by From Asad Zaman and RWER current issue The intimate connection between economic theory and political power is clearly illustrated by the rise and fall of Keynesian Economics in the 20th Century. Confidence generated by theories glorifying the workings of a market economy led leading economists to predict permanent prosperity, just prior to the Great Depression of 1929. After the crash, Keynes set out to resolve the most glaring contradiction between economic theory and reality. While economic theory maintains that free markets automatically eliminates unemployment, the Great Depression created high unemployment which persisted for more than a decade. Keynesian theory recognized this failing of free markets, and placed responsibility for creating full employment on the government.
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from Asad Zaman and RWER current issue
The intimate connection between economic theory and political power is clearly illustrated by the rise and fall of Keynesian Economics in the 20th Century. Confidence generated by theories glorifying the workings of a market economy led leading economists to predict permanent prosperity, just prior to the Great Depression of 1929. After the crash, Keynes set out to resolve the most glaring contradiction between economic theory and reality. While economic theory maintains that free markets automatically eliminates unemployment, the Great Depression created high unemployment which persisted for more than a decade. Keynesian theory recognized this failing of free markets, and placed responsibility for creating full employment on the government. Application of Keynesian theory led to a period of unprecedented prosperity in Europe and USA following the 2nd World War. However, there was a snake in the Garden of Eden: the wealth share of the top 1% declined precipitously between 1930 and 1980:
The top 1% fought back by a well-thought out multi-dimensional plan to reverse this decline in their wealth shares; details of this planning are available from Naomi Klein’s Shock Doctrine, and Alkire and Ritchie Winning Ideas: Lessons from Free Market Economics. A central element of this plan, implemented in the Reagan-Thatcher era, was the rejection of Keynesian economics and a return to the same pre-Keynesian ideas that had been proven wrong by the Great Depression of 1929. Modern textbooks of labor theory continue to teach that free markets eliminate unemployment, blithely ignoring the massive amounts of empirical evidence against this proposition. Chicago school economists argued that government interventions to create full employment bring about short term increases in employment, which are reversed in the long run. Furthermore, such interventions inflict great costs upon the economy in the form of high inflation. Central Banks responded by dropping the goal of reducing unemployment, and shifting policy focus to fighting inflation only. The result was a long period of economic stagnation, with high unemployment, which weakened power of labor force and enabled capitalist exploitation, reflected in the rapid rise of the wealth share of the top 1%. Another graph which shows that the productivity increased a lot, but the wealthy captured the lion’s share of these gains, while the labor share remained nearly constant, is given below:
This clearly demonstrates why economics textbooks stick to the theory that free markets create full employment, when they obviously do not (see: 70 years of failure by economists to understand the labor market). Allowing unemployment to exist, and preventing the government from intervening to eliminate it, permits capitalists to exploit labor to the hilt, appropriating all gains from increasing productivity, and denying labor any share of the increasing profits. read more