By Tom O'Leary
The great potential of argument and dispute is that it leads to clarity of thought. Richard Murphy has done the left great service. In his broadsides against John McDonnell's policy framework he has shown his own utter confusion. In this way, clearing up these confusions and clear misconceptions about economics nd economic policy provides an opportunity to clear out some dead wood from the left's economic thinking. That the Murphy objections are unfortunately shared by a number of people who falsely believe that they are 'keynesians' or even Marxists only makes the task of clearance more important.
The John McDonnell framework is that there should be a balance on the current, or day to day Government spending over the business cycle. Borrowing should be reserved for the Government investment. Murphy acknowledges this in his piece. But he seems to have no understanding of what this means. As a result his critique of the McDonnell framework contains howlers. So, he argues that a commitment to balancing the current budget means McDonnell will 'dampen the economy and at least partially withdraw cash from the economy' at a certain point of the cycle. He also argues that the same commitment to balancing the current budget means being committed to austerity. Both of these points are nonsense.
The McDonnell framework places no upper limit on the level of Government investment at all. In the probable economic crisis McDonnell and Corbyn will inherit, Government will need very large borrowing for investment over the longer term, more than one parliament. Government will be boosting the economy for many years to come. The increase on the productive capacity of the economy via investment also means that capacity constraints are way off into the future.
Austerity and the deficit
This large scale increase on investment is not only the alternative to austerity, it is the opposite of it. Tory austerity is comprised of two elements. These are very deep cuts in public investment but public current spending has actually risen. This is not because, as some wild-eyed Tory MPs like John Redwood claim, because there has been no austerity. The cuts have been severe and deep. Women have borne the burden of them, and we await a study showing how black and Asian communities have suffered disproportionately.
But cuts to Government current spending and investment have not led to the elimination of the deficit. The deficit has not fallen at all because of austerity. George Osborne never understood why and it appears Richard Murphy doesn't either.
The deficit has modestly fallen because of modest growth, caused by monetary easing, a falling pound, lower interest rates and Quantitative Easing. This has led to moderately rising tax revenues, not falling Government spending. It is growth that reduces the deficit. It is only growth which can eliminate it. This is exactly what John McDonnell intends.
How is this to be achieved? By increasing Government investment on a sufficient scale to restore robust growth. In this regard, Richard Murphy seems ignorant of two crucial facts.
- Any deficit is comprised of two components, expenditure and receipts. A commitment to eliminating the deficit says nothing at all about the level of expenditure alone. Deficits can be eliminated by increasing revenues, either through rising economic activity or (something Murphy ought to know about) tax reform to ensure lower tax evasion.
- The deficit on the Government's current account is caused by economic weakness, primarily the weakness of private sector investment. Cuts to Government investment simply deepen this crisis. Therefore any increase in Government investment is expressed first as an increase in economic activity. This in turn is felt as an improvement in Government revenues, as tax rises and Government outlays on poverty fall. This is because the returns on an increase in Government investment come not to the investment account but to the current, or day to day spending.
But eliminating poverty cannot be achieved by increasing NHS spending (Government Consumption). Poverty could be eliminated by a very substantial increase in investment, led by public investment. This should create high wage, high skill jobs. It reduces the Government's outlays on poverty and increases the Government's tax revenues. This is what McDonnell means by eliminating the deficit on current spending. It is not cuts, but investment.
All of this passes Murphy by. Instead, he argues that the Government should be the 'borrower of last resort', but actually means that the Government should always run a current budget deficit. Otherwise, 'cash is withdrawn from the economy', by which he probably means that the private sector as whole will be obliged to reduce its net surplus.
Currently all three components of the private sector are running a surplus, the household sector (which should have net savings but has to deplete these because of the crisis), the company sector (whose large surplus consists of uninvested profits) and the overseas sector (composed of foreign investors who have been lending to the UK at a record rate, but may choose not to at any point).
These are the counterparts of the Government deficit. But no progressive, or Keynesian economist, or any socialist, would regard either an investment strike and profit hoarding by UK companies as a positive, or increasing indebtedness to overseas speculators as a welcome development. Yet these are the counterparts of permanent public sector current deficits, which Richard Murphy advocates.
But he also goes much further in an attempt to theorise his hostility to Corbyn/McDonnell and their economic framework. In a follow-up piece he argues that there is an identity between Government Investment on the one hand and Savings plus Imports on the other, and that Government Investment has no impact on Consumption at all (!):
'In other words what the identity suggests has happened: what has been considered to be desirable investment has not lead to a growth in net consumption, which is what maters to most people. That's not to say that there has been no growth, but most people have not benefited.'This is an economic howler, which would produce a Fail for an Economics A Level student. Investment, Savings, Taxes and GDP, etc. are not fixed amounts. The factor which increases the aggregate total is Investment. Increased Consumption requires first increased Investment. Under Murphynomics the Industrial Revolution was a waste of time. Government should have increased borrowing to buy more gruel instead.
Consumption versus Investment
Keynes, unlike the self-styled 'keynesians', was very clear that the decisive factor in economic growth is investment. Against his critics, he argued that this was the central theme of his 'General Theory'. This is an important point of agreement with Marxists and indeed most rational economic schools. Marxists are in favour of the development of the productive capacity of the economy (the 'productive forces'). Keynes, in seeking to regulate the level of investment in order to prevent slumps accepted the need for a 'somewhat greater socialisation of the investment function'. By contrast the 'keynesians', like Osborne seek to regulate the consumption function, and let big business and the banks determine the level of investment in the economy. It is their non-investment which is responsible for the current crisis.
Murphy charges McDonnell of seeking no fundamental change in the economy. Like virtually all of his charges this is posted to the wrong address. It should be a self-criticism of the 'keynesians'. British post-WWII relative and spectacular economic decline was accompanied by and in part a product of 'keynesian' demand management and permanent deficits on the Government's current account. This is the status quo.
A key reason why the current leadership of the Labour Party is so vilified is precisely because its domestic agenda breaks with that status quo. A very large increase in Government Investment would entail in Keynes' term, some increase in the socialisation of the investment function. In Marxist terms the state would increase its ownership of the means of production. This is desirable for economic and democratic reasons, and is something which has been fought against by every British Government after Attlee.
Richard Murphy has betrayed his own lack of economic understanding with his misjudged attacks. But if others can learn from his mistakes, clarity can come from confusion.