When the financial market crisis in 2007 and 2008 threatened the global economy, governments around the world stepped in and bailed out many financial institutions, which were on the brink of collapse. Large amounts of private debt were transformed into public debt. In the Eurozone, this resulted in the sovereign debt crisis. In his excellent book The Great Eurozone Disaster: From Crisis to Global New Deal (Zed Books, 2012), Heikki PatomÃ¤ki not only provides an insightful analysis of the crisis, but he also makes clear recommendations for the best way out of crisis.
PatomÃ¤ki’s argument is in many respects a classic Keynesian analysis. He correctly points out that ultimately the global financial crisis was only the trigger of the sovereign debt crisis. Insufficient demand unevenly distributed across the European Union (EU) and the neo-liberal institutional set-up of the Economic and Monetary Union (EMU) were the real problems. ‘The difficulties facing the European Monetary Union have been primarily caused by the asymmetries in the formation of overall demand in the European political economy as a whole, and also by the institutional arrangements and restrictions that were put in place by the Maastricht Treaty’ (P.79). A successful solution to the crisis, for PatomÃ¤ki, consequently, needs to tackle the question of demand. ‘A sufficient level of effective aggregate demand is an essential requirement for adequate real investments and economic growth’ (P.49).
When reflecting on potential future scenarios, PatomÃ¤ki identifies three different alternatives: ‘According to the first scenario, the neoliberal European project will continue and deepen; in the second scenario, the EU will develop into a social-democratic federation of states and a world power; but in the third scenario the EU will pursue transformations of global governance and promote democratic and social goals, understanding itself as part of a much wider dynamic whole’ (P.108). The current EU policies around the so-called Fiscal Compact and its focus on fiscal discipline, the first scenario, are considered disastrous. ‘When a sufficient number of EU states decide to cut public spending at the same time, it has a marked negative impact on the level of effective aggregate demand within the whole of the EU’ (P.83). The second scenario, the Euro-level, social-democratic federation, would be in a better position to address the problem of aggregate demand spread equally across the EU.
The real solution for PatomÃ¤ki, however, lies in the EU becoming part of a democratic global Keynesianism. This would include the re-regulation of financial markets within a setting of new global institutions, perhaps including even a global central bank, with the goal to manage trade deficits and surpluses. ‘Needed are the sorts of global governance mechanisms that can shape the supply of money in the system, balance surpluses and deficits on an equitable basis, and direct the formation, composition and distribution of economic growth’ (P.168). His vision includes a world parliament to ensure the democratic nature of the new system as well as respect for ecological issues. In sum,
‘global Keynesianism is an approach that frames questions of public economic policy and politics more generally on the world economic scale. Global Keynesianism aims to regulate global interdependencies in such a way as to produce stable and high levels of growth, employment and welfare for everyone and everywhere, simultaneously. Global Keynesianism is an ecologically responsible doctrine: governing interdependence could not otherwise by sustainable’ (P.175).
Nevertheless, as impressive as PatomÃ¤ki’s analysis clearly is, and as nice as it would be to have a ‘global Finland’ characterized by equality, democracy and social justice, there are serious flaws in his historical understanding as well as recommendations for the future. Most importantly, it is his (mis-) understanding of the capitalist social relations of production, which causes a number of problems in his analysis. In line with his Keynesian focus on demand levels and related issues of distribution of wealth, he completely overlooks the way exploitation is rooted within the way of how production is organised around wage labour and the private ownership of the means of production as well as the related, fundamental class conflict between labour and capital.
A different understanding of the capitalist social relations of production has implications for how we can explain the current crisis in the first place. Rather than pointing to the lack of regulation (P.37) and personal greed (P.39), from a historical materialist perspective the emphasis is on the structural crisis tendency of capitalism. The fact that so many US financial institutions engaged heavily in the risky subprime mortgage market was not the result of personal greed, but due to competitive pressures forcing one financial institution to obtain the same high profit margin as its competitor, which dealt in subprime mortgages (see also Corruption in the banking industry — the problem of a few ‘bad apples’?).
Moreover, a class analysis results in a completely different understanding of how the Keynesian compromise came about in industrialised countries after World War Two. In contrast to PatomÃ¤ki’s rather technocratic vision, in which experts, understanding how the economy works, devised a system of demand management, a class analysis makes clear that the welfare state was the result of class struggle. Against the background of the Cold War and on the basis of strong labour organisations at the national level, forged in industrial conflicts at the beginning of the 20th century, labour was in a position to balance the social power of capital. The result was a compromise, in which capital retained the right to own the means of production in exchange for rising wages and an expansive welfare state for workers. In other words, a balance of power in society was absolutely essential. Keynesian ideas provided the economic formula of implementing the compromise in concrete policies.
This has clear implications for the possibilities of global Keynesianism. Rather than establishing new institutions of global governance and a technocratic consensus on the best Keynesian way forward, it is a balance of class power, which is required. However, this is clearly not the case. Globalisation has precisely implied a dramatic increase in the structural power of capital, which has shifted the balance of power at the global as well as national level in favour of capital. After all, the dominance of capital has been behind the neo-liberal shift in European integration since the mid-1980s in the first place.
Nevertheless, even if there was a balance of class power in society at the global level, it is questionable whether global Keynesianism would be feasible within the general capitalist setting. Capitalism has always expanded outward along lines of uneven and combined development. Structurally, in order to continue the accumulation of surplus value, capitalism constantly has to look for new markets and cheap labour elsewhere. This does not, however, lead to equal development, but to highly uneven development and increasing inequality between countries as well as within countries. Ultimately, we can only understand the Keynesian class compromises in industrialised countries, if we see it as a part of the wider global setting. While a degree of equality had been achieved within Northern welfare states, this was also based on, and conditioned by, continuing exploitation of the Global South be it in the area of mineral extraction, be it through drawing on cheap labour of the periphery. Similar to Germany, Nordic countries including Denmark, Finland, Norway and Sweden have historically related on export-led growth, with which their welfare states were financed. It is in these trade relations, in which high value added goods are traded in exchange with labour intensive goods that surplus is transferred from developing to developed countries. In short, structurally, global Keynesianism is simply impossible within the capitalist social relations of production and global uneven and combined development.
Finally, a historical materialist analysis has clear implications for what is required for a viable alternative way forward. Rather than focusing on how the distribution of wealth could be re-arranged within global institutions, the emphasis has to be on changing the capitalist social relations of production, the ‘hidden abode’ within which exploitation takes place. It is the system of the private ownership of the means of production and wage labour, which needs to be changed. Only socializing the means of production can overcome exploitation and inequality.
Prof. Andreas Bieler
Professor of Political Economy
University of Nottingham/UK
2 September 2013