“First, let's euthanize all the rentiers”: putting some class back in the Keynesian prescription

(The following article appeared in The Edmonton Journal on January 19, 2009 on p. A15.)


One of the hallmarks of a Great Book is that it often illuminates our condition even when it is supposedly “wrong”. A case in point is the prediction made by John Maynard Keynes in The General Theory of Employment, Interest and Money that the low interest rates of the 1930s would persist indefinitely into the future, with positive implications for social justice: “If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the sensible way of gradually getting rid of many of the objectionable features of capitalism (p.221).” ... “This state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. ...I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (p. 376).”

Regrettably, although lower rates and correspondingly ineffective monetary policies today demonstrate the relevance of Keynesian analysis, they probably do not represent a long-term trend. What we are experiencing now is probably just another episode of temporary incapacity and failure on the part of private investors, financiers, and financial institutions. The rentier class—those who make their money on bond interest and other speculative financial investments—are still not about to wither away, at least not on their own.

Fortunately, Keynes’s failure in 1936 to anticipate the return of high interest rates or the future advent of persistent inflation was not fatal to his theory. The main point of his book was to show that even under laissez-faire conditions of complete price flexibility it was possible, and moreover likely, that an economy would tend toward less-than-full employment, owing to a lack of effective demand. It was the corpus of classical economics since Adam Smith that was flawed, since it had been unable to explain this fact. That central insight that remains both relevant and true in the very different world of the 21st century.

Today’s ideological heirs to the classical tradition have given an overwhelmingly neoliberal cast to globalization, through their preference for free markets (backed by technical arguments for “more competition” and for the superiority of monetary over fiscal policy); and through their elevation and celebration of the new rentiers. Culturally, the successes of global hedge funds made speculative raiding by highly leveraged institutions of finance capital appear acceptable, even glamorous. Not to be outdone, leading Wall Street investment banks were allowed by a sympathetic U.S. government to get into the act, through such financial innovations as the “collateralized debt obligation” —which made the securitization of subprime mortgages possible—and “auction rate securities”—which could pay higher interest than regular bank deposits, because they were not subject to pesky capital requirements or deposit insurance. A shadow banking system worth $4 trillion was created, rivalling the conventional banking system in size and importance, but with the same kind of financial vulnerability that made the Great Depression possible.

Call it old-fashioned, but since this economic crisis is at bottom a financial one, perhaps our course of action today should be guided not only by Keynesian arguments about fiscal and monetary policy (i.e. stimulative deficits, internationally coordinated, combining needed public works with more purchasing power in the hands of those with the highest marginal propensity to consume), but by a more Keynesian attitude toward financiers. A policy that any financial institution that functions like a bank and needs to be rescued like a bank deserves to be regulated like a bank. An effort to reconceive international financial institutions such as the IMF so that they are once again focused on development and economic fundamentals instead of playing confidence games with currency speculators, an approach that has repeatedly exacerbated economic crises rather than averting them. Perhaps a Tobin tax to blunt speculation, better regulate international financial flows and level the investment playing field. And, even if it turns out that the new rentiers, with their imaginative arsenals of currency, credit and stock manipulations, will continue to play more important roles in guiding capitalism than Keynes had either expected or hoped, a clear signal that from now on they will be restrained and disciplined at least as much as the governments they have recently held in thrall.