Backing Keynesianism to fight unemployment

By Jonathan Power

LONDON (JP): Inside an unsung organization was an unsung hero. Shahen Abrahamian worked as the non-bylined chief economist of the sadly ignored United Nations Conference on Trade and Development (UNCTAD). He died suddenly in August, at the age of 49, but left as his testament what this Cambridge-educated Iranian had long fought for, the game plan for a resurgence of Keynesian thinking in international economics.

He would have liked, I think, to have read what John Kenneth Galbraith wrote in the current issue of World Policy Journal:

"Economists are a rootless, changeable bunch. We have a striking predilection for constructing systems of belief, preaching them for a few years, then abandoning them, often for good reasons that we should have recognized years before."

Thus, after the (highly successful) Keynesianism of the 1960s, came the domestic supply-side economics of the 1980s, to be followed by the global supply-side nostrums of the Clinton Administration.

"Crisis of both theory and performance has swamped each in turn. We are left to wonder what comes next. A force of global Keynesianism perhaps?" asks Galbraith, without elaborating on the answer.

Enter, or rather sadly, exit, Shahen Abrahamian. Unbeknown, I suspect, to Galbraith, no one has worked harder to put flesh on the notion of global Keynesianism. His latest and last contribution, just published by UNCTAD is a full-throated cry for policies of full employment, not just in the Third World, from which he hailed, but first and foremost in the industrialized world because, he argued, until that problem is solved the third world, twice damned, will go on getting the blame for northern unemployment as well as having to deal with its own miseries.

"There can be no doubt that unskilled northern labor," he wrote, "has been displaced on a significant scale in a number of industries, including footwear and clothing by developing countries. Nonetheless, the growth of north-south trade does not provide a convincing explanation of the unemployment problem as a whole."

To prove this, he cites the fact that differences among industrialized countries are unrelated to differences in their trade balances with developing countries. Between 1970 and 1993, Canada, which suffered the second largest decline in its trade balance with the developing countries, had the largest increase in total manufacturing employment. But Italy, which had the smallest decline in its Third World trade balance, lost a fifth of its manufacturing jobs.

He effectively refutes those who blame growing unemployment on new technologies. He then seeks to provide a national answer to "why it has been so difficult for the labor displaced to be deployed at remunerative wages as in the Golden Age of the 1950s and 1960s?"

Is it man-made rigidities_an over-regulated labor market and the Welfare State? This is the current fashion but, in fact, he most convincingly shows, if all enterprises were given the chance to operate more flexibly none might choose to expand output "unless the level of aggregate demand also rose".

Like all Keynesian theory, it is so obvious once said, and yet so elusive in the torrent of supply-side propaganda we have to live with these days. And thus we are surrounded by a massive sea of unemployed whilst firms continue to downsize rather than enlarge productive capacity.

But there is an alternative, says Shahen Abrahamian. Do away with restrictive monetary policy, which has pushed up interest rates to historically high levels. It is this that has shunted economies into low-growth policies in which low demand growth and low potential output growth have fed back into each other. Moreover, it has been coupled with the vogue for cutting public investment in infrastructure which has had a knock-on effect on reducing private investment.

The Keynesian answer is the antithesis of this to raise the tempo of investment and growth. If the capital stock in manufacturing Europe had grown after 1973 by a modest 1 percent more than actually was the case, there would now be an extra four million jobs in manufacturing and rather more in services.

Businesspeople need lower capital costs on the one hand, and improved prospects for sales on the other. This would not lead to greater inflation. Times are crucially different from the 1970s. Not only is there much greater slack and flexibility in the labor market but, most important, there is a whole new world, in degree at least, of global competition. There is today a much closer link between wages and productivity.

However, it is not enough to simply expand demand. We have to raise productive capacity and this partly involves increased public investment in infrastructure which should not be treated as deficit spending.

We also, Abrahamian continues, have to get back to using fiscal policy in demand management which means, before we do anything else, tackling the overhang of public indebtedness. His brain wave is a one-time levy on holdings of financial assets.

A brave and clear voice is now prematurely stilled. Others must pick up where he left off. The economic road now being traveled produces too much failure and conflict, not to speak of wasted lives, both in the industrialized world and the Third World. An unsung Keynesian musician now needs his music to be played.