Inflation and the making of macroeconomic policy in Australia, 1945-85

Everything you always wanted to know but were afraid to ask…

My PhD thesis is now available here.

Abstract

This thesis traces the impact of inflation on the making of macroeconomic policy in Australia between the end of World War II and the mid-1980s. I take issue with accounts of policy change that focus primarily on ideological change on the part of policymakers. Instead, I present policy as strategic activity within a complex, evolving economic system which is not centred on policy, and in which, therefore, policy does not have a monopoly on initiative.

I draw on Marxian state theory and Tinbergian theory of economic policy to explore why counter-inflationary policy emerged as an imperative for the capitalist state and how it came to play a dominant role in organising macroeconomic policy in general. I also focus in detail on the development of central banking in Australia, drawing on post-Keynesian structuralist monetary theory. The body of the thesis is divided into two parts, one dealing with ‘the long 1950s’ and the other ‘the long 1970s’. Both are treated as periods of transition, rather than of stable policy regimes.

In the ‘long 1950s’ macroeconomic policy was brand new, and the authorities had to build an effective system of macroeconomic management, sometimes against the active opposition of other groups. A contradiction developed between full employment and price stability, and the latter was prioritised because of limits set by the balance-of-payments under the Bretton Woods international monetary system.

The ‘long 1970s’ was a period of crisis and distributional class conflict. The break-up of Bretton Woods and the movement towards flexible exchange rates changed the form of constraint but continued to impose a counter-inflationary imperative. Monetarism provided an organising and legitimating principle for extremely restrictive macroeconomic policy and the abandonment of full employment as a policy goal, even though policymakers were sceptical of its propositions. Finally, I discuss the movement towards deregulation as something which strengthened rather than undermined the central bank’s power to pursue monetary policy.

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1.5 Conclusion

Alright, having so much trouble fitting all my material on inflation theory into a couple of thousand words, so I’ve decided to make it a whole new chapter. The upside is that this chapter is finished! The downside is that all the chapter references above are now wrong! Here’s the summary of the chapter as a whole. You may notice some subtle differences of emphasis from the body of the chapter, in point #4 in particular; that’s partly thanks to the helpful discussions in the comments here. Eventually I’ll rework the earlier sections a little, correspondingly. But in general, I’m pretty happy with this chapter. Hopefully the next one will come faster.

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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In this chapter I have set out my approach to understanding economic policy and its historical development within the broader social structure of capitalism. To summarise:

1. Economic policy exists at the boundary between two relatively independent systems, the state and the economy. These two systems are only relatively independent, because each is necessary to the other’s reproduction, and they are not even institutionally separate, in that, for example, the economic system depends everywhere on a system of laws and their enforcement, while state activities involve the use of money and wage-labour.
2. The capitalist state has historically evolved certain structures and processes which deal with dysfunctions in the economic system, and thus modified the way in which the two structures reproduce themselves as a whole. Two fields in which state involvement has been especially important are the reproduction of labour-power and the management of money. This evolution can be understood in more-or-less functionalist terms, though it is of course driven by conscious political activity – within legislative, executive and judicial structures – focused on solving specific ‘problems’, which dysfunctions appear as politically. This is definitely not to say the process is driven by a singular state subject.
3. However, in the course of the Great Depression and the Second World War, something like a unified strategic actor in the field of economic policy emerged (though the unity is of course contingent and can break down). It was unified partly on the basis of new macroeconomic theory which posited it as such an actor, calling for a rational and combined use of certain state structures which had already developed independently within the economic system for other reasons. It involved especially the use of state budgets (fiscal policy), central banking (monetary policy) and arbitration system (wages policy) as instruments.
4. The work of Jan Tinbergen on economic policy illustrates well the ‘point of view’ from the ‘subjectivity’ of economic policy. The economic system appears as a problem to be solved – in fact, even abstractly represented as a system of equations. However, the contradictions of the system – especially those arising from the conflicting aims of classes and other groups with the social power to pursue them – mean that it may lack a solution. Contradictions can reappear at a policy level, with instruments torn in different directions. This can motivate policy attempts to restructure its own apparatus and to reshape the economic system itself to attack the social power bases of the groups in pursuit of functionality. Meanwhile, groups themselves are actively seeking to improve their own strategic position. This may include attempts to use political power to restrain or direct policy itself. However, the fact that policy has come to be held responsible for the functionality of the system as a whole places powerful selective pressures on political possibilities.
5. My use of this conception of economic policy to explain the development of counter-inflation policy in Australia between 1945 and 1985 is in sharp contrast to the standard neoclassical ‘new macroeconomic consensus’s’ narrative of its own emergence, as essentially the triumph of correct views over error. Here I briefly pointed to some problems in the standard narrative, and signalled some aspects of my own story, which will be expanded upon in the coming chapters.

1.4 Inflation as a policy problem

So a longer delay than I hoped in putting up the rest of the first chapter. Partly that’s because we’ve had visitors, but mainly because I’ve found it tough to whittle down the huge mess of a draft. This was a tough section to write because it summarises later chapters, and it’s hard to find a balance between incomprehensible density and taking up too much space with stuff that will be repeated later. I have ended up leaning towards the dense because all this stuff will be expanded on in the substantive chapters. The density shows especially in the last couple of paragraphs here; it may be better to just cut them and leave to the later chapters. Two more sections still to come, which is going to make this a long chapter – and it may end up being split in two.

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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December 19, 1969: Friedman's curve shifts upward

Understanding inflation as a policy problem requires an understanding both of its causes – at least as perceived by policymakers – and of the relationships of these causes with policy instruments and other policy goals. If there were a clear chain of influence between a policy instrument and the target of a stable price level, and no competing demands on the instrument, inflation would present no particular problem. The message of the monetarists is that such is the case: the only barrier to price stability is a failure to understand inflation’s nature as “always and everywhere” a question of the money supply (a clear chain of policy influence) and/or that policy can have no long-run effect on unemployment (no competing demands on the instrument). From such a perspective, inflation is a problem only because policymakers misunderstand it – or because they pander to a public that misunderstands it.

In the ‘new macroeconomic consensus’ of the 1990s and 2000s, the monetarist preoccupation with the money supply has been replaced by a focus on the ‘correct’ interest rate. [Arestis, 2007; Arestis and Sawyer, 2008] But the conception of the history of counter-inflation policy – as the eventual triumph of correctness over error – remains. Inflation is explained as a result of what the authorities failed to do. This is the centrepiece of a new crop of neoclassical research into the stagflationary episode of the 1970s. Despite significant debate on the details among this recent literature, Cecchetti et al [2007: 8] note that “[a]ll of these accounts view the Great Inflation as a result of monetary policy error and the Inflation Stabilisation as a restoration of more effective monetary policy.” For example, Nelson [2004] puts forward the ‘monetary policy neglect hypothesis’, while from a different perspective Cecchetti et al [2007: 42] themselves explain ‘the Great Inflation’ in terms of policy deviations from the Taylor rule:

Summing up the international comparisons, three of the four countries exhibit a qualitatively similar pattern in which deviations from a simple policy rule in the 1970s and early 1980s are consistent with the timing of the increases and declines in trend inflation (and its volatility). The peak in the inflation trend and the undershooting of interest rates relative to those implied by a Taylor rule generally occurred around the mid-1970s. There also is some evidence that increases in deviations from policy rules (in an accommodative direction) accompanied increases in trend inflation in the early 1970s.

Yet the Taylor rule – that a central bank should set interest rates according to a formula linking them to the output gap and the distance between actual and target inflation – was not formulated until 1993, as The Economist [2007] dryly notes in reporting on this research. To ‘explain’ the 1970s inflation in this way shows a great deal of confidence that economists have finally worked out how inflation works for once and for all. As we will see, the notion that “the mystery element in monetary policy” [Coombs, 1971 (1954)] has finally been cleared up has been a recurring theme in economic thought. Time and again, paradigms have been knocked over and pre-Enlightenment history re-written as a tragicomedy of grievous, incomprehensible error.

My own story is very different. First, I recognise that inflation has no single cause; rather, it develops from the conjuncture of a number of conditions. It may be argued that this is implicit in the ‘new consensus’ literature with its acknowledgement that ‘potential output’ (i.e., the level of real output associated with a stable rate of inflation) and the corresponding rate of unemployment are not fixed, but depend on factors such as labour productivity, the institutional structure of the labour market, and so on. However, the main point of these models is precisely to fix all these diverse factors in place, at least ‘in the short run’, and in focusing the attention on a few variables, the structure itself is reified and slips into the theoretical unconscious. The apparatus of the output gap, the ‘non-accelerating inflation rate of unemployment’ (NAIRU), and the Taylor rule form an assemblage of a number of factors which could be pulled apart and reassembled in different ways. The particular form it takes represents a decision about which factors to take as given – permanently or in the short run – and which to treat as variables.

Second, I argue that the changing way in which the theoretical structure was assembled not only informed policy but was strongly influenced by the development of policy itself. The material shape of the state policy apparatus within the economic system, and policy strategy in using it, were among the complex of factors determining inflation. For theory, what was considered a constant, what was an exogenous variable, and what was a policy variable depended partly on policy capacity. Or, rather, it depended, on what was perceived as policy capacity, which was subject to dispute. Furthermore, given that price stability was one of a number of policy goals, there was the possibility that policy capacity that could potentially be brought to bear on inflation would not be fully available, given inflation’s interrelationship with other goals. In particular, I argue that inflation theory developed alongside counter-inflation policy in the tension between price stability, full employment and ‘external balance’. Finally, the field on which these tensions played out reflected not only the developing capacities and strategies of policy, but also those of other social actors. All these factors influenced the structure of inflation theory, which in turn informed policy strategy.

So, while my narrative could be read as a long pre-history of the ‘new macroeconomic consensus’ which finally cohered in the 1990s, it is not teleological, while that consensus’s own origin myth is: the consensus was right all along, even before it was formulated, and economists and policymakers eventually realised it. Instead, I present a narrative of a development that could have been different. Policy change comes from contradictions, both internal to policy and external clashes of policy with the defence (and offence) lines of other group-actors. Consequently, also, there is no suggestion in my story that policy history has ended with the consensus: my excavation of the past points to contradictions which still exist below the surface today. (See Chapter 9.)

The non-expectations-augmented Phillips curve relating (inversely) unemployment and inflation is the beginning of the new consensus story, which presents it as the pre-monetarist Keynesian theory of inflation. In my own narrative, it is only the half-way point, already representing a conglomeration of factors which had previously been theoretically separate. It rose to prominence in the 1960s because it appeared to unify two strands of Keynesian inflation theory: ‘demand-pull’ theory focusing on inflation’s relationship with effective demand, and ‘cost-push’ theory centred on its relationship with money-wage growth. These two strands of theory matched separate avenues of policy influence: the first implicated aggregate demand management through fiscal and monetary policy, while the second implicated wages policy. The rise of the Phillips curve internationally was related to the failure of policy to secure direct influence over the money-wage. Targeting it indirectly with aggregate demand put the goal of price stability in conflict with that of full employment, though policy often still aimed to ‘shift the curve’ rather than accept a fixed trade-off. In Australia, where the arbitration system seemed to put the money-wage closer to policy control, the Phillips curve took longer to find policy favour, though a trade-off between unemployment and inflation was recognised as a possibility early on. (See Chapter 4.)

It is far from the case that policy was unaware of the potential for inflationary momentum before the introduction of expectations into Phillips curve models by Phelps [1967] and Friedman [1968]. On the contrary, the reaction of money-wages to price inflation was at the centre of Australian policy attention. Even in the Phillips curve literature, there is recognition that experience of inflation could shift the curve – right from Samuelson and Solow’s [1960] original Phillips curve article. The changing way in which inflationary momentum was understood is in itself an interesting story, but as I argue in Chapter 7, is not an explanation for the policy turn of the 1970s. I show that expectations-augmenting the Phillips curve does not explain the 1970s jump in the ‘non-accelerating inflation rate of unemployment’ apparent in such models. The explanation for this jump must be sought elsewhere. I present the policy upheaval of the 1970s and 1980s not in terms of policymakers seeing the light, but as a result of the need to reconcile expectations of a growth rate of real living standards and employment with an economic system that could no longer provide them.

References

Philip Arestis [2007]:”What is the new consensus in macroeconomics?”, in Philip Arestis (ed.), Is There a New Consensus in Macroeconomics?, Palgrave Macmillan, London.

Philip Arestis and Malcolm Sawyer [2008]: “A critical reconsideration of the foundations of monetary policy in the new consensus macroeconomics framework”, Cambridge Journal of Economics, 32:5, pp. 761-79.

Stephen Cecchetti, Peter Hooper, Bruce C. Kasman, Kermit L. Schoenholtz and Mark W. Watson [2007]: “Understanding the evolving inflation process”, paper presented to U.S. Monetary Policy Forum, available at http://www.brandeis.edu/global/rosenberg_institute/usmpf_2007.pdf, accessed 11 June, 2008.

H. C. Coombs [1971 (1954)]: “The development of monetary policy in Australia”, in Neil Runcie, Australian Monetary and Fiscal Policy: selected readings, v. 1, Hodder and Stoughton, Sydney, pp. 22-43, originally the English, Scottish and Australian Bank Limited Research Lecture, 1954.

The Economist [2007]: “Anatomy of a hump”, The Economist, 10 March.

Milton Friedman [1968]: “The role of monetary policy”, American Economic Review, 58:1, pp. 1-17.

Edward Nelson [2004]: “The Great Inflation of the Seventies: what really happened?”, Working Paper 2004-001, Federal Reserve Bank of St. Louis.

Edmund S. Phelps [1967]: “Phillips curves, expectations of inflation and optimal unemployment over time”, Economica, 34: 135, pp. 254-81.

Paul A. Samuelson and Robert M. Solow [1960]: “Analytical aspects of anti-inflation policy”, American Economic Review, 50:2, pp. 177-94.

1.2 (II) Economic policy as an emergent strategic agent

A draft thesis section. This is a draft of an unfinished document, please don’t quote without getting in touch first. Quoting in blogs is fine.

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The macroeconomic reconceptualisation centred on two key variables: aggregate demand and the money-wage. The first is the most widely-acknowledged element of the ‘Keynesian revolution’ – the insight that unemployment of labour and other resources was not necessarily a matter of relative prices being either in disequilibrium – the problem therefore being temporary – or distorted by market power, especially that of labour organisation. Involuntary unemployment could be a result of insufficient aggregate demand, and wage adjustment might be counter-productive. A Say’s Law world in which monetary flows were a minor secondary phenomenon faded before a vision of monetary leakages and injections, a system which could be mapped with the host of new statistics collected for the purpose. One such map was Copeland’s [1952] Study of Money-Flows in the USA:

In his model of the entire circuit, transactions are defined as transfers of rights agreed between two subjects representing units of account receiving and spending money. Each sector is located ‘between’ other sectors, so that none has an initial or final role. After this presentation of a homogeneous circuit, with no beginning or end, Copeland attempts to define the strategic sectors: those which have some power over their own monetary flows (like the government with a war time budget) or some power over the monetary flows of others (like the banks). The characterisation of public expenditure in terms of flows inserted into the circuit is an essential precondition for the presentation of state regulation as economic policy. [de Brunhoff, 1978: 76]

The reconceptualisation made new practices possible with existing institutions: the government budget, formerly considered simply in bookkeeping terms as the accounts for government operations, now became a lever. Likewise, central banking shifted towards macroeconomic responsibility from being a relatively passive clearing house and overseer of the banking system, with policy mainly a by-product of its own reserve management. Because their target was the same – aggregate demand – both institutions were unified, however imperfectly, in a collective enterprise in which they became two arms of a single ‘economic policy’.

The new theory prescribed a new role for these state institutions. But it took some time, and organisational restructuring, before the treasuries and central banks fitted the part. The ‘Keynesian revolution’ was an ideological child of the Depression, and the 1930s saw some experiments with stimulatory public works spending – contemporaneous with, but not inspired by, the General Theory. [Bleaney, 1985: 49-80] But the full development of ‘economic policy’ in de Brunhoff’s sense was really a postwar phenomenon. It took the mobilisation of war and reconstruction to overcome institutional inertia and reorganise the institutions, and it took a decade or two for the new sensibility in economic theory and policy to cohere into a fully-developed orthodoxy. Even in the 1950s, as we will see, the formation of an institutional ensemble capable of filling its prescribed role was still a project rather than a finished reality.

The transformation of the Australian Treasury is illustrated by Crisp [1961]. From a duty, in Gladstone’s words, “to save what are meant by candle-ends and cheese-parings in the cause of the country”, by 1954, Deputy-Secretary Randall was reporting that it was “mixed up in all manner of activities not dreamt of half a century ago”¹. Crisp summarises:

What we may broadly call the Keynesian economics and public finance became available only in the late 1930s as a theoretical framework and justification for a whole set of new methods and policies. They emerged just in time to be matched with wartime exigencies and opportunities and, enriched by experience then gained, to form the foundations of thinking about post-war policy… The Budget’s ‘housekeeping’ purpose still retained its intrinsic importance sufficiently to determine, or at least powerfully to influence, many policy issues. But this role was not transcended by the new conscious and positive – and far from simple – instrumental use to be made of the Budget in the wider context of national economic policy. Its magnitude and detail were now designed to influence investment decisions, the general levels and pattern of investment and the demand for goods and services. Its extremely complex effects on incentives, cost structures, inventories, labour supply, the balance in the supply of basic necessities and ‘inessentials’ would be carefully watched, for they were shot through with political as well as with economic significance. [Crisp, 1961: 321, 323-24]

The map was not the territory, and the theoretical map was continually redrawn as policy practice met unforeseen resistance, unintended consequences, and new problems in the economic sphere. Note, for example, the list Crisp gives above of the “extremely complex” effects of fiscal policy on incentives, cost structures, etc. Things were not as simple as a model in which policymakers selected the appropriate level of aggregate demand. Most importantly, the policy apparatus forged intellectually in the battle against Depression was called upon for quite a different kind of war.

There was irony in the fact that their first applications occurred under conditions of full (even over-full) employment and vast unsatisfied demand, rather than of unemployment and underconsumption such as challenged the powers of constructive analysis of Keynes and his colleagues in the inter-war years. [Crisp, 1961: 321]

Keynes’s General Theory was motivated by, and organised around, a single problem: “the failure of the economy to generate enough aggregate income to keep its people employed… proximately due to firms’ unwillingness to operate at a sufficiently high level of production; that unwillingness in turn… due to their estimate, fulfilled in the case of unemployment equilibrium, of inadequate demand for their output.” [Chick, 1983: 47] However, addressing that problem involved a much wider vision of the economic system, a theoretical system which could deal with many other phenomena, and versions of this vision were developed by many others besides Keynes in many different directions. Likewise, the great problem of Depression unemployment motivated the reorganisation of the state’s economic apparatus into a coherent mechanism for acting strategically within the economic system – though of course, still exhibiting Poulantzas’s ‘fissiparous unity’. The third part of the story, and the part this thesis as a whole explores (focusing on the Australian case), is the subsequent development of this institutional ensemble and the strategy which motivated it against an entirely different phenomenon – inflation.

1Gladstone’s remark comes from a speech in Edinburgh, 1874, quoted by Crisp [1962: 316], and Randall, quoted [ibid: 319].

References

Michael Bleaney [1985]: The Rise and Fall of Keynesian Economics: an investigation of its contribution to capitalist development, Macmillan, Houndmills.

Suzanne de Brunhoff [1978]: The State, Capital, and Economic Policy, translated by M. Sonenscher, Pluto Press, London.

Victoria Chick [1983]: Macroeconomics After Keynes: a reconsideration of the General Theory, Phillip Allan, Oxford.

M. Copeland [1952]: A Study of Money Flows in the United States, National Bureau of Economic Research, New York.

L. F. Crisp [1961]: “The Commonwealth Treasury’s changed role and its organisational consequences”, Australian Journal of Public Administration, 20:4, pp. 315-30.

Panitch and Gindin on the US dollar

From comments here it seems like the meaning of current account imbalances is a big problem for people thinking about the crisis. I just got the new book edited by Leo Panitch and Martijn Konings, American Empire and the Political Economy of Global Finance, in which this gets some discussion. I thought I’d post the entire section of the chapter by Panitch and Gindin where they set out their point of view, because I don’t think they’ve elaborated it as much elsewhere. There’s a later chapter by Scott Aquanno entirely devoted to the role of US Treasury securities in global bond markets which is also extremely relevant; haven’t read it yet but from a skim it looks very good – will post something shortly. I’d be interested to know what people think of this, what needs clarification, etc.

Yet balance of payments deficits did not have the same meaning for the United States as they did for any other state [under Bretton Woods]. This was not widely recognised at the time, but as an obscure paper prepared for the Federal Reserve of Boston pointed out: ‘[t]his asymmetry appears to be appropriate for it corresponds to an asymmetry in the real world’ (quoted in Hudson 2003: 327, italics added). [FOOTNOTE: Kindleberger (1981: 43) was one of the few economists in the 1960s who questioned the significance of the balance of payments crisis in the US, arguing that the deficit largely reflected the American supply of financial intermediary services through borrowing short-term capital and lending long in terms of foreign investment – a ‘trade in liquidity profitable to both sides’ – rather than a trade deficit or over-investment abroad as was commonly understood.] Before this perspective could be universally accepted (especially amongst bankers), however, the fiction of a gold standard behind the dollar standard would have to be abandoned and replaced not only by flexible exchange rates but types of global financial markets that could sustain them. And it would come to be seen that, far from necessarily representing a diminution of American power, the outflow of capital and the balance of payments deficits were actually laying the basis for a dollar-based credit expansion and financial innovation, both domestically and internationally – what Seabrooke appropriately calls the ‘diffusion of power through the dollar’ (2001: 68). Above all, it would be necessary for the American state, as the imperial state, to retain the confidence of the ever more dynamic and powerful financial capitalists in the face of pressures on the dollar. All this implied addressing the deeper contradictions of the Bretton Woods arrangements for fixed exchange rates and tying the dollar to gold, which by then had become a barrier to the American state’s capacity to navigate between its domestic and imperial responsibilities. [pp. 26-27]

… [fast-forward to the 2000s]…

The widespread predictions that the ballooning US trade deficit portended a much more serious crisis waiting to happen were based on the expectation that this deficit was likely to prove unmanageable because it was bound to undermine the dollar as the imperial currency. But it is also necessary to put this in historical perspective. When the balance of payments deficit first emerged in the early 1960s, it led to what now is generally seen as an excessive panic. Robert Roosa, speaking from his experience of trying to address the problem within the Treasury, concluded prophetically in 1970: ‘Perhaps, by conventional standards, the United States would have to become a habitual renegade… barely able to keep its trade accounts in balance, with a modest surplus on the current account, with an entrepot role for vast flows of capital both in and out, with a more or less regular increase in short-term dollar liabilities used for transaction purposes around the world’ (quoted in Hudson 2003: 319).

In the 1970s it was widely assumed that the American trade deficit would necessarily lead to American protectionism. There has certainly been plenty of nationalist sentiment in the US, but rather than withdrawing from world markets the American state has consistently used the threat of protectionism to beat down foreign opposition to the global neoliberal project, thereby transforming ‘nationalist impulses into strategies for opening up other nations’ markets’ (Scherrer 2001: 591). The continuous deficit since the 1980s did not alarm investors. Even while that deficit increased dramatically in the early years of the new century and peaked at almost 6 per cent of GDP by 2006, this did not scare off foreign creditors. To understand this properly it is necessary to reconsider what is often seen as a structural decline in manufacturing competitiveness. While American foreign direct investment continued to expand through the 1990s, manufacturing at home in that decade actually grew faster – much faster – than in any of the other developed countries.  Furthermore, the US led the rest of the G7 in the growth of exports right through the 1980s ad 1990s. The US trade deficit was thus not caused by a loss of manufacturing and export capacity but by the enormous importing propensity of a US economy which experienced much greater population growth, and had a much greater proportion of its population working – and working for longer hours – than in any other developed capitalist economy. Imports contributed to lowering the cost of reproducing labour and obtaining both low- and high-tech inputs for business, each of which facilitated low inflation at home as well as increased exports. There were, of course, particular sectors that were hit hrd by the restructuring of American industry, but the overall picture was one of a relatively strong capitalist economy which, while being able to import ever more by virtue of its relative financial strength.

In considering whether the inflow of capital implies that the US economy is vulnerable to capital flight, it is once again important to note that the inflows did not come in just as compensation to ‘cover’ the deficit, as imagined by those focusing exclusively on international trade statistics. The inflow of capital was mainly the product of investors being attracted by the comparative safety, liquidity and high returns that come with participating in American financial markets and the American economy. The dollar stayed at relatively high levels until recently because of that inflow of capital, and it was the high dollar that allowed American consumers and businesses to import the foreign goods cheaply. In recent years the inflow mainly came from central bankers abroad motivated by the goals of padding their foreign exchange reserves and limiting the decline in the value of the dollar relative to their own currencies.

All this precisely reflected how the new imperialism had come to differ from the old one. While financial markets in the old pre-First World War imperialism were quite developed in terms of the size of capital flows, they generally took the form of long-term portfolio investment, much of it only one way, from th imperial centres to the periphery. In contrast, international markes in short-term securities today are massive and, in the absence of the gold standard, it is American Treasury bills that stand as the world’s monetary reserves. In addition, the old imperialism limited the extent of manufacturing in the third world, while the division of labour in the new imperialism has, by way of foreign investment and outsourcing, included the expansion of manufacturing in the third world. This not only contributed to the American trade deficit but as the trade surpluses, espcially in South-East Asia, were recycled into capital flows to the US, it also contributed to making the imperial power itself, remarkably, a debtor in relation to some third world countries. Yet at the same time these very developments sustained the American economy’s ability to have privileged access both the the world’s savings and to cheaper goods.

Even though the recent downward adjustment of the dollar relative to other currencies has reduced the size of the trade deficit, a major speculative run on the dollar is of course not impossible. But the form that the globalisation of capitalism now takes makes this less rather than more likely. The largest holders of the dollar in Asia and Europe (the respective central banks) want to block the dollar’s collapse because that would threaten their exports to the US, and because it would devalue the dollar assets they hold. The global economy has developed with and through the dollar as the dominant currency, and there is no ecidence to date that the only other remotely serious candidate, the Euro, is about to replace the dollar in this respect. This is primarily not an economic issue but an imperial one – and neither Europe nor Japan has shown either the will or the capacity to displace the US from its leading role in the capitalist world. In contrast to the old paradigm of inter-imperial rivalry, the nature of current integration into the American empire means that a crisis of the dollar is not an ‘American’ crisis that might be ‘good’ for Europe or Asia, but a crisis of the system as a whole, involving severe dangers for all. To suggest that because the holders of American Treasury bills are now primarily in Asia we are therefore witnessing a shift in the regional balance of power, is to confuse the distribution of assets with the distribution of power (Arrighi 2001). [pp. 40-42]

On the liberal use of artificial ice in the ruling of India

In the context of a discussion of the impact of climate on various races’ fitness to rule:

This may have to be modified a little, but only a little, if F. Galton should prove to be right in thinking that small numbers of a ruling race in a hot country, as for instance the English in India, will be able to sustain their constitutional vigour unimpaired for many generations by a liberal use of artificial ice, or of the cooling effects of the forcible expansion of compressed air. See his Presidential Advice to the Anthropological Institute in 1881.

– Alfred Marshall [1920 – but 1 ed. in 1890], Principles of Economics, 8 ed., p. 603.

Fragmented but stuck together

I finished MacIntyre’s Short History of Ethics and he was going pretty much where I thought he was. Modern society dissolved the bases of old integrative ethics based on role-fulfilment, just as happened in the dissolution of the classical Greek polis. But he doesn’t focus so much on the modern form of one consequence of the earlier breakdown – the draining away of political content from ethics as people become remote from political decisions. Possibly because there is no medieval equivalent of the polis, so that isn’t felt as a loss: those with political agency are even more restricted in number and philosophers are not among them.

Still, the dawning of modern ethics is full of politics. From Hobbes onwards MacIntyre treats political philosophy as indistinguishable from ethics – Machiavelli and Hobbes share a chapter with Luther and Spinoza, for example. The transition to absolutism and later its dissolution with the rise of the bourgoisie leave their marks. But the Victorian utilitarians appear as the last of a breed for whom ethics and politics are inseparable.

From the late 19th century onwards ‘ethical philosophy’ becomes very abstract, treating individuals as if they are independent from society, and becomes increasingly bogged down in extremely dull arguments about language as some metaphysical reason for ‘shoulds’ is sought. (This kind of thing has a history, stretching back to Kant’s categorical imperative, which ran parallel to Enlightenment political philosophy.)

Of course no such metaphysical ahistorical reason can be found. Kantian ethics is a failure. Ethical philosophy becomes estranged from everyday practical ethics, and those practical ethics – of ordinary people, remote from politics despite formal democracy – have themselves become fragmented as society has become mediated primarily by commodity exchange and hierarchies at a workplace level. In a capitalist society social development is removed from both ‘organic’ social interaction and from the political sphere, which has come under the dominion of representative democracy. This is my interpretation: MacIntyre calls it the rise of ‘individualism’ but I think that makes it sound too much like a purely ideological devolopment.

In discussing Greek society, I suggested what might happen when such a well-integrated form of moral life broke down. In our society the acids of individualism have for centuries eaten into our moral structures, for both good and ill. But not only this: we live with the inheritance of not only one, but of a number of well-integrated moralities. Aristotelianism, primitive Christian simplicity, the puritan ethic, the aristocratic ethic of consumption, and the tradiions of democracy and socialism have all left their mark upon our moral vocabulary. Within each of these moralities there is a proposed end or ends, a set of rules, a list of virtues. But the ends, the rules, the virtues, differ… A conservative Catholicism would treat obedience to established authority as a virtue; a democratic socialism such as Marx’s labels the same attitude servility and sees it as the worst of vices. For puritanism, thrift is a major virtue, laziness a major vice; for the traditional aristocrat, thrift is a vice; and so on.

It follows that we are liable to find two kinds of people in our society: those who speak from within one of these surviving moralities, and those who stand outside all of them. Between the adherents of rival moralities and between the adherents of one morality and the adherents of none there exists no court of appeal, no impersonal neutral standard. For those who speak from within a given morality, the connection between fact and valuation is established in virtue of the meanings of the words they use. To those who speak from without, those who speak from within appear merely to be uttering imperatives which express their own liking and their private choices. [p. 268]

But society no longer relies on ideological moral agreement to function (if it ever did). A wide range of incompatible ethical viewpoints proliferates, along with the pluralist ideology that ‘everybody has their own opinion’ and deciding between them is impossible. This is not dysfunctional for capitalist society because people’s practical activity is, for the most part, directed by capital, for which they have to work. Role is dissociated from commitment. The impersonal, bureaucratic aims of the employer rule; the ideas in people’s heads about the good life are at best a hobby.

Again, MacIntyre doesn’t quite go there – that’s my interpretation – but now that I’m a little way into his later book After Virtue [1981], I think that’s what his ideas point to.

Historical parallels

I’ve been reading Alasdair MacIntyre’s [1966] A Short History of Ethics. I’m only up to the sixteenth century, which is about halfway, so I don’t know where he’s going, but so far it’s really interesting. He doesn’t try to give a comprehensive catalogue of ethical philosophy, but the ‘short history’ in the title is a little misleading, because it’s not an abridged catalogue either. He is pressing an argument about how thinking about ethics has been formed by social forces and the class position of those recording their thinking; in other words, it’s a materialist history. But it also takes the content of the philosophy seriously. One of his main points is how the development of Western society (it is entirely Eurocentric) has changed even what ‘ethics’ is supposed to be about: for example, the divorce of ‘desire’ from ‘duty’ and the exclusion of the former.

So, the afterlife of classical Greek ethics once the classical polis had broken down:

For both Plato and Aristotle, although the relation of virtue to happiness may constitute a problem, that there is a connection between them waiting to be elucidated is a fundamental assumption. Unless virtue somehow leads to happiness, it lacks a telos, it becomes pointless; unless happiness is somehow bound up with the practice of virtue, it cannot be happiness for the kind of beings men are, it cannot constitute a satisfaction for a moralised human nature. Happiness and virtue are neither simply identical nor utterly independent of each other. But in the case of both Cynics and Cyrenaics we see the tendency to reduce one to the other, and to in fact operate with the concept of virtue alone or with that of happiness alone. This separation of virtue and happiness is interestingly accompanied by a large stress upon self-sufficiency, upon avoiding disappointment rather than seeking for positive goods and gratifications, upon independence from contingent bad fortune, and this stress perhaps provides the very clue which we need to understand their separation. The sense one gets in reading the records of post-Socratic philosophy which survive in writers such as Diogenes Laërtius and Cicero is of a disintegrate social world in which there are more puzzled rulers than ever before, in which the lot of the slaves and the propertyless is very much what it was, but in which for many more middle-class people insecurity and an absence of hope are central features of life.

This suggests interestingly that the possibilities of connecting virtue and happiness are dependent not solely upon the features of two concepts which remain unchanged and hence have an unchanging relation, but upon the forms of social life in terms of which these concepts are understood. Let me suggest two extreme models. The first is of a form of community in which the rules which constitute social life and make it possible and the ends which members of the community in question pursue are such that it is relatively easy to both abide by the rules and achieve the ends. A well-integrated traditional form of society will answer to this description. To achieve the personal ideals of the Homeric hero or the feudal knight or the contemplative and to follow the social rules (which themselves invoke a respect for rank and religion) cannot involve fundamental conflict. At the other end of the scale, we might cite as an example the kind of society which still sustains traditional rules of honesty and fairness, but into which the competitive and acquisitive ideals of capitalism have been introduced, so that virtue and success are not easily brought together. Or there may well be intermediate types of society in which for some groups only it is true that their ends and the rules of society are discrepant. From the vantage point of each of the different kinds of society the relation between virtue and happiness will look very different. At the one extreme we shall find virtue and happiness regarded as so intimately related that the one is at least a partial means to or even constitutive of the latter. At the other extreme we shall find a total divorce, accompanied by injunctions by the would-be moralists to regard virtue rather than happiness, and by the would-be realists (illuminatingly called ‘cynics’ by the moralists) to regard happiness rather than virtue. Even though both words remain, the one will come to be defined in terms of the other. But inevitably in such a situation both the concept of virtue and the concept of happiness will become impoverished and will lose their point to a certain extent. [pp. 102-03]