Paul Mattick 1956

The “new look” in economics — Reviews


Source: Western Socialist, Boston, USA, May-June 1956;
Transcribed: by Adam Buick.

Policies to Combat Depression. A Conference of the Universities National Bureau Committee for Economic Research. Princeton University Press, 1956. (417 pp; $8.50).

The Political Economy of American Foreign Policy. Report of a Study Group sponsored by the Woodrow Wilson Foundation and the National Planning Association. Henry Holt & Co., New York. (414 pp; $600).


According to Keynes, depressions are no longer necessary. And, in fact, instead of depression there was the second world war and the upswing of economy activity based on the probability of a new war. Government manipulations and expenditures kept unemployment at a low level; a greatly increased productivity maintained the profitability of capital, and the American economy experienced further expansion despite contracting markets. Government interventions in the economy have lost their temporary character and are now regarded as permanent “built-in-stabilizers.” Although the full-employment mechanism of the Keynesian system are now recognized as inadequate, because they had been based on a rather na´ve simplification of the problem of economic control, in spirit and terminology the newer “new economics” are still Keynesian, even though the master is now rarely mentioned.

In Policies to Combat Depression, fourteen economists discuss the question whether or not depressions may still arise despite the existence of “stabilizers.” The result of the discussion is nil, of course, as it is impossible to predict the further course of economic development on the assumption that there is no further economic development. And because of this assumption, these economists do not concern themselves with the equally disturbing question of the consequences of a possible depressionless development with respect to the future of the private enterprise system, that is, with the socio-economic meaning of the further growth of “built-in stabilizers.”

For all these economists, government intervention must serve private capital, even though “government expenditures are considerably greater than gross private investment” and will not “fall below the level of private investment in the near-term future.” Government spending, including deficit-financing if necessary, is seen as the only effective means to combat depression. Beyond this, however, depressed industries should be helped along with special credit facilities, easy money policies should induce bankers to help business firms maintain larger inventories, special tax and financial inducements should be offered to private builders of houses for low and middle income groups, public works should be constructed with an eye to the needs of private capital — roads for the automobile industry, airports for the aircraft industry, and so forth. It is the function of the “public sector” of the economy to secure the existence of private enterprise.

The “mixed” economy thus supported does not stop tottering, however, as is indicated by recent so-called “recessions,” the one of 1948-49 serving as a “case study” to evaluate the effectiveness of various anti-depression policies. The lesson derived is that as yet there is no way of finding out whether or not the new economy is less susceptible to severe fluctuations than the old, for it is not possible to say that government actions would have been adequate if the 1948 downturn would have been more severe than it was.

The question is raised whether under present conditions the association between war and full-employment is an accident or as necessity, and it is said that though not a necessity it is by no means accidental. One economist points out that a large government budget “is likely to yield full employment and inflation, whether it is spent on the means of death or on the means of life,” but he thinks the latter remedy unacceptable because of the special needs of private capital. He suggests the expansion of state and local government expenditures; more public works instead of more armaments, so as not to expand the powers of the Federal government and not to contract markets any further.

Some economists deal at great length with the stabilizing effectiveness of budget flexibility, that is, they speculate about alterations of economic activity under various assumed conditions when government expenditures increase or decrease. This innocent and non-committal game looks as impressive on paper as it is meaningless in reality. Others concentrate on tax policies during recessions and in general, that is, on ways and means to reduce or increase personal income for purposes of economic stabilization. Corporate income taxes are considered, and rapid amortization schemes are proposed to raise incentives for private investments.

With the inducement to invest through a preferential treatment of new investment there goes — in true Keynesian fashion — the increase of the propensity to consume, or rather “social security” as an instrument of economic stability. And with this goes a beneficial housing policy, slum clearance and urban redevelopment and the wonderful anti-depression power of self-liquidating public works. Farm price supports are also seen as fostering stability; in fact, nothing seems to be going on in the economy which is not of a stabilizing nature. Ni wonder the system totters under so much stabilization.

It totters mainly, as the economists point out, because of the precariousness of international relations. At the very beginning of this collection of papers it is said that even if it were possible to make the economy, qua economy, hardier and more shock-resistant, we live in a world where international developments have and will continue to have major repercussions on the economy. As the policies of 1948-1949 were significantly influenced by the international tensions of the cold war, future policy remains unpredictable for the same reason.

The last paper deals then with international trade and payments policies in the post-war world. Here it is said that the hopeful plans of Bretton Woods have all been given up. Instead of free trade and general currency convertibility, “recovery” of the international trade and payments situation restricted itself to the formation of the European Payments Union and the maintenance of the Sterling area. The expansion of American production and American aid brought some degree of trade liberalization and intra-European convertibility, which, however, may disappear again in a new depression. To combat this possibility requires international anti-depression policies and therewith continued American interest in the welfare of the European economies.

This is also the opinion of the nine economists who wrote The Political Economy of American Foreign Policy, a review of the concepts, strategy, and limits of America’s foreign economic policy. Their book is divided into a diagnostic and a prescriptive part. The diagnostic half is a highly recommendable description of the development and decay of nineteenth century world economy. The disintegration of the world trading system is viewed as a process of “nationalization.” Independent national states “intervene anarchically in the international economy, each trying to achieve its own ends with little regard for the interests of other countries and with slight concern for the efficiency of the system as a whole.” In the past this has not been possible to present-day degrees because of England’s monopolistic and controlling position in world economy. The Pax Britannica secured efficiency for “the system as a whole.” England’s place is now taken by the United States which, however, is “only partially integrated into the world economy, with which it is also partly competitive, and whose accustomed mode and pace of functioning it tends periodically to disturb.”

This is as it is, however, and nothing can be done about it. Although the West European countries and Japan depend upon the expansion of foreign trade, and though their economies have outgrown their base of natural resources, they now live in an economic environment which has been increasingly uncongenial to the rapid expansion of their industrial exports. They cannot compete successfully with the productively superior American industry and could not do so even if all American tariffs would be removed. Neither can they enjoy an adequately growing exchange of manufacturers for primary products with Asia, Latin America and Oceania, at favorable terms of trade, because of limitations on the growth of agricultural output in those areas due to their own industrialization process. The “dollar-problem” for Western Europe and Japan is then not a mere balance-of-payments problem but a “structural trading problem with North America.” The dollar shortage is mainly the financial reflection or symptom of the structural dollar problem.

These few remarks can only indicate the trend of the book’s argument. It is substantiated with a wealth of material useful to any reader whether he agrees with the author’s interpretation of the material or not. Even the prescriptive and therefore necessarily weaker part of the book incorporates so much factual knowledge as to turn it into a quite comprehensive and valuable handbook of international affairs. The prescriptive part is determined by the authors’ convictions that only the West-European nations are reliable allies and able to contribute to the defense of American capitalism. Although the underdeveloped regions should find some consideration, Western Europe and Japan are America’s first concern. The underdeveloped nations still within the frame of the “free world” should not only be helped but should be induced to integrate their developing economies with those of the West. In other words, although the past cannot be resurrected as a whole, it should be revived to some extent. Even though the world market of the nineteenth century is lost for good international trade may be carried on under modified conditions that allow for some degree of industrialization of primary-producing countries without impairing their trade relations with the industrially highly developed Western nations.

Because a universal trading system is “not a historic possibility in our time,” the authors plead for a wholehearted acceptance of regional solutions, such as exemplified by the Sterling area and the European Payments Union, even though they do discriminate against American interests. They see an adequate alternatives to economic nationalism not in economic internationalism but in economic supra-nationalism. The progressive unification of the Western Community and its economic integration with the extra-American free world depends, however, not only on their own intentions in this direction, but more so on “the progressive extension of American influence, power and responsibility within and on behalf of the Atlantic Community.” America must not only secure her own prosperity but follow a policy which secures prosperous conditions to the rest of the free world; it must not compete but collaborate.

This, of course, is quite a tall order and its execution would violate the principles both of capital production and of national expansionism. The authors themselves point out that their program lies “beyond political economy,” and is solely determined by the theoretical recognition that nations must “transcend their accustomed conception of national interest in order to go on having a national interest to protect.” They fear that short of a serious attempt to unify the Western world without regard to particular national interests, there is only the road to imperialistic control, or defeat through “world communism.” The implementation of their program, meager a it is in itself, they leave to those who decide practical policies, that is, to people defending nothing but particularistic interests.