Ben Wray

Ben Wray

Kalecki’s revenge: The new politics of unemployment

Reading Time: 9 minutes

Socialists need demands for the unemployment crisis that go beyond the limits defined by the ruling class. Ben Wray argues for a new system of full employment that challenges power in the heart of the economy.

If you want to understand the tensions among the British ruling class over the future strategic direction of the economy, the following two sentences in the FT from Giles Wilkes, former No 10 adviser and fellow at the Institute for Government think-tank, is a good place to start.

“A striking success of British policy in the last three decades was creating a labour market that clears easily at low levels of unemployment. They won’t give that up easily.” 

What Wilkes means by “clears easily” is that labour costs remain low despite historically high levels of employment. In December, official unemployment data showed it was at its lowest level since 1975, at 1.28 million, while an all-time high of 32.8 million were in work. Yet wages still remained on course not to reach their pre-2008 crash peak until 2025. 

This is not how it is supposed to work. A tighter labour market should see upwards pressure on wages, as workers feel more confident to push for wage rises knowing that there are other jobs available. This shift is the “striking success” that Wilkes speaks of, and he is of course right to assume the Tories will not want to give it up. The more interesting question is: why are they worrying about it?

There is an emerging debate about what to do with the UK Government’s furlough scheme when it expires in its current form at the end of June. Take-up of the scheme has been huge, with 6.3 million UK workers now furloughed, and 800,000 employers applying to use the scheme. It is estimated that around half of furloughed workers would have been made redundant already without the scheme, and there is little reason to believe many fewer than that would not be sacked if the scheme did expire at the end of June. Clearly, the prospect of record-breaking mass unemployment akin to the US is an outcome Chancellor Rishi Sunak would ideally prefer to avoid, but the question for the British ruling class is – at what cost?

A number of voices are talking about the possibility of government facilitating labour redeployment from furloughed sectors, many of which are in industries that are clearly not going to survive, at least in their current form, such as tourism and hospitality. Moving workers to businesses on their way up is a destructive process if facilitated through traditional labour market mechanisms alone.

“We want to facilitate the reallocation of workers from sectors that are going to shrink to ones that are going to grow,” Stuart Adam, senior research economist at the Institute for Fiscal Studies (IFS), told the Financial Times.

The IFS are notorious fiscal hawks, but even they seem to have got the message that more austerity now would only entrench what appears set to be a second great depression. They have said the government should “consider public investments that would employ these people in the interim to do productive work that will pay off later, such as improving national infrastructure”.

The Resolution Foundation has talked about some sort of labour redeployment scheme and the TUC has proposed a “job guarantee”, providing work and training at the national living wage for a minimum of six months. 

Direct government interventions of this nature into the economy to provide something like full employment is what Wilkes means when he talks about Tory nerves. What they don’t want is rising wage inflation, which could lead to the working class finding its voice again. This fear is deeply entrenched in British ruling class thinking.

The classic text on these matters is Michael Kalecki’s The political aspects of full employment (1943). What Kalecki argues is that the economic case for full employment had basically been won, but political opposition, buttressed by “so-called ‘economic experts’ closely connected with banking and industry”, was the remaining hurdle.

“In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany,” Kalecki argues. “This was to be clearly seen in the US (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?”

Kalecki identifies three reasons: “…(i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidising consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.”

It is worth taking the time to examine Kalecki’s explanations for all three of these reasons, but we will prioritise the third, as this has the most important bearing here.

“Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure,” Kalecki states. “The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.”

Is Kalecki’s analysis relevant to today’s world? It’s easy to observe significant differences.

The first is that the neoliberal state was actually highly active in the economy at large before this crisis. Confusion between neoliberalism and laissez-faire economics is a common misunderstanding; the neoliberal state has not been smaller, it’s served a different purpose: to maintain low interest rates and low inflation, to keep asset prices rising, to support finance capital through it’s regular booms and slumps, and to hive-off parts of state economic activity which could be profitable to corporations. The major economic policy intervention of the neoliberal years – PFI, right-to-buy and help-to-buy, housing benefit, working tax credits, bank bailouts, low tax rates, privatisation – all speak to these priorities.

The second is that the role of the central bank in the neoliberal economic regime is crucial, and more expansive than in Kalecki’s time. Then, monetary expansion was still restrained by the gold standard, whereas today under the free-floating currency system the Bank of England can and does use money creation powers as a permanent intervention into the financial system, mobilising hundreds of billions in ‘Quantitative Easing’ which acts to maintain ‘price stability’, all the while swelling asset price inflation. We have even seen in this crisis the BoE skipping the bond purchasing process altogether and directly financing UK Government spending, with new almost interest-free cash. This is a wonky, but fundamentally important difference to the restraints on monetary policy in Kalecki’s day, and also speaks to a significant shift in priorities for the British ruling class: whereas “ the rentier interests” were a secondary concern to British capital in 1943, today the price of land and property is at the heart of the UK’s financialised economic model.

US military deployed to provide emergency food aid to millions of unemployed

US military deployed to provide emergency food aid to millions of unemployed

The third aspect is partly a product of the latter two differences: that in the modern globalised neoliberal economy, there does not appear to be as direct a relationship between high employment and strengthened labour power. The persistent rise of in-work poverty is evidence of this. The secret of the ruling class’ success in suppressing wages with high employment is that the jobs were not secure. A decade of austerity saw around one million fairly secure, decent-paid and unionised jobs in the public sector disappear, while more took their place in the private sector, but they were of low-quality, with much less trade union representation and weak rights. A number of other structural factors weakened labour in its contest with capital: increased household indebtedness; new forms of labour relations in the context of the rise of digital platforms; the fall in tax rates, rise in tax havens and increased mobility of capital across borders. And even then, it is worth considering the extent to which we should allow the Tories to claim genuinely high employment in the 2010s: as David Jamieson has highlighted in an analysis of the UK labour market, when you add together ‘bogus self-employment’, the sharp growth of underemployment with part-time jobs, and the benefit sanctions regime forcing people off job seekers allowance and into the ‘non-economic activity’ bracket, the extent to which low unemployment was not a Tory deception is at least worth factoring in.

So can we chuck Kalecki away, then? Not so fast. All three of the points above – the neoliberal state, central bank permanent-interventionism, globalisation – are all under strain in a crisis as severe as this, as the motor of GDP growth under this governance system has been private credit expansion. When that huge expansion of City of London debt stops and central bank intervention can no longer energise it, governments will be forced to act in a different way to keep all the dominoes of financialisation from falling on top of one another. Attempts to under-write UK bank lending to small businesses have failed, because even with no liabilities, the banks don’t see where the returns are going to come from in a crisis this deep, and they’re probably right to worry. It takes mega-intervention on a non-profit making basis to induce activity at the moment, which only the state can do at any serious scale. Hence the IFS talking about New Deal-type economics.

And as the crisis deepens, inter-state tensions will grow, pressure on global supply chains will intensify and deglobalisation, a process already underway pre-crisis, could become institutionally entrenched. It’s too early to speculate about what this breakdown could look like exactly, and there are countervailing tendencies the other way (most importantly, the growth of automation as robots replace workers in many industries). But there is at least the possibility that capital will be more restrained by borders, a potential opening for labour power to be enhanced. As economist James Meadway has argued, “for the first time in decades, the terrain may not be decisively skewed against those who work”.

Could Kalecki have his revenge? This is what Giles is getting at, and it is at least one reason why the Tories are just as likely to accept mass unemployment as they are to embrace some sort of Keynesian, New Deal solution. It’s important to remember that while mass unemployment is a disaster for millions, for the Tories they will see an opportunity to wipe out zombie firms and re-structure British capitalism towards growth markets. They worry that the furlough scheme, along with the permanent low interest rate environment, is preventing what they see as a necessary purge of the weak. The Times is talking about an “addiction” to furloughing, and it’s not exactly clear whether they mean businesses or workers – or both.

Sunak is said to be considering a reduction of the furlough rate to 60 per cent of wages, a move that would force hundreds of thousands into debt default and rent arrears overnight (many are already at that point). He is already beginning to use the language of austerity, saying the cost of the current furlough scheme is not sustainable.

The business lobby is demanding a more flexible furlough, which would act as a giant corporate subsidy when lockdown ends. Predictably, Labour leader Keir Starmer has backed this. The Treasury is said to be looking at the options, but is concerned that it would easily be manipulated by employers (of course, it would).

Socialists need to develop a clear line on these crunch employment debates. So far the left has largely failed to set the agenda, despite the government having to make unprecedented interventions to stop the economy from collapsing. With Starmer lining up behind the business lobby, there is little by way of leadership over the huge threat posed by the prospect of mass unemployment. Calls for a UBI are all fine and well, but it is no serious answer to one-quarter or even one-third unemployed, as some economists are predicting.

We should demand full employment, but not on a short-term, temporary basis, but as a permanent change to the economic system, where the state guarantees the right to a job on a liveable income for all who want it. We should not entertain doubts about affordability – the Bank of England has already proved it can create new money at a whim, and so can do this to create jobs for all. There is no shortage of work that needs done, from the vital care needs of a society cracking under the pressure of the pandemic and lockdown to the urgent need to transform our energy and transport systems through a Green New Deal. We should back calls for a labour redeployment scheme, but demand that it is done through the democratic participation of communities, unions and citizens, to come to a clear idea of the work needed in every part of the country and those that can help with the rapid training and skills development needed to deliver this. We should resist any job scheme which pushes workfare to subsidise corporate profits. 

There will also be a need to go further than demands for large fiscal intervention. There is a danger the left becomes trapped by this, while the key resources of the British economy remain in the hands of big capital. As George Kerevan has written, this is the limit of a turn to MMT (Modern Monetary Theory): an approach to the economy which sees the level of state spending as fully adaptable to private sector activity. That’s fine as far as it goes, but the question of the private sector – most critically, the control of monopoly tech capital over data and of monopoly finance capital over credit creation – is fundamental and can’t be ignored. To put it simply, if Jeff Bezos and co get to control Britain’s digital infrastructure, any job guarantee scheme will be left picking over the scraps.

Kalecki was right about the “class instincts” of the ruling class. They have not gone away, but if we are honest the titans of capital are probably calculating the issue of labour power into their considerations significantly less than in Kalecki’s time. If we can galvanise a social movement behind a coherent set of demands for decent jobs for all, ruling class complacency could be a source of strength for our side.

Would you like to read more?
Support our work
Donate now