A first point to make might be that presumes government has no impact on aggregated demand (and investment is premised on the expectation of future demand).

But, before you pile on Hockey, note that Julia Gillard’s stated reason for the whole “return the budget to surplus in 2012-2013″ thing also accepts the same logic.

Now, we might also like to question whether it’s the quantum of investment that’s the most important thing, or where the investment is going. That’s one thing that concerned Keynes. (Obviously, there has to be a certain quantum of investment, and I’m not saying otherwise.)

Here it’s worth understanding the difference between Gross National Product (the sum of all goods and services produced) and Gross National Income (how much of that value stays in the country). In Australia, there’s a pretty sizeable gap between GDP and GNI, which goes some way to explaining why there is limited “trickle down” from the resources boom. The other issue (or rather, one of them) with a surfeit of investment in resources is the effect it has on the exchange rate, which has obvious negative impacts on the rest of the joint, particular other export industries.

Note also that the self-interest of the mining industry is far from identical to the interests of the economy and Australia. Though they’ve done a very good job of convincing a lot of people otherwise.

Monetary policy is of very limited use in rebalancing things for a number of reasons, including the relationship between interest rates and the dollar.

So, you would think fiscal policy might help. It might be that something like…. a Resources Rent Tax would be a good idea. Or government spending to stimulate the rest of the joint.

But, of course, that, we’re told would be bad. Crowding out, etc.

Here we need to have a look at the rest of the equation – not just investment, but also demand and the anticipation of future demand and thus profit.

Fortunately, Philip Pilkington has written an excellent post on just this topic at Naked Capitalism.

I particularly like this:

Now, I can already hear the inevitable Austrian chime in. “Arg! You lying Keynesian totalitarian scum! The government didn’t need to invest to employ those five workers; another capitalist could have done so. You’re just a crypto-communist who wants the government to control our lives and tell us what to do! You hate freedom and liberty, ahhh! <3 Ayn Rand 4eva!”.

Now, I think you should read the whole thing (and not just the funny bit), but here’s the conclusion:

As we can see, profits actually come from some fairly unusual sources. Government spending up to the point of full employment actually increases profits, while workers’ savings diminishes them. This ties into the MMT argument that government should offset workers’ desired savings. As we can clearly see from the contemporary situation, this happens in an almost automatic manner; as the private sector saves and pays down debt in the current uncertain environment, the government goes into deficit in order to float profitability.

We should also note that capitalist economies are not perpetual motion machines. Many people seem to have a vague inclination that capitalist economies are somehow ‘self-generating’ and, for example, that government spending or private debt-financing are exogenous or external factors. This is clearly not the case. Money enters the economy through either government spending or private sector indebtedness. These then wash through the economy and eventually turn up as profits. These facts need to be front and centre when public policy is considered.

One of the big conundrums of social democracy is that measures to increase profit are also (up to a point) in the interests of workers, precisely because we live in capitalist economies. One of the ways to deal with, if not dissolve away, that conundrum is to pay attention to the distributional question of the balance between return on capital and return to labour, and the effects of fiscal policy on the business cycle. That’s not really happening now.

It should be though, because the joint is looking pretty stuffed.

Nostrums about debt and deficit need to be crowded out by some actual fact about how capitalist economies work.

The meltdown that followed the end of the credit and housing bubbles was addressed by governments stimulating demand. All very Keynesian.

However, there was a second string to the response to the GFC that got forgotten as quickly as you could say “recovery” (and “Goodbye, Kevin Rudd and Gordon Brown”!)… that was the whole “regulate international finance flows and markets and bankers and stuff” bit. Remember what the G20 was going to do?

So we now have the situation where ‘markets’ have demanded, and got, austerity economics. But that has led to continued economic gloom. And states who might wish to continue to stimulate demand would have to borrow further from… markets. So the aforesaid markets display their ‘animal spirits’ and jump off a cliff.

And so it goes.

Keynes’ whole point was that there were very large scale irrationalities at work in market behaviour, even if some of the time it operates within its own rationality. Hence, in his book, the need for states to temper their excesses. None of this, by the way, is or should be particularly radical.

Gordon Brown was actually right that stimulus should have been maintained for longer, and the overweening irrationality of markets addressed at the international level. It’s interesting, now, in some of what’s starting to come out in memoirs, that he faced a lot of opposition from Newer Labourish types in his own party, who wanted to jump onto the ‘cut debt now’ wagon in advance of the Tories.

Tony Blair’s (really weird) memoir Journey, by the way, ends with a call for even more markets.

One for the true believers.

For those who don’t want to wade through all of it, Bernard Keane has analysed Abbott’s address at Crikey:

Yesterday’s economics speech by Tony Abbott was a major disappointment, confirming rather than reversing the impression that the Opposition leader and economics don’t have much more than a nodding acquaintance.

Keane’s on the money in suggesting that it’s thin gruel, when you strip away the decontextualised Keynes quote and the statistics. Its sole take away message appears to have been contained in the twin claims that the 1997 Asian Currency Crisis was a bigger threat to the Australian economy than the Global Financial Crisis (demonstrably untrue, but in the Abbott style of “our crisis was bigger than your crisis”) and that Tony is not actually the ghost of B.A. Santamaria but rather imbued with the values of Peter Costello and John Howard. (It would be interesting, of course, to discuss precisely what constituted the values of Peter Costello and John Howard.) So, it’s really an attempt to reassure the business horses who were stampeded by Abbott’s recent thought bubbledom.

For what it’s worth, I thought Joe Hockey made a better fist of defending a very shaky brief on Lateline last night than his Leader, though Tony Jones was able to expose the contradictions in what passes for reasoning among the Coalition – the Liberals stand for low taxes, but on the other hand, we might need an awful lot of levies because of Labor’s terrible wasteful spending. What Hockey did show, as did Abbott, is that the cupboard on either substantive policy measures or the savings that would need to be identified to make the ‘debt’ line more than rhetoric is bare. It’s certainly not impossible for the Liberals to advance a fiscal policy from opposition, but they’re always waiting; waiting for Henry, waiting for the Budget. As with health, this mob don’t have much of a clue what they might do if they were elected. They just know they’d like to be.

Elsewhere: Public Opinion.

Update: Ben Eltham in New Matilda.

Albrechtsen tied herself in a series of knots trying to find the “gotcha” moment in Rudd’s ideological discourse. In point of fact, it’s quite possible to reconcile fiscal conservatism with being a social democrat, but the Hayek worshippers seem stuck in an age when there was supposedly a slippery slope between any view that markets are social institutions and socialism itself.

Here, it’s perhaps interesting that Gordon Brown chose to invoke Adam Smith on several occasions, a thinker to whom the authors of Hayekian dribble pay only occasional and meaningless obeisance:

Now, let me put markets in context. They can create unrivalled widening of choices and chances, harnessing self-interest to produce results transcending self-interest. When they work, they will fulfil the promise of Adam Smith that individual gain leads to collective gain, that even when people are pursuing private interests and private wishes they can nevertheless deliver public good.

But as we are discovering to our considerable cost, the problem is that, without transparent rules to guide them, free markets can reduce all relationships to transactions, all motivations to self-interest; as Jonathan Sacks has said, they can reduce all sense of value to consumer choice, all sense of worth to a price tag. So, unbridled and untrammelled, they can become the enemy of the good society.

And we can now see also that markets cannot self-regulate, but they can self-destruct and, again, if untrammelled and unbridled, they can become not just the enemy of the good society; they can become the enemy of the good economy. Markets are in the public interest but they are not synonymous with it.

Gordon Brown, a former university lecturer with a History PhD from Edinburgh, perhaps has a better claim to public intellectual status than Kevin Rudd. His whole speech is worth a read, and the full text is here (as is Rudd’s).

So why was Brown conjuring up the spirit of Adam Smith (aside from the Scottish angle)?

In 1960, Maurice Merleau-Ponty referred to Marxism as a body of thought that no longer had life, but felt that liberated Marx himself to speak more clearly. That’s a sentiment echoed by many – and Marx as a philosopher enjoyed something of a revival after the demise of Soviet Marxism in 1991. Something similar might be happening to Adam Smith. The body of practices, and the free market ideology underpinning and supporting them, which invoked Smith as a founder, are now in rapid decay. We can now read Smith for what he says, rather than for what ideologues have made him say, and that gives his insights much more contemporary force.

In this context, I’d gesture again to the fact that “free markets” are not identical with capitalism. A recent student of Smith, the Italian-American economist and historical sociologist Giovanni Arrighi, argues:

One of the major problems on the left, but also on the right, is to think that there is only one kind of capitalism that reproduces itself historically; whereas capitalism has transformed itself substantively—particularly on a global basis—in unexpected ways. For several centuries capitalism relied on slavery, and seemed so embedded in slavery from all points of view that it could not survive without it; whereas slavery was abolished, and capitalism not only survived but prospered more than ever, now developing on the basis of colonialism and imperialism. At this point it seemed that colonialism and imperialism were essential to capitalism’s operation—but again, after the Second World War, capitalism managed to discard them, and to survive and prosper. World-historically, capitalism has been continually transforming itself, and this is one of its main characteristics; it would be very short-sighted to try to pin down what capitalism is without looking at these crucial transformations.

Writing in the New York Review of Books, the Nobel prize winning economist Amyarta Sen makes a complementary point:

What are the special characteristics that make a system indubitably capitalist—old or new? If the present capitalist economic system is to be reformed, what would make the end result a new capitalism, rather than something else? It seems to be generally assumed that relying on markets for economic transactions is a necessary condition for an economy to be identified as capitalist. In a similar way, dependence on the profit motive and on individual rewards based on private ownership are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist?

All affluent countries in the world—those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Australia, and others—have, for quite some time now, depended partly on transactions and other payments that occur largely outside markets. These include unemployment benefits, public pensions, other features of social security, and the provision of education, health care, and a variety of other services distributed through nonmarket arrangements. The economic entitlements connected with such services are not based on private ownership and property rights.

Also, the market economy has depended for its own working not only on maximizing profits but also on many other activities, such as maintaining public security and supplying public services—some of which have taken people well beyond an economy driven only by profit. The creditable performance of the so-called capitalist system, when things moved forward, drew on a combination of institutions—publicly funded education, medical care, and mass transportation are just a few of many—that went much beyond relying only on a profit-maximizing market economy and on personal entitlements confined to private ownership.

Sen goes on to discuss Smith:

Indeed, early advocates of the use of markets, including Smith, did not take the pure market mechanism to be a freestanding performer of excellence, nor did they take the profit motive to be all that is needed.

Even though people seek trade because of self-interest (nothing more than self-interest is needed, as Smith famously put it, in explaining why bakers, brewers, butchers, and consumers seek trade), nevertheless an economy can operate effectively only on the basis of trust among different parties.

There’s a clear echo there in Brown and Rudd’s rhetoric.

Sen also observes:

It is also worth mentioning in this context, especially since the “welfare state” emerged long after Smith’s own time, that in his various writings, his overwhelming concern—and worry—about the fate of the poor and the disadvantaged are strikingly prominent. The most immediate failure of the market mechanism lies in the things that the market leaves undone. Smith’s economic analysis went well beyond leaving everything to the invisible hand of the market mechanism. He was not only a defender of the role of the state in providing public services, such as education, and in poverty relief (along with demanding greater freedom for the indigents who received support than the Poor Laws of his day provided), he was also deeply concerned about the inequality and poverty that might survive in an otherwise successful market economy.

It’s probably time – along with Arrighi and Sen – to reread Adam Smith as well as Keynes. And it is time to recognise that Hayek was much more of an ideologue than a serious thinker, providing a range of justifications for a particular form of capitalism – now dubbed neo-liberalism – rather than making any real contribution either to public welfare or to economic policy. Geoffrey Barker:

Keynes was, moreover, hostile to the general equilibrium assumption of the laissez-faire advocates. As early as 1926 he wrote: “It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest.” Perhaps most significantly, he did not he see economic planning as an encroachment on “freedom.” In 1944, two years before his death, Keynes wrote to Friedrich Hayek about his book The Road to Serfdom, which argued against economic planning. While acknowledging that he agreed with most of the book, Keynes took Hayek to task over his attack on planning.

“You agree that a line has to be drawn somewhere, and that the logical extreme is not possible,” he wrote. “But you give us no guidance whatever as to where to draw it… [A]s soon as you admit that the extreme is not possible, and that a line has to be drawn, you are, on your own argument, done for, since you are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.”

Keynes’s logic, of course, is impeccable; his judgement is mature and balanced. The question is not whether or not Keynes is “back” but whether today’s politicians can put together packages for economic and financial recovery with similar logic and balance.

Two of the more pressing questions since the election in November have been how Obama will respond to the global financial crisis and from what political position he will seek to govern. Both, in a way, have been answered, but hardly definitively. It’s worth observing in passing – and the point is a crucial one for us here in Australia – that the selective invocation of the mantra “there’s only one President at a time” means that we know very little about what the new administration’s stance on global financial regulatory issues and the governance architecture of the world economy will be. Such decisions as are taken – and paths not taken – will probably be of more lasting moment than how effectively and quickly his fiscal stimulus works to turn around America’s domestic economy. But, in that regard, the addition of tax cuts to the infrastructure investment proposed in his domestic package (to corral in some congressional Republican support, or so it’s being framed) reflects a debate about the composition of any stimulus which is important, and to some degree being played out, in our own context as well. Here, I was intrigued to see Andrew Leonard at Salon’s How The World Works blog suggest that a passage in the Inaugural address shows Obama has come down on the Keynesian side of the argument. (And to see Leonard compare Obama’s eloquence with Keynes’, to the former’s detriment.)

Turning to politics, Jonathan Freedland at The Guardian finds solace in Obama’s choice of and approach to themes for the claim that he has indeed set his course on introducing radical measures with conservative appointees. It might equally well be claimed that the repudiation of the Bush era in the speech is part of the post-partisan positioning, so we’ll see. On a related note, Heather McRobbie looks at the influence of the Gaza conflict on Obama’s message to the Middle East and the Islamic world, and isn’t confident words will ring out over the ruins which deeds have recently created. Freedland also examines some of the political pitfalls Obama might face.

On climate change and global warming, Christine Milne sees signs of hope in Obama’s rhetoric of change and collective purpose and his environmental appointments, and writes:

There are certainly a few disappointing nominees in the mix as well, but then there is the factor that, for the first time in living memory, America have a President who, because of the way he campaigned and was elected, is answerable not to the big money and the big corporations, but to the countless millions of individuals who put him where he is. And, furthermore, a President who has built a massive active constituency whom he can mobilise at short notice to campaign on his behalf, spread his message, and bring America with him as he goes.

Again, I hope she’s right, but I think you’d underestimate the power of big business and polluter lobbies – particularly in Congress – at your peril, and I think we also need to wait and see the colour of the Obama administration’s money in global climate negotiations.

Finally, Robert Corr links to an excellent piece from Marc Ambinder on the rhetorical structure of and literary allusions in Obama’s speech.

Update: Some good thoughts from I cite’s Jodi on desperate love for Obama.

Update: As well as writing of his own thoughts on Obama, Andrew Bartlett looks at the fallibility of political predictions, and how few have the good grace to admit when they’ve got it wrong.

But of more moment, probably, is the response of those who actually make decisions about the labour market. Predictably, the Howard era Fair Pay Commission Chair, Ian Harper, warned that the low paid couldn’t expect much. This, despite the fact that the pay rises awarded by the FPC over the past two years failed to have the dire impact on employment predicted by business lobbies. It was interesting in this context to read a good piece by Mike Steketee in The Australian last week:

Some economists argue that cutting wages, particularly for the unskilled and low skilled, is the surest way of keeping more people in work. Quite apart from the fact that Labor’s ruling out such an option helped it win the last election, the main problem facing businesses is lack of demand for their products.

Cutting wages would reduce consumer demand further and it would run directly counter to the Government’s policy of putting more money into people’s pockets to try to put a floor under demand. In any case, the wages share of national income is the lowest for a generation, suggesting labour costs are less of a burden for business than in the past.

In short, it’s aggregate demand, stupid.

There’s some anecdotal evidence around that some employers are looking at other means of addressing costs than shedding labour. At issue here is also the skills shortage – it’s precisely the less skilled and lower paid who are at more risk in an economic downturn which widens inequality, as Steketee points out. So disinvestment in skills is also a false economy. But it’ll be interesting to see whether an understanding of the nexus between consumer spending and employment and employment expectations actually cuts through. Harper’s tired nostrums suggest that certain orthodoxies have survived the global financial crisis.

After a decade or so when we heard so much blah about corporate social responsibility, it’d be nice to see some recognition from business that the economy is part of that responsibility. That’s actually in the collective self-interest of business, but as Keynes and others showed, that’s precisely what the incentive structure of capitalist economics has difficulty incorporating. There may well be some room here for some creative thinking from government, going beyond pump priming. Fingers crossed.

The stock market’s fall may also have had something to do with evidence of a growing deflation in consumer prices in America, or so opinionators opined. Well, I guess we don’t have the “inflation dragon” to kick around anymore.

And we’ve had another outpouring of deficit aversion, bipartisanship at last (!), in response to Glenn Steven’s expression of the belief that the government had a responsibility to “borrow to invest”.

And, yet, we’ve had a piece of prime silliness – to put alongside all these other signs of the times – in Crikey‘s editorial:

There’s not a lot politicians can do. The Government handing money to low income earners who’ll have virtually no choice but to spend it makes sense, but there’s only a limited number of times a $10b heart-starter can be administered to the economy. Even the Opposition has been doing its bit lately, prefacing virtually every statement on the economy with the mantra that Australia is best-placed to weather these difficulties.

And there’s not much businesses can do without demand. It’s actually up to us consumers to realise Australia’s economic fate is in our hands, and act accordingly.

Righteo. Hopefully there’ll be another Herringbone sale again soon and I’ll try to do my duty. The rent went up $200 a month – does that help?

But Crikey’s leader writer might like to think about household debt being at 160% of earnings at a time when – even if unemployment is yet to really hit home – the evidence is in that hours and overtime are being cut back all over the shop. And while the mortgage rate may be down, there’s been very little or no discernible movement in credit card rates – something Kevin Rudd acknowledged some time ago, and vaguely promised to look into now that consumer credit is to be regulated by the Commonwealth. If citizens – also known as consumers – are trying to do their own “deleveraging” and get their balance sheets back to something a little more realistic, I hardly think that’s a matter for the loud condemn. Or for that matter, people choosing not to buy more, well, stuff. Do you like stuff? You can never have enough stuff – apparently.

I’d much rather go with Glenn Stevens’ view and look to the government as investor and consumer of last resort.

However, I think we can now advance a few hypotheses, however tentative, about what’s occurring – in terms of both political economy and the sociology of knowledge.

The first point I wanted to make is that Bernard Keane is probably right about this:

Government is back, and small government types, libertarians, deregulationists, will have to cop it sweet.

Some aspects of the causation of the global financial crisis have in fact been accurately identified by liberal economists, but the harnessing of them to an increasingly desparate ideological noise machine has diminished their force, and distorted such truth as they have. Here, it’s worth having a good read of Dani Rodrik’s analysis of the causes of the crisis [via The Global Sociology Blog]. As Rodrik suggests, they are multiple and complex. That complexity should give pause to anyone who wants to cherry pick causal factors for a grand narrative, but it also suggests that “free markets rule and evil regulation/government/lefties are at fault” is exposed as a ludicrous claim.

Further, it implies that the dogma associated with market neo-liberalism has to give way to reality, and lies exposed as an ideological rather than a scientific discourse. Here, Joseph Stiglitz is spot on:

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith’s conclusions do not hold when there is imperfect information – and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership – the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

One of the main reasons why economic theory – in its purist liberal incarnation – has been discarded so quickly as failing to offer any useful policy prescriptions at a time of unprecedented crisis is that it’s part of the problem, and therefore can’t provide the solution.

What in fact we’re seeing is that there are no “natural” or “perfect” markets, and if any can be found lying around the shop, like the credit derivatives swap market with $62 trillion at stake, they’re the vortex of the madness that has engulfed the system’s various “rationalities”. We need to start thinking much more rigorously about the role of states in the creation of the conditions of possibility for these events, and the economic field as a complex set of vectors and forces. I’ll come back to the role of the state in a subsequent post, but I think we need to underline as a starting point in both understanding and diagnosing the global financial crisis the need to put the “political” back into “political economy”.