Demand Side Minds: An Overview
"Economics is the religion of the present."
- Thorsten Veblen
Demand Side economics arose from the work of John Maynard Keynes – the most accomplished economist of the last century, John Maynard Keynes. It was part of the practical economic blueprint in the United States through the 1970s. Demand Side theory explains the macroeconomic phenomena in postwar America. This volume outlines Demand Side and extends and illuminates by reference to the work of John Kenneth Galbraith and Joseph E. Stiglitz.
John Maynard Keynes and the Great Depression
Demand Side economics arose during the Great Depression and was ratified by the experience of World War II. Its two major impulses were the work of John Maynard Keynes and that of the New Deal Democrats. The Great Depression, whatever its causes, was a contradiction to the free market capitalism as practiced in the United States and to its Classical apologists. The same contradiction confronts the same Classical Conservative ideology today. The causes of the Depression have been extensively debated, but the contradiction lies not in the advent, but in its lingering and worsening year after year. In Classical theory, a condition such as the Depression could not persist for any meaningful length of time. When the Depression did persist, the response by economists had to be either learning and adaptation or denial. There was no shortage of the latter in academia, but political reality propelled the former to the fore in the arena of government and public policy.
Keynes identified a paucity of effective demand as the cause of the prolonged slump. Economic activity was not returning to adequate levels because there was no force to draw it there. In classical theory, production itself always provided the means to purchase. This was codified in Say's Law. Adherence to Say’s Law prior to Keynes determined whether you were a legitimate economist or a crackpot. Keynes addressed his most stinging critiques to Say's Law and its totemistic Classical followers. There is no automatic stabilizing mechanism to the a market economy, he said.
Simplistically put, if people do not earn an income because there was nobody to buy their goods or services, the appropriate remedy is government-sponsored demand with deficit spending, spending financed not by tax revenue, but by borrowing. This is the nut of Demand Side economics: It is the strength and direction of demand which organizes and energizes a society's economy. (This means effective demand, of course, not simply an intense desire or even need, but a demand with real money behind it.)
Deficit spending recommended itself as well to activist economists in Franklin Roosevelt's New Deal, but not so much as a means of creating effective demand as much as a way of financing the mitigation of the suffering of the unemployed, aged, disabled and impoverished. Programs to help these groups in the absence of an ability by the government to raise sufficient revenue created the deficit spending Keynes prescribed. During the dark years of the 1930s, however, the efforts of the New Deal never reached a scale sufficient to banish all doubts about Demand Side as an economic framework, nor did they completely invigorate the economy. That scale was found in World War II.
The massive government action and mobilization of the economy required by the War washed the Depression away virtually overnight. Domestic living standards actually rose even as the society's treasure poured into munitions, war machinery, massive operations across the globe - in other words, into products and services that were entirely destructive or would eventually be destroyed. In spite of nonproductive, non-consumer goods being produced on a tremendous scale, the economy also produced more consumer goods for the people on the home front.
This organization and mobilization was made possible by Keynes' concepts' opening the way for a statistical definition of the economy. The execution of this definition was pioneered by Simon Kuznets and comes to us in the form of the National Income and Product Accounts.
World War II and its economic organization ratified Keynesianism, and until the middle of the 1970s, public policy was guided by a Demand Side understanding. At the same time the United States was favored in industrial competition by virtue of the destruction of the competing industry of Europe and Japan. The two converged in a broad prosperity that had never before been seen.
Leon Keyserling, the New Deal and the Postwar Prosperity.
quote from Keyserling.
Leion Keyserling is, of the economist featured here, no doubt the least well-known. He came to Washington in the early 1930s to participate in the challenge of the Great Depression along with the best minds of a generation. Keyserling participated in New Deal policy from the outset, being the chief drafter of the Wagner Act in 19xx. He structured the signal piece of eocnomics legislation in American History, the Full Employment Act of 1946. He managed economic policy under Harry Truman, conducting a successful transition from War to peace and setting in place the pillars for postwar prosperiity. And late in life he materially assisted in the Full Employment Act's sequel, the Humphrey-Hawkins Bill.
Keyserling was no doubt the most powerful of all chairs of the President's Council of Economic Advisers. But -- in a comment more telling about its authors than its subject -- many mainstream and academic economists found Keyserling less than qualified for not having completed his PhD. Keyserlling is not just a place holder for the genius of the New Deal. He was a powerful exponent of an economics that worked.
John Kenneth Galbraith and the Rise of the Corporate State
As were Keynes and Keyserling, American economist John Kenneth Galbraith was active in public service and accomplished at its highest levels. Like Keynes, Galbraith was also an influential writer on economics and a noted academic. Canadian born, schooled at Harvard and Berkeley, Galbraith moved into the federal government at the outset of World War II, where he directed the Office of Price Administration, the second most powerful civilian post in the management of the wartime economy. Galbraith was literally controller of prices in the United States, charged with keeping wartime shortages from turning into crippling inflation or spawning debilitating black markets. At the War’s conclusion, Galbraith led the post-mortem survey and analysis of the German war industry and economy. His group reported out a surprising ineptness of the German economic organization and at the same time cast doubt on the effectiveness of Allied bombing. [FN survey]
Under John F. Kennedy, Galbraith served as ambassador to India. Often described as a maverick in his professional work and writing, Galbraith simply examined the affluence and institutional changes that were forming clean of the coloring of self-congratulation. The conceit of Americans for the good times that followed the war was by no means confined to economists, but the prosperity that occasioned it was based less on the imagined American virtues than on the advantage of having an infrastructure intact and an industrial capacity left undamaged, surviving as the sole financial as well as industrial superpower. Later the generation that enjoyed the prosperity and power came to be known as the Greatest Generation, but most credit is due their parents, whose basic talents were pragmatism and an ability to learn from the errors of World War I. This was the generation of Keynes, Keyserling and the elder Galbraith.
Galbraith described the rise of the corporation to dominance, the rise of government as a primary component of and actor in the economy, and the immense explosion of material prosperity that followed the War. Galbraith's writings explored a need for institutional counterweights to the Corporate Oligarchy - unions, governmental oversight, regulations, and social insurance. His foundational book The New Industrial State defined the part of the economy dominated by the large corporations as the Industrial System. This was the chief trait of the new industrial state. While previously corporations had rule industries where scale of operations required bigness, Galbraith saw that they had moved into other parts of the economy as well. The pervasiveness of the corporation iis even more apparent today than when Galbraith wrote in 1967. The New Industrial State dissected the corporate culture, the technical reasons for its arising, the group think which he called the Technostructure, its goals, how it determined prices and controlled markets, and its ever more involved relationship with the state.
This relationship evolved into predation, as Galbraith's son James K. chronacled and explored, of the institutions of the state itself -- particularly those developed in the New Deal. Corporate oligarchs in conspiracy with politicians under a banner of Supply Side anti-regulation exploited privileged and entrenched positions. The younger Galbraith's "predator state" analysis earns him a place in this volume.
Beginning with the administration of Richard Nixon, Demand Side began losing influence. With the ascension of Ronald Reagan, Demand Side was shunted aside as a policy tool. The free market bias that had failed in the Great Depression returned to dominance in policy-making, along with a revival of the Classical justification. Simultaneously and not coincidentally the sturdy growth rate that had trended up more or less steadily from the end of World War II was halved. A similarly stable unemployment rate doubled. The federal debt ballooned. The de-industrialization of America began. Median income stagnated. The disparity between the rich and poor grew. Aside from a respite during the eight-year Clinton Administration, that situation of ballooning debt and underlying economic stagnation continues into the Great Recession.
Hyman Minsky and Economic Instability
Superficially, the Reagan era ushered in the Great Moderation, tepid growth but low inflation. This was taken by the economic establishment to be stability and prosperity. Maverick economist Hyman P. Minsky, a practitioner of legitimate Keynesianism, identified this placid surface as the incubator of instability endogenously produced by capitalism. Minsky published Stabilizing an Unstable Economy in 1986. The subsequent quarter decade produced the object lessons for its accuracy. But even as this present volume is written, the lessons of Minsky are completely unknown by a wide range of policy-makers.
Examples might be:
- The direct line from budget deficits to corporate profits;
- That money is created not by the central bank, but by financial markets in facilitating investment and borrowing;
- Inflation can be useful as a means of escaping economic crises without banking breakdowns.
Joseph E. Stiglitz and Globalization
Not only did the poor get poorer in the United States (in inflation-adjusted, or "real," terms) beginning in the late 1970s, but also around the globe, particularly in Africa and Latin America. Some Asian economies did begin to develop, but others struggled. Remarkable successes were scoored in China, Japan, South Korea, and others. Tragedies have occurred in Africa and Latin America. It was no coincidence that the economic troubles of these countries followed their adoption of the charts of the Free Marketeers. The Neoliberalism (to be defined and developed in Chapter xxxx) that had failed so well within the United States failed even better in these countries. Nations under the sponsorship of the dominant corporations fell extremely hard. This international rise and fall has been the context for the work of Joseph E. Stiglitz on Globalization.
Stiglitz was awarded the Nobel Prize in Economics in 2001 for work which demonstrated the absence of free market efficiency. He won a second Nobel in 2007 as a key member of the Intergovernmental Panel on Climate Change. Like Keynes, Keyserling, and the Galbraiths, Stiglitz contributed significantly in public life as well, serving first as chief economist in the administration of Bill Clinton and later as senior vice president and chief economist to the World Bank. Two of his books Globalization and Its Discontents and Making Globalization Work describe the causes and conditions of developing economies stressed, exploited and then shackled by Western Neoliberal mandates, often through the auspices of the International Monetary Fund and World Bank.
James K Galbraith and the Predator State
James K. Galbraith's work is in some ways an extension of his father's. In many ways it is more explicit and prescriptive. The younger Galbraith was also involved in public service, serving as the executive director of the Congressional Joint Economic Committee and a lead in the drafting of the Humphrey-Hawkins Full Employment Act.
The ascendency of the Reagan Revolution, under the banners of deregulation and market efficiency, the corporate sponsors of neoclassical economics rode into power inside and outside of government. Galbraith and his demand side lineage were pushed to the side. The banks ran the Treasury Department, Health insurers and Big Pharma rode to riches on the health care system, Big Oil wrote the federal energy policy, and so on. This process culminated under George W. Bush. It was dissected and its pathology described by James Galbraith in a piercing tome The Preditor State. Galbraith marked the capture of democratic social institutions and the exploitation of them for private gain. His remains the most coherent and forward-looking macroeconomic perspective extant.
George Soros and the Way Markets Works
The work of these giants of the theory and practice of economics informs the Demand Side economics presented in this volume. Each of them except Minsky has held highly responsible positions in government or the private sector, and all save Keyserling have had notable academic achievements. And each has contributed substantially to the advancement of understanding in the discipline of economics.
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