Posted by Yves Smith – Naked Capitalism
Yves here. We’re pleased to be presenting a post from a new site, RGK, which stands for “Reviving Growth Keynesianism”. It’s mission, as its proprietor Nicholas Johnson, explains, is to “republish and circulate old-school, left-Keynesian ideas.” One of its inaugural offerings is reissuing a 1938 Harvard-Tufts manifesto, An Economic Program for American Democracy.
The post below introduces the tract and highlighting key points. Both the precis and the extracts of the underlying document are very readable and cogent. In fact, if you’ve read any of the important thinkers of the 1930s and 1940s, say Marriner Eccles, you may have noticed how clear their exposition and thinking is, and how they show a sophisticated understanding of how businesses and households operate. The economics profession seems to have gone into intellectual decline since then, even as its professionals have gained stature and political influence.
Get a cup of coffee. This piece is lengthy but worth your time.
By Nicholas Johnson. Originally published at RGK
In 1938, a group of Harvard and Tufts economists published a book titled An Economic Program for American Democracy. The group included a few famous names – Richard V. Gilbert; George H. Hildebrand, Jr.; Arthur W. Stuart; Maxine Yaple Sweezy; Paul M. Sweety; Lorie Tarshis and John D. Wilson – and a few who never signed the document, owing to their positions in the government, which prevented them from taking a bolder line on questions of public policy than the FDR administration was prepared to defend.
The book was easily the theoretical high-point of growth Keynesianism during the New Deal. The group were all students or followers of Alvin Hansen, “the American Keynes,” but they took his analysis much farther than his initial insights.
Hansen was famous for translating the concepts of The General Theory into a reading of American history, which he called the “secular stagnation hypothesis“. Basically, the idea was that there were no good investment opportunities left in America, even at extremely low interest rates, due to:
- the closing of the frontier with the end of western expansion in the 1890s
- the slow-down in population growth due to the demographic transition
- the exhaustion of the new technologies from the industrial revolution, which had all already been exploited
In other words, objective factors had brought about a permanent decline in private investment. But since full employment required high levels of investment, this meant that the Great Depression was the end-state of a “mature economy” – there would be no natural market forces tending to restore jobs and growth. This was it – the Great Depression-lite was all we really had to look forward to. It turns out that he was wrong about (2) and (3) (for more on that, see Gordon and Benanav from our reading list), at least for the 1930s, though it looks more and more reasonable as applied to today’s economy.
However, his students mixed Keynesian analysis with a little more historical insight. They argued that it was only liberal capitalism which had reached objective limits – the way to economic prosperity was still open for other systems that didn’t rely on the profit motive to elicit investment. Hence, in their view, the need to replace the forever-lost volume of private investment with a bold program of public spending and redistribution.
The book became a surprising best-seller. The argument convinced Hansen almost immediately – and it convinced much of America, and even the President himself. Indeed, according to historian Herbert Stein, when FDR proposed to his son that he make an educational film about the goals of the New Deal, he “suggested this book [An Economic Program for American Democracy] as the best dramatic material for picturization of the economic philosophy of his administration.” According to FDR, the book “which reflected the Keynesian approach to full employment, was a bible of the New Dealers.” (487)
The Harvard-Tufts team were drafted during the war to be the “backroom boys,” responsible for large swathes of government policy. Members of the group served in:
- Office of Price Administration
- Office of Strategic Services
- War Production Board
- The Federal Reserve
- Treasury Department
- State Department
This is somewhat ironic, since as we shall see the book was largely a plea for public investment to restore the health of America’s political economy, lest we succumb to the militarism that was then engulfing much of Europe and Asia. The program was for American Democracy, as an instrument to ward off an Americanized Fascism at home. After the war, many of the authors continued to worry that it was the military providing the economy with stimulus, not the pacifist socialism they had hoped the New Deal might become under their intellectual influence. Some, like Paul Sweezy, eventually turned to Marxism to explain why the military industrial complex had won out over social democracy in America. Others, merely dispirited, retreated into the academy to write books, trying to persuade Americans that the “peace dividend” was large enough to justify drawing the American military back within the perimeters of the empire.
But here we are less concerned with the authors’ later disillusionment – the product of the Second World War and the subsequent Cold War, complex historical processes with many overlapping causes that were out of their control – than with the hope and promise that their book’s success represented.
The following blog post introduces some of the highlights of the book, with brief commentary and context for some of the quotes. Check out the entire text here.
One of the first theoretical moves they make is, like Hansen, to periodize American economic history. In their case, it’s a play in three parts, with the final act (hopefully) contained within their books’ pages:
The first, beginning when the earliest colonists set foot on our shores, was the period of economic expansion. It came to a dramatic close with the collapse of 1929. The second period has so far been one of economic stagnation.
From there, they quickly move on to a Hegelian theory of the state:
The conception of government as the organized expression of the collective strength and aspirations of the great mass of the people has come to stay. The New Deal has not failed. Rather its great weakness has been a wavering adherence to its own principles.
And they give their project its full world-historical perspective, analyzing the advance of settler colonialism across all global frontiers:
From a world viewpoint the settlement and industrialization of the North American continent was the most spectacular achievement of western capitalism. It was, however, by no means the only such achievement. Everywhere the frontiers of civilization and trade were pushed outward.
Finally, they arrive at a vision of capitalist globalization that sounds as if its lifted from the Manifesto or Luxemburg:
In this way Africa, South America, Asia, and Australia were all brought within the ambit of capitalism, while on the European continent itself industrialism steadily spread into areas where formerly the modes of a simple agricultural economy had prevailed. Thus the economic systems of the whole world were geared to expansion, and their healthy functioning depended upon the continuation of the basic conditions of expansion: the availability of new lands and new markets.
They attribute stagnation to two facts – the closing of global frontiers, and the decline in population growth. Oddly, they don’t mention the Immigration Act of 1924, which basically shut off the inflow of new arrivals from everywhere but Northern Europe. Over the prior five decades, millions of Southern and Eastern Europeans had swelled the ranks of the American working class, adding to the complexity of the division of labor (at low wages) and increasing the consumption demand from the home market. After the 1924 act the new pilgrims to America’s shores slowed down to a bare trickle. Hence, the slowdown in population growth was to a large extent a self-inflicted injury, at least in America.
Nevertheless, they attributed the continued growth of the American economy in the 1920s to a switch to intensive rather than extensive growth. Urbanization was facilitated by the auto-industry and the networked home – construction, electrification, running water, radios etc. Overall, they viewed the growth of this decade as equally shared.
However, overcapacity soon led to inequality, and hence economic collapse:
When, during the closing years of the decade, the new demand became saturated, the replacement demand, though gradually increasing, was not nearly sufficient to maintain those industries on the scale to which they had been expanded. The backbone of the prosperity was broken: the great industries which had been primarily responsible for it ceased to distribute enough purchasing power, and quickly the whole economic structure collapsed.
In the middle pages, they concisely summarize the stagnationist position:
The growth in the nation’s income rested, therefore, upon the presence of abundant private investment opportunities, and new opportunities were continually provided by the discovery of new industrial techniques, the rapid growth of population, and the pushing back of geographical and economic frontiers. However, as has been indicated in the preceding section, these underlying factors of growth upon which our economic life has depended in the past are no longer operative. The rate of population growth has slackened, the new techniques developed today in many cases involve less capital investment than the older methods which they are displacing, and the process of pushing back frontiers is now nearly complete. It is largely because of these and other similar basic changes in our national life, rather than because the New Deal was “disturbing to business confidence,” that private industry was unable to continue the recovery movement when the stimulus of government spending had been withdrawn.
Their key axiom was this:
We have shown that since the gap between the aggregate incomes of individuals and their current disbursements widens as incomes increase, private capital outlays must keep growing if incomes are to expand in the absence of public expenditures
But in addition to public demand, structural reforms were also still necessary. For instance, the railroads suffered from the overweening influence of finance:
The inflated capitalization and banker control of the railroads presented in 1937, and still presents, a major obstacle to substantial investment in this field. Although the electric power industry, unlike the railroads, still appears to be relatively well situated from the standpoint of possibilities for long-term growth, its phase of youthful, spontaneous expansion came to an end in the decade of the ’20’s, and further vigorous growth in this industry must depend in the future much more largely upon wise public policy.
They saw similar needs in the housing market, where laissez-faire policies led to the proliferation of slums. Here, there was significant room for high quality government housing.
Finally, they finish the first half of the book with the resounding declaration that permanent stagnation in liberal capitalism means the New Deal can’t simply end if jobs return. Stagnation required permanent public vigilance:
The notion that public spending can safely be resorted to only as a temporary, emergency device must be abandoned. A program must be developed which recognizes the necessity for permanent public investment.
What would the so-called “Permanent Program” consist of?
First, they layout a detailed program for stimulating consumption:
- old-age benefits
- aid to education and health
- workmen’s compensation and social security services
- unemployment compensation and relief
- wage and hour standards
To pay for it, they propose closing loopholes in the tax law and a stricter enforcement of the existing codes (which would be the liberal line for the rest of the century).
Next, they detail a program for investment:
- The “core” of which was a long-range investment program, “a fifty-year plan for rehousing and rebuilding America”
- A massive conservation effort for husbanding natural resources and collective flood control
- Massive investments in education and health
- Structural reform of the railroads, up to and including nationalization, and updating of its capital stock with public funds
But this is no dower, penny pinching Soviet modernization project. They are clear that the public goods they envision are luxury quality:
And housing is, of course, only part of the job that needs to be done. […]
American cities are poor in recreational facilities. Parks, playgrounds, and indoor recreation centers are far too scarce. The streets still provide the chief playground for children in the crowded sections of our cities. The urban populations of the country also need extensive suburban park areas within easy reach where they can enjoy real country air and surroundings.
Traffic facilities have not kept pace with the tremendous growth of traffic in the last twenty years. A rising level of incomes will impose still further strain on our already overburdened streets and highways. To relieve congestion it is particularly important that cities be provided with express highways carrying through traffic either around or over crowded districts. Rapid transit lines, either underground or over special rights of way, have been developed in only a few cities.
They are aware that many might object to their program, on the theory that this harms the government’s credit, and hence might plunge the country into higher debt payments. However, their response is classically Keynesian – it sounds more or less like today’s advocates of MMT:
c) Government credit. It is important to realize that a threat to government credit is a political, not an economic, issue. Under modern conditions a large part of the investable funds of the country are in the hands of a few large financial institutions: banks, trust companies, and insurance companies. The men who control these institutions have it in their power, if they disapprove of a government’s program, to refuse to buy its bonds and hence “weaken its credit.” With the large excess bank reserves and surplus funds seeking investment, which characterize our present-day economy, such a refusal could only be considered political in its implications. Should such an eventuality arise, which it may be hoped is unlikely, the government would be forced to take measures to protect the community by extending the already recognized principle of public control over the financial system. The Federal Reserve banks would provide a first line of defense. But selling bonds to the Reserve banks would not be a satisfactory permanent solution. If the commercial banks should continue to refuse their co-operation, the public would clearly be justified in assuming control of the entire banking system.
Since the problem is lack of demand, it can’t possibly be the case that inflation will ever be the problem that needs addressing – but insofar as it is, the Fed has plenty of tools with which to protect us.
However, price increases due to monopoly may be a microeconomic problem in some sectors:
It follows that a program designed to raise the national income through stimulating directly and indirectly the volume of expenditure on useful goods and services must include measures to insure against excessive price rises in industries where free competition does not prevail.
The solution, however, was not to breakup the monopolies:
We are opposed for two reasons to trust-busting as a method of solving this problem. First, because we believe that past experience has demonstrated the ineffectiveness of trust-busting. Second, it is our conviction that trust-busting, even if it were entirely practicable, could not be carried sufficiently far to restore competition without sacrificing those technical and organizational achievements which now for the first time in history make possible a real life of abundance for all. There is no better guarantee of man’s ability to solve the problems of a complex society than the amazing organizational achievements of our modern billion-dollar corporations. The trouble with the large corporation is not its size nor any lack of efficiency, but rather its lack of social responsibility. Tremendous power for good or evil is placed in the hands of a few individuals, and the logic of unrestrained profit-making too often insures that it will be used for evil. Our problem today is not to destroy these creations of the technical and organizing genius of mankind, but to find ways and means of harnessing them to the great task of promoting the welfare of the community as a whole.
Instead, they favored regulation on the model of public utilities boards – which had a long history in America, and often worked. And where this method was unsuited, they advocated for public ownership – which had not been tried extensively in America, but was fashionable at the time among the Europeans.
They even incorporate the concept of “surplus population” in their analysis of America’s agrarian transition – and its solution, the creation of new industrial employment to soak up the agrarian surplus:
The major difficulties—low prices and surplus production—which beset American agriculture today are rooted in two basic causes: a low national income and a farm population which is larger than would be required to satisfy the demand for agricultural products even on a high level of national income. It follows that agricultural prices and incomes can be increased only by raising the demand for food and clothing on one hand, and by creating more industrial jobs for the surplus farm population on the other. But, as we have already demonstrated, rising demand and new jobs are simply the other side of an expanding national income. A permanent solution of the agricultural problem can be achieved only through a program designed to raise the national income such as we have already suggested.
Nor are they miss the problems posed by automation:
Since the beginnings of modern industrialism, workers have found themselves constantly under the threat of displacement by machines. Even in the periods of rapid economic expansion many workers suffered severe hardship in the process of adapting themselves to abrupt changes in the technique of production. Deprived suddenly of their jobs, they have been left to shift for themselves in an attempt to find new ones.
A serious problem even in the period of expanding employment opportunities, technological displacement has become a major catastrophe under conditions of economic stagnation. The worker thrown out of a job by a new method of rolling steel, or making tires, or picking cotton, is confronted with thousands of already unemployed workers in whatever direction he turns. Instead of a few months or even years of looking for a new job, the displaced worker sees permanent idleness ahead of him.
The general program we have outlined will create new job opportunities; it will give the displaced worker somewhere to go. But this is not enough.
They favored a jobs guarantee, but argued that the Permanent Program needed to go further:
The provision of jobs, however, is by itself not enough. Labor should also have an equal voice with employers in determining the payment for and conditions of work. In the absence of such equality, the freedom of contract, which is the basis of our economic order, loses its meaning and becomes a mask for exploitation and oppression. We believe that long experience has conclusively demonstrated that equality of bargaining power between employers and workers is realized in practice only when workers are organized in strong independent trade unions. For this reason we believe that it is the duty of government to do everything in its power to prevent employers from interfering with the rights of workers to self-organization, whether that interference be exercised inside or outside the place of employment.
In Chapter III part (B), there is a lengthy section which summarizes their views quite concisely:
Why do we anticipate trouble? Why is it not possible to rely on the national income to maintain itself at a high level once the government has succeeded in getting it there? The answer has already been given in the preceding sections, but it will be well to review the nature of the difficulty before outlining our long-run program for meeting it.
The national income can be looked at in two ways: according to the way it is spent, and according to the way it is earned. On the spending side the nation uses only part of its income for consumption purchases. The rest is saved, that is, it is withheld from consumption and either allowed to accumulate in a bank or is invested in securities, an insurance policy, or a personal business. On the earning side, the national income is received in part by those engaged in the production of goods for current consumption; in part, by people engaged in building durable capital structures. Wages, salaries, rents, interest, and profits paid out in the construction of houses, roads, railroads, public utility plants, and the like fall in this category. So long as corporations and individuals who have the power to spend money on capital goods decide to pay out at least as much as the whole country is simultaneously deciding to save, no serious difficulty develops. But this balance is precarious. There is no necessary equivalence between the two sets of decisions. On the whole, the country’s saving is inflexible—both because of the unequal distribution of income and the prevalence of saving through institutions. This means that an unfavorable change in the investment outlook causes little shifting from saving to spending on consumption.
Investment demand, on the other hand, is highly variable. Even in the period of its great expansion the American economy was subject to periodic setbacks because of temporary choking of investment outlets. Today the country is faced with a long-run change in trend. Private enterprise, even at its best, is unable to absorb the whole of the savings the country tends to pile up. In the absence of supporting measures by the government, the result is a collapse of economic activity and a decline in the national income to poverty levels.
The danger of such a decline can be attacked from two sides. On one side, redistribution of income from the saving to the spending sections of the community will reduce the country’s saving and increase its consumption. On the other, new fields for the investment of savings can be developed. A careful consideration of the country’s needs leads us to advocate an attack on the problem from both sides at once.
First, as to consumption. There can be no doubt that the lower-income families in the country need more money to spend on ordinary articles of consumption. According to an estimate of the Brookings Institution, even in 1929 about 70 per cent of the families in the United States had incomes of less than $2,500. Twenty-one per cent were below the $1,000 line. Clearly there was plenty of room even in that prosperous year for increased consumption on the part of the mass of the people. Had the then-existing government been looking for ways to maintain full employment of the country’s resources, there was plenty of opportunity for expansion in meeting the consumption needs of the mass of the people. There was no need to search for new and strange fields for investment.
On the other hand, it would not be good public policy at this stage in our national development to rely entirely on increasing consumption directly through redistribution of income as a means of sustaining stable prosperity. Most important of the considerations against such a policy is the fact that there are vast fields in which investment, particularly public investment, is needed. In some fields, notably the provision of low-cost housing, public investment is a necessary adjunct of a consumption-increasing policy. Since private enterprise has been unsuccessful in the provision of new housing for the lower-income families, public agencies must themselves undertake extensive housing construction if the dwelling standards of these families are to be raised. Large public investment in building schools and hospitals will similarly be necessary if the country is to provide itself with more adequate education and health services. Other investment fields—highway building, conservation of natural resources, flood control, city planning, and so forth—though less directly related to consumption, are just as important to the increasing well-being of the nation.
While the need for the capital goods which a public investment program can provide is the most important reason for urging its adoption, other considerations are pertinent. A sudden reorientation of the whole economy to production of consumer goods would be difficult, even if it were desirable. Large numbers of people have been trained in the capital goods industries, for example, the steel industry; whole communities have grown up around them; and vast amounts of specialized plant and equipment are devoted to them. The shift in emphasis from capital to consumer goods production should accordingly be as gradual as possible. With the program of public investment outlined here it need involve no actual shrinkage in the capital goods industries as a group. Such shift as is necessary can be accomplished entirely through a more rapid rate of growth in the consumer goods industries.
This program is designed to protect private enterprise in the traditional private sector of the economy. It proposes to do this by restoring the demand for the products of private industry through a vigorous expansion of the public sector. A moderate amount of income redistribution is entirely consistent with this aim. Too great an inequality in the distribution of incomes is a danger both economically and socially. This is recognized in principle in the country’s present tax rates and needs only to be translated into practice by making these rates really effective. On the other hand, an attempt to achieve anything like complete equality of incomes undoubtedly would be a deterrent to private enterprise. Nothing of the sort is proposed here. In the program which we shall outline below the wealthy will be permitted to keep for themselves as large a fraction of a given taxable income as they do now.
Furthermore, in connection with our proposals for redistribution of income, the distinction between the long-run and the immediate programs must be kept in mind. We do not advocate any redistribution of income on the present poverty level of national economic activity. For the near future we urge a policy of Federal borrowing and spending which will raise the incomes of all, rich and poor alike, to higher levels. It is only as these higher levels are attained that a moderate degree of redistribution will be desirable as part of a comprehensive program for keeping the economy on an even keel. The measures we propose do not involve reducing anyone’s income now or in the future. They are not even designed to prevent the further accumulation of wealth by those who have already accumulated vast fortunes. They are designed merely to keep the rich from getting richer at too rapid a rate. This is surely the part of wisdom if we are to maintain not only economic stability but also our political and social democracy.
Finally, the closing paragraphs are worth quoting in full, since after 90 pages of technical analysis, the full political stakes of the book leap out from behind the facts and figures and stand before the reader, stark, imposing moral clarity. Democracy and the structure of capitalism are in contradiction, and the result has been the Great Depression; the businessmen have misdiagnosed this, and the results of their flawed analysis have been previewed – already in 1938, mind you – by the holocaust of militarist Europe:
In this concluding section it remains only to emphasize the importance of prompt action along the lines laid down in order to arrest the disastrous trend of economic contraction and to set America once again upon the course of expansion and progress. The dangers of delay are strikingly brought home to us by the experience in other lands, where governments which refused to accept the responsibility for the proper functioning of their national economies have in case after case fallen victim to their own inaction, and where, in all too many instances, democracy itself has perished.
Here in America we can save our free democratic institutions only by using them to expand our national income. For private enterprise, left to its own devices, is no longer capable of achieving anything approaching full employment of our human and material resources. This the experience of the last decade has taught us. No one is to blame for this state of affairs; its explanation lies in the structural changes in the economies of the capitalist world which we have already analyzed. Those businessmen who profess to see the origin of our difficulties in uncertainty and fear of what the future will bring forth are simply mistaking symptom for cause. They lack confidence in the future because the future holds insufficient promise of profitable investment and expanded markets. The policies of government which businessmen are wont to hold responsible for their lack of confidence in the future arise in part from a desire to preserve to business its paying customers, in part from a realization of the necessity for eliminating serious abuses from our commercial and fiscal practices, and in part from an insistent demand on the part of the people that labor be given the same opportunity for self-organization that business has long enjoyed. Surely measures as wise as these would not prevent businessmen from providing for the requirements of an expanding economy, nor would their abrogation induce investment in the face of a contracting trend. President Roosevelt was entirely justified, we believe, when he recently stated that “the problem of bringing idle men and idle money together will not be solved by abandoning the forward steps we have taken to adjust the burdens of taxation more fairly and to attain social justice and security.”
The need for immediate action to achieve this end cannot be overemphasized. For the danger exists that businessmen, obsessed with a devil theory of government, will attempt to use their economic power to suppress democracy and place in its stead a dictatorship supposedly dedicated to the fulfillment of their desires. Should they succeed, it would then be too late to correct a grievous error. For, like the sorcerer who could no longer control the forces of the nether world which he had called up by his spell, business would be overwhelmed by its own creature. Such a dictatorship would revive economic activity, but it would be activity devoted increasingly to producing weapons of death and destruction which must sooner or later be used to plunge the country into a holocaust of slaughter and bloodshed.
Few Harvard job market papers since have ended with such a clear-eyed view of the stakes of analyzing political economy. July 17, 2020