Simon Clarke Keynesianism, Monetarism & the Crisis of the State

7/23/2019 Simon Clarke Keynesianism, Monetarism & the Crisis of the State

1/374

c Simon Clarke 1988.All rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or other-wise without the prior permission of the publisher.

Published byEdward Elgar Publishing Company LimitedGower HouseCroft RoadAldershot

Hants GU11 3HREngland

ISBN 185278010X


2/374

2


3/374

Keynesianism,

Monetarism and the

Crisis of the State

Simon ClarkeSenior Lecturer in Sociology, University of Warwick


4/374

Contents

1 Introduction 1

The challenge of monetarism . . . . . . . . . . . . . . . . 1

Money and the state . . . . . . . . . . . . . . . . . . . . . 11

2 The Hidden Hand and the Limits of the Capitalist

State 21

State and economy in the eighteenth century . . . . . . . 21

The theory and practice of mercantilism . . . . . . . . . . 23

The challenge to mercantilism . . . . . . . . . . . . . . . . 26

The division of labour and the rationality of exchange . . 28

Money and exchange . . . . . . . . . . . . . . . . . . . . . 31

The hidden hand and the accumulation of capital . . . . . 34

Capital, labour and the equality of exchange . . . . . . . 37

The market and the state . . . . . . . . . . . . . . . . . . 38

The limits to the state . . . . . . . . . . . . . . . . . . . . 43

The principles of public finance . . . . . . . . . . . . . . . 44

3 Political Economy and the Rise of the Capitalist

State 47

Adam Smith and the crisis of mercantilism . . . . . . . . 47

Classical political economy . . . . . . . . . . . . . . . . . 51

Ricardo and the problems of post-war reconstruction . . . 55

Political economy and constitutional reform . . . . . . . . 61The reformed state and economic regulation . . . . . . . . 64

The administrative reform of the state . . . . . . . . . . . 68

The mid-Victorian boom . . . . . . . . . . . . . . . . . . . 79

i


5/374

ii

4 Money, Credit and the Overaccumulation of Capital 85

The limits of liberalism and the critique of money . . . . 85Money and exchange in petty production. . . . . . . . . . 87Commercial capitalism and the development of money . . 89Commercial capital and the rise of capitalism . . . . . . . 93The contradictions of political economy . . . . . . . . . . 95The social form of capitalist production . . . . . . . . . . 98Capitalist competition and the overaccumulation of

capital . . . . . . . . . . . . . . . . . . . . . . . . . . 101Money, credit and the overaccumulation of capital . . . . 107Overaccumulation crises and the development of state

money . . . . . . . . . . . . . . . . . . . . . . . . . . 110From the hidden hand to monetary policy . . . . . . . . . 113

5 The Form of the Capitalist State 120

Capital and the state . . . . . . . . . . . . . . . . . . . . . 120Civil society and the state . . . . . . . . . . . . . . . . . . 126Capital and the development of the capitalist state form . 130The limits of the liberal state form . . . . . . . . . . . . . 133The working class and the state . . . . . . . . . . . . . . . 136Overaccumulation, class struggle and the nation state . . 143Economics, politics and the ideology of the state . . . . . 151

6 Class Struggle and the State: the Limits of Social

Reform 155

Capital, the state and the reproduction of the workingclass . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Pauperism and the state . . . . . . . . . . . . . . . . . . . 158Political reform and social administration . . . . . . . . . 161The crisis of 1873 and the Great Depression . . . . . . . . 165Depression, industrial relations and social insurance . . . 168The limits of social reform . . . . . . . . . . . . . . . . . . 171

7 Overaccumulation and the Limits of the Nation

State 176

The national form of the capitalist state . . . . . . . . . . 176

The international system of nation states . . . . . . . . . 178The 1873 crisis, the nation state and the rise of

imperialism . . . . . . . . . . . . . . . . . . . . . . . 182Overaccumulation and imperialist war . . . . . . . . . . . 189


6/374

iii

8 War, Revolution and Depression: The Limits of

Liberalism 193

The impact of war . . . . . . . . . . . . . . . . . . . . . . 193The post-war reconstruction of liberalism . . . . . . . . . 196The reconstruction of the liberal world order . . . . . . . 203The problem of the staple industries . . . . . . . . . . . . 209The 1929 crash and the collapse of the gold standard . . . 212Money and credit in the crisis of overaccumulation . . . . 215

9 Economists and the State: The Keynesian

Revolution 221

The marginalist revolution in economics . . . . . . . . . . 221The economists and the depression of the 1920s . . . . . . 226The state and the depression of the 1930s . . . . . . . . . 229The Keynesian Revolution . . . . . . . . . . . . . . . . . . 234The political impact of Keynesianism . . . . . . . . . . . . 241

10 Post-War Reconstruction and The Keynesian

Welfare State 244

Wartime planning and the budget . . . . . . . . . . . . . 244Planning for post-war reconstruction . . . . . . . . . . . . 246Planning for a new international order . . . . . . . . . . . 249The reconstruction of Anglo-American imperialism . . . . 252Marshall Aid and the rebuilding of Europe . . . . . . . . 255Planning and the budget . . . . . . . . . . . . . . . . . . . 259The legacy of Labour . . . . . . . . . . . . . . . . . . . . . 263The foundations of the post-war boom . . . . . . . . . . . 267Welfare, wages and the working class . . . . . . . . . . . . 271Keynesianism and the boom . . . . . . . . . . . . . . . . . 275The regulation of accumulation on a world scale . . . . . 277The limits of liberal Keynesianism . . . . . . . . . . . . . 280

11 Keynesianism, Monetarism and the Crisis

of the State 287

The brief triumph of Keynesianism . . . . . . . . . . . . . 287The problem of productivity . . . . . . . . . . . . . . . . . 290

The rise of Keynesian interventionism . . . . . . . . . . . 294The limits of Keynesian intervention . . . . . . . . . . . . 298The challenge to Keynesianism . . . . . . . . . . . . . . . 304The turn to the market . . . . . . . . . . . . . . . . . . . 307


7/374

iv

The class struggle and the crisis of Keynesianism . . . . . 311The crisis of Keynesianism and the rise of monetarism . . 316The challenge of monetarism . . . . . . . . . . . . . . . . 323The triumph of monetarism . . . . . . . . . . . . . . . . . 329Overaccumulation and the world crisis of Keynesianism . 341

12 Conclusion 352

Money, the market and the state . . . . . . . . . . . . . . 352The limits of monetarism . . . . . . . . . . . . . . . . . . 356The crisis of social democracy and the future of socialism 359

Index 366


8/374

Chapter 1

Introduction

The challenge of monetarism

Over the past decade Keynesian full employment policies have beenabandoned in one country after another, to be replaced by mone-tarist policies that place a premium on price stability. The mon-etarist counter-revolution has not only abandoned the Keynesiancommitment to full employment, but more fundamentally has chal-lenged the Keynesian conception of the role of the state in theregulation of capitalism, returning to the pre-Keynesian emphasison the primary role of money and the market. How are we tounderstand this development, and what is its significance?

Monetarists would claim that their triumph simply reflects thefailure of Keynesianism and the correctness of their point of view:a new sense of realism has replaced the Keynesian fantasy of uni-versal plenty, a popular demand for freedom has arisen to challengethe tyranny of the state. Many Keynesians, by contrast, see mon-etarism as a reactionary throwback, a misguided academic theorythat has been pressed by doctrinaire economists on bigoted andnarrow-minded politicians. But to see monetarism as the triumphof either rationality or irrationality is to attribute too much coher-ence and too much power to theories that serve more to legitimate

than to guide political practice. The ideas of monetarism are im-portant, but their importance is ideological, in giving coherenceand direction to political forces which have deeper roots.

The most popular explanations for the rise of monetarism look

1


9/374

2 Introduction

for these roots in political developments. The triumph of mone-tarism is commonly explained by the political failures of the left,that opened the way for the populist ideology of the New Right,manifested most dramatically in the rise of Thatcherism and Rea-ganism.1 The appropriate response of the left is then supposed tobe a political response, to regain the ideological initiative. The lefthas to develop a new politics and a new ideology, that will addressthe popular hopes and fears to which the New Right speaks, andrebuild a united movement that will win the hearts and minds ofthe people.

The problem with this approach is that the rise of monetarism

cannot be explained in terms of purely political developments.Thatcherism and Reaganism are only variations on a theme thathas been played around the world. Moreover the rise of monetarismhas not been specifically tied to the rise of the New Right. InBritain it was under a Labour government, and most particularlyfrom 1976, that monetarist policies began to be pursued and Key-nesian ob jectives abandoned. Moreover the turn to monetarismunder Labour did not only involve a turn to monetarist economicpolicies and objectives. The Callaghan government played all theNew Right tunes, however off-key, attacking the trades unions, ex-tolling the virtues of the family, pandering to racism, tightening theadministration of social security, stressing its commitment to lawand order, launching the Great Debate on education. Althoughin Britain Thatcher replaced Callaghan, in Southern Europe, Aus-tralia and New Zealand social democratic governments have takenit upon themselves to carry through the monetarist revolution, inthe guise of a politics of austerity, while social democratic partiesaround the world have capitulated to a new realism. Thus mon-etarist policies have been forced on governments of very differentpolitical and ideological persuasions, although policies that havein some cases been adopted only under the force of circumstanceshave in others been espoused enthusiastically. While social demo-cratic governments submit to the power of money in the name ofrealism, right-wing governments proclaim its power as that of amoral principle. These differences are important, but to stress the

1The most influential version of this explanation on the British left hasbeen that proposed in the pages ofMarxism Today, and particularly in StuartHall and Martin Jacques, eds. , The Politics of Thatcherism, Lawrence andWishart, London, 1983.


10/374

The challenge of monetarism 3

distinctiveness of the variations is to ignore the underlying theme.The rise of monetarism cannot be explained in terms of contin-gent political developments, in terms of personalities and politicalfactions of the right and the left, for these developments are sys-tematic, to be observed throughout the capitalist world. Thesepolitical developments express a deeper crisis, of which they arethemselves a part.

An alternative set of explanations looks to the economic crisisto explain the rise of monetarism, seeing monetarism as a capitalistresponse to the crisis. There are two very different interpretationsof the significance of monetarism along these lines. The first in-

terpretation rests on an identification of Keynesianism with theinterests of industrial capital and monetarism with the interestsof financial capital. Keynesian policies involve high levels of stateexpenditure in support of the productive sector of the economy,state intervention in financial markets to secure cheap credit for in-dustry, and demand-management to provide a growing market forindustry, making possible a high and rising standard of living andof welfare provision for the mass of the population. Although suchpolicies serve the general interest, as well as the particular interestsof industrial capital, they do not serve the interests of bankers andfinanciers, who seek high interest rates and the freedom to investtheir money where they can achieve the highest returns, withoutregard for the common good.2

On this interpretation the crises of the 1970s arose because theinterests of financial and industrial capital came into increasinglysharp conflict with one another, these conflicts coming to a head inthe form of financial crises as the freedom of mobility of financial

2For an interpretation of Britains economic decline from this point of viewsee the work of Sidney Pollard, especiallyThe Wasting of the British Economy,Croom Helm, London, 1982. Geoffrey Ingham, Capitalism Divided, Macmillan,Basingstoke, 1984, offers a sociological account. This has been a recurrenttheme in New Left Review since Perry Andersons manifesto, published soonafter he took control of the journal, The Origins of the Present Crisis, NewLeft Review, 24, 1964, devastatingly criticised by Edward Thompson, ThePeculiarities of the English, Socialist Register 1965, Merlin, London, 1965. Farmore valuable than any of these accounts of a supposed British exceptionalism,

which cannot account for the global character of the crisis, is Kees van der PijlsThe Making of an Atlantic Ruling Class, Verso, London, 1984, which appliesa similar analysis on a global scale. I have criticised the approach, particularlyin relation to the analysis of South Africa, in Simon Clarke, Capital, Fractionsof Capital and the State, Capital and Class, 5, 1982.


11/374

4 Introduction

capital threatened to undermine Keynesian industrial strategies.The rise of monetarism reflected the victory of financial over in-dustrial capital. Bankers exploited their financial power and theirprivileged access to the state to force governments to adopt re-strictive financial policies that restored financial stability and con-fidence, but at the expense of high interest rates and cuts in publicexpenditure that drove the economy into recession. The appro-priate response of the left within such a framework is to reassertthe virtues of Keynesianism within a strategy that subordinatesfinancial interests to the needs of national industrial regeneration,exposing and confronting the narrow and unpatriotic self-interest

of the bankers and financiers that hides behind the ideology andpolitics of monetarism.

This explanation has a superficial plausibility. The economiccrises of the 1970s, like those of previous decades, did indeed takethe form of financial crises whose resolution sacrificed the real econ-omy on the altar of money. However on closer examination theplausibility of the account soon breaks down. How could finan-cial capital manage to impose policies which are so transparentlyagainst the national interest? If Keynesian industrial strategiescould really have succeeded, if only they could subordinate financialcapital to the state, why has government after government, electedon manifesto commitments to such strategies of national regener-ation, capitulated and pursued monetarist policies? Why shouldambitious politicians drive the economy into recession if they couldso easily have adopted policies which would have brought prosper-ity and votes? Only the crudest of conspiracy theories could explainsuch pervasive irrationality.

The problem underlying such an account is that there is noevidence that the supposedly sharp conflict of interest between fi-nancial and industrial capital actually exists. Industrial capitalhas no more interest than financial capital in the expansion of pro-duction for its own sake. Both forms of capital are motivated bythe one concern, profit. Only a relatively small part of the capital,even of manufacturing companies, is tied up in plant and build-ings required to carry on production, and even the apparent fixity

and immobility of those assets proves illusory when production be-comes unprofitable. On the other hand, a significant proportion ofthe assets commanded by the financial institutions takes the formof loans to, and shares in, manufacturing enterprises. Moreover


12/374


the financial institutions derive the bulk of their profits not frominvestment of their own capital, but from concentrating the sav-ings and bank deposits of the mass of the population, so that theydo not necessarily benefit from high interest rates, their profits de-pending primarily on commissions and on the difference betweeninterest paid and profits received. The profitability of financial in-stitutions depends on a high level of demand for their loans, whichin turn depends on general capitalist prosperity. When the econ-omy goes into a recession, so that there is surplus capital available,the financiers search ever more desperately for outlets for this cap-ital, which is diverted into ever more speculative channels. But

this diversion of capital is not the cause of the shortage of fundsfor productive investment, but the consequence of the shortage ofprofitable opportunities.

The very distinction between financial and industrial capital isbecoming increasingly anachronistic as accumulation on a worldscale is dominated by multinational corporations, which take theform of financial holding companies, closely integrated with multi-national banks and financial institutions, which move their capitalfreely between countries, between branches of production, and be-tween productive and financial investments. It was these multina-tional corporations who closed plant, moved productive investmentabroad, and diverted their funds into cash and into financial andspeculative investments in the course of the crisis. Far from beingthe victims of the rise of monetarism, they were its driving force.

The fundamental error underlying this influential approach isits misunderstanding of the power of money. The power of moneyis not the power of banks and financial institutions, although it isthe latter who wield the power of money, it is the power of capitalin its most abstract form. Thus the conflict between the needs ofthe domestic economy and the interests of multinational capital isnot a conflict between the interests of different fractions of capital,but between the interests of multinational capital and the needs ofthe mass of the population. The irrationality of monetarism is notthe irrationality of economists and politicians, it is the irrationalityof capitalism.

The second kind of economic explanation of the crisis sees it notas a confrontation between industrial and financial capital, butbetween capital as a whole and the working class. There are twodominant versions of this approach. On one interpretation the ris-


13/374

6 Introduction

ing wages and high standards of welfare provision associated withthe Keynesian Welfare State represented a significant achievementof the working class, asserting its own interests against the interestsof capital. In a period of boom capital could afford the concessionsrequired to finance the Keynesian welfare state, in the interestsof political and industrial peace. However the continued advanceof the working class eventually encroached on capitals profitabil-ity and precipitated, or at least intensified, a crisis of profitability.Capital had therefore to reverse the gains of the post-war decades,cutting state expenditure and increasing unemployment in orderto weaken the working class politically and industrially so as to re-

store profitability. Monetarism is the ideological mask that seeks toconceal this capitalist counter-offensive. The appropriate responseof the left is a militant and determined counter-offensive to restorethe gains of the post-war boom and to bring capital under socialcontrol.3

This approach has the merit of bringing the capitalist crisis andthe class struggle to the fore. Unfortunately it is much too sim-plistic. The rate of growth of wages and improvement in welfareprovision in the post-war boom had little to do with the strengthof the organised working class. Britain had probably the strongestand most militant working class, but consistently had the low-est rates of growth of wages and welfare spending. Rather thanmilitancy being the cause of the profitability crisis, it is far moreplausible to argue that it was the consequence, as workers aspira-tions were increasingly frustrated by the inability of capitalism todeliver the goods. More importantly, the transition from Keyne-sianism to monetarism does not simply involve a rise in the rate ofexploitation. Monetarism does not consist in a frontal assault onthe working class, pushing the trenches back a few hundred yardslike a Somme offensive, any more than Keynesianism representedan unequivocal advance of the working class. If things were so sim-

3The classic expression of this position in Britain was Andrew Glyn andBob Sutcliffe, Workers, British Capitalism and the Profits Squeeze, Penguin,Harmondsworth, 1972. An alternative version stressed labour shortages as thesource of both capitals weakness and the working classs strength. See Andrew

Glyn and John Harrison, Britains Economic Disaster, Pluto, London, 1980.Its development in relation to the state stressed the contradiction between thelegitimation and accumulation functions of the state, the fiscal crisis of thestate precipitating a legitimation crisis. See especially Jim OConnor, TheFiscal Crisis of the State, St James Press, New York, 1973.


14/374


ple the popularity of monetarism with the working class electoratewould be inconceivable. Monetarism rather involves a fundamen-tal restructuring of the relations between capital, the working classand the state, involving not simply a shift in the balance of eco-nomic and political power, but a change in the form of the stateand class relations, in which some elements of the working classgain at the expense of others.

It is this observation that underlies the second approach whichsees the roots of monetarism in the capitalist crisis. In this case thecrisis is not simply a crisis of profitability, it is a structural crisis,throwing the predominant institutional forms of regulation of cap-

ital accumulation into doubt. The crisis of profitability is not theresult of a fall in the rate of exploitation, but of the growing barriersto accumulation presented by the exhaustion of the technologicalpossibilities of the third industrial revolution. It is therefore a crisisof the overaccumulation of capital in relation to the outlets for itsprofitable employment. First, increasing industrial profits requirethe massive replacement of labour by machinery, which substan-tially increases the fixed costs of the enterprise. Second, there arelimited opportunities for increasing productivity in the service sec-tor, so that the latter acts as an increasing drag on profitability,whether services are publicly or privately provided. Third, accu-mulation in the metropolitan centres has run ahead of the supplyof raw materials, and especially oil, leading to a sharp deteriora-tion in their terms of international trade. The simplest version ofthis argument sees the class struggles that ensue from this profitsqueeze primarily in economic terms.4

A more complex version of this analysis has recently cometo prominence in the work of the French Regulation School.5

This approach interprets the Keynesian welfare state as one as-pect of the systematic forms of regulation appropriate to a partic-ular regime of accumulation, characterised by the dominance ofFordist production, based on the rapid cheapening of consump-

4The work of Ernest Mandel, especially Late Capitalism, New Left Books,London, 1975, and The Second Slump, New Left Books, London, 1978, is themost sophisticated example.

5

The pioneering work was Michel Aglietta, A Theory of Capitalist Regula-tion, New Left Books, London, 1979. See also Wladimir Andreff, The Inter-national Centralisation of Capital and the Re-ordering of World Capitalism,Capital and Class, 22, 1984 and Michel De Vroey, A Regulation ApproachInterpretation of the Contemporary Crisis, Capital and Class, 23, 1984.


15/374

8 Introduction

tion goods through assembly line production, with rising wagesand welfare expenditure conciliating the working class and pro-viding capital with a growing market for its products. The crisisis then seen as a crisis of Fordist methods of production, whichundermines the whole apparatus of Fordist regulation. The mainquestion raised by this analysis is whether the ensuing crisis is somekind of terminal capitalist crisis, with monetarism representing thelast desperate response of a doomed class, or whether capitalism isentering a new phase of post-Fordist accumulation, in which mon-etarism represents the attempt to construct forms of regulationappropriate to a new regime of accumulation based on flexible

specialisation;6

the application of the microelectronics revolutionto manufacture and to services; the commodification of public ser-vices; the Japanisation of industrial relations; the globalisation ofaccumulation under the dominance of the multinational compa-nies; and a growing segmentation of the labour force, based on thedivision between core and peripheral labour, on a world scale.

The main weakness of the regulation approach is that, de-spite its sophistication, it tends to degenerate into a structural-functionalist reductionism in which the forms of regulation of ac-cumulation are determined by the social form of the labour processand the structure of production. This weakness is most marked inthe regulation approachs treatment of money and the state.

The regulation school sees monetary disturbances not as an ex-

pression of the contradictory form of capitalist production, but onlyas a symptom of an underlying crisis in the regime of accumulation.For the regulation school the regulative role of money is function-ally integrated into the regime of accumulation. The appropriaterelationship between the various branches of production is estab-lished by the institutionalisation of the regime of accumulation.Once such a relationship is established, the presumption seems tobe that accumulation is confined within the limits of the market, asthe allocation of investment is determined by the tendency to theequalisation of the rate of profit. As accumulation comes up againstthe barrier of existing technology, the introduction of new meth-ods of production breaks down the existing relation between the

branches of production. Monetary instability, in which money ap-pears as an autonomous power, is a symptom of this breakdown in

6Michael Piore and Charles Sabel, The Second Industrial Divide, BasicBooks, New York, 1984.


16/374


the regime of accumulation. With the reconstitution of the regimeof accumulation the regulatory role of money is once more subor-dinated to the institutional forms of the regime of accumulation.Thus money is seen as an instrument of regulation that expressesthe social and political relations of the regime of accumulation.7

However much the power of money may be institutionalisedwithin, and circumscribed by, the social and political relations of aparticular regime of accumulation, the power of money does notderive from the institutional forms in which it appears. The powerof money is the power of command over commodities and, in acapitalist society, over labour-power as a commodity. It is conse-

quently the irreducible form, and the most abstract embodiment,of the social power of property. It is correspondingly the founda-tion of the capitalist mode of production, which is a form of socialproduction defined by the appropriation of labour on the basis ofproperty. The subordination of civil society and the state to theautonomous power of money is not, therefore, merely a symptomof the breakdown of the regime of accumulation, it is the perma-nent expression of the subordination of the economic, social andpolitical reproduction of capitalist society to the reproduction ofthe social power of capital.

The treatment of the state in the regulation approach suffersfrom the same weakness as the analysis of money. The under-lying model is one of successive phases of structural integrationand structural disintegration of capital accumulation. In a phaseof structural integration sustained accumulation is possible withinthe framework of the appropriate forms of regulation. As accumu-lation comes up against the limits of profitability within the regimeof accumulation, capital seeks to develop new forms of productionto increase the rate of exploitation. However these new forms ofproduction undermine the structural integration of the regime ofaccumulation.

The phase of disintegration is a period in which the transforma-tion of methods of production lays the foundations for a new regimeof accumulation. However the construction of such a regime can-not be accomplished solely through the market. The task of the

state is to remedy this deficiency by sponsoring the restructuring7Aglietta has recently developed a very idiosyncratic theory of money in

Michel Aglietta and Andre Orlean, La Violence de la Monnaie, PUF, Paris,1982.


17/374

10 Introduction

of the regime of accumulation and associated forms of regulation,including those that are a part of the state itself, to establish thestructural integration on the basis of which accumulation can berenewed. Thus the state is no more an expression of the powerof capital than is money. The state is merely the institution thatultimately secures the functional integration of the regime of accu-mulation as it imposes order onto chaos. The power of capital isdiffused through the structure of the regime of accumulation, whichis ultimately determined by the social form of production. Not sur-prisingly this approach tends to lead to very pessimistic politicalconclusions in confining the class struggle within the developing

structure of the regime of accumulation.The analysis of the state on the basis of the regulation approach

has been developed primarily in Germany by Hirsch and Esser, whohave proposed the concepts of the Fordist and neo-Fordist formsof the state, which define the modes of domination appropriate tothe corresponding regimes of accumulation.8 The crisis of Fordistaccumulation is simultaneously a crisis of Fordist modes of dom-ination. As capital accumulation undermines the social relationsappropriate to previous forms of reproduction, it leads to monetaryinstability, a rise in industrial conflict and the emergence of new so-cial movements. The state responds to social disintegration in thecrisis by penetrating more deeply into civil society to restructuresocial relations into forms appropriate to the emerging form of theregime of accumulation. This statification of society in the crisis isexpressed in the concept of the Fordist security state, which givesway to the neo-Fordist state in which state regulation is achievednot through the Keynesian modes of political integration appropri-ate to Fordism, nor through the directly repressive mechanisms ofthe transitional phase, but through the state-regulated commodi-fication of civil society. Monetarism does not involve a withdrawalof the state from economic regulation, but offers new, highly dif-ferentiated and flexible forms of state regulation, appropriate tothe segmentation of the working class and the greater flexibilityof production characteristic of neo-Fordist accumulation. The roleof the class struggle is strictly limited within this framework. It

cannot overcome the structural constraints imposed by the form of8This contribution is assessed by Werner Bonefeld, Reformulation of State

Theory, Capital and Class, 33, 1988. See also Bob Jessops reply in Capitaland Class, 34, 1988.


18/374

Money and the state 11

accumulation, it can merely slow down or accelerate the restruc-turing of the regime of accumulation, and modify the balance ofclass forces within the regime. The only available political strategyfor the left is therefore to abandon the struggle to reconstruct out-dated forms of regulation and political integration in order to seeka new accommodation with capital on the basis of the new formsof accumulation.

The regulation approach is very valuable in drawing attentionto the systematic character of the regulation of capital accumu-lation, relating the forms of regulation of capitalist production tothe forms of regulation of accumulation by money and the state.

However the explanatory relationships proposed are very unclear,both theoretically and empirically. Thus the approach has tendedto produce impressionistic typologies of the structure of the regimeof accumulation that lack any firm historical anchorage. Althoughthe connections indicated by the regulation approach are very sug-gestive, it is not at all clear that the different aspects of a par-ticular regime of accumulation can be so neatly tied together ina functional whole, nor that the directions of causality are as un-ambiguous as indicated in the model. Moreover the structural-functionalism of the approach leads it considerably to overempha-sise the coherence and stability of the regime of accumulation in aperiod of sustained accumulation, and to exaggerate its disintegra-tion and instability in a period of crisis, so that it loses sight of thecontinuities underlying the historical transformations of capitalistreproduction and of the capitalist state form. It is unable to graspthese continuities because it has no theory of money and the stateas the dual forms of capitalist power, nor any conception of thecontradictory character of capitalist regulation that derives fromthe contradictory form of capitalist production.

Money and the state

This book draws on the insights of all the approaches outlinedabove. My starting point is the belief that it is important to take

the issues that divide monetarists and Keynesians seriously. Al-though monetarism and Keynesianism are undoubtedly ideologi-cal, even in their most abstract and theoretical forms, they concealwithin themselves practical truths, however mystified the form in


19/374

12 Introduction

which they represent such truths. However monetarism and Key-nesianism are not populist ideologies so much as ideologies of thestate, giving ideological coherence to the institutional frameworkand policy decisions of the state. The crisis of Keynesianism andthe rise of monetarism did not express a popular ideological rev-olution, but a crisis of the policies and institutions of the Keyne-sian welfare state. The Keynesian ideology was discredited becauseKeynesian policies became increasingly unpopular. Monetarism as-sumed a hegemonic position because monetarist policies securedelectoral endorsement.

The crisis of the Keynesian state was itself the expression of

a more fundamental crisis in the accumulation of capital. Thiscrisis appeared in the growing financial pressure faced by nationalgovernments as they attempted to maintain economic growth byexpansionary Keynesian policies. However the crisis did not expressa conflict of interests between financial and productive capital, buta contradiction between the popular demand for rising incomesand employment, which could only be satisfied by the growth ofproduction, and the capitalist need to subordinate production toprofit. This contradiction was not simply a matter of a decline inthe rate of profit, whether as a result of the tendency for the rate ofprofit to fall or the growing strength of the working class, but of astructural crisis of accumulation. However this structural crisis wasnot the result of the changing functional requirements of changesin the labour process, but of the tendency for capital accumulationto take the form of the overaccumulation and uneven developmentof capital. Moreover the political and ideological crisis to whichthe crisis of overaccumulation gave rise cannot be reduced to theunfolding of an economic or a structural logic, but was determinedby the development of the class struggle within the framework ofparticular social, political and ideological forms.

My criticisms of the approaches outlined above are not pri-marily empirical, but are essentially theoretical. The immediatetheoretical problem raised by the debate between monetarism andKeynesianism is that of the relation between the power of moneyand the power of the state. The underlying theoretical problem is

the more general one of the relations between economics, politicsand ideology. All the approaches outlined above are unsatisfactoryin the last analysis in offering a one-dimensional analysis of the cri-sis of Keynesianism and the rise of monetarism, seeing it alterna-


20/374


tively as an ideological, political or economic phenomenon, ratherthan offering an analysis that can grasp the complex relationshipbetween these different dimensions of the historical process. Myprimary aim in this book is to develop a more adequate frameworkwithin which to grasp both the coherence and the complexity ofthe relationship between economics, politics and ideology in thecrisis-ridden development of capitalism.

The immediate origins of this book lay in my own earlier workon the analysis of ideology. My first book in the field preparedthe methodological ground, rejecting the idealism of structuralistanalysis in favour of an historical materialist approach to ideology.9

The present book develops out of my analysis of the ideologicaldimensions of political economy, marginalist economics and modernsociology as social theories.10 However the confrontation betweenKeynesianism and monetarism raises the more complex questionof the political significance of economic ideology, which can onlybe addressed within the framework of a theory of money and thestate.

The theoretical framework of my argument draws primarily ontwo related strands of thought that have developed over the past fif-teen years, involving a re-examination of Marxist theories of moneyand the state. In Britain these developments have taken place pri-marily through the Conference of Socialist Economists.

The reconsideration of the Marxist theory of money arose outof a renewal of the debate around Marxs theory of value.11 Thecentral theme of the debate was the distinctiveness of Marxs labourtheory of value in relation to that of Ricardo, and the conclusionwas that for Marx value did not correspond to Ricardos embodiedlabour, but to abstract labour that appeared in the form of money.This implied that the distinctiveness of Marxs theory lay not somuch in the idea of labour as the source of value and surplus value,as in the idea of money as the most abstract form of capitalistproperty, and so as the supreme social power through which social

9Simon Clarke, The Foundations of Structuralism, Harvester, Brighton andHumanities, New York, 1981

10

Simon Clarke,Marx, Marginalism and Modern Sociology, Macmillan, Bas-ingstoke, 1982.

11See particularly Diane Elson, ed., Value, CSE Books, London, 1979; SueHimmelweit and Simon Mohun, The Anomalies of Capital, Capital and Class,6, 1978; Simon Clarke, The Value of Value Capital and Class, 10, 1980.


21/374

14 Introduction

reproduction is subordinated to the reproduction of capital.12

The reconsideration of the theory of the state was sparked offby the German state derivation debate.13 However the CSEdebate also drew heavily on the reconsideration of Marxs the-ory of value, to move away from the German debate, which wasstrongly influenced by the systems theory of Jurgen Habermasand Claus Offe, and later embraced the structural-functionalismof Nicos Poulantzas and the French Regulation School.14 Thisdivergence arose primarily because the central substantive issuesin the CSE debate were rather different from those that motivatedthe French and German contributions. The CSE debate was stimu-

lated particularly by Britains entry into the EEC, which raised thefundamental question of the relationship between the internation-alisation of capital, working class struggles and the nation state.The debate then developed in relation to the issues of law and thestate, raised by the growing recourse to the legal regulation of theworking class through the 1970s; of the relation between money andthe state, raised by the succession of financial crises confronted byLabour governments; and of the relation between the working classstruggle and the state, raised by the growing conflicts around theform of the welfare state.15 All these issues raised the question of

12The seminal paper on money was an undated, untitled, unpublished paperby John Merrington and Christian Marazzi, followed by an unpublished paper

by Christian Marazzi on Theories of Money, that drew on the work of ToniNegri, see especially his Marx Beyond Marx, Bergin and Garvey, S. Hadley,Mass., 1984. A recent book that develops an analysis of the power of moneywithin a different theoretical framework is William Reddy, Money and Libertyin Modern Europe, Cambridge University Press, Cambridge, 1987. Despiteits idealist formulation Georg Simmels Philosophy of Money, RKP, London,1978, remains the most penetrating phenomenological exploration of the socialpower of money. By contrast most of the Marxist literature is remarkablysterile, particularly when set against Marxs own writings.

13See especially John Holloway and Sol Picciotto, The State and Capital, Ed-ward Arnold, London, 1978. Bob Jessop, The Capitalist State, Martin Robert-son, Oxford, 1982. John Holloway, The State as Class Practice,Research inPolitical Economy, 3, 1981.

14I have criticised Poulantzass theory in Simon Clarke, Marxism, Sociologyand the Theory of the State, Capital and Class, 2, 1977.

15The debate around the form of the welfare state was an international

debate, particularly influenced by the work of Claus Offe, see especially hisContradictions of the Welfare State, Hutchinson, London, 1984, for his mostrecent position. The seminal work was probably Frances Piven and RichardA. Cloward, Regulating the Poor, Random House, New York, 1971. The mostvaluable contributions to the debate have come from feminists, who have gone


22/374


the form of the state in relation to the forms of class struggle,and it was this question that brought the state debate into a closerelationship with the value debate.

The theoretical conclusion of the CSE contribution was thatwe have to look behind the institutional separation of economics,law and politics to see money, law and the state as complementaryeconomic, legal and political forms of the power of capital. The un-derlying unity of these differentiated, and complementary, forms ofcapitalist power was explained by Marxs theory of value, the threeaspects being united in capitalist property, money representing themost abstract form of capital, whose power is institutionalised in

the law and enforced by the state.16

The methodological conclusion was to reject equally the dom-inant tendencies of the economistic Marxism of the Second andThird Internationals, and the complexity of post-Marxist mod-ernism, whose sophistication was no more than a mark of its super-ficiality,17 in favour of a view of Marxism as a theory of socialforms. This interpretation drew particularly on Marxs Grundrisseand on various oppositional currents in the Marxist tradition toreaffirm Marxs famous dictum, men make their own history, butthey do not make it just as they please; they do not make it undercircumstances chosen by themselves, but under circumstances di-rectly encountered, given and transmitted from the past.18 How-ever this approach was concerned to reject the interpretation ofMarxs dictum in terms of the dualism of structure and processthat marks sociological interpretations of Marx. The forms of cap-italist domination cannot be theorised in structural-functionalistterms, because the functional imperatives are themselves generated

the furthest in demystifying the forms of domination embedded in the wel-fare state. See especially Elizabeth Wilson, Women and the Welfare State,Tavistock, London, 1977 for an early contribution, and her Thatcherism andWomen: After Seven Years, Socialist Register 1987, Ralph Miliband et al.,eds, Merlin, London, 1987. I do not attempt to cover the detailed debates overthe form of the welfare state in this book not because they are not central tomy theme, but because they are relatively well known.

16On the analysis of the law, which I hardly touch on in this book, see BobFine, ed.,Capitalism and the Rule of Law, Hutchinson, London, 1979, and the

important book by Geoff Kay and James Mott, Political Order and the Lawof Labour, Macmillan, London, 1982.

17Kay and Mott, op. cit. , pp. 647, 724.18Karl Marx, The Eighteenth Brumaire, in Karl Marx and Frederick Engels,

Selected Works, Lawrence and Wishart, London, 1968, p. 96.


23/374

16 Introduction

by the forms of class struggle. Moreover these forms express notthe functional integration, but the profoundly contradictory char-acter of the capitalist mode of production, so that their adequacyis always problematic not only for the working class, but also forcapital. Thus the class struggle does not simply take place withinthese forms. The forms of capitalist domination are themselvesthe object of class struggle, as capital and the working class con-front them as barriers to their own social reproduction. Althoughthe unity and complementarity of these differentiated forms canbe articulated theoretically, their development is the outcome ofa history of class struggle in and against the institutional forms

of the capitalist mode of production, whose historical resolution isalways provisional.

This approach did not lead to a systematic theoretical and his-torical account of the development of the forms of capitalist dom-ination, the participants in the debate being concerned more toanalyse particular aspects of the contemporary crisis. In the mean-time there was a tendency to borrow the schematic typology of theFrench Regulation School to fill the gap, despite an awareness ofthe theoretical weaknesses of the latter indicated above. Similarlythe gap left by the absence of an historically grounded analysis ofcapitalist crises was filled by relying on the law of the tendency forthe rate of profit to fall, although a more adequate framework wasoffered by the theory of overaccumulation, which was developed inthis context particularly by Makoto Itoh.19

In the absence of such an historically informed account the formderivation approach has been accused of economism.20 The focusof such an accusation is the analysis of the relation between capitaland the state, which has been a persistent problem faced by Marxistpolitical theory. Although capitalists undoubtedly enjoy privileged

19Makoto Itoh, Value and Capital, Pluto, London, 1981. Marxs own treat-ment of crisis is notoriously ambiguous. In general Marxist crisis theories havebeen concerned to prove or disprove the inevitability of crisis within an equilib-rium theory, based on Marxs reproduction schemes or his analysis of the lawof the tendency for the rate of profit to fall, rather than exploring the historicaldynamics of overaccumulation and crisis within the kind of disequilibrium the-

ory that dominates Marxs own work. My own analysis of overaccumulationis similar to that of John Weeks, Equilibrium, Uneven Development and theTendency of the Rate of Profit to Fall, Capital and Class, 16, 1982.

20Jessop, op. cit. , pp. 956, John Solomos, The Marxist Theory of theState and the Problem of Fractions, Capital and Class, 7, 1979.


24/374


access to state power, the capitalist character of the state certainlycannot be reduced to the political privileges of capitalists. Howeverthe political representation of capitalist interests is only one of theforms through which the relationship between the social power ofcapital and the political power of the state is mediated. The socialpower of capital is not embodied in the person of the capitalist, butin the social power of money. The fundamental theoretical problemis therefore that of the relationship between the social power ofmoney and the political power of the state. This is equally thefundamental political and ideological problem raised by the crisisof Keynesianism and the rise of monetarism, and is the underlying

theme of this book.The relationship between the power of money and the power

of the state has been a persistent theoretical, political and ideo-logical issue since the first emergence of commerce. However theissue arose in its modern form as the penetration of capital intoproduction subordinated social production to the rule of moneyand dissolved the social relations of authority and dependence thathad hitherto been the basis of political power. The rise of capital-ism precipitated a crisis in the political and ideological forms of thepre-capitalist state, which was resolved by the reconstitution of thestate on the basis of the radical separation of the state from civilsociety and of the social power of money from the political power ofthe state. Although the crisis of the pre-capitalist state form cameto a head most dramatically in the French Revolution, the recon-stitution of the state was first achieved, less dramatically but moresystematically, in Britain, where the erosion of pre-capitalist socialrelations by the penetration of capital was most complete. Theconstruction of the liberal state form was articulated theoreticallyby classical political economy, which first systematically addressedthe problem of the relationship between money and the state in itsmodern form, and which gave ideological coherence and politicallegitimacy to the emerging state form.

The first two chapters of the book examine the rise of politicaleconomy and the construction of the liberal state form in Britain.21

21

Although the focus is on Britain and the presentation is historical theaim is to draw out the essential relationships from the mass of contingenthistorical events. In the first instance the essential relationships are taken tobe those articulated by classical political economy. However the analysis is alsoinformed by the advantages of hindsight and of comparative research, so that


25/374

18 Introduction

Political economy legitimated the radical separation of the statefrom civil society on the basis of the adequacy of the market asthe means by which all particular interests were subsumed underthe general interest. The law of property, enforced by the state,was the means by which all members of society, capitalists andworkers alike, were confined within the limits of the market, whilemoney was merely the means of circulation, the rational instrumentthrough which conflicting interests were reconciled. The subordi-nation of civil society and the state to the anonymous rule of moneyand the law expressed not the rule of capital but the rule of reason.

Marxs critique of political economy began with his critique of

its theory of money. For Marx money was not merely the meansof circulation, but was also, in its developed form, the independentform of value. The subordination of social production to the powerof money gave rise to antagonistic social relations of production inwhich the power of money confronted the direct producers in theform of capital, and in which social production was subordinatedto the reproduction of capital. Money and the law were conse-quently the social forms through which civil society and the statewere subordinated to the power of capital. In Chapter Four I buildon Marxs analysis of the contradictory form of commodity moneyand an interpretation of his account of the capitalist tendency tooveraccumulation and crisis to develop an analysis of the contra-dictory forms of credit money and of state money, and so of thelimits of the monetary regulation of capitalist accumulation.

In Chapter Five I build on Marxs characterisation of the lib-eral state form to address the question of the contradictory formand the limits of the capitalist state which derive from the contra-diction between the class character and the national form of thecapitalist state. The class character of the state, embodied in itsliberal form, requires it to secure the reproduction of capital. Thenational form of the state requires it to express, politically andideologically, the national interest, against all particular interests.The reproduction of the state correspondingly requires it to resolvethis contradiction. The contradiction appears to the state in the

the presentation, in these as in subsequent chapters, emphasises those aspectsof the British experience, and of political economy, that seem to me to have acomparative significance and a contemporary resonance, although limitationsof space have made it impossible to make more than gestural comparativereferences.


26/374


form of the social and political aspirations of the working class,to which it has to respond within the limits of its form, confiningthe working class within the form of the wage and the constitu-tional form of the state. The admission of the working class tothe constitution on a national basis increases the pressure on thestate to secure the sustained accumulation of domestic productivecapital. However this constraint introduces a further contradiction,between the national form of the state and the global character ofcapital accumulation.

The remaining chapters of the book present an account of thedevelopment of the capitalist state form on the basis of the anal-

ysis of the contradictory forms of capital accumulation and thecapitalist state. The capitalist state developed in the form of thenation state, within a framework of nation states, in the contextof the accumulation of capital on a world scale. The accumulationof capital on a world scale, and the interaction with other nationstates, defines the broad context within which particular nationstates have developed, but the development of each has its ownrhythm and its own harmonies and disharmonies that cannot bereduced to variations on a single theme. As in the earlier chaptersthe focus of the account is the British state, within the global con-text of overaccumulation and crisis, but again the aim is neitherto provide an historical account of the British state, nor to presentthe British example as ideal-typical, but to draw out the theo-retical, comparative, and contemporary significance of the Britishexperience.22

Chapter Six explores the development of the institutional formsof industrial relations, social administration and electoral represen-tation through which the capitalist state sought to confine the as-pirations of the working class within the limits of its liberal form,and in and against which the class struggle has subsequently de-veloped. Chapter Seven explores the contradiction between thenational form of the state and the global character of accumu-lation to analyse the rise of imperialism that culminated in war.

22For this reason I have not cluttered the book with extensive bibliographical

references to give the account a spurious scholarly authority. Any originalitylies not in the empirical detail, but in interpretation. Those familiar with theliterature will recognise the iconoclastic elements of my interpretation, and thedegree to which I have simplified complex issues, which I hope will not bemistaken for navety.


27/374

20 Introduction

Chapter Eight explores the unsuccessful inter-war attempt to re-solve the contradictions of the capitalist state form on the basis ofthe reconstruction of the liberal world order. Chapter Nine thenturns to the ideological crisis to which this failure gave rise, a crisisthat culminated in the Keynesian Revolution. Chapter Ten anal-yses the foundations of the Keynesian Welfare State in the periodof post-war reconstruction and the early stages of the long boom.The Keynesian Welfare State is presented as the culmination ofthe attempt to resolve the contradictions of the liberal state form,rather than as a radically new form of the state, based on therationalisation and generalisation of the systems of industrial rela-

tions, social administration and electoral representation within theframework of the liberal state form and the liberalisation of theworld economic system. Chapter Eleven then analyses the crisis ofKeynesianism as an expression of the underlying contradiction ofthe capitalist state form in the face of a global crisis of overaccu-mulation. This contradiction appeared as a conflict between thepower of money and the power of the state, as the institutionalisedforms of class collaboration increasingly appeared as a barrier tothe accumulation of capital and the aspirations of the working class,and so took the form of a class struggle over the form of the state.The rise of monetarism expressed the provisional triumph of capi-tal in this struggle as the subordination of the institutional formsof the Keynesian Welfare State to the power of money confined the

aspirations of the working class within the limits of capital.


28/374

Chapter 2

The Hidden Hand and

the Limits of the

Capitalist State

The problem of the relationship between money and the state wasthe central preoccupation of Adam Smith, and, following him, ofclassical political economy. Indeed Smith was the first to proposethe problem in its modern form, because he was the first to develop

a systematic model of the economy as a sphere independent of, andprior to, the state. Before considering Smiths account we needbriefly to indicate the context in which he developed his ideas.

State and economy in the eighteenth cen-

tury

Although the Civil War had finally destroyed the feudal charac-ter of landed property, and the Revolution of 1688 had achievedthe separation of the state from the person of the sovereign, theeighteenth century state still essentially represented the institu-

tionalised power of the landed class, albeit a class with an in-creasingly capitalistic orientation. Property was the unequivocalbasis of political power, and the boundaries between the stateand civil society, between public and private power, were by no

21


29/374

22 The Hidden Hand and the Limits of the Capitalist State

means well-defined. The political apparatus was based on admin-istration through institutionalised corruption and the public sanc-tioning of private powers. The limited franchise, and the extentof government patronage, largely insulated the government fromparliamentary or popular pressure, leading to the development ofa self-perpetuating political elite, drawn predominantly from thelanded class, but with ties to the big metropolitan merchants andfinanciers, and headed by the crown.

Central government had little relevance to the mass of the pop-ulation, whose only contact with it would normally be with theCustoms and Excise, which had regulative duties in addition to

the collection of revenue. Local administration was in the hands ofpersons of rank and property, whose day-to-day authority derivedas much from their position in civil society as from their publicoffice, whether in the corrupt government of the municipal corpo-rations, or through the parishes and vestries, or, above all, as thelocal justices, on whom the bulk of local administration fell. Thelocal authorities had very considerable discretion in the definitionand exercise of their powers. There was very little Parliamentarysupervision of local administration, while the enforcement of Par-liamentary decrees was in local hands. Although the royal courts inprincipal had jurisdiction over the local administration, the courtswere cumbersome and inefficient and largely irrelevant as a checkon local power.

Although the state apparatus was firmly in the hands of thelanded class, landed property was assuming an increasingly capi-talist form, while the prosperity of both state and landowners de-pended on the growth of trade. The interest of the landed class andthe state in the development of commerce gave the great merchantsand financiers access to state power, above all in the formulationand implementation of the economic policies of the state. Howeverthe interest of the capitalists was not identical with that of thestate and the landed class. The capitalists were interested only intheir own profit, whereas the state and the landed class claimedan interest in the growth of the wealth of the nation, and in thepreservation of the order and civil peace on which the security of

property depended. The body of doctrines and of policies thatemerged from the interplay of these conflicting considerations toprovide the ideology of the state in this transitional period hascome to be known as mercantilism.


30/374

The theory and practice of mercantilism 23

The theory and practice of mercantilism

The task of mercantilist economic theory was to advise the sover-eign on how best to regulate the economy in order to enhance thewealth and power of the state and of its citizens. Mercantilismnever constituted a coherent body of doctrine. However at theheart of mercantilist ideas was the argument that it was foreigntrade alone that generated the surplus that could finance growingstate activity, and above all the naval and military power of thestate.

The theoretical basis of the doctrine was the idea of a surplus

generated through trade. This surplus had its origin in the mer-chants profit upon alienation, as Steuart called it, the differencebetween the cost of the article to the merchant and the price hereceived for it. Prices depended on the relation between supply anddemand, so high profits depended on controlling markets in orderto maintain the highest possible price differential between differentmarkets. Profits gained from domestic trade merely redistributedwealth within the nation, so it was only foreign trade that couldaugment the national wealth. Success in foreign trade depended onthe ability of the merchants, and of the state that backed them, toestablish monopolistic control of sources of supply and of markets.Such success depended in part on the commercial skills of the mer-chants and on their financial resources, but more fundamentally itdepended on the military power of the state, and its willingness towage wars for commercial advantage.

Exchange was seen not so much as the exchange of commoditiesfor one another, mediated by money as the means of exchange, as aseries of exchanges of commodities for money in order to accumu-late more money. Thus the primary economic role of money was toserve not as means of exchange, but as money capital. The limitsto mercantile activity were set by the availability of money to serveas capital, to equip the ships and purchase the commodities to betraded. The limit to the ability of the state to maintain the navaland military forces necessary to defend its commercial interests wasset by the national hoard of money that comprised its war chest.

Thus the key to commercial success was the accumulation of thisnational hoard, which became the central objective of mercantilistpolicy.

The growth of commerce held out the promise of great wealth,


31/374


but it also carried the risk of disruption of the social order. Tradewas not seen as a productive activity, creating new wealth, it merelyredistributed the wealth that had already been produced. Whileforeign trade provided the means to profit at the expense of for-eigners, in domestic trade the merchant could only gain at theexpense of the labouring and the landowning classes. The stateattempted to confine trade within the limits of the existing socialorder through the extensive body of Tudor and Stuart legislationthat sought, however ineffectively, to restrict the activity of do-mestic merchants by preventing usurious lending, engrossment andprofiteering, and by regulating prices, wages and working condi-

tions according to customary notions of justice and equity. Simi-larly the desire to maintain a favourable balance of trade, the fearof pauperism and unemployment if domestic producers were under-mined by foreign competition, and the need to maintain domesticsupplies of strategic materials, led to legislation, subsidies and di-rect state intervention to encourage domestic production and toprovide protection from foreign competition.

Within the society in which mercantilism developed the identi-fication of the mercantile interest with the national interest had acertain validity. The profits to be made in foreign trade were fargreater, and far more ostentatious, than those to be made in theearly forms of capitalist agriculture and manufacture, while theywere far more easily taxable than was rent. Thus healthy trad-ing profits and the accumulation of monetary reserves did makethe greatest single contribution to the financial, and so military,strength of the state, and such strength was essential in a systemof warring states each seeking to mobilise the political, economicand military power of the state to secure a commercial advantage.Thus the mercantilist identification of the trading interest with thenational well-being had an appeal far beyond the commercial class,and mercantilist doctrines were espoused by writers and statesmenwho had no commercial involvement, nor any identification withthe mercantile interest.

The system of mercantilism provided the framework for thegrowth of capitalist enterprise between the sixteenth and the eigh-

teenth centuries and laid the foundations for the explosive growthof capitalism in the industrial revolution. The expansion of Britishtrade was based on the growing political, military and financialpower of the state, exercised in pursuit of commercial advantage.


32/374

The theory and practice of mercantilism 25

The colonial system secured sources of supply to feed the worldmarket, and established a system of multilateral trade lubricatedby the use of gold and silver as the means of international payment.The growth of trade stimulated the commercialisation of agricul-ture, the expansion of domestic manufacture, the improvement ofdomestic and international communications and the growth of pop-ulation that laid the foundations for the industrial revolution. Thedevelopment of banking and the stabilisation of the monetary sys-tem provided the institutions of money and credit that financedthe growth of trade and the activity of the state. The developmentof a regular system of taxation, primarily in the form of customs

and excise, and the rationalisation of the state finances providedthe state with the resources to pursue an aggressive commercialand colonial policy that, if successful, further increased commer-cial prosperity. Although trade was regularly disrupted by war,by financial crises and by harvest failure, the growing power andprosperity of the merchants, the landowners and the state, if not ofthe mass of the population, appeared to vindicate the mercantilistsystem.

By the middle of the eighteenth century mercantilism came upagainst its limits. Capital was increasingly penetrating into thesphere of production, employing wage labourers or, more gener-ally, domestic producers working within the putting-out system,to produce for the world market. While the companies trading incolonial produce still depended on the use of the states militaryand political power to secure their markets, those trading in domes-tic produce were increasingly competing on the basis of price andquality. For the latter the restrictions of mercantilism were at bestirrelevant and at worst a barrier to the development of capitalistproduction and the expansion of the market.

In the first half of the eighteenth century these interests werelargely reconciled. The growth of British trade was primarily atthe expense of other trading nations, particularly the French andthe Dutch, involving in equal proportions the export of domesticproducts and the re-export of colonial produce from the East andWest Indies and North America. However growth of foreign trade

slowed sharply after 1750 as Britain came up against the barrierof stiffer European competition. Although reexports continued togrow, until supplies were cut off by the American War, the vol-ume of exports of British produce stagnated. On the other hand,


33/374


the costs of commercial wars and the maintenance of the colonialsystem increased astronomically. Between 1750 and the end of theAmerican war in 1783 central government expenditure, over 90 percent of which in the latter year was military expenditure and debtinterest, increased from 6 to 16 per cent of the Gross NationalProduct. The slow growth of trade meant that revenues, derivedlargely from Customs and Excise, had not increased commensu-rately with expenditure. The result was that the state found itincreasingly difficult to finance its expenditure. Although the bur-den of taxation increased by 70 per cent between 1750 and 1783,the national debt trebled over the same period, to the great profit

of the emerging class of financiers. The political counterpart ofthe states financial difficulty was the growing popular resistanceto taxation, to financial skulduggery and to political corruption.As the century wore on the mercantilist system was increasinglydiscredited as it became transparently clear that it benefited only asmall group of merchants and stockjobbers at great public expense.This was the context in which political economy emerged.

The challenge to mercantilism

Political economy challenged the mercantilist programme by strik-

ing at its theoretical foundations. At the heart of the challenge wasthe development of a completely different conception of money andexchange. By contrast with the mercantilist conception of trade asthe exchange of commodities for money, in which one party gainsat the expense of the other, the critics saw trade as the exchangeof commodities for one another, to the mutual benefit of both par-ties. The aim of trade was not the accumulation of money, butthe acquisition of commodities in which alone wealth consisted.This apparently small change of perspective implied a quite differ-ent conception of money. For the mercantilists the national stockof money corresponded to the accumulated profits of trade, andso constituted the national capital. Policies that regulated foreigntrade in order to increase the supply of money would augment

the national capital and provide the basis for the further expan-sion of trade. For the critics, by contrast, the national capitalwas not identified with a sum of money, but with the commodi-ties that money could purchase. This changed view of money led


34/374

The challenge to mercantilism 27

to the fundamental distinction, absent from mercantilism, betweenmoney, seen as the means of circulation, and capital. The growthof capital corresponded to the growth of trade, and the stock ofmoney to the needs of trade for money to serve as means of circu-lation. It was therefore the level of trade that determined the stockof money not, as mercantilists believed, the stock of money thatdetermined the level of trade. This implied that restrictions ontrade could only harm the national interest, which was best servedby the unrestricted growth of trade.

The germs of these ideas can be traced back to the late sev-enteenth century, but they were first systematically developed in

the middle of the eighteenth century. The new theory of money inrelation to foreign trade was developed by David Hume, who sawin foreign trade the possibility of mutual advantage, and arguedthat money, far from being the substance of wealth, is a mere con-ventional unit of account, devised to facilitate the exchange of onecommodity for another.1 This led Hume to develop his quantitytheory of money, according to which an increase in the quantity ofmoney, far from stimulating trade, could not increase the nationswealth, but would merely lead to an increase in prices.

Humes originality was not in propounding the quantity the-ory, but in describing the process by which the stimulus to demandprovided by a rise in the quantity of money was translated into arise in prices. According to mercantilism an increase in the sup-

ply of money, secured through a favourable balance of trade, wouldstimulate the domestic economy as plentiful money reduced interestrates and boosted investment. Humes development of the quantitytheory of money depended on the new view of money as a meansof exchange, and the corresponding distinction between money andcapital. Hume rejected the mercantilist belief that an increase inthe stock of money would stimulate trade by reducing the rate ofinterest since the rate of interest had nothing to do with the sup-ply of money, but was rather determined by the rate of profit oncapital. An increase in the supply of money would therefore simplylead to an increase in demand, without stimulating any increase insupply. Although increased demand would lead to attempts to in-

crease production in the affected branches of production this wouldmerely increase the demand for labour, and so push up wages. The

1David Hume, Of Money, in David Hume, Writings on Economics, E.Rotwein (ed.), University of Wisconsin Press, Madison, Wisconsin, 1970, p. 33.


35/374


increase in wages would then be transmitted to other branches ofproduction, until all prices rose.

The rise in domestic in relation to foreign prices stimulated byan increase in the domestic money supply would lead to a rise inimports and a fall in exports. Money would flow out of the countryand prices fall again until the supply of money corresponded to theneeds of circulation. This specie-flow mechanism by which thebalance of international payments regulated the supply of moneyin relation to the needs of domestic circulation became establishedas the orthodox version of the quantity theory of money in thenineteenth century. Its importance for Hume lay in the conclusion

that mercantilist policies that aimed to increase the stock of moneywould lead to monetary instability without contributing anythingto national prosperity.

The criticism of the mercantilist theory of money developed byHume undermined the mercantilist conception of exchange and,ultimately, of the dependence of the economy on political regula-tion. If exchange was a transaction that benefited both parties,and profit derived not from unequal exchange but from productiveinvestment, as Hume suggested, the conflict inherent in exchangewas dissolved, and the political regulation of exchange was unnec-essary. The idea of society as a political community that underlaymercantilism could be replaced by the idea of the economy as asphere that contained the potential for harmony and prosperitywithin itself. The conditions for such harmony to be sustainedwere that exchange should be free and equal, the equality of ex-change being regulated by money as the means of exchange. It fellto Adam Smith to develop these implications of Humes conceptionof money and exchange.

The division of labour and the rationality

of exchange

Smiths great workThe Wealth of Nationswas written primarily asan assault on the doctrines of mercantilism. Smith was concerned

to demolish the mercantilist belief that money was an end, that theaccumulation of wealth could be identified with the accumulationof money, and to establish instead the instrumental rationality ofmoney as a mere means to the superior end of enhancing the ma-


36/374

The division of labour and the rationality of exchange 29

terial prosperity of the nation that derives from the improvementin the productive powers of labour.

For Smith the mercantilist prejudice that identified money withwealth, and the aim of economic activity as the accumulation ofmoney, arose as a sophistical argument devised by the merchants tofurther their own self-interest by falsely identifying it with the na-tional interest. The system of monopoly that hoisted their profitsrestrained trade and so limited the development of the productivepowers of society. Smith, by contrast, following the French Phys-iocrats, identified wealth with production, so that the conditionsmost favourable to the growth of the wealth of the nation were

those conducive to the most rapid growth of the productive powersof labour. Exchange was no longer seen as the means by whichwealth was appropriated in the form of money. Exchange was themeans by which the producer realised the fruits of his or her labourin the form of consumable commodities, with money serving merelyas the means of exchange.

At the heart of Smiths critique of mercantilism was his viewof money. Smith claimed that it is not for its own sake that mendesire money, but for the sake of what they can purchase with it.2

The accumulation of money, far from contributing to the prosper-ity of the nation, constitutes a drain on the national wealth. Thisview of money as a mere means of exchange rests on his assertion

that consumption is the sole end and purpose of all production,a maxim that he claimed is so self-evident that it would be ab-surd to attempt to prove it,3 despite the fact that it was in directcontradiction to the mercantilist conception of wealth.

If money is not an end in itself, but is merely a means of ex-changing one thing for another, the powers attributed to moneyare not inherent in money, but derive from its function as meansof exchange. The rationality of money is the rationality of the sys-tem of exchange whose development it facilitates. Money is themeans by which the hidden hand of the market achieves its ends,the great wheel of circulation as Smith described it.

Smith regarded the development of the market as the result ofthe propensity in human nature to truck, barter and exchange one

2Adam Smith, The Wealth of Nations, Everyman edition, Dent, London,1910, vol. I, p. 385.

3ibid, vol. II, p. 155.


37/374


thing for another,4 a propensity rooted in the faculty of reason.Exchange made it possible for each producer to specialise accordingto his or her talents and so stimulated the advance of the divisionof labour, of productivity, and so of economic prosperity. As far asthe individual economic actor was concerned each could make freejudgements of the gains to be made from any particular exchange,gains rooted in the increased productivity permitted by specialisa-tion, and so could decide whether or not to exchange accordingly.So long as the market is free, and property and the person are se-cure, each individual exchange that takes place will contribute toan increase in individual and social prosperity. On the other hand,

any political or institutional barriers to the freedom of exchangewill prevent advantageous exchanges from taking place and so willlimit the extent of the division of labour and so the national wealth,even if they work to the advantage of particular individuals. Thegeneral conclusion is that free competition allows the individual tobe the best judge of his or her own economic interest and providesthe opportunity for each to act accordingly. Since every agent isfree to decide whether or not to make an exchange, and will choosenot to do so if he or she judges the exchange disadvantageous, no-body can suffer loss as a result of exchange. Since both partiesgain from every exchange, the system of exchange must work tothe benefit of all.

This simple model appears very convincing, and indeed has

convinced generations of economists, who have followed Smith inmaking it their starting point. However Smiths model is developedwithin a very specific, and quite unrealistic, context. The modelis not of a capitalist society. It is a model of a society of indepen-dent petty producers, each free to enter any branch of production,entering the market with the products of his or her own labour,and bartering them for the products of others. The example Smithgives is that of a tribe of hunters or shepherds within which aparticular person makes bows and arrows, for example, with morereadiness and dexterity than any other.5 This fortunate personsoon finds it advantageous to specialise in making bows and ar-rows and to exchange them for cattle and venison.

If Smiths little parable is to have any relevance to a capitalistsociety it is necessary to establish that the introduction of money

4ibid, vol. I, p. 12.5ibid, vol. I, p. 13.


38/374

Money and exchange 31

and of capital does not affect the results of the analysis, so thata capitalist society can be understood on the basis of this simplemodel of a barter economy.

Money and exchange

Smiths account of the emergence of money is parallel to the lib-eral political theorists account of the emergence of the state. Justas the state as the form of political regulation emerged sponta-neously from a mutual appreciation of the inconvenience of ad hocalliances, so money as the form of economic regulation emergedspontaneously from a mutual appreciation of the inconvenience ofbarter.

Smith argued that money is simply an instrument of account-ing and exchange that has no substantive economic significance.His story of the emergence of money from barter comes directlyfrom Aristotle, and can still be found in any introductory eco-nomics textbook. With the development of exchange the inherentlimitations of barter meant that this power of exchanging mustfrequently have been very much clogged and embarrassed in its op-erations . . . In order to avoid the inconveniency of such situations,every prudent man in every period of society, after the first estab-lishment of the division of labour, must naturally have endeavoured

to manage his affairs in such a manner as to have at all times byhim, besides the peculiar produce of his own industry, a certainquantity of some one commodity or another, such as he imaginedfew people would be likely to refuse in exchange for the produce oftheir own industry.6

We can all appreciate the inconvenience of barter, so the ra-tionality of money is clear to all of us. Money simply provides ameans of exchange that enables the barter economy to work moreefficiently. We can now sell our bows and arrows for money, and usethe money to buy venison, rather than having to find a venison-owner who happens to need a new bow and arrow. The intro-duction of money makes no difference to the simple barter model.

Money is a commodity distinguished from others only by its gen-eral exchangeability. Similarly in its role as measure of value, theintroduction of money has no substantive effects. It is simply more

6ibid, vol. I, p. 20.


39/374


convenient to express exchangeable values in terms of money thanin terms of labour.

In its role as measure of the value of commodities money servesto regulate production and exchange. The rise and fall of moneyprices in relation to the real prices of commodities, that corre-spond to the trouble and toil involved in their production, regu-lates the division of labour and the improvement in productivityin society. If the market is free, then supply will be spontaneouslyadapted to demand, and the incentive to innovation will be main-tained. Any interference in the freedom of the market, however,will undermine the regulative role of money. Thus the conception

of money as means of exchange, rather than as the substance ofwealth, leads directly to the conception of money, rather than thestate, as the appropriate means of regulation of social productionand of the division of labour.

Having established the instrumental rationality of money, Smithcould immediately pass on from its rational origins t

Simon Clarke Keynesianism, Monetarism & the Crisis of the State

Documents

Transcript of Simon Clarke Keynesianism, Monetarism & the Crisis of the State