Practical philosophy

“The naively metaphysical standpoint of sound bourgeois common sense considers thought independent of being and defines truth as the correspondence of thought to an object that is external to it and ‘mirrored’ by it. It is only this outlook that can sustain the view that all forms of economic consciousness (the economic conceptions of a pre-scientific and unscientific consciousness, as well as scientific economics itself) have an objective meaning because they correspond to a reality (the material relations of production which they comprehend)”

Karl Korsch, Marxism and Philosophy, 1923

I’m thinking of writing a textbook, perhaps called How to Learn Marx’s Theory and Apply it for Yourself to the Contemporary World. It would have to involve i) a short history of dialectics; ii) an outline of, perhaps, The Phenomenology of Spirit, The Philosophy of History and perhaps The Logic (if I could manage that); iii) a short history of political economy, focusing on labour theories of value; iv) an outline of Smith and Ricardo in respect to this question in particular v) Marx’s philosophy of the interaction of the subject and the object, as originally formulated in the Theses on Feuerbach vi) Marx’s philosophy in practice, as he applied to concrete analyses of historical and contemporary history and journalism; vii) Marx’s philosophy/ methodology in practice, as he applied it to economic analysis; viii) the relevance or otherwise of any of his tools to understanding the contemporary world, especially the specific nature of contemporary imperialism and the ongoing crisis of global capitalism; ix) Marx’s theory of colonialism and Marxist theories of imperialism; x) the theoretical and organisational degeneration of anti-imperialism and the Western left as a large-scale modern socio-historical phenomenon, that can only be explained by a careful and judicious application of Marx’s philosophical and social scientific method of the interaction of the subject, ala Karl Korsh in Marxism and Philosophy; and xi) ongoing problems with Marxist philosophy, social theory and economics, and possible answers to them.

Some quick points about Marx's philosophy and economics.

 1. Objectivity is distinguished by Marx in two ways i) material objectivity (eg use-values and wealth) and ii) social objectivity (in economics, exchange-values, or the quantities of abstract or homogenised labour). So both use values and exchange values are, in Marx’s theory, supposed to be objective, but in different ways. Many mix up the two, and, with regard to marginalism, mix up the perception of values of goods and services (a subjective, individual-psychological question) with use values, which can never be subjective.

2. The subject-object thing runs right through Marx from beginning to end, from the architecture of Capital—which begins with the general abstract conclusions on the nature of wealth in the capitalist mode of production and descends to the concrete evidence from which the general categories are derived—down to the detailed concrete passages detailing, say, the process of increasing subordination of the worker amid the process of development of manufacture. This is because Marx knows that all theory is inescapably subjective—but not only in the sense of being individually subjective,but also socially subjective, from a group point of view. However, he believes that the objective position of wage-labour in opposition to capital (again, the two form an inseparable mutually defining "unity") gives it a unique vantage point in the social structure. Hence the crucial distinction between a class in itself (an objective social-structural position in relation to property [land, labour and capital]) and a class for itself (a subjective awareness of position, interests and capabilities that informs social and political action). One reason why "subjective" in Marxism is not synonymous with "bias" in the everyday sense is that, once the accumulation of capital is seen to result from the labour process, as the product of dead labour, the subjective view from the objective position of the working class—that it is the class responsible for wealth creation—is seen to be objectively correct. That is, the subject and the object re-emerge as a unified whole, a unity. And in fact, the same thing is right there in the Theses on Feuerbach, as it is in The 18th Brumaire and the Civil War in France. Because one of the things that Marx is saying (or rather illustrating) in the quote from the Critique of the Gotha Programme is that wealth has a passive as well as an active side, a material as well as a social, an objective as well as a subjective. It is not possible to be a Marxist and not grasp that Marx's methodology—which conceives of reality as sensuous human activity, as political and social practice—is at base a conception of social change as the mutually determining relation subjective and objective factors at various levels. Because this is the very core of Marx's innovation, his specific philosophical advance over both mechanical pre-Marxist materialism (say, of Holbach or Feuerbach), which conceives of reality as an external object, and idealism, for which reality and contemplation are one and the same. That's more or less point one in Marxism, and if you haven't got that, nothing else is really available to you, and you are forced merely to decry it as "pseudo philosophical claptrap", in the manner typical of today's anti-intellectualism—essentially revelling in its own ignorance. "The chief defect of all hitherto existing materialism—that of Feuerbach included—is that the thing, reality, sensuousness, is conceived only in the form of the object or of contemplation, but not as sensuous human activity, practice, not subjectively".

3. Marxist objectivity, Marx's version of realist method—and so Rosdolsky's version of realist method—is always an everywhere understood as a mutually determining process between subjective and objective factors.

4. Without use value, there can be no exchange value, because any labour that goes into a product that no one wants is socially unnecessary. 

5. Another reason why abstracting from use values can't mean excluding them from the value equation, or separating them from exchange value, in Marx's system: because the use value of labour power treated as a commodity is the source of fresh value when it is turned into labour during production. Therefore, the lines of manufactured trousers hung up for sale in Marks and Sparks imply the class struggle!

6. It is some time since I studied the question, but some common objections to the LTV are as follows: i) scarcity is also a feature common to commodities that gives them value (Austrian School); ii) in an economy in which food or energy are commonly part of the production of commodities (whether as imputs for the worker or for production), then the same relation applies as it does for labour, and we have a food or energy theory of value (neo-Ricardians, the most important of whom is Sraffa); iii) even if there is then a food or energy theory of value, can we talk of exploitation of food or energy? Technically, yes; but morally, no. Marx aims for a dispassionate account of exploitation as a technical relation, but it has an irreducibly human-centred moral component: normative ethics vs scientific socialism. iv) Most of the classical economists, including Marx, assumed a falling rate of profit, but it is unclear whether there is strong empirical evidence for this on a worldwide scale over time. v) Marx's theory of the falling rate of profit is based on the idea that, because labour power is the sole source of fresh value, as the capitalist invests in new machinery (dead labour) to give them a competitive advantage, this may raise individual profits in the short run, but, as capitalists as a whole adopt the new technology, over the long run, the ratio of fresh value-creating labour (variable capital) to constant capital (machinery) falls, and with it surplus value (the relation between value and prices is that value is something like the long-term equilibrium price around which prices fluctuate because of variations in supply and demand), the source of profits. But what about new lines of industry, which are being developed all the time, will they not offset the overall declining tendency? But what if the productivity increase delivered by the new capital offsets the falling tendency? This development is not specified in detail, ie there is no integrated theory of it.

7. Only exchange vales can represent values, because they are the form that value takes in capitalist society and value is the content. In contrast, use values are the bearers of exchange value. Represent and bear do not mean the same thing.

8. A use value cannot be subjective. This is because it is the quality of the commodity that allows it to fulfil some socially mediated human need. It is the quality, the socially mediated human appeal, that allows it to enter exchange in the first place. Without it, no equivalence of, say 2 shirts for 1 exquisite tie, on the basis of their containing the same amount of abstract human labour, could take place.

9. The marginalists start with scarcity and find the explanation in variations in value in individual psychology, in individual tastes. For them the external world of material things and the subjective world of the mind (ie of individual tastes) are radically separate. For Marx, on the other hand, the two are inseparably part of the same whole, the same totality.

10. "It is in the various use values that value is expressed". No, value is expressed as exchange value. Use values are carriers of exchange value. These are two ideas that are fundamental to understanding the LVT, before you decide whether the the criticism of it are true or false.

11. The secret of Marx's analysis, as he used it, is that socially objective factors—such as exchange value—are themselves the outcome of previous clashes of subjective and objective factors. That's why the subject-object formulation holds. In practice, it is not a theoretical question, but a scholarly-practical question, the end result of scrupulous and detailed investigation at more and more concrete levels of social reality, at lower and lower levels of social reality, spiralling downwards to follow the inner relations (not causative relations!) of the mutually conditioning sides. Thus, even if the LTV aims at social scientific objectivity, it does not aim at class objectivity. On the contrary, it aims to punch a series of holes in classical political economy, in this way placing itself wholeheartedly in the service of achieving working class power.

12. On the Jewish Question.  Marx, in his argument with Bauer on the insufficiency of mere religious emancipation, adopts—mock-naively and for (heavy handed) satirical purposes—the characteristic denigrating epithets commonly heaped on Jews to suggest that they would be more appropriately heaped on the chief denigrators, the respectable bourgeoisie. Also, he's just emerging from pure Hegelianism (I think he's 25) so that the language makes it difficult for the casual reader to grasp what he's saying. He's saying social emancipation should be the revolutionary democratic goal.

13. The two basic point where today's "anti-imperialists" go wrong, is that, on some occasions, in relation to some kinds of regime, some forms of western Imperialism are relatively progressive; the partial advances in democratic and social control, though insufficient, are not illusory, but are real. This leads them into all kinds of reactionary contortions.

14. Marx never repudiates the idea that capitalism is progressive relative to some kinds of social formation. He certainly uses some of the (to us) loaded phrases of the day. He is also inevitably Eurocentric, despite his very serious attempts to get to grips with other cultures (on India, he probably read as much as was available in the day, even if this wasn't very much or very good). But "progressive" and "civilising" do not mean the same thing. The earlier passages on India merely note that, despite all the human horrors and destruction wreaked by colonial domination, at the same time the social basis of a stultifying social form, of "oriental despotism" is shattered. In a way, he is arguing against the romanticisation of social forms that severely check human development. The later passages on the Russian mir is not about changing his mind on the accidentally progressive aspect of colonialism (I don't think he had a fully-worked out view on what we would call imperialism, just hints here and there), but on there being the possibility of multiple trajectories towards social advance, rather than a single one suitable for all times and places.

15. The point about Marx's earlier quote about India and the one about the mir is his ability to see alternative potential futures immanent in existing social structures—notwithstanding that, based on the inadequate sources of the day, his picture of pre-colonial India has since been superseded. In contrast, the dogmatist sees only one possible path—whether that be inevitably positive or negative. But both are attempts at "a general historico-philosophical theory, the supreme virtue of which consists in being super-historical", but neither are really much to do with Marx's Marxism—ie, Marxism at its most powerful. That's why the "bleeding dry" of the later Marx fits perfectly well with, and is not cancelled out by, the earlier argument of progressive potential of destruction of repressive social and or state structures—whether we wish to apply it to historical societies or Saddam's Iraq—because in between the two are the actions of the main actors, the oppressor and the oppressed, which fulfil or nullify possibilities that were previously present. That's why Marx's views on the mir wasn't cancelled, in this sense, by the actual history of the development of capitalism in Russia.

16. Just as he saw the potential for the break up from the outside of social relations restrictive of human developments—but perhaps thought this potential closed off following the Indian mutiny—so he saw the potential for social progress on the basis of the Russian commune in a context of globalising capitalism. Ie neither of the potentialities he thought he saw materialised and, in fact, both have had to undergo full scale capitalisation or recapitalisation—in India's case, in part owing not just to transfers of technology and knowhow, but more importantly to the transformation in social relations, of the dominant property form, the precise trajectory of which owes in part to the imperial inheritance.

17. No expurgation of the possibility of Indian agency from the dynamic political picture:
"All the English bourgeoisie may be forced to do will neither emancipate nor materially mend the social condition of the mass of the people, depending not only on the development of the productive powers, but on their appropriation by the people. But what they will not fail to do is to lay down the material premises for both. Has the bourgeoisie ever done more? Has it ever effected a progress without dragging individuals and people through blood and dirt, through misery and degradation? The Indians will not reap the fruits of the new elements of society scattered among them by the British bourgeoisie, till in Great Britain itself the now ruling classes shall have been supplanted by the industrial proletariat, or till the Hindoos themselves shall have grown strong enough to throw off the English yoke altogether. "
O yes, and tell us, clever clogs, by what processes do you propose might lead to the Indians being able to throw off the English yoke themselves?
"The political unity of India, more consolidated, and extending farther than it ever did under the Great Moguls, was the first condition of its regeneration. That unity, imposed by the British sword, will now be strengthened and perpetuated by the electric telegraph. The native army, organized and trained by the British drill-sergeant, was the sine qua non of Indian self-emancipation, and of India ceasing to be the prey of the first foreign intruder. The free press, introduced for the first time into Asiatic society, and managed principally by the common offspring of Hindoos and Europeans, is a new and powerful agent of reconstruction. The Zemindari and Ryotwar themselves, abominable as they are, involve two distinct forms of private property in land — the great desideratum of Asiatic society. From the Indian natives, reluctantly and sparingly educated at Calcutta, under English superintendence, a fresh class is springing up, endowed with the requirements for government and imbued with European science. Steam has brought India into regular and rapid communication with Europe, has connected its chief ports with those of the whole south-eastern ocean, and has revindicated it from the isolated position which was the prime law of its stagnation."

So: some historical errors on the nature of Indian property systems, owing to inadequate sources, but no “imperiocentric” siding with the English against the Indians, or denying that they would have to be the agents of the own political destiny if they were to enjoy the benefits of the destructive and self-serving interference of the imperialists.

Neither Islington nor Scunthorpe, but a few modest steps towards international socialism!

On Ed Miliband's alleged swerve to the right on budget policy, I find myself in between the "Blairite neo-liberals", if I can combine familiar insults, and the old Labour stalwarts. First, this is because the longer-term question isn't really about fiscal policy. Fiscal policy can offset a slump in demand to some extent and for some time. If you cut too far and too fast, you risk tipping the economy back into recession. If you don't make the right noises and some progress on cutting the budget deficit, at some point borrowing costs will soar: even more so in the febrile atmosphere of today's international financial markets. That is, both positions are true, depending on the specific circumstances. Also, the level of spending that was affordable in the 2000-07 bubble (the greatest bubble in human history) is affordable no longer now that the bubble has burst. The system of private ownership and generalised commodity production is not neutral between possible solutions: it favours making working people rather than property owners pay. These are really technical questions about how capitalism works now.

But I think where the unions and the old Labourites—and those on the left of the party more generally—miss a trick against the "Blairite neo-liberals" is over the longer-term and ultimately more important questions of the kind of society we would like to live in: What kinds economic and social structures? Are any of these are plausible? If so, how might we practically develop them?

On this second set of questions of practical social and moral philosophy—which will be at the heart of what the Labour Party becomes, assuming it is capable of change in time—the old Left seems to have very few, new positive creative proposals, which is unfortunate.

As for Ed, I think that, for practical short-term political purposes, to keep the two main halves of the party on side, he needs to stick to "fiscal conservatism" (if that means addressing the structural budget deficit over the longer term)—especially as 2012 could well be a very bumpy year economically around the globe—while at the same time offering the unions and the old Labourites something positive and attractive and big on the practical social and moral front that they can hold on to. What that might be, I'll try to make some concrete suggestions later.

Fly on the wall

I usually try to write at least one poem a year. This is my effort for 2011.

You wake at 5 am, ashamed. A rough
wind billows, unseating garden furniture
as next-door's mobile tinkles, shivers.

In the dream—a wild ride along the strand
in an open-topped car, black sand and dancing.
At a ball old loves, still beautiful, ignore you,

though you find yourself witty. A hump
on your shoulder grows to an inarticulate silence
as filmmakers, glad for the find of a circus act,

slide over the dance-floor, cheerfully afraid.
On camera in the washroom only one friend
will defend you, dabbing her blackened eye.

Staccato squeal of a fox's breathless terror.
The wind is blowing bed sheets into sails.
The plash of car tires. Another rainy day.


Jan 6th 2012

The global economy on the brink again

Some notes from October

1. The euro zone debt crisis is the most pressing problem weighing on the outlook for global economic growth.
• It is depressing consumer and business confidence, causing uncertainty over future job and income prospects, and investment returns.
• As euro zone growth prospects worsen, investors pull out of stocks, currencies, government bonds, suspecting they won't get paid or paid enough.
• This has affected the stocks of banks, especially those who lent lots to Greece. Again, this has made banks reluctant to lend to one another: don't know how much each other are exposed.
(An aside: corporate profits in US are highest in 50 years, but they are holding on to cash because of poor growth outlook: like an aeroplane, capitalism must keep moving, or it falls out of the air.)
• You would expect a slowdown in manufacturing as sales to foreigners fall and as firms invest less in production capacity—machines, premises and jobs.

2. What is a debt crisis, and how does it come about?
• Governments borrow, from home and abroad, to cover budget deficits.
• This accumulates into public debt.
• If budget deficits are too high for too long, and/ or debt gets too high—both in relation to the size of the national economy, which is not fixed—the lenders start to think that inflation could rise and/or that the government might not be able to pay them back (a "default").
• If they are willing to lend, they only do so at higher interest rate, to keep the real rate of return stable or to compensate for perceived increase in risk.
• At some point, the cost of borrowing to cover new spending shortfalls or to cover the costs of paying back old ones becomes unaffordable.

3. Because of (1) we now find ourselves on the brink of another global recession, but probably not as severe as the last.
• The euro area will go into a shallow recession next year.
• Negative feedback loops from the financial market disturbances generated there could push the US into recession too.
• The chance of a break up of the euro area is also high.

4. Why do we find ourselves here?
• High debt loads left over from before the last recession, and as a consequence of it: the credit induced property and/ or asset bubbles, followed by increased debt burden, because local currency cost of foreign-currency borrowing rises after the local-currency falls.
• On top of the consequences of the global recession of 2008-09, or as part of the response to them, a series of negative shocks that have kept the prices of commodities—notably food and fuel—very high by historical standards:
> the Arab Spring (oil supply shock, keeps oil prices high);
> the Japanese earthquake and tsunami (demand shock and supply disruptions);
> bad harvests in 2010, eg Russia's wheat ban (supply shock);
> the squabbles over the US debt ceiling and the ratings downgrade;
> the prolonged ad hoc approach to the euro debt crisis (point 1).
> US quantitative easing? (boost equity markets, but some "surplus liquidity" has driven rises in commodity prices, in part contributing to this year's global inflationary wave, eg pushing up energy prices and restraining growth because of the supply side shock)

5. What are they trying to do? Will the latest deal work?
They are split, but measures possible include:
• reduce (restructure) Greek debt so that investors only get of their money back;
• recapitalise banks so that they can absorb more losses if need be;
• expand EFSF so it can buy Italian and Spanish government bonds, bringing down the yields on them and so making continued borrowing possible

6. What will be the consequences if the euro breaks up for countries leaving?
• Bank run as try to move money out of country threatening bank system;
• the government defaults, reducing debt burden: can't pay, won't pay;
• capital controls as new currency introduced;
• the new currency falls.
• import compression but trade partners in recession: no benefit to exports.
• Euro debts increase.
• Companies and firms become insolvent.
• Much reduced external funding.
• Further austerity or printing money: with depreciation, this produces high inflation, which is the same as a rapid fall in living standard.

7. Why should we care? How will it affect us?
• UK banks hold shares in the European banks that have lent a lot of money to Greece (and Italy and Spain). This will affect lending in the UK. Without a reasonable rate of lending, household spending and investment could be much lower for longer.
• Low foreign demand will affect firms' foreign sales at the same time as the government is cutting spending and jobs, and when business and consumer confidence—partly because of the expected govt cuts
• Boosting exports vital to offset weak domestic demand: low confidence, fiscal tightening
• This will mean large-scale loss of jobs and declines in living standards, not to mention the mental anguish and misery that goes with it.
• These will keep UK growing at below trend rate longer, prolonging the misery.

8. What does it mean for Labour and what should it mean?
• Understanding basic economic terms and ideas is important for Labour members, because it's one of the main languages of class power, and without a basic grasp of it, it's easy to be misled—or worse, bored into submission. But all it is is category definitions, relationships between categories, and processes: shorn of the maths, it's no harder than accountancy, but a lot easier than physics or philosophy, or even some kinds of sociology.
• Too fast, too soon is right: on the one hand, this is how capitalism works.
• On the other hand: this is not 1997, the hold of the dominant ideology—"there is no alternative"—has been decisively weakened loosened for the first time since the 1970s. So this is not the time for another fight out of new and old labour: both of them have had their day. We need something new, again.

Model worker

While I remember, I want to jot down a couple of points about the two macroeconomic models I have found to be of the most practical use in looking at policy and performance in emerging economies: the full Keynesian domestic economy model, which brings in flexible prices and depends on particular view of how firms are likely to respond to changes set off by a change in demand; and the Keynesian open economy model in the short run, which is for economies in which international trade is significant component. It assesses the likely impact and effectiveness of monetary and fiscal policies—the two main levers of policy control—when the exchange rate of a country’s currency is kept artificially fixed against the currencies of the outside world and when it is allowed to float. These models are best "applied" separately, even to the same economy, in order to simplify the analysis of the expected lines of causation.

ISLMAS(K)AD. In contrast to the situation when we are looking at the knock-on effects of demand changes on the goods and financial markets of the domestic economy only, the introduction of the possibility of changes in the price level produces two new effects for policymakers to consider. In the first, [and in addition to the feedback loops set off between the goods and money markets through changes in interest rates and national income,] a price change caused by a rise in demand in the goods market, reflecting perhaps a fiscal expansion, erodes the real money supply, altering the equilibrium conditions in the money market—that is, its shifts the LM curve down, wiping out some or all of the gain in output from the original change in demand. The second is the effect of a change in the price level on the labour market, understood as working in a particular way. The key features of this model, which give rise to its distinctive results, are the assumptions of flexible prices in combination with "sticky wages"—that is, when nominal wages take time to adjust to changes in the price level, either up or down. Assuming that there is spare capacity in the economy, a boost in government spending or a cut is taxes will push up demand for goods and services, but it will also push up price growth. If the nominal wage fails to adjust upwards to compensate for inflation, the real wage falls, inducing a rise in labour demand (ie firms find it profitable to employ more staff) and a fall off in labour supply (people want on average to work less). This divergence of labour demand and supply temporarily boosts the level of employment and so, as conditioned by a definite level of technological development, economic output and income. At the same time, it reduces the level of involuntary unemployment. In modern economies, at least until the great economic crisis of 2007-09, this was the direction of price movements that interested economists, as it matched, for a time, the broad empirical trends of the economies in which they found themselves. However, I think I'm right in saying that Keynes emphasised the "downward stickiness" of wages, as, writing in the 1930s on the events of the Great Depression, what interested him was, understandably, the impact of deflation, which he identified as a trigger of the intractable and socially damaging problem of high and enduring unemployment. This was because institutional and legal factors prevented money wages from adjusting to a fall in prices by falling themselves, as predicted in classical economic theory. In turn, this tended to boost the real wage and so induce a fall in labour demand from firms and a rise in labour supply, at once reducing both employment and output, and amplifying "involuntary" unemployment.

Because the model sets out systematically the relationships between a large number of variables, it is a helpful framework for looking at a wide range of phenomena relevant to assessing the health and stability of economies, from demand-pull inflation and hyperinflation, overheating, soft and hard landings, to the co-ordination of policy with economic recoveries and slumps.

ISLMBOP. In an open economy, which incorporates the impact of inward and outward/net currency flows on the financial and goods markets, fiscal policy is powerful when the country’s currency is set at a specific rate, whereas monetary policy is relatively ineffective. If the authorities allow their currency to find its own level, however, without interfering by buying or selling on the currency market, then the reverse is true: the impact on monetary policy in enhanced and that of fiscal policy weakened. The reason for this is that

Down with the so-called rebels!

I'm not saying there aren't any good arguments against intervention in Libya, but here, the author's self-identification with the left seems to me misplaced. This is because the "our-poor-vs-their-oppressed" routine tends to be the standard, unprincipled line of a nationalist reactionary. If only the West had allowed Gadaffi to kill a few more Libyans, a few more Americans could have had their teeth pulled for free—such is the noble logic of this article, only slightly exaggerated.
Posing as clued-up and streetwise, the argument simply reinforces the conventions of a system of production and distribution in which we are told that we can't have both—in this case, help foreigners and help ourselves—but must choose between them. In a world of great material abundance, however, in which economic textbook "scarcity" is, in some sense, socially created and imposed (which is one of the things that Marx means when he says that capitalist social relations have become a fetter on social progress), this appeal to greed and selfishness—exactly the human traits that capitalist social relations tap into and amplify—merely binds us more closely to that system. At the same time, it conspicuously fails to point the finger at a ruling ideology that carefully places outside of the jurisdiction of social policy the vastly lopsided income distributions which it conceals and protects, portraying them instead as an unalterable feature of the natural landscape, unquestionable, dangerous to tinker with, beyond choice. And this is the crux of the problem.
Also: nice scare-quotes sneer at the Libyan "rebels" (=not really rebels, not really worthy of our solidarity?) fighting for their freedom.

Looking both ways

Question: How does a closed economy adjust to shocks from the outside or to economic policy changes in the short run? Why is using the ISLM a more sophisticated and useful approach than looking at the real and financial sectors separately?

ISLM: internal macroeconomic adjustment in the short run

An alarming slowdown in economic growth gnaws away at business confidence, so that increasing numbers of firms lose faith in their ability to hit next year's sales targets, leading them to hold off on investments that would otherwise have gone ahead, depressing economic growth still further. Or instability in the financial markets sees more investors cashing in financial holdings so as to avoid the chance of a fall in their value. It is the macroeconomic implications of scenarios like these that the forbiddingly named ISLM framework helps us to analyse systematically. By selecting the most relevant economic indicators and sketching the expected relationships between them, this framework helps us to trace through the rest of the economy the knock-on effects of destabilising economic developments, such as the ones above, and to work out the kinds of results that we might expect from policy responses to them. The most important variables include the rates of growth of government spending, household consumption, private investment expenditure, and the national output of goods and services. Important, too, are changes in tax rates, money holdings and interest rates. Over a longer period, changes in the price level would be included on this list. When looking at imbalances in the goods and the money markets taken separately or together, the crucial difference is that, in the second case, there are feedback loops between them, going in both directions. The key link by which imbalances in the real economy are transmitted to the financial sector is between the economic activity (or output) and money demand. Imbalances originating in the money market affect the production of goods and services by way of changes in short-term interest rates. And just as we conventionally show the main relationship as between output (Y) and the price level (P) in graphical form when looking at aggregate demand (“PY space”), so it is useful to illustrate the two-way links between the goods and money markets as a relationship between output and short-term interest rates (“IY space”), because these, as I have said, are the main channels through which changes in one market are transmitted to the other. Thus, the IS schedule (the letters stand for “investment” and “savings”) is simply a graphical summary of all possible combinations of interest rates and national output in which goods demand and supply just balance. It incorporates much the same information as in the PY or aggregate demand diagram—since aggregate demand is affected by changes in both the goods and the money markets—but is examined from a different angle so as to bring out the interlinks between the domestic economy’s component markets. As lower interest rates encourage borrowing by firms and households for investment and consumer purchases—and thus also higher levels of economic output—the IS curve is negatively sloped: as interest rates rise, investment, and so economic output, falls. Likewise, the LM schedule (standing for “liquidity preference”, or money demand, and “money”, or money supply) represents all the combinations of interest rates and output in which money supply and demand are in balance. In contrast with the IS line, the LM schedule is positively sloped: as output rises, it takes higher interest rates at every level to equate money demand with a (nominal) money supply that is centrally fixed. Movement along the curve can be read as showing that higher money demand is associated with increased rates of growth in national income—that is, to facilitate the rise in the number of transactions—but that higher rates of interest are required to maintain balance with the fixed money supply. The point of crossover of the two schedules thus represents the unique rates of interest and output growth needed to keep both markets in balance at the same time.

By goods alone: IS

One way to proceed is to contrast the results to be expected following the combined and separate adjustment to developments that upset balance in either market. In the real domestic economy, the kinds of changes that could affect the level of demand for goods and services include alterations in the pace of growth of private investment, household disposable income or government spending. It would also include changes in tax or savings rates, or in the responsiveness of private investment to changes in interest rates. (Reforms of public spending or of the rates of taxation—fiscal policy—are the main policy instruments used by the government to influence activity in the real sector.) Changes in the first set of factors would affect the position of the IS curve, shifting it up or down, boosting or sapping demand for goods and services—and thus the growth rate of national output—at all interest rates. Changes in the second set would tilt the IS curve so that it becomes flatter or steeper. A flatter IS curve implies that only small changes in interest rates are needed to induce a relatively large increase in investment demand. A steeper curve means that even large changes in the interest rate are able to induce only a small change in desired investment. (The slope of the IS curve might be said to reflect the level of development or friendliness of the business environment.) In the short run, changes in domestic spending mean that some combination of firms, households and the government together plan to buy more or fewer goods and services than are currently being supplied. Such a change tells domestic producers whether to make more or fewer products. In this relatively simple model of the domestic economy, firms are assumed to be able to respond unproblematically to imbalances in the goods market by adjusting production for the inputs they need: they supply just as much or as little as is desired.

Money alone: LM

In the financial sector, three factors are typically cited as capable of igniting disturbances. In each case, any imbalance in the money market triggers changes in interest rates, which ensure that a new equilibrium level, higher or lower than the initial one, is achieved. The first factor is a change in the pace of growth of economic activity. For example, a splurge in consumer spending—say, in the run up to Christmas, or ahead of a rise in value-added tax (VAT)—boosts aggregate demand and hence the rate of growth of national income, simultaneously pushing up the demand for money to carry out these additional buys. The LM curve shifts up and left. A second important destabilising factor would be any trend towards holding more private wealth as money. Such a rise in "liquidity preference"—say, in response to high volatility in bond markets, as in my opening paragraph—would likewise shift the LM curve leftwards and up, also by setting off by unbalancing rise in monetary demand. A third important factor that can produce money market imbalance is a change in the growth of the real money supply. In the short run, when prices are fixed, this is identical with the growth or contraction of the nominal money stock, which is controlled by the central authorities as a tool of (monetary) policy to influence other economic indicators, such as the short-term interest rate, or, over the longer term, the pace of growth of the general price level. Typically, it does this by buying or selling government securities (bonds and bills), which increases or decreases amount of cash in the financial sector, pushing interest rates down or up. The excess money supply linked to faster growth in the stock of money in the economy disturbs equilibrium in the money market, triggering a shift in the LM curve, this time rightwards and down, so that money market balance is restored: a reduction in the interest rate induces a switch from less attractive interest-bearing bonds to cash, so that money demand rises to the point where it just offsets the increase in the money supply, restoring money market balance.

Both together: ISLM

Probably the clearest example of the distinct result of the interaction of the goods and money markets can be seen by working through the knock-on effects of a change in demand. From such a change, the main conclusion is that impact of the multiplier, whether positive or negative, is dampened by the interaction with the financial sector, because of the two-way feedback loops between the goods and money markets.

Causes. A rise in demand could be the result either of putting more money into the circular flow of income or of withdrawing less from it. In a closed economy, this might result, for instance, from an increase in government spending, or a tax cut (which would leave households with a larger slice of their income to divide between spending and saving, in this way, assuming that the ratio between them stays the same, boosting consumption demand). Such measures featured heavily in the many "fiscal stimulus packages" that have been implemented by governments around the world since 2008 in an attempt to counter the impact of a sharp drop in foreign demand set off by the global economic crisis. A boost to domestic demand might also stem from an improvement in business or consumer confidence, lifting investment and consumption demand, perhaps because the outlook for economic growth has substantially brightened, or because the latest figures show employment growing more briskly than expected.

Mechanism. An increase in spending and/or confidence boosts aggregate demand, though the rise in output is larger than the original impetus because, along the way, the original sum becomes someone’s income and they, in turn, spend a proportion of it, creating additional goods demand. In the short run, however, with prices relatively rigid, the rise in demand induces only an increase in economic output and the IS curve shifts right: output is higher at all interest rates. But that's not the end of it because the expansion of economic activity shows up in the money market as an increase in demand for money, which is needed to cope with the increased number of transactions. With wealth split, for analytical purposes, between money and bonds, saying that there is an excess of demand for money is the same as saying that there is an excess supply of bonds. With bond offerings exceeding planned new bond purchases, bond prices fall and the yield on bonds moves in the opposite direction—ie the interest rate rises. (Another way or seeing it is that interest rates rise because, in the case of bond-financed government spending, government borrowing bids up the cost of borrowing by creating additional demand for the supply of loanable funds.) This restores balance in the money market by choking off the increase in money demand to equate it to the nominal money supply, which is fixed by the central monetary authorities. At the same time, some business projects are rendered unattractive by the rise in interest rates. This discourages some private investment demand ("crowding out"), reducing aggregate spending and shifting the IS curve somewhat back left. Thus the conclusion is that the full impact of the multiplier on national output is dampened by the feedback loop in the financial sector. This also works the other way, so that the same mechanism will ameliorate the impact on the real economy of a drop in demand. The result contrasts not only with the outcome expected in the goods market taken in isolation, where the impact on the multiplier unfolds fully, but also, looking ahead, with the expected outcome of macroeconomic adjustment over the longer term, once the effect of the inclusion of the domestic labour market is taken into account where fully flexible wages and prices ensure that a boost to government spending produces no increase in output or employment at all (at least, with the classical or monetarist versions of the supply curve). Instead, all of the adjustment takes place in the form of faster price growth and the complete crowding out of private investment. From the point of view of disturbances originating in the financial sector, such as a loosening of monetary policy to try to “jump start” the economy to offset an economic slowdown, or a change in the pattern of distributing assets between money and other forms of wealth, in the first case would see the LM curve shift right, reducing interest rates and pushing up investment demand, which in turn pushes the curve back in the direction it came from.

Practical application

Under what circumstances might such a model be of practical use? A practical use of such a model would be when the international context is either a small or negligible factor for the economy in question, or the international trading environment is stable. This would include countries with economies characterised by a relatively low level of trade of integration with international financial markets. In countries in which the capital or debt markets are underdeveloped, the feedback loop between goods and financial markets is inhibited and the financial sector is an ineffective medium for transmitting official interest rate policy.

A modest proposal 2

Whereas the post below is a sort of starting point for investigation, this is a shorter version, for a Labour Party meeting.

An amendment to resolution 2, in context:
I want to place my proposed amended resolution 2 in the context of a constructive alternative proposal for a viable short- and medium-term policy strategy for the party. Point 8 addresses directly the content of the original resolution. My amended version follows.

1. New Labour applied the social democratic principle of trying to make capitalism fairer by adapting to the dominant political-economic ideology of the day so as to channel more resources to social projects.
2. The global economic and financial crisis of 2007-09 has changed the political, economic and intellectual terrain dramatically and for good, shaking the dominant ideological edifice in place over the past 30 years—namely, the idea that there is no alternative to unrestrained free-market capitalism—as it was in large part the unforeseen by-product of untrammelled deregulation.
3. As a consequence, the raison d'être of New Labour has fallen away.
4. It is unsurprising that the right reacts according to the dictates of its shop-worn worldview. The left must not do the same. It must create a new policy framework to make Labour values relevant anew to the changed national and global situations.
5. May 2010 saw the defeat for social democracy in one of its incarnations. There is now an opportunity for a thoroughgoing rethink. Ed Miliband’s “slow start” as Labour leader shows that he has rightly decided to take time to reforge strategy and policies for the new era.
6. It would be premature to imagine that the discrediting of the unrestrained free-market yet augurs the decline or transcendence of capitalism itself, not least because…
7. Realistic alternative socio-economic mechanisms that will provide dynamic innovation and which are ready to put to in place straight away are at best embryonic.
8. In the short term, Labour’s priority must be to expose the ideological, class character of the government’s cuts agenda, which could yet endanger Britain’s faltering economic recovery. It must also offer a clear, alternative policy approach to the problems of weak growth, a large fiscal deficit and burgeoning of inflation that shows that it grasps the way in which a national capitalist economy currently works in an international context.
9. Over the medium to longer term, more promising prospects arise. It should be possible to sketch a strategy that pursues two broad policy paths at once. The first path would be pro-market and pro-globalisation, to maximise state resources available for pursuing the second, more radical path, using the economic tool-kit at hand. The second path involves a commitment, not just to the redistribution of state funds, but also to substantial and sustained material and practical support, within civil society, for experimental political and economic institution-building, with the goal of addressing the well-known shortcomings of capitalist production, of extending social control over political and economic life, and of developing alternative socio-economic mechanisms that could open up economic opportunity and unleash the creative capabilities of all.
10. Thus, although capitalism might not automatically equip its own gravediggers as fast as some of us might like, we should try to ensure that it supplies sufficient taxes to pay for the gravediggers’ advanced vocational training.

Amended resolution: That the party should continue to expose the ideological, class character of the government’s cuts agenda, which hits the worst-off disproportionately and could yet endanger Britain’s faltering recovery. It should offer voters an economically credible, pro-growth and pro-employment policy, making use of efficiency savings, as the main means of reducing the fiscal deficit and the national debt. Any spending cuts that are necessary because of the mismatch between expectations about government income before and after the crisis—as the economy enters a lower average growth path—will thus be clearly distinguished from those of the Tories in terms of timing, scale and targeting.