Yash Tandon

Summary

This paper is an argument for caution against taking the present division within the ranks of the intellectual right as providing elements of a way forward for the intellectual left. For over twenty years the so-called "Washington Consensus" provided the ruling orthodoxy of development "theory". Its "axiomatic" tenets were the basis not only of mainstream development economics at the academic level but also of the main policy directions of most developing countries, especially those which had come under the strictures of the World Bank's Structural Adjustment Programmes. The split within the ranks of this ideological front of the right, best represented by the recent writings and speeches of Joseph Stiglitz, the Senior Vice President of the World Bank, among others, has created false illusions in the ranks of some in the intellectual left. They see in this rift on the right a cause for alliance with the revisionist right as a way of advancing their own theories and strategies.

Of special significance in the fostering of such illusions is a renewed interest among the "revisionist" right in the role of the state in the economy. Viewed against the background of twenty years of relentless privatisation and the diminishing role of the state, it is indeed understandable that a reassertion of the role of the state in the economy should warm the hearts of those who had been arguing for it all these years, especially those who cherished a statist view of "socialism". But the statist shift of the right revisionists is not a fundamental shift; it must be evaluated in the light of the present crisis of capitalism itself.

Also, whilst a break in the ranks of the ruling orthodoxy is a moment of celebration, its significance must not be exaggerated. Worse it would be for the left if the "revisions" proclaimed by such "reformists" as Stiglitz were to be seen as providing the guiding light for a new development theory. Indeed, this paper argues that such "revisions" are aimed at strengthening, not weakening, the political power of international capital.

This essay focuses on the political as against the economic. And the reason is that one of the enduring features of the old orthodoxy and its recent revisions within its own mainstream is to treat economics in abstraction from politics, as if the "market" operated in a power vacuum. This economistic reductionism obscures the role of power and politics, and treats "policies" as if they were simply a matter of "technical" balancing between the various fiscal and monetary "tools" of "managing" the economy. Indeed, the worst sins of obscurantism in our times are committed by economists, especially of the right but those of the left too. It is to counter this that this essay focuses on the role of the state. The "Keynesian state" is a particular kind of bourgeois state that appears at a particular moment of capitalist crisis to try to get the system out of that crisis.

Every Economic System has its Corresponding State

By state is meant here the power which imposes a certain definite order which enables the economic system to function; this includes the power of sanctions against those defaulting or resisting the system. No economic system works on its own through its own laws of motion. These laws may determine the course of economic life of society to a larger or lesser degree, and may indeed have in-built sanctions, but they require an additional force, the power of the state, to ensure conformity to them.

In the contemporary period, the so-called "market" forces are supposed to determine economic activity at national and global levels. Indeed, these forces do have some in-built force of sanctions. Neo-liberal economists often allude to these sanctions as a means of enforcing conformity on the part of developing countries. They say, for example, that if a country's economic policies give "wrong market signals" it will not succeed in securing foreign direct investments which, they allege, a developing country needs, requires, for development. In other words, it is the "logic of the market" that dictates a certain policy direction. It is, it would seem, the force of the market imposing "its own" self-enforcing "sanctions" against non-conformist states.

Nonetheless, the self-enforcing or even self-regulating power of "the market" is exaggerated. For example, debt-strapped countries of Africa know, from experience, that any serious deviation on their part from World Bank strictures is an invitation to the World Bank, the IMF and the "donor community" to "cut off aid", or to stop the shipment of vitally needed spare parts, as a means of securing compliance with the "rule" of the World Bank. In such instances, the "donor community" do act in concert, if not in explicit conspiracy. If the World Bank does not give the green light to investments or to aid money for a country, the rest of the donor community wait for the light to come before they resume their investments or aid to the country. The country is thus forced to conform.

The market forces do not act on their own. They need the additional power of a regulating or enforcing authority. This is what we define as "the state". At the national level, this "state" is clearly visible in the form of the Government, the courts, the police, the prisons and the army. At the international level, it is not so obviously visible. Power is not centralised at that level. It is also not so identifiably institutionalised as at the national level. But it - the state, as defined above - is there also at the international level.

When the United States and the United Kingdom bomb Iraq to (try to) secure Iraq's compliance with a Security Council resolution, they act "as if" they were a "state" at the global level. It does not matter if the rest of the world do not support such action (e.g. Russia or China), or support it with reservations (as with continental Europe). In imposing sanctions on Iraq, backed by their interpretation of an "enabling" resolution of the Security Council, the US and the UK acted jointly as a "global state". Their action has nothing to do with justice or equity - these are irrelevant; it has to do with imposing a certain kind of "order". The global system rests on a certain predictable "order" as defined by its hegemonious states.

It is much the same at the economic level. The G7 countries of the most developed economies act as the principal organ of "global governance" at that level. It is here that serious contradictions between the powerful states of the world are resolved, and some sort of "consensus" secured on how to enforce, or restore, order on the international economy. Here, too, there is unequal power. The US acts as a "primus inter pares", and often has to compromise and adjust if there is concerted opposition to its views by the rest of the membership of the G7. Once again, as in the military sphere, there is an invisible bond between the "Anglo-Saxon" states of the US and the UK. Indeed, their "model" of economic governance based on a "hard line" dictated by capital is often contrasted with the "softer" or "social democratic" approach of much of continental Europe. At the market level there is, of course, intense competition between the G7 countries. Often they fight like dogs for a bone, as they did, for example, when they were negotiating, for eight years, the Uruguay Round of trade Agreements. But when the system is under threat, as it was during the entire period of the "cold war", the G7 close ranks and fight "as one" against the perceived or real threat to the system.

The Keynesian State at the National Level

The function of the bourgeois state at the economic level is, thus, to organise and regulate market forces at the behest of those who own capital, and in order to facilitate its accumulation. At the political level, its function is to impose a certain "order" that enables the system to function, including the use of coercion to secure compliance from deviant individuals, groups, states or tendencies.

This is its general description. But the generality hides many forms that the bourgeois state takes at the national level. One such form is the "democratic" one where power is accountable to a "parliamentary" or "congressional" body periodically elected by a constitutionally defined voting community. This constitutionality and periodic renewal of electoral mandate legitimises the rule of capital. The USA and the United Kingdom are the best known "models" of this form of state. Scratch the "democratic" skin, and below it lies essentially a plutocratic form of governance. The poor have no chance in this system to reach the top echelons of power, except where they may be "adopted" as candidates of the rich plutocrats.

Another form of the bourgeois state at the national level is a dictatorship, such as that under Nazi Germany. Here the rule of capital is imposed by brute force against the working classes and all those who do not "fit" into the system as defined by the dictatorship (as the Jews in Germany). Historically speaking, this is the form of state that manifested itself in the so-called "late" capitalist countries, such as Germany, Italy and Japan. The First and Second World Wars are portrayed in the history written by the victors as a "life and death" struggle between "democracies" and "dictatorships"; but these were, nonetheless, essentially "in-house" struggles between two kinds of bourgeois states. Once the Second World War was over, these states closed ranks against the greater danger to the bourgeois order that the "Soviet system" posed.

A third form of bourgeois state at the national level is the "social-democratic" form, practised by several countries of continental Europe. Here, the bourgeois state managed to work out a clever compromise with the working classes so that the gains of the system are beneficially shared by them. The working classes are "nationalised" to the extent that they do not make a common cause with the working classes of other countries or systems. Thus, in the "cold war" against the Soviet Union, the working classes of the social-democratic states were first "nationals" and only then "workers". Also, in more recent times, when their wages or employment are under threat by products from third world countries using "cheap" labour, they cease to entertain illusions of cross-border "class solidarity", and become passionate defenders of "national" security.

A fourth form of bourgeois state at the national level is the Keynesian state. Here the state directly intervenes in the economy because, for one reason or another, the market has failed to sustain the health of the economy. This form has superficial similarities to a social-democratic form, but is, in fact, a genre of its own. Here there is no deliberate effort made to compromise with the working classes to give them a stake in the system. In fact, quite the opposite. The workers' wages are lowered in the interest of the larger economy, including, generating fuller employment of labour and capital.

What gave Keynes ideas a "socialist" veneer is his espousal of the activist role of the state in the economy, especially in engaging in the control of money supply through "open market operations". Even in his own time, the Economist of the day was fighting against the "socialistic" ideas of Mr. Keynes. Actually, what Keynes was advocating in his General Theory was a lowering of the wages of the workers for the sake of "full employment" and the preservation of capitalist accumulation which was then under very serious threat from the credit crisis of 1929-31. Keynes himself was clearer than the Economist of the day. "I conceive, therefore," he wrote, "that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises … But beyond this no obvious case is made out for a system of socialism…"

Despite Keynes, a confusion has ever reigned in academic and policy circles, both of the left as well of the right, identifying "Keynesianism" with "socialism". That is because "socialism" has come to be identified, generally, with the direct involvement of the state in the economy, and this, in turn perceived as marginalising or ousting of the private sector.

But the debate that dichotomises the state and the private sector is, in any case, a false debate. Actually, no Chinese wall separates the two. The private sector within the capitalist system cannot function without the state exercising control over at least the regulation of the economy. Whether the state then owns and manages a part of the economy is a separate debate, and has not necessarily anything do with "socialism". The argument that equates state ownership of a part or whole of the economy with "socialism" is a confused argument. What determines the "sociality" of a state regulated economy is whether the regulation is done on behalf of the directly producing classes (workers and peasants) or on behalf of the small elite that own and/or control the major means of production. It follows that the Keynesian state is not a "socialist" state. It is quintessentially a capitalist state, one that for certain conjunctural reasons seeks to intervene in the market directly in order to sustain the accumulation of capital by its owners.

What, then, is one to make out of a "Keynesian state at the global level"?

The Keynesian State at the Global Level

As stated earlier, at the global level, there is no centralised state. The function of regulating the economy at the global level is exercised by various configurations of different states of which the USA is predominant. It acts as the imperial state, sometimes acting on its own, and at other times concerting and planning with a group of other "like-minded" states - the United Kingdom (on military and strategic issues), the G7 (on the health of the global economy), the OECD countries (on wider issues of concern to the rich nations), and so on. These states, however, are in competition with one another just as much as they are in co-operation to protect the overall system when it is in danger of collapse, or when it is in "systemic crisis". The "state" at the global level, then, is this varying configuration of forces of control and direction at the global level acting on behalf of the entire international finance capital, and of the security to the capitalist system.

Within this broad framework, the Keynesian state appears at a particular conjuncture in the development of capitalism. It is, essentially, a form of state that appears when the system is facing serious, even potentially fatal, crisis. This is when the global capitalist classes have to act in concert, burying their differences, to save the system, even if this requires direct intervention in the economy in apparent opposition to the "private" sector. This may also involve, as Keynes says in the above quotation, certain "compromises", but these do not point in the direction to "socialism".

The Keynesian state at the global level, then, is a configuration of bourgeois states concerting to save the global economy which, conjuncturally, is in the throes of a deep, possibly fatal, crisis.

In more recent times, Keynesian economic ideas have once again come to the surface. Indeed there is a whole journal (Journal of Post-Keynesian Economics, edited by Paul Davidson) that has appeared to ventilate these ideas. And with it has come a renewed interest in the role of the state in the economy. The fact that important representatives of the neo-liberal classicists such as Joseph Stiglitz, and active practitioners such as George Soros, should resurrect the idea of an activist state to intervene to save the system is a significant pointer to the nature of the present crisis of capitalism. To understand why this has happened we must begin with the basic tenets of contemporary neo-liberalism, and its extension in development theory - the so-called "Washington consensus". However, in order to limit the discussion we shall focus on those aspects of these which touch on the state.

Neo-liberalism, the Washington Consensus, and the Role of the State

It is a misunderstanding of contemporary neo-liberalism to say that it has no role for the state. As stated above, this is not possible in any system, for no economic system runs on its own without its order being guaranteed by the power of the state. What neo-liberalism is opposed to is a direct role of the state in the ownership of parts or whole of the economy. This was the hallmark of the statist economies of the Soviet Union and other "socialist" economies. The statist basis of these economies was mistakenly identified with socialism itself, and so in the Western economies it became a point of ideological difference to distance the state from the economy. This was consciously and relentlessly done under the deregulation and privatisation programmes of Margaret Thatcher in the UK and Ronald Reagan in the USA. But there was nothing personal about their choices. Thatcherism or Reaganism acquired an ideological flavouring by the manner their advocates pushed the case for privatisation and deregulation, but these were products of a certain logic in that phase of global capital accumulation during the 1970s and 1980s.

For example, having consolidated the gains of state monopolies in such sectors as telecommunications and the financial services, the US and UK were now aggressively privatising and deregulating in order to force open the doors of European and Japanese (and later East Asian) economies that were still closed to them. Well before the US and UK deregulated and liberalised these sectors, they had decades of state-backed monopolies and cartels, and a closely regulated banking system. When they liberalised the telecommunications sector in the 1980s, to take advantage of the lead they had acquired in the technological and financial aspects of that industry, the telecommunications industry in Europe and Japan was still largely in state hands.

Thus the notion of the "minimalist" state became one of the major tenets of neo-liberalism only after the two major capitalist countries had already acquired a lead in certain strategic sectors of the economy through state or state-backed monopolies. Now, in the 1980s, the idea of the "minimalist" state acquired an almost doctrinal status. The state's role was confined to creating the "enabling environment" for the private sector. The latter now became the principal engine of growth. Any country that still continued to harbour state-owned enterprises became targets of attack as pursuing "wasteful", "corrupt" or "socialistic" practices.

It was also about this time that a set of ideas - later to be known as the Washington Consensus - developed. These ideas were based on the experience in Latin America in the 1980s as an "answer" to a contraction of their GNPs and general decline. The "consensus" became the lightening rod for World Bank and IMF bureaucrats called upon to devise "structural adjustment programmes" (SAPs) for third world countries which sought their help to get out of structural or temporary balance of payments difficulties. They used the authority of their office and the power of their money to force on these countries a set of policies which Stiglitz was later to summarise as consisting of primarily five indicators - inflation, money supply growth, interest rate, budget and trade deficits. That was the sum-total of their economic wisdom.

At the political level, the minimalist state became part of the Washington Consensus. Developing countries which were hostage to World Bank's SAPs were forced to privatise, or stand accused of "Soviet style" statist dirigism. This, the Bank's bureaucrats argued, spawned waste and corruption, and "diverted" capital from the private sector where it properly belonged. Stiglitz was later to say that the focus of the Washington Consensus on liberalisation, deregulation, and privatisation had grossly ignored the important role the state needs to play in regulation, industrial policy, and social protection and welfare. But that was twenty years later, after the damage had already been done to several third world economies forced to follow the SAPs based on what Stiglitz called the "misguided" Washington Consensus.

One geographic area that escaped the full force of the application of the Washington Consensus was East Asia. Here the state was central in the control and direction of the economy. At first the World Bank tried to take credit for the success of the East Asian "miracle", but when it was challenged on this it admitted that the Asian success was not based on the Washington Consensus. So in its 1993 study on "The East Asia Miracle", the World Bank revised its notion of the role of state in development. The Asian experience forced the World Bank to put to question its earlier notion of the "minimalist" state. For the next five years, the Bank held East Asia as a "model" to be emulated by other developing countries. However, in 1998, following the financial meltdown of East Asian economies, it made yet another volte face, and blamed the crisis on "crony capitalism" which, it alleged, was a necessary product of statist economics.

More sober analysis since the early days of the Asian crisis has brought home the point, even in neo-liberal circles, that to blame "crony capitalism" for the crisis is to dismiss bigger causes of the crisis, that the Asian crisis is part of the larger global crisis. From that it was a logical step to the view that it was not simply the East Asian cronyism that needed to be changed, but the whole global system of financial architecture. This, then, was the beginning of the re-emergence of idea of resurrecting the Keynesian state at the global level.

Re-birth of the Keynesian State at the Global Level

Like in the 1930s when the ideological spin-doctors of capitalism were challenged to seek ways out of the deepening crisis (Mr. Keynes being one of them), so now they are facing a similar challenge. References are made to the 1930s crisis, and parallels sought between that crisis and the contemporary one. The "solutions" too are not too dissimilar. It is once again the "state at the global level" that is called upon to intervene in the present crisis. The debate about the "financial infrastructure" is part of that search for a solution to the present crisis.

With globalization has appeared a disjunction between the economic and the political. As banks have become more global, the regulators have remained national. National governments are no longer in a position to control the movement of capital. For example, the Union Bank of Switzerland has assets worth $600b spread over nearly a hundred countries, and un-regulatable by the state of Switzerland. The Bank of International Settlements' guideline that the Central Bank of home countries should monitor and regulate branches of its national banks overseas is found to be inadequate.

Ironically, whilst the Governments of the developed countries are unable to control the movement of capital originating from their own countries, they are forcing the pace of financial liberalisation on the developing economies. The main reason that led to the financial crisis in the countries of East Asia was not "crony capitalism", but the pressure on them to liberalise their financial markets. Hence, the argument now being developed in Asia (and other third world countries) that the developing countries should not be stampeded into liberalising their financial services without first putting regulatory structures in place.

It is in the light of this that one must understand the recent debates within the ranks of the principal ideologues and institutions of the system that the Asian financial crisis has sparked. The Asian governments are complaining that the IMF "solutions" have deepened their economic and social crises instead of resolving them. Led by Mahathir Mohammed of Malaysia some of them are trying to apply Keynesian remedies to their distressed economies. That means an increased role of the state in controlling and managing national finances, especially capital account convertibility and exchange rate policies. These matters, they contend, cannot be left to the vagaries of an uncertain and unpredictable market.

But these matters are not going to be resolved by economics. At stake is the control of the system. The strategy of the Bretton Woods institutions under US leadership is to maximise the advantage that the East Asian crisis has provided for them to reverse the gains that the countries in the region had secured during the cold war years. During the cold war years, the US had turned a blind eye whilst Japan followed by other East Asian countries had borrowed, stole and copied US technology to put together an industrial base that was later to challenge the market dominance of US multinationals. The US tolerated that because they needed an industrial infrastructure in these countries to fight against communism in the area. Now that threat is no longer there. Hence, the US is taking every advantage it can secure - from the TRIPs agreement in the Uruguay Treaty to the financial crises of the East Asian economies - to reassert its hegemony over the region. Thus, when the Japanese proposed, for example, that it set up an Asian Fund to bail out the East Asian countries in distress, the USA vetoed the proposal on the grounds that this would undermine the authority of the IMF. The IMF, in turn, provided "bail out" funds on conditions that forced the governments of these countries, especially that of South Korea, to open up their economies to ownership and control by foreign capital, in particular US corporate capital.

Within the World Trade Organisation, the United States is pushing for further liberalisation of financial services within a period of three to five years. Even the Bank of International Settlements argues that a prudential regulatory system may take ten or more years, especially for countries with high FDI to Stock Exchange capitalisation, as is the case with most third world economies. The ratio of FDI to Stock Exchange capitalisation in Malaysia is 195% and in Hong-Kong 206 % compared to an average of between 3% and 10% in most OECD countries. This makes the Asian countries extremely vulnerable to changes in stock or exchange rates.

But the argument is not about "prudence", or even about sound economic management at the national level. It is about control. The Keynesian state at the global level (principally the G7 countries under the hegemony of the United States) will finally break the walls that the Keynesian states in developing countries will attempt to erect to protect their national sovereignties.

Conclusion

In an era dominated by economics and Economism, it is important that the left is not caught up in the "stylistic" arguments about the "techniques" of "prudential" management of national or global economic systems. To be sure, it is important to understand the language of the economists. But it is even more important to analyse the power dynamics and the underlying ideologies that Economism obscures. The debate between the alleged evils of state dirigism (identified falsely with "socialism") and the professed virtues of privatisation was never a genuine debate about the merits of each case. It was always an ideological debate that obscured the underlying forces and the underlying motivations of those who advanced those arguments. We now know from people like Joseph Stiglitz that the IMF and World Bank strictures about the "minimalist" state whose principal function was to facilitate the private sector were "misguided".

There is now a renewed interest in the Keynesian model of state activism. This is a reflection of the current state of crisis of the system. But Keynesianism adopted at the national level can only create temporary road blocks against the inexorable march of capital. The more powerful forces of Keynesianism at the global level, represented by the "state" power of the hegemonious G7, will shape the economic and social engineering of the world as we turn around the new millennium. Capital will seek to expand to conquer the world, and to crush all resistance, under an "order" imposed by the Keynesian global state. The only limit capital will recognise is the one people will make it recognise. In the long run, the counter to global Keynesianism is not national Keynesianism. Direct democratic action is the only way to stop the power of capital and that of the Keynesian global state.

Notes

1. See, for example, the Economist issues of September, 1931.
2.General Theory of Employment, Interest and Money, London: MacMillan, 1953 edition, p. 378.
3. UNCTAD's World Investment Report , 1997, p.14.
4. See Joseph Stiglitz, " More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus," Speech delivered 7.1.98 at the 1998 WIDER Annual Lecture, Helsinki, Finland
5. Ibid., p. 7.
6. See the Economist, 13 December, 1997, p. 12 .
7. UNCTAD, World Investment Report, 1997, p.14.
8. Ibid., p.13

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