The Downfall of the American Order?

Liberalism's End?

Peter J. Katzenstein,Jonathan Kirshner

• Editore: Cornell University Press
• Anno: 2022
• ISBN:
  9781501763007
• Argomento: Politics & International Relations
• Categoria: International Relations

The Downfall of the American Order? offers penetrating insight into the emerging global political economy at this moment of an increasingly chaotic world.

For seventy-five years, the basic patterns of world politics and the contours of international economic activity took place in the shadow of American leadership and the institutions it designed—an order designed to avoid the horrors of previous eras, including, most poignantly, two world wars and the Great Depression.

But all things must pass. The global financial crisis of 2008, the legacy of two long, losing wars, and the polarizing and tumultuous presidency of Donald Trump all suggest that global affairs have reached a turning point. The implications of this are profound.

The contributors to this book cast their eyes back on the order that once was, and look ahead to what might follow. In dialogue with each other's appraisals and expectations, they differ in their assessments of the probable, ranging from a hollowed-out American primacy muddling through by default, to partial modifications of old institutions and practices at home and abroad, and to wholesale contestations and the search for new orders. Contributors: Rawi Abdelal, Sheri Berman, Mark Blyth, Francis J. Gavin, Peter A. Gourevitch, Ilene Grabel, Peter J. Katzenstein, Jonathan Kirshner, and John Gerard Ruggie

1

KEYNES AND THE ELUSIVE MIDDLE WAY

Jonathan Kirshner

Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement. . . . Your greatest danger ahead is the probable practical failure of the application of your philosophy in the U.S. in a fairly extreme form.

—John Maynard Keynes to Friedrich von Hayek, on The Road to Serfdom

“The Compromise of Embedded Liberalism,” the felicitous phrase coined by John Ruggie in his seminal article articulating the purpose with which the post–World War II economic order was forged, is often associated with Karl Polanyi.1 In The Great Transformation, Polanyi argued that laissez-faire capitalism was unsustainable and incongruous, and he did indeed situate the notion of embeddedness at the heart of the matter: “Instead of economy being embedded in social relations, social relations are embedded in the economic system.”2 But the economic philosophy of embedded liberalism is a distinctly and fundamentally Keynesian conception. It is an attempt to embrace and harness the essential engines of capitalism and an expanding international economy in order to provide the means to prosperity, while at the same time insulating national economies from unmediated, often destructive market forces so that they might enjoy the autonomy to pursue a variety of domestic social purposes.

The Great Transformation was published in 1944 (based on a series of lectures that Polanyi delivered from 1941 to 1943), and it was motivated to dismiss capitalism, not domesticate it.3 Whereas Keynes, who similarly renounced laissez-faire (in a dramatic break, as he had been raised firmly within the faith—he had taken it “with his mother’s milk” from its most revered high priests), in the dozen odd years from 1925 to 1938 struggled to develop a “middle way” that would save capitalism from itself. And the postwar order was forged, under the profound intellectual influence of Keynes, to facilitate the practice of the middle way.4

Keynes’s break with orthodoxy in 1925 was a watershed moment, heralded by his essay “The End of Laissez-Faire” and its declaration, “The World is not so governed from above that private and social interest always coincide.” This disenchantment would grow still more pointed in the depths of the Great Depression: “[Laissez-faire capitalism] is not intelligent, it is not beautiful, it is not just, it is not virtuous—and it doesn’t deliver the goods.” Yet in the same breath Keynes also observed, “When we wonder what to put in its place, we are extremely perplexed.”5 Keynes’s disposition and his profound opposition to collectivist economic and political ideologies meant that he rejected the revolutionary answers that many were reaching for in the 1930s. Thus emerged his search for a middle way between the unpalatable extremes of unfettered capitalism and authoritarian collectivism. This was Keynes’ project, and it was, for a time, wildly influential.

Keynes was one of the architects of and the principal intellectual influence on the institutions designed to oversee the international order after World War II. Even more important, he was, despite his early death in 1946, the most influential touchstone of economic thought in the postwar decades. Thus, Keynes’s articulation of a middle way deeply shaped the economic practices in the quarter-century that followed the war. Varieties of national economic policymaking in these years were not necessarily “Keynesian” (as defined by the American neoclassical economists who imagined they were his disciples). Nevertheless, in the 1950s and 1960s the practice of capitalism looked much more like an embrace of embedded liberalism than like the then discredited, neo-Dickensian unfettered capitalism associated with the robber-baron abuses of the 1890s and the horrors of the Great Depression.6

This chapter draws on Keynes’s writings to consider his articulation of the middle way, as well as the broad (if, as envisioned, varied in practice) embrace of that philosophy after the war and its subsequent erosion in favor of less socially constrained capitalist practices. With a focus on the United States, I consider some of the key causes of the long retreat from Keynes’s vision: the possibility that only exceptional circumstances permitted the practice of embedded liberalism in the first place; the unhappy trip from Keynes to “Keynesianism” and the unraveling of the latter in the dismal 1970s, which allowed for the ascension of anti-Keynesian economic theory (most notably, rational expectations theory) and economic practices antithetical to the middle way; and the rise of bare-knuckled “shareholder value” capitalism. And in particular, I emphasize how the great financial deregulation project of the 1990s that heralded the emergence of a second postwar American order was incompatible with the practice of the middle way. This point cannot be overemphasized. The middle way, and the postwar order as envisioned, depended on the taming of finance and the control of capital flows. Capital controls permit the practice of independent monetary policies; and as early as 1926, still groping toward a coherent vision, Keynes understood that “It is not an accident that the opening stage of this political struggle, which will last long and take many different forms, should centre about monetary policy.”7 And ultimately, as Keynes would have anticipated (and feared), the permissive financialization of the American economy led to widening inequality, the global financial crisis of 2007–08, and from those the widespread rise of virulent populism and personalist authoritarianism. Keynes was right to fear the consequences of Hayek in practice, and the great dangers it would unleash.

Establishing the Middle Way

The Keynesian revolution in macroeconomics would culminate with the publication of The General Theory and its immediate aftermath. As Keynes explained plainly, that revolution was founded on two fundamental departures from orthodoxy: (1) an economy, once stuck in a rut, could remain in a rut; (2) actors in the economy made decisions in an environment characterized by uncertainty, not risk.8 But the middle way was much more than a macroeconomic theory—it was an economic philosophy. And its development was a slow burn that emerged from the mid-1920s, after the publication of A Tract on Monetary Reform—an excellent and still valuable book, but one written by a brilliant, inquisitive, insightful, but still largely mainstream economist.9

Keynes’s writings have been broadly interpreted over decades, but a basic and central attribute of the middle way was that it was indeed, importantly and unambiguously, a middle way, inspired by a renunciation and scathing indictment of unfettered capitalism, but tempered by an abject horror of collectivism. Despite his definitive repudiation of laissez-faire, Keynes never much wavered from most of what we now call microeconomic theory (the foundations of which can still be found in Marshall’s Principles of Economics, first published in 1890): “A large part of the established body of economic doctrine I cannot but accept as broadly correct. I do not doubt it.”10 Moreover, philosophically, Keynes placed an enormous premium on individualism and celebrated the diverse, idiosyncratic choices afforded by the decentralized market; by disposition (and in accord with his emphasis on uncertainty and thus the unforeseeable consequences of rash measures) he could be well described, at least with regard to proposals of economic policy, as cautious. James Meade, emerging from a meeting once quipped “Keynes on the rate of interest showed himself in a typical mood: revolutionary in thought and very cautious in policy.”11

Thus, although Keynes defined the challenge of the ideal society as how best “to combine three things: economic efficiency, social justice, and individual liberty,” the solution was not to be found in the extremes: “The abuses of this epoch in the realms of government are Fascism on the one side and Bolshevism on the other.” Sensing the need, perhaps, to avoid any ambiguity, he immediately added, “Socialism offers no middle course.”12

Keynes was under no illusions about the horrors of fascism (unlike many of the British right, who were content to avert their eyes), and had no taste, fashionable in many left-leaning Western circles of the day, for the Soviet experiment. A visit to Russia with his new bride in 1925 yielded the following observation: “Red Russia holds too much which is detestable . . . I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and international strife.”13 (This, is should be noted, was a full ten years before the show trials of the 1930s and thirty years before Khrushchev rendered finally undeniable the full range of the Stalinist terror.) Keynes was repulsed by collectivist authoritarianisms, but more to the point, he feared them. In particular, he feared that the great mass of people, unwilling to bear the increasingly bitter portions served by laissez-faire capitalism, would turn to these alternatives. And so he set out to save capitalism from itself: “The authoritarian state systems of to-day seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement is associated—and in my opinion, inevitably associated—with present day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.”14

As noted, Keynes was not simply providing a new way of conceptualizing macroeconomics, he was articulating a philosophy of political economy. And for a discussion of embedded liberalism and its prospects, the specific technicalities of the former are for the most part less central than the overarching vision of the latter. In The General Theory, he phrased it this way: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”15 Thus on offer is more than a means to achieve full employment. The basic questions of “What’s fair?” and of “Who should get what, and why?” are also squarely on the table—and once again, the free market, left to its own devices, is found more than wanting.

Unfortunately, Keynes was frustratingly vague on the specifics of the distribution of income. For both positive and normative reasons, he strongly favored a more equitable distribution of income. As a technical matter, Keynes put much emphasis on the “marginal propensity to consume” and the fact that poorer and working-class people spend more of their income on consumption simply because they have more basic needs to urgently fulfill. Thus, wealth transfers from rich to poor boost aggregate demand. “If capitalist society rejects a more equal distribution of incomes,” he wrote in 1937, “then a chronic tendency towards the underemployment of resources must in the end sap and destroy that form of society.” Keynes also favored robust estate taxes and higher taxes on large incomes.16 Beyond these admonitions, however, he was vague, and he routinely tempered his enthusiasm for redistribution with the qualifying notion that some significant degree of income inequality was essential to provide the impetus for progress and the incentive structure necessary for a market economy to function.17

This knot is rather easily untied, however, as Keynes’s concern for income distribution, once that murky middle ground has been reached, is rooted not in a mathematical formula but in an emphasis on a broadly shared sense of economic justice, a core Keynesian theme which can be traced to his earliest writings. Keynes’s enduring wariness of inflation, for example (a characteristic many of his critics overlook), was more philosophical than material—and deeply informed both his conception of the middle way and, as I will argue, the consequences of its unraveling. High levels of inflation are especially dangerous because they bring about an “arbitrary arrangement of riches,” Keynes wrote in 1919, which “strikes not only at security, but at confidence in the equity of the existing distribution of wealth.” This matters profoundly because, as he subsequently observed, “No man of spirit will consent to remain poor if he believes his betters to have gained their goods by lucky gambling.” Even the “pre-Keynesian” Keynes stressed this point: “The business man is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.” Capitalism cannot be sustained if it is viewed as inherently unfair.18 (It is jumping ahead to note that the aftermath of the global financial crisis of 2007–08 left very few outside a well-heeled community of insiders retaining the view that the system was in any way fair, contributing to the understandable but dangerously misguided tear-it-all-down populism of both the left and the right.)

Finally, no discussion of the middle way and its contemporary implications would be complete without emphasizing another strand of Keynes’s philosophy: his anti-economism.19 Keynes, first comfortable and later wealthy, nevertheless saw something unclean in the pursuit of wealth for its own sake. He opposed the overvaluation of pecuniary criteria in shaping personal and social decision-making beyond what was necessary to attain necessities and satisfactory comfort. Ultimately, capitalism had no soul. This was another reason why he feared communism, despite its economic incoherence and political insidiousness. He thought it might appeal by providing social purpose, which people crave. Capitalism, in contrast, was vacuous, “without internal union, without much public spirit,” and often, though not always, “a mere congeries of possessors and pursuers.”20

As Keynes wrote in his memoir, “My Early Beliefs,” which Robert Skidelsky properly described as “a key document for understanding his life’s work,” Keynes concluded that it was “the Benthamite calculus, based on an over-valuation of the economic criterion,” that was “the worm which has been gnawing at the insides of modern civilization and is responsible for its present moral decay.” Similar sentiments informed his better-known essay “Economic Possibilities of Our Grandchildren,” in which he famously declared that the purpose of economics was to solve the economic problem, so that people would no longer need to organize their lives around the empty chase of money and instead have the freedom to pursue their varied, idiosyncratic interests that would allow them “to live wisely, agreeably and well.”21

Before turning to the forging of the Keynesian-inflected postwar order and to the opening and closing of the window that permitted the possibility of the practice of the middle way, it is worth underscoring how essential this philosophical grounding is (especially as that philosophy was quickly shed by the neoclassicals who sought to domesticate Keynes and was subsequently rejected by the free-marketeers who would usher in a new era of unabashed economism that was, as Keynes had feared, vulnerable to dangerous backlash.) “Capitalism was in some ways repugnant to him but Stalinism was much worse,” Joan Robinson summarized. “He hated unemployment because it was stupid and poverty because it was ugly. He was disgusted by the commercialism of modern life” and “indulged in an agreeable vision of a world where economics has ceased to be important and our grandchildren can begin to lead a civilised life.”22

Making the World Safe for Embedded Liberalism

Nothing is more certain than that the movement of capital funds must be regulated.

—John Maynard Keynes, 1941

The founding of the Bretton Woods institutions is a familiar story often told.23 The general frameworks of international economic governance that would characterize the A...

Indice dei contenuti

• Preface
• Introduction
• 1. Keynes and the Elusive Middle Way
• 2. The End of Social Purpose? Great Transformations of American Order
• 3. The Construction of Compromise and the Rise and Fall of Global Orders
• 4. The Social Democratic Order and the Rise and Decay of Democracy in Western Europe
• 5. California Dreaming: The Crisis and Rebirth of American Power in the 1970s and Its Consequences for World Order
• 6. Of Learning and Forgetting: Centrism, Populism, and the Legitimacy Crisis of Globalization
• 7. Post-American Moments in Contemporary Global Financial Governance
• 8. Corporate Globalization and the Liberal Order: Disembedding and Reembedding Governing Norms
• 9. Liberalism’s Antinomy: Endings as Beginnings?
• Notes
• Contributors
• Index