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International Socialism, March 1999


Peter Morgan

The new Keynesians: staking a hold on the system?


From International Socialism 2:82, March 1999.
Copyright © International Socialism.
Copied with thanks from the International Socialism Archive.
Marked up by Einde O’Callaghan for ETOL.


Will Hutton
The Stakeholding Society
Polity Press 1999, £9.99

In the face of the recent crisis in the National Health Service Will Hutton made this one undeniable statement in his Observer column:

The harsh truth is that Britain spends too little on its health service. Another £1 billion a year over and above the increase in the Comprehensive Spending Review, together with scrapping the PFI, would allow nurses’ pay to return to 85 percent of average earnings and new hospitals to increase rather than reduce capacity. This could be financed by ... raising the top rate of tax to 50 percent for incomes over £100,000 a year. [1]

It is articles such as this that have made Will Hutton a popular journalist. Throughout the 1990s, writing firstly for The Guardian and more recently with his weekly column as editor of The Observer, he has been a fierce critic of the Thatcherites and free marketeers who extol the virtues of unfettered capitalism. His best selling book The State We’re In contained an impressive indictment of the Tories’ market mania. And in this new collection of his writings, he carries on in this tradition.

Some of his most powerful articles are those in which he attacks the monetarist madness of the right wing, supporting his arguments with an impressive array of facts and figures. For example, in a Guardian article of July 1994 called An End to the Rule of Fish Market Economics his attack was aimed at the new secretary of state for employment, Michael Portillo. At the time Portillo was keen to tell all who would listen that it was excessive pay demands of ordinary workers that were to blame for the high levels of unemployment and not the capitalist system. Quoting the results of a study by David Blanchflower and Andrew Oswald from their book The Wage Curve, Hutton drew a somewhat different conclusion:

Two economists have [examined] the data in twelve countries showing the actual relation between wages and unemployment – and what they have discovered will cause Mr Portillo and the free market acolytes at the Department of Employment heart failure. Free market theory would predict that low wages would be correlated with low local unemployment; and high wages with high local unemployment. But Blanchflower and Oswald have found precisely the opposite. In twelve countries the same law holds – the higher the wages, the lower local unemployment, and the lower the wages, the higher local unemployment. This is not a conclusion that can be squared with the free market textbook theories of how a competitive labour market should work. [2]

But while the free marketeers of the Tory party are Hutton’s favourite enemy, there is more to his writings than this, as the editor of this book points out: ‘Will Hutton’s political project [is] the creation and advocacy of a radical political economy that could both intellectually challenge the neo-liberal consensus and provide the fountainhead for a coherent policy package of progressive economic, political and social reform’. [3] Hutton, therefore, has styled himself as the person who can provide some answers to the problems that beset the British economy. Along with The Guardian’s Larry Elliott Dan Atkinson, Hutton helped to popularise Keynes’s argument that the only way to stop the market wreaking havoc is for the state to intervene in the economy. In 1998 as the economies of Japan and the Far East lurched deep into recession, with the prospect that the crisis would embrace the rest of the world economy, the ‘New Keynesians’, as they became known, won new audiences. Under the headline Back By Popular Demand, Hutton asks, ‘Is Keynes staging a comeback?’ He then goes on to say, ‘As our economies have become more marketised, growth has slowed and unemployment has risen. The search is on for a new theory and policy that might produce better results ... [Keynes] offered a revolution in the way the capitalist economy should be conceptualised, and that should be the inspiration for revisiting his ideas’. [4]

However, whether Keynes’s ideas can produce better results is by no means as certain as Hutton believes. Keynes was a critic of the free market orthodoxy. Under the impact of the 1929 Wall Street Crash he dealt a blow to the idea that capitalism was a self regulating system which would guarantee human happiness so long as it was left to its own devices. The free market argument rested on the assumption that capitalism would never go into recession, provided governments and trade unions did not interfere with its smooth running. Because the ability of people to buy goods is supposed to equal the supply of them, there could be no such thing as ‘overproduction’ where goods are unsold because people cannot afford them. It was also argued that there would only be unemployment if workers pushed wages too high for it to be profitable for bosses to employ them. It was an argument that made a revival with Thatcher in Britain and Reagan in the US during the 1980s.

Keynes pointed out that the supply and demand of goods did not necessarily balance. Simply because some people saved didn’t necessarily mean others would borrow to invest – capitalists would only invest if they thought it would lead to higher profits in the future. Yet the fear of a coming recession leads more people to save and fewer capitalists to invest. Keynes described how capitalists, rather than being risk taking entrepreneurs, very often hold back from investing because they don’t know what lies in store. So, he concluded, the free market inevitably produced unemployment and under-investment.

Keynes also attacked the idea that a cut in workers’ wages was a way to restore profits. He showed how a cut in wages would lead to less demand for goods, more bankruptcy and even more unemployment. [5] Keynes thought governments should borrow money and spend to stimulate demand in the economy. In this way, he believed, governments were capable of preventing crises from breaking out. Crises exist, he argued, either because workers are not paid enough, or unemployment is too high, which means there is insufficient effective demand to absorb the goods produced. The result, therefore, is that goods remain unsold, profits are not realised, firms go bust and the economy goes into crisis. For Keynes the solution to the cyclical problem of boom and bust must be solved by creating effective demand.

Hutton is convinced that this strategy of state intervention could solve the problems of capitalism in general, and the long term problems of British capitalism in particular. Take, for example, his solution to the problems of the so called ‘Tiger’ economies today. Writing in The Observer on 23 November 1997 as a series of devaluations, stock market crashes, bank collapses and then IMF rescue packages hit the headlines, Hutton wrote:

The Japanese government first promised to respond to the prolonged slowdown in Japan by boosting demand; then it levied taxes; then it cut them – and all the time the banking system is plagued with bad debts and the economy by paucity of demand. What is required, simply, is an unconditional offer of international support for all Japanese banks – and a vast programme of public works to kick-start the economy. It may seem very Keynesian and very Old Labour; but anything less and the world faces the slump of its second biggest economy. [6]

There are two things to say about this. Firstly, just two years earlier Hutton praised the model of Japanese capitalism to the hilt as the system to follow, so some acknowledgement of a change in attitude might have been in order. In The State We’re In, for example, Hutton wrote, ‘If Japan maintains its current rate of investment as a proportion of national output, nearly a third as high again as the US, then it will be the largest economy in the world by 2005 while East Asia as a whole will become the dominant force in world output and trade by the first decade of the next century’. [7] In contrast, there were those on the left at the time who recognised that Japanese capitalism was in a deep and protracted crisis. Writing in International Socialism a few years ago Colin Sparks and Sue Cockerill said, ‘Japan, for so long the wonder of the capitalist world, today displays many of the classic symptoms of economic, political and social crisis. The country of relentless growth is experiencing something that looks very much like the kind of economic stagnation familiar to other capitalist countries. There are few signs of any return to the years of boom’. [8]

Secondly, and more importantly, is the fact that old style Keynesianism is precisely the remedy that the Japanese government has pursued throughout the 1990s as the crisis kicked in – and yet the problems of the Japanese economy continue. Since 1991 the Japanese government has pumped $600 billion into the economy and cut interest rates to almost zero. Whilst these measures almost certainly stopped the slowdown getting worse, they have not lifted the economy out of recession, despite following Keynesian policies of fiscal reflation, cutting taxes and boosting government spending. In fact if we want to understand why the Japanese economy is in crisis, and why this has now spread to most of the world’s capitalist economies, we have to look beyond the ideas of Keynes. Long before Keynes wrote, Karl Marx developed a theory of capitalism which showed that there were deep seated problems inherent in the system which drove it into crisis.

Marx argued that there was a tendency for the rate of profit to fall. As capitalism grows the rate of profit – or the rate of return capitalists get for their investment – tends to fall. The reason for this is competition, as capitalism is based upon the blind competition between competing firms. To stay ahead of their competitors, capitalists have to invest in new machinery to increase the productive capacity of their workforce in order to drive the price of their goods down and capture more of the market. But labour is the source of all value so as more investment is ploughed into machinery relative to workers being employed, this undercuts the very source of profit – and causes the overall rate of profit to fall. The growth in the ratio of capital investment to labour is not a problem for the individual firm – all they are concerned with is undercutting their immediate competitors. The problem arises for the capitalist class as a whole if every firm is introducing labour saving equipment. The greater the success of capitalists in accumulating, the greater is the pressure throughout the system for the rate of profit to fall. The most important reason why the world economy has faced such a period of prolonged crisis since the mid-1970s has been because of the significantly lower rates of profit than that which prevailed in the preceding 25 years of the ‘long boom’. But on its own this does not explain why the system suddenly lurches into crisis – or why it is that the Japanese economy, for so long the envy of the capitalist world, is now in deep recession. So Marx also examined the cycle of boom and bust, more commonly called the trade cycle. Once again he argued that problems arose because of the competitive, unplanned nature of the capitalist system. While it is true that each individual firm may make investment decisions, the fact that the system as a whole is unplanned means that shortages build up sooner or later – for example in raw materials, machinery or labour. These shortages push up costs – causing inflation – but as the new goods come into the system from increased investment the market becomes flooded and the higher costs cannot be passed on. Profits are squeezed, certain firms go to the wall, there is a crisis of ‘overproduction’ (too many goods that cannot be sold for a profit) and the system goes into crisis. When the rate of profit falls it has an impact on the trade cycle, making booms shorter and weaker and slumps longer and deeper – thus producing the three recessions of 1974, 1980 and 1990. It is this process which underlies what has happened to the world economy in the last 18 months.

Marx did also argue that there were certain ‘counteracting tendencies’ which tended to push the rate of profit back up. The most important of these are crises themselves which wipe out large sections of capital allowing other sections to restore profitability and growth to resume. But that doesn’t mean to say that crises are simply a painful but effective way for the system to rationalise itself before embarking on a new period of growth, because at the same time as crisis sets in there is a tendency for the centralisation and concentration of capital, in greater units. The greater the units of capital, the more difficult it becomes for a cyclical crisis to open up a new period of expansion, and the more catastrophic for the system a crisis becomes. In the current economic crisis it has proved even more difficult for the world’s ruling classes to restructure capital to eliminate excess capacity and overproduction. This is a point Colin Sparks makes about the crisis in Japan:

The way that capitalism would ‘naturally’ resolve such a situation is for the weaker capitalists to go under. Firms would go bust. Banks would fail...this has not happened this time round. The major capitalist economies are very reluctant to allow big units of capital located in their territorial patch to go bust...the prime example of this at the moment is Japan... Since the collapse of the ‘bubble economy’ at the end of the 1980s, it has proved very difficult to get the economy to grow [and] it has proved politically impossible to force through the restructuring of the large number of banks that have loans that are no longer making payments. [9]

Thus Marx provides an explanation for the crisis today but his ideas are noticeably absent from the writings of Will Hutton. Indeed in his two books, The State We’re In and The Stakeholding Society, there are only three references to Marx – and these are cursory. In fact Hutton is even less willing to talk about radical solutions to the problems of capitalism than Keynes. For example, Keynes argued there was a ‘declining efficiency of investment’ which meant the system was prone to crisis which would ultimately get worse. The problem of how to get capitalists to invest for the common good of society led him to hint at far more radical solutions. At points in his work The General Theory of Employment, Interest and Money, which was published in 1936, he calls for the ’comprehensive socialisation of investment’ as the means to secure full employment and overcome the worst aspects of the market. The answer then would be for the state to take investment decisions out of private hands. The logic of this analysis was too radical for Keynes and he never argued for it to be implemented. For the modern day Keynesians, such as Hutton, it is not even considered as it actually challenges the whole basis of capitalism – the accumulation of profit.

Hutton remains firmly convinced that the capitalist system remains the best way to organise society. So he says, ‘It is true that competition and rivalry are essential to economic progress, markets produce winners and losers, and there is no economic system on earth that can spare loss-making firms from the pain of restructuring and redundancy. Profit is essential to a market economy and so is the freedom to trade’. [10] Whilst the revival of Keynes’s ideas is proof of the depth of the crisis and the fact that many people are looking for solutions, by ignoring the most radical element of Keynes’s analysis Hutton makes a massive concession to the ideas of monetarism.

The problem for Hutton is not capitalism as such, but the British form of capitalism. He remains firmly committed to the belief that the reason for the long term decline of British capitalism is that British society is dominated by a ‘semi-feudal’ state, which gives privileges to money capitalists of the City who are only interested in short term profits. Britain’s interests, therefore, are not determined by the long term drive of industry for competitive investment, but short term profit making of financial institutions. In Money Before the Machines, an article written in The Guardian on 3 January 1995, he states, ‘The heart of the problem is ... a systematic failure of the financial system to commit to British companies – providing them with neither a stable, long-term ownership base nor with cheap long-term debt. Instead British finance is nearly always near the exit door, ready to bail out by calling in its short-term loans or selling its shares’. [11]

However, the British state is not a feudal relic, but was a product of the world’s first bourgeois revolution. Britain has declined but not because it is not a republic, does not have an elected second chamber, or does not have a written constitution. Most of the great capitalist powers are as undemocratic as Britain. Indeed one of the most successful economies of the last 50 years until recently is Japan and this is headed by the most archaic form of rule – a feudal relic, the emperor. The fault lies with the capitalist organisation of society, not some British aberration caused by the domination of the City’s pursuit of short term profits for the financial sector.

Hutton therefore has to confront the problem of short termism in the City and long term decline of the system. The solution, he firmly believes, lies with ‘stakeholding’. It is a concept that remains remarkably vague, but essentially stakeholder capitalism comes down to persuading employers to act for the common good rather than for their own profits. For this to come about, Hutton argues, some form of constitutional reform is necessary: ‘This is, in part, about recasting corporate law, and thus the legal obligations of companies to their stakeholders’. [12] Today the limits of constitutional change are being revealed as cosmetic tinkering with the House of Lords without any fundamental challenge to the root of the problem. Today’s Blair government is much more persuaded and influenced by Robert Ayling, Bernie Ecclestone and Rupert Murdoch, none of whom will have their profits threatened by the constitutional change which Hutton is so keen on.

Hutton therefore ends up in the same camp as Blair. He never challenges the central contradiction of capitalism – the fact that employers derive their profits from the labour of workers. Instead he says, ‘The [stakeholding] model has to be constructed around accountability and transparency, and operated by managers and workers alike who accept that they make common cause and have a mutuality of obligation’. [13] For many readers this may all sound vaguely familiar – it was the jargon of the 1970s and the Social Contract which ended in defeat for the unions and opened the door to the monetarists who became so dominant during the 1980s. Stakeholding therefore allows Hutton to make his peace with the market system: ‘I accept that the price mechanism is the best means we have to allocate goods and resources, and that the signals of profit and loss are the most compelling means we can devise to drive both the level and composition of output in ways that correspond to real demands’. [14] Thus, despite his devastating critiques of the free marketeers, he can see no alternative to the market itself. He has opened the door to serious criticisms of New Labour, yet his vision of constitutional reform and stakeholding is entirely compatible with Blair’s project. The capitalist system is so ill it requires a far more radical solution than either Keynes or his loyal disciples are prepared to advocate.


1. W. Hutton, The Observer, 10 January 1999.

2. W. Hutton, The Stakeholding Society (Oxford, 1999), pp. 16–17.

3. D. Goldblatt, Editor’s Note, in W. Hutton, ibid.

4. Ibid., p31.

5. For a more detailed and comprehensive account of the ideas of Keynes, see C. Harman, The Crisis in Bourgeois Economics, International Socialism 71 (1996), pp. 3–56

6. W. Hutton, The Stakeholding Society, op. cit., p. 217.

7. W. Hutton, The State We’re In (London, 1995), p. 269.

8. S. Cockerill and C. Sparks, Japan in Crisis, International Socialism 72 (1996), p. 27.

9. C. Sparks, The Eye of the Storm, International Socialism 78 (1998), pp. 21–22.

10. W. Hutton, The Stakeholding Society, op. cit., p. 88.

11. Ibid., pp. 56–57.

12. Ibid., p. 272.

13. Ibid., p. 273.

14. Ibid., p. 1.

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