world. They say socialism will come about because it is necessary, not because we want it. Leninism is the logical outcome of this position; the dictatorship of the party over the masses whose mere opinions cannot stand in the way of History.

The "subjectivist" approach is not right wing - it offers the only hope for a libertarian society. To dismiss the human ac-tivity that causes capitalism so much trouble, is to objectivise people and, as Castoriadis pointed out, leads to bureaucratic politics and the substitution of ideology and the party for human beings.

Finally, Brenner talks about a global crisis, but seems to confuse an economic crisis with a human one. One of his headers reads "A Golden Age for Finance and the Rich" - which, to state the obvious - is hardly a crisis for them! It may be one for us, but since when did human beings matter to capitalism or those who run it?

Whilst having serious reservations about these first three books, the last two are excellent. Indeed, the first three are the kind you'd get from the library and read via the index; whereas you would want to buy, read from cover to cover and tell your friends to read the second two. I have nothing but praise for Doug Henwood's Wall Street: How it works and for whom (Verso). This excellent book exposes the role of finance, how it influences real life and the truly awful state of capitalist economics.

The book is packed with facts, arguments and analysis and, whilst it would be impossible to do it justice in any review, a few points from the book are usefully repeated here. First, far from being a source of funding for industry, the stock market "has surprisingly little to do with real investment", is "stupefyingly expensive" and "gives terrible signals for the allocation of capital". In fact 92% of all US investment between 1952 and 1997 was paid from the firms' own funds and between 1980 and 1997 the stock market was a "negative source of funds.

Second, the bond market - the financial heart of capitalism - fears economic strength and loves weakness. When the economy looks too strong, Wall Street demands that the state tighten its controls to slow it down, to ensure the real value of the financial assets of the elite. New Labour has imported this set up over here by handing over control of interest rates to the Bank of England.

So, if it doesn't provide funds for investment, what does Wall Street do? What it does very well, according to Henwood, is to concentrate wealth (the richest 1/2% of the US population claims a larger share of national wealth than the bottom 90%). With this wealth comes extraordinary social power "the power to buy politicians, pundits and professors and to dictate both public and corporate policy".

Financial markets are a key means by which the ruling class rules. So when the media reports the "reaction of the markets" they mean the reaction of the tiny number of people who control the vast majority of shares.

With the rise in power and influence of the stock markets, there has been an increase in what Henwood calls "rentier income" (namely dividends and interest payments). This increase in "rentier income" has had a negative impact on investment and, so, growth. Combine this with the short termism associated with the financial markets and it is little wonder that the economy is in such a bad state.

As the stock market dislikes a strong economy, the booming US and UK stock markets reflect (ironically) how badly the real economy is doing. The stock market boom undermines the real economy as it impacts on government policy. It is a feedback loop with a vengeance, and given the inherent instability of the financial markets, one which will eventually implode. Given the looming current financial crisis, Henwood's book is timely.

Henwood also shows how working class debt, a means to sustain consumption in the face of stagnant or falling wages, is also used to increase the wealth of the rich via interest rates and debt service. As an added bonus, debt acts as a "conservatising force" - a hefty monthly mortgage or credit card bill makes ”strikes and other forms of troublemaking look less appealing".

Henwood is a left wing "Post Keynesian", one of the few schools of economic theory with anything sensible to say, it is not based on the usual nonsensical, absurd assumptions. An important aspect of post Keynesian thought is its acknowledgement of power relations within a capitalist economy - appropriately he quotes Tony Negri: “Money has only one face, that of the boss".

Unless you understand that the economy is marked by power (derived from wealth) you will not get very far. Capitalism is marked by power, hierarchy and authority both inside an outside the workplace. Anarchism is aware of this fact; anarchists are well placed to develop a revolutionary critique of economics, unlike most Marxists who seem to have to fit all their ideas into the orthodoxy or be denounced.

Henwood has a couple of lovely pages discussing "Hilferding's curse" Hilferding was a Social Democrat who wrote Finance Capital, a massively influential book in Marxist circles, Unfortunately, as Henwood explains, this book is rubbish - which could give Marxist reviewers of Wall Street a problem. When the Socialist Workers Party did so they tried to blame the sorry state of Marxist theories of finance on Stalin! Stalin did pollute much "socialist" thought but strange how the SWP did not mention that Hilferding's book influenced Lenin (particularly his book Imperialism and ideas on the transition to socialism) and thus the whole of Leninism, including the allegedly anti-Stalinist Trotskyists. Oops.

In passing, Henwood exposes the Hilferding of the right, Milton Friedman, and his monetarism for the nonsense it is. Which brings us on to our last book. Robin Ramsay's The Prawn Cocktail Party, The Hidden Power Behind New Labour (Vision 1998). Ramsay is the editor of one of the excellent Lobster magazines covering the secret state, conspiracy etc, In this book Ramsay charts the attempts of "the City" to restore its pre-WW2 dominance politically and economically. From "Operation Robot" in the 1950s to Thatcher's freeing of finance after 1979, Ramsay paints a vivid picture of the comeback of finance after its bash with Keynesianism and the interests of industrial capital which it represented. In the process he discusses the activities of MI5 and the CIA in the British Left and the links between New Labour and the European-American transnational elites, all well researched and documented.

The key decade for the victory of finance was the 1970s. In 1971, proposals from the Bank of England to remove restrictions on banks (such as lending ceilings and liquidity minimums) were removed. Only changes in interest rates (market forces !) would be used to control credit in the economy. Unfortunately the demand for credit/money is not affected by interest rates until they become very high. In the early 70s as the British economy suffered from a profits squeeze like most of the West. The effect of freeing the banks was a large increase in the money supply.

Unsurprisingly inflation exploded under Heath's Tory government.

This [is] another of the joys of Ramsay's book - a reminder that the Tories, rather than Labour, are the party of high inflation. Inflation may have peaked at 25% under Labour (who brought it down using Keynsian policies) but it was at 20% and rising when Heath left office. The Tories' embrace of Friedman's ludicrous monetarism in the late 1970s helped to destroy the economy, producing the worst recession in 50 years. Of course anyone with half a brain and not blinded by ideology could have predicted the disaster created by monetarism (and many did). After a few years of trying to control the money supply the Tories gave up as it was impossible and because inflation has little to do with the money supply.

The key year for the dominance of the city was 1979. The 74-79 Labour government placed controls on the banks. Thatcher set them free again, abolishing exchange controls, restrictions on lending etc. They put up interest rates high enough to affect economic activity and so deepened the recession, destroyed a large section of the manufacturing base and, ironically, put up inflation. Once unemployment had exploded enough, inflation levels started to fall. In the end monetarism had to be abandoned before the economy self-destructed. With the dominance of the city however the British economy has continued to get worse although you would never think so listening to politicians and the media.

All in all, the 1980s were disastrous for the working class, the domestic economy and monetarism.

In his analysis of this period, Ramsay, rightly, follows the money. As he notes "all that happened is that economic policy followed the money", an analysis which should be applied to any theory with links to reality. If you work out who benefits from a theory you will soon see why it is taken seriously by "experts" and pundits.

Ramsay argues that New Labour has taken over the role of the party of finance from the Tories. He details how the party has been taken over by a Thatcherite clique with its policies dictated by the City, big business and the US ruling elite. The party not only wooed the City, it has become its political wing. Hence the title named after the "prawn cocktail offensive" of a few years ago.

And New Labour has indeed proved worthy of their backing. The "Iron" chancellor's first act was to make the bank of England independent by giving it the power to set interest rates. Given that this follows the US - and proposed EU - model it is a clear indication of whose interests Labour are putting first. This placing of finance before industry is done in the name of controlling inflation (i.e, maintaining rentier profits) and "stability" - not that there is much evidence that low inflation leads to high levels of growth.

It is worthwhile here to name the "theory" behind New Labour's decision; the "natural rate of unemployment", This is the level of unemployment below which inflation is said to start accelerating. Ignoring the fact that any level of inflation can start an upward spiral, this rate is both invisible and mobile, which means that the Bank of England hikes up interest rates (shifting industrial profits to finance, workers' income to the rich and increasing unemployment) on the off chance that the unemployment rate happens to coincide with this "natural" rate. Despite the fact that you can prove anything with an invisible, mobile rate, it is taken very seriously by economists, politicians and the financial markets. Like God, it cannot be proved not to exist. Who invented this quasi religious piece of "theory"? Milton Friedman, whose Monetarism has proved to be so successful!

Unsurprisingly, New Labour is facing the same problems as occurred during the first years of Thatcherism, with manufacturing industry complaining of high interest rates and an over strong pound. As Ramsey argues

"Gordon Brown acts as though he got the equivalent of economic amnesia, and cannot remember anything that happened before 1997".

All in all, Ramsey's book is an excellent and essential read, though not perfect. His division of the capitalist class into financial and industrial is correct as is the fact that their interests can clash. The rule of finance has had an adverse effect on industrial capital (industrial capital is aided by moderate inflation as it cuts labour costs and interest repayments, finance capital likes high interest and low inflation as this gives them a larger slice of the surplus value we produce).

But it would be wrong to conclude that we have an interest in supporting or working with industrial capital (as Ramsey sometimes seems to imply). As Henwood points out:

"Liberals and populists often reach for potential allies among industrialists, reasoning that even if financial interest's suffer in a boom, firms that trade in real products would thrive when growth is strong. In general industrialists are less sympathetic to theses arguments. Employers in any industry like slack in the labour market; it makes for a pliant workforce, one unlikely to make demands or resist speed ups. If a sizeable proportion of industry objected fundamentally to central bank policy - then central banks wouldn't operate the way they do, while rentiers might like a slightly higher unemployment rate than industrialist, the differences aren't big enough to inspire a big political fight".

Like the differences in the ruling classes' vision of the EU, it is a family quarrel, nothing more. We need to look to our own class, no-one else. So, all five books are useful in determining when economists are lying to you. And in order to change the world, you really need to understand how it works and who it works for. You need the facts to see through the hype and PR exercises and unquestioned assumptions of the media.

The fact is that after 20 years of free market reforms, things have gotten worse. 20 years of "non adversarial", "flexible" labour markets have resulted in stagnating pay levels, longer hours and increased workplace stress. Not that anarchists will be surprised by this. The hype and the reality are moving in opposite directions and such tension can only be a godsend for agitators and other rebels. The question is whether anarchists can take advantage of the situation. We can only be helped by the facts and arguments provided in these books - knowledge is power after all!