Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extend on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment. (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, the powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of "sound finance" is to make the level of employment dependent on the state of confidence. (quoted by Krugman 94-95; bolding mine)Krugman, who initially found this view 'extreme', now finds it 'all too plausible'. Certainly it provides a functional explanation of the evidence-less hostility to government spending to boost employment---the 'stimulus', a hostility which holds much of the people of the world hostage to falling wages, rising unemployment, and increased misery all around. What the hostage taking 1% and the government policy makers they buy ignore at their own peril is the risk of violent revolt. Even hostages have a boiling point.
Sunday, June 10, 2012
Economic hostage taking
This observation by Michal Kalecki, quoted by Paul Krugman in his End this Depression Now, caught my eye.