Comparison of Keynesian and Neoliberal Eras Capital and Labour - Essay Example

Keynesian and Neoliberal Eras’ Capital and Labour: A Comparison Keynesian and Neoliberal Eras’ Capital and Labour: A Comparison Keynesianism Keynesians’ central tenet is that an economic recession can be stabilized by government intervention. John Maynard Keynes sought to find solutions for the Great Depression since classical economists had no explanation or solution to the slump, and retain the capitalistic system (Sheehan, 2012). Keynes asserted that the free market could not self-balance or achieve natural equilibrium in supply and demand to achieve full employment, stabilize prices and laid down three ways in which the economy works. First, he faulted private sector decisions that may lead to adverse outcomes such as reduced spending in recession necessitating intervention by the state through stimulus packages (Jahan, Mahmud, and Papageorgiou, 2014). Second, he asserted that wages and prices slowly responded to changes in the market forces, creating shortages and surpluses of labour. Lastly, Keynes explained that demand changes affected in the short term labor and output, and not the prices of commodities. Keynes pointed out that inadequacies such as unemployment were brought on by economic imbalances. His solution to the Great Depression was to kick-start resurgence in a two pronged approach; reduction of the Central Bank’s interest rates (monetary policy) to induce commercial banks to lower their lending rates, and investment by the government in heavy labour infrastructure (fiscal policy) creating opportunities, employment while countering effects of economical imbalance. Keynesians believe that government interventions can reduce the extremes of a business cycle. Fiscal policies act contrary to the business cycle, for instance, deficit spending on infrastructure to create employment during downturns and raising taxes in inflation to slow down the economy in abundant demand (Jahan, Mahmud, and Papageorgiou, 2014). Monetary policies can also stimulate the economy in the short run when need be. Keynesians have been criticized for advocating for government interventions by economists who believe that highs and lows are expected in any economy and any interference in this natural set up only upsets regaining of equilibrium (Jahan, Mahmud, and Papageorgiou, 2014). This school dominated until the 1970s’ economic stagflation when it suddenly waned for lack of appropriate response to the peculiar financial crisis. The ability of the fiscal policy to regulate the business cycle was doubted, and instead, cautious use of the monetary policy upheld to alleviate crisis. These views were adopted by Keynesians and assimilated. Keynesians of the 60 and 70s restored the fiscal policy effectiveness in the short term, but it was the world economic slump of 2007-08 that saw a resurgence of Keynesianism as argued by Sheehan, (2012). Its teachings were applied globally, specifically empathically in the United States and the European Union, and with recognition of the role of the financial system. The global institutions of economics have adopted and practice successfully some of Keynes recommendations (Jahan, Mahmud, and Papageorgiou, 2014). Welfare states are forms of government that protect and provide citizens’ wellbeing in tune with Keynesians’ goals of common good in a society despite having capitalistic economic regimes. The state provides funding for services such as healthcare, and direct benefits to individuals including pensions or allowances. The goals of a welfare system or redistribution of wealth from the rich to the poor through taxation of those with higher incomes to reduce the gap between the rich and the poor. A universal model of welfare state covers all citizens while a selective one or a non-universal welfare system covers those who need it most, or fit certain criterion that identifies beneficiaries. The welfare system is criticized as being counterproductive to economic production as it does not improve production, nor create profit (Jahan, Mahmud, and Papageorgiou, 2014). Most critics intimate that needy or poor people in the society should be left to their own devices so that they learn the hard frugal behaviors, hard work, self-control and chastity. Others decry the burden it imposes in administration, which creates a bureaucracy and taxes imposed on the wealthiest citizens to support the welfare state. Defenders region that it is not a redistribution of wealth or incomes, but a way of helping citizens to provide for sickness in good health, save for unemployment or retirement while they are employed and have adults educate children who in turn pay for their pensions when they become adults (Sheehan, 2012). The system shifts income across different stages in life, but not from a societal class to another (Jahan, Mahmud, and Papageorgiou, 2014). Keynes argued that employers and employees only agree on nominal wages upon on employment, not actual or deserved wages. These nominal wages cannot be cut as fronts by classical economists to increase market flexibility due to contract or legal provisions or labor rights. Keynes differed with classical economist that these laws and provisions should be scrapped to allow the market set its wages and concluded that wage cuts would actually increase recessions by reducing the spending power (Jahan, Mahmud, and Papageorgiou, 2014). Keynes opined that his measures would only be applicable with significant slack in the labor market, but otherwise market forces held sway. The government stimulates production when recipients of the money spent it on consumption goods and save the rest; or businesses use the funds for employment, further increasing consumer spending. Neo Liberalism The integration of national economies into international markets is known as economic globalization. A more palatable term is neoliberalism, which describes modern capitalism. The main characteristic of neoliberalism is opening of markets, deregulation of markets and selling of public enterprises to the private sector as well as the subjugation of the state to global market trends and policies (Sheehan, 2012). Other aspects include free market trends, decreased public expenditure for social services, and shift to individual responsibility from communal or public good such as requiring individuals to find solutions to their welfare problems without help from the state (Jahan, Mahmud, and Papageorgiou, 2014). Neoliberalism can be summarily described as liberalization, privatization and globalization that began in the 1970s and 1980s to enhance the role of the private sector in the economy under belief that it would produce a more efficient government and improve the economic health of the nation. There is a trend to reduce the interference of government in business matters, and a shift towards will government create only a level laying ground for all players (Jahan, Mahmud, and Papageorgiou, 2014). Keynes is the intellectual force behind the Bretton woods institutions. The World Trade Organization (WTO) strives to remove all barriers to trade globally, while the World Bank (WB) and International Monetary Fund (IMF) are concerned with liberalization of domestic capital accounts and privatization. Keynes led the British delegation at the 1944 Bretton Woods Conference, helped set down the global financial system and facilitated the rebuilding of nations devastated by World War II. Modern Keynesians have built upon his thoughts, and improved upon his ideas to define modern day economic situations. Developing countries have less access to global markets than developed countries. Lenders invest in foreign multinational corporations at the expense of domestic firms. This enables speculative inflow of capital booms and drink during recession, deepening a country’s economic crisis. The Washington Consensus is a bunch of policies of neoliberalism on fiscal policy on not running large deficits to be paid back by future citizen of the country, but occasionally used for short periods, reduction of public spending from subsidies towards pro-growth, pro poor services , healthcare and infrastructure, tax reform to marginal rates, interest rates defined by market, floating exchange rates, trade liberalisation, capital account liberalisation for foreign investment, privatisation of state enterprises, deregulation of impediment to market entry or payment reaction except justified ones and property rights. Those spell out the mandate of the Bretton Woods institution, who encourage in all member states. Opponents criticise neo-liberalists for subverting a states right to self-determination, lack of accountability to stakeholders due to business secrecy, removal of efficiency associated with economies of scale through competing companies, hindering long-term sustainable productivity, being too exploitative, economic inequality, increase in corporate power and the elite class among others. Collective bargaining agreements are on the rise in many markets as reinforced by global instruments, as well as bodies created by these instruments. This refers to the process of negotiations between employers, usually management, and a group of employees aimed at reaching an agreement to regulate working conditions. The employees and their interest are normally represented by union representatives as argued by King, (2002). Belonging to a union is an employee’s right in many jurisdictions. The agreement covers wages, hours, training, health safety, overtime, grievance mechanisms and their labour rights. This agreement is known as a collective bargaining agreement (King, 2002). This right is enshrined in international human rights conventions and enforced by the International Labour Organisation (ILO). Collective bargaining can also be a continuous process between management and a permanent committee of union representatives to keep constantly reviewing working conditions (Jahan, Mahmud, and Papageorgiou, 2014). Free flow of capital is only possible between states with free trade agreements and some measure of freedom from capital controls and within free trade regions such as the European Union. Neoliberalism began after World War 1 with little restriction on movement of capital and lots of tariffs and duties. Gradually, there has been a change in most developed nations and within free trade areas to remove most trade barriers, encouraged partly by the recognition that they are counterproductive, and by the Bretton woods institutions (Jahan, Mahmud, and Papageorgiou, 2014). Some of the advantages of free movement of capital have been economic growth, foreign expertise, help from external markets in recession, extended financial options for investors, reduction of corruption and tax evasion and enabling of the convenience of use of technology as noted by King (2002). Controls on the other hand are favoured as they seem to giver higher economic growth, reduction of financial crises, and cheapening local credit. More nations are also joining hands to create these zones in the global climate for more bargaining power (Jahan, Mahmud, and Papageorgiou, 2014). Free trade zones are special economic zones within country where goods are produced and exported without custom duties. They are production centres that import raw materials and export finished goods. These are mostly located near sea ports, frontiers, airports or areas with trade advantages. They reduce trade barriers to trade. Export processing zone on the other hand are specialised free trade zones in developing nations that promotes industry and commerce. The host governments set them up. The reason for these economic zones is to attract foreign investment and expertise to the host countries, as well as increasing trade. Keynes middle way policy programmers was initially tailored for a state economy, hence only affected individual countries as noted by Sheehan, (2012). With globalization, capitalism has stretched across borders. Most countries around the globe are working on capitalism basis. Keynesian principles still apply, as modified to fit global scenario. The only changes that neoliberalism has introduced is to expand the market, change the intervening authority from national government to the Bretton woods institutions on economic matters (Sheehan, 2012). While the economic world is still not fully globalized, there is definite shift in this direction expected to pick up speed in the future. Global crises, as evidenced by the 1007 – 08 economic slump, will continue to occur. Keynesian policy interventions sill hold true, albeit with a few modifications to fit the modern economy. Modern economical debates need to consider expanding the tax base (The Political Economy) and the globalized capitalism deeply revised to conform to his teachings. References Jahan, S., Mahmud, A. S. & Papageorgiou, C. (2014). What Is Keynesian Economics? Finance & Development, Vol. 51, No. 3 Pdf Version available from http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm 2014 King J. E. (2002). A History of Post Keynesian Economics since 1936. Edward Elgar Publishing Limited Cheltenham UK 2002. Sheehan, B. (2012). The Political Economy of John Maynard Keynes – A Beginner’s Guide. Brendan Sheehan, Leeds Beckett University Winslow, Ted (2005). Keynes’s Economics: A Political Economy as Moral Science Approach to Macroeconomics and Macroeconomic Policy. Paper Presented to Research Network Alternative Macroeconomic Policies 9th Conference - Alternatives to the Orthodoxy Berlin, 28 - 29 October 2005 Read More