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In Australia, Keynesianism Is Back in Fashion — but It Still Won’t Work

Neo-Keynesians, nostalgic for the postwar economic boom, imagine that state spending can create full employment and resolve the crisis of neoliberalism. But their analysis is wrong about the past, wrong about the present, and wrong about capitalism itself.

Sydney, Australia. (@socialcut / Unsplash)

Large-scale state intervention into the economy is firmly back on the agenda in country after country, and Australia is no exception. It’s unsurprising, then, that a version of Keynesianism is coagulating amongst academics, elements of the Australian Labor Party (ALP), the Greens, trade unions, and progressive think tanks.

Ged Kearney’s op-ed, “Full Employment Could Be the Answer to Rebuilding the Economy” is a chemically pure version of this neo-Keynesian ideology. A close and critical look at Kearney’s argument is an excellent way to get a handle on this wider debate.

Paper Tigers

Kearney is the former president of the Australian Council of Trade Unions (ACTU) and Labor MP for Cooper, in Melbourne’s north. She argues that the ALP governments headed by John Curtin and Ben Chifly (1941–49) built their economic policy on the basis of the 1945 “White Paper on Full Employment,” penned by a team of economists who were led by H. C. Coombs. This, Kearney explains, directed government spending toward socially useful projects, raising direct state employment (a Job Guarantee in all but name), while also boosting wages — and thus consumer demand.

Although she needs to indulge in a little hand-waving to avoid accidentally celebrating Robert Menzies, Australia’s Liberal prime minister between 1949 and 1966, Kearney, asserts that this policy-making approach delivered growth and relative social equality until the 1970s. The good times ended, we are told, when neoliberal policies lowered growth, worsening economic insecurity and social inequality.

The ACTU’s recent National Economic Reconstruction Plan, written with Jim Stanford from the Centre for Future Work, makes a similar argument. Stanford cites the importance of the White Paper to postwar reconstruction, and blames increasingly dire social and economic conditions in Australia on a change of policy: “Due to years of failed trickle-down economics, wage suppression, and austerity, we entered the COVID-19 pandemic with an economy that was hardly growing at all.”

The moral of the story is simple. The good times can return, Kearny argues, “with political will and an acknowledgement of the failures of the neo-liberal approach [that] has not created the resilient economy that we need.” Good policy, good economic outcomes; bad policy, bad economic outcomes. If only good people with good ideas can win the battle of politics, all will be well.

Misunderstanding Capitalism

This narrative is wrong about the past, wrong about the present, wrong about the nature of capitalism, and wrong about how to overcome it.

Obviously, there are differences between postwar Keynesian capitalism and the neoliberal variety. In the former, unemployment was lower and rates of full-time and permanent employment higher. Even so, labor-force participation as a percentage of the population went up under the neoliberal regime. And while the policy choices of states do have an impact on economic trajectories, the neo-Keynesians dramatically overstate the importance of government policy in comparison to global and systemic forces.

Their first error is to assume that the economy is driven by demand. As Kearney writes: “The basic economic premise that money in people’s pockets is what drives the economy is sound.”

Clearly, demand matters. If commodities cannot find a buyer, capital withers on the vine. Yet for a business, selling goods and services is not an end in itself. Rather, the goal is to accumulate capital; to turn a sum of money into a greater amount of money, endlessly. If profits cannot be made, no amount of demand can spur production.

The profit motive underpins competition. A firm that produces inefficiently either loses market share by charging higher than average prices or generates a lower profit on investment. So competition forces business to grow and ramp up productivity. This can be done by squeezing more out of workers (longer hours, lower wages, trading away conditions for “flexibility,” etc.), or by investing in productivity-enhancing technology and machinery, making the same amount of labor time more productive.

As Marx explains, when other businesses match this investment, the “surplus value” produced by labor power — the source of profits — declines in proportion to total capital expenditure. The result is a declining rate of profit.

Australian manufacturing is an instructive example. According to the Productivity Commission, due to technological investment, “in 2001–02, about 1.1 million employees (15 percent fewer than in 1966–67) produced double the real output of 1966–67.” Yet, as a 2014 federal government report on Australian manufacturing noted, despite productivity growth, between 2001 and 2014, the “gross operating profit . . . of manufacturing businesses [fell] from 9.5 to 7.8 percent.”

As the rate of profit declines, capitalists become reluctant to invest. Often called “overaccumulation,” this tendency makes crisis unavoidable. Increasing demand, whether by government expenditure or low interest rates, can only delay the inevitable.

Even when encouraged by state intervention, full employment is therefore exceptional. Sustained unemployment is the norm. And when profits are low, unemployment suits business: competition over scarce jobs puts downward pressure on wages.

Government Policy Didn’t Create the Postwar Boom

But didn’t state intervention following World War II successfully achieve full employment? No. Full employment was a side effect of a boom that didn’t last. Today’s neo-Keynesians fail to grasp this point, and misread the 1945 White Paper. They overemphasize its impact on policy, exaggerate the impact of policy on growth, and misunderstand the crisis that spelled the end of classical Keynesianism.

For example, in her 2019 book On Fairness, ACTU secretary Sally McManus writes the following:

In economies where jobs in a strong public sector are available, private employers have to compete for workers by offering comparable pay and conditions . . . for the thirty years from the World War II John Curtin Labor government, to the end of the Gough Whitlam Labor one in the 1970s, Australia had such a policy.

This, McManus argues, strengthens the bargaining position of workers, driving up wages and conditions.

But this conclusion doesn’t hold up on reading the White Paper. As legal academic Anthony O’Donnell shows, the paper was a very modest document based on the idea of mild counter-cyclical investment. It proposed to maintain full employment by using state spending to boost demand, fueling private investment. Cowed by fears that wage rises would lead to inflation, it linked wage increases with productivity gains instead.

In the period between the Second World War and the mid-1970s, government policy did not simply put the ideas of the White Paper into effect. Evan Jones, a former Sydney University academic, demonstrates that state intervention was often pragmatic, contradictory, and focused on specific problems. For example, the Chifley ALP government opposed union demands in an attempt to control inflation.

Indeed, as Jones explains, the postwar boom was produced by multiple national and international factors, with government policy playing at most a secondary role. In his essay “Australia’s Role in World Capitalism,” Bruce McFarlane documents the crucial role played by US multinationals in Australia’s high-growth decades. These firms, which then stood at the very heart of the world economy, poured capital into Australia partly because they considered it to be politically secure. This capital inflow, as McFarlane notes, was funded by super-exploitation in the Third World.

As far as policy was concerned, as Kevin Rowley argues, capitalism in Australia “benefitted from an international conjuncture which promoted a massive inflow of labor, capital, and technology, and allowed Australian exports of primary produce and minerals to flourish.” As for policy, Rowley notes the importance of tariffs — in addition to protecting local industries from imports, they were used to encourage US capital investment.

The Death of the Keynesian Consensus

In focusing on economic policy, today’s neo-Keynesians forget that neoliberalism emerged in response to an economic crisis that combined rising inflation, unemployment, and stagnant growth (together, known as “stagflation”).

Broadly, the 1970s crisis resulted from two factors. The first was the tendency toward overaccumulation described above. At the same time, record levels of worker militancy and powerful social movements drove wages up and won extensions to the welfare state. Combined with the cost of the Vietnam War, these factors squeezed profits, slowing investment. Growing spending power was not matched by growing output, driving up prices.

In the United States between 1966 and 1970, corporate profits as a share of gross national product fell from 11 percent to 7.1 percent. Between 1967 and 1972, however, wages rose by 15 percent. Social spending accelerated, from about 25 percent to over 50 percent of the federal budget by 1978. The state budget itself, as a percentage of GNP, grew from 18 percent to 24 percent over the same period.

As Leo Panitch and Sam Ginden note, by 1970, “the US rate of profit was already down 40 percent from the high level of the mid 1960s.” To explain the trend, they point to rising wages and the declining efficiency of machinery investments, noting that both factors were “closely linked to class conflict in the workplace.”

In her book How Labour Built Neoliberalism, Elizabeth Humphrys identifies a similar trend in Australia. Between 1972 and 1975, labor’s share of national income rose from 55 percent to 62 percent. This dovetailed with a profits squeeze in the 1970s: “In elite business, political and media circles it became increasingly accepted that not only were rising real wages the cause of the predicament in Australia, but their suppression was the essential solution.”

What we call neoliberalism was a reaction to these developments. Moreover, this policy agenda begun in Australia under ALP prime minister Gough Whitlam. In an approach that Humphrys describes as “proto-neoliberalism,” Whitlam reduced tariffs and sought to control inflation through wage restraint.

Ultimately, the Bob Hawke–Paul Keating Labor government only restrained working-class militancy with 1983’s Prices and Incomes Accord that restricted unions and temporarily restored profit levels.

The Second Coming of Keynesianism?

Today, Australia’s position in the world system is broadly similar to that it enjoyed in the postwar era: the economy still relies on exports and inflows of capital. However, the international economic situation is starkly different.

World War II had seen the destruction of capital and productive capacity on a vast scale. Today, on the other hand, as Aaron Benanav has demonstrated, there is vast overaccumulation in the global economy. Excess manufacturing capacity has reduced demand for labor, leading to de-industrialization and underemployment.

While the growth of finance, supported by central banks, helps keep profits flowing, it does little to power investment and employment. The international economic conditions that spurred the postwar boom no longer exist.

The system is malfunctioning, producing a dizzying growth of unemployment. Even if the neo-Keynesians in the ALP, the Greens, and the labor movement managed to win political and ideological hegemony, there is little reason to believe that state policy could produce the results they want.

Of course, the Left and the labor movement should demand immediate measures to ameliorate declining conditions and increase our power, dignity, and autonomy from capital. Yet we will come up against a hard limit built into the logic of capital accumulation. Without radically transforming the relationships that govern production, good people with good policy ideas will be steamrolled by the reality of capitalism.