Cooking the Books: Going for Growth
When Mervyn King announced on 8 July that the Bank of England was predicting zero growth for 2012, Chancellor George Osborne pledged that the government would now devote a 110 per cent effort to creating growth. But how?
Growth is defined as an increase in Gross National Product (GNP). This is made up of three things: business investment, government expenditure and consumer spending. So, in theory, growth could be brought about by increasing any of these. In practice, however, it can only come about through an increase in business investment. This is because this is what drives the capitalist economy, but it only takes place in the pursuit of profit. When it contracts or stagnates this is a sign that profitability has fallen. Growth won’t take place again till this is reversed.
When there is a slump the obvious solution seems to be to increase consumption by giving people more money to spend. Keynes wasn’t so naïve but he did provide an economic theory that justified doing this. So it is fair to say that the Keynesian solution to a slump is that the government should intervene to increase both its own spending and consumer demand.
When this was last tried in Britain by the Labour governments of the 1970s it didn’t work, but merely led to “stagflation”, i.e. rising prices but no growth. The then Labour Prime Minister, James Callaghan, had to confess at the 1976 Labour Party Conference:
“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment” (Times, 29 September 1976).
The fallacy behind this policy, still advocated by Labour left wingers and the Green Party, is that it assumes that capitalism is an economic system geared to meeting paying consumer demand whereas it is in fact an economic system geared to making profits to accumulate as capital. Profits are the key to growth not government and consumer demand.
In a slump there is a fall in consumer demand but this is a consequence of an increase in unemployment due to a fall in profitable investments. This is why government action to increase demand does not work. Only an improvement in profit prospects, leading to an increase in business investment, will bring about an inevitably gradual exit from a slump. Various things that happen in a slump help to bring this about. Lower wages, lower interest rates, a fall in the value of fixed assets and the elimination of unprofitable firms all help to restore profitability. So does a reduction in taxes. In fact, insofar as a government does not decrease its spending and so taxes to finance it, this can prolong a slump.
To apply Keynesian remedies in a slump could even make things worse. Not that the present government has any intention of doing this. They can pledge to “go for growth” as much as they like but unless profits recover there will be no growth.