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.


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.

The Poulantzas project

Nicos Poulantzas in days before smoking in the office was structurally selected against

Now that I have some spare time on my hands, one of my medium-term projects is to do a proper engagement with Poulantzas, with the aim of sorting out my own theory of the capitalist state, and of economic policy in particular. I draw on Poulantzas a bit in my thesis, borrowing useful ideas without dealing with his vision as a whole. Now I want to go back and sort out exactly what I think. Poulantzas is one of those theorists who is incredibly helpful even when I disagree with points or even think the framing itself is misguided. He asks the right kinds of questions, and shows what a theory of the capitalist state has to do, even when his own particular constructions (which he kept radically revising throughout his short career) are problematic. Thirty or forty years on, he is still the person to engage with in Marxian state theory – a tradition that reached its high-water mark in the late 1970s, and never died but faded away.

Poulantzas is also difficult to read, and I don’t think it’s the translation. He adopts the language of other theoretical systems – first Sartre’s, then Althusser’s – of which he simply assumes knowledge. So there are a lot of sidetracks to do in dealing with him. On the other hand, once the language is understood, he is a very clear and systematic writer. And the fact that most of his exposition takes place through engagement with other writers is a good thing – in dealing with Poulantzas, you are also dealing with the Marxian ‘classics’, with Gramsci, Sartre, Althusser, Ralph Miliband, Perry Anderson, and Foucault.

The book Paradigm Lost: state theory reconsidered, edited by Aronowitz and Bratsis [2002], has some great chapters on why Poulantzian state theory – along with the work of Miliband, which I’ll also discuss – receded as a research program and why it deserves to be revived. (It also makes clear why Poulantzas and Miliband – their names linked mainly by the polemics they directed against one another – can be seen as part of the same program.) Leo Panitch, in his chapter, “The impoverishment of state theory”, stresses that there was substance and systematicity to the state theory of the 1970s that was new to both social science and the Marxian tradition, especially in its attempts to deal with modern advaced capitalist democracies:

It needs to be stressed today that we did not at all see ourselves as falling back on a prefabricated Marxism; the new theory of the state had Marxist roots but it was founded on the notion that nothing like an elaborated and coherent theory of the capitalist state (in contrast with the complex array of concepts and tendential laws that constituted Marxian economics and historical materialism) had been fashioned either by Marx himself or by his successors—up to and including Gramsci. And the new theory was concerned to displace the narrowly ideological official Marxism of the Communist parties. [p. 90]

My plan, then, is to work through Poulantzas’s major essays and books and some of their reference points – with particular attention to his theory’s relevance for the development of economic policy in the twentieth century. Economics is sometimes said to be a weak point for Poulantzas – but that gives me something to do.

Published in: on 16 September, 2010 at 12:54 pm  Comments (3)  


The thesis is finally done – ‘Inflation and the making of macroeconomic policy in Australia, 1945-85’. There will be an online version eventually, once it’s marked and corrected.

Anyway I think I might now have the time and energy to revive things here, though there probably won’t be much content on inflation, macroeconomic policy, Australia, or the decades 1945-85 for a little while.

The plan is to use this site more for scraps, notes and conversation – that is, what a blog is meant to be for – and I’ll try and put more substantive pieces elsewhere. One reason I want to revive Scandalum Magnatum is that Sydney friends have put up blogs so I now have locals to link to. Dr_Tad and liz_beths have started Left Flank, focused on Australian politics. They have kicked off with an excellent series of posts on the Federal election and some constructive criticism of the Greens. On a more philosophical plane is Jonathon Collerson’s Wrong Arithmetic – and also check out the group blog associated with a Sydney Capital reading group which has achieved the rare feat of continuing to exist long enough for an attempt on Volume II.

I’m also excited to get back into discussions with international friends, and especially to tag along with Duncan Law’s project to review the literature on the history of capitalism.

Published in: on 6 September, 2010 at 10:53 am  Comments (6)  

nobody here

Published in: on 8 August, 2010 at 9:03 pm  Leave a Comment  

All that is solid melts into liquidity (and then sometimes freezes)

What follows is a descendant of the paper I presented at Historical Materialism in London about a year ago. It’s an attempt to introduce a post-Keynesian conception of liquidity into Marx’s theory of credit-money. It has gone through a few versions. After the conference I was invited to present a longer version as a seminar at SOAS to a bunch of post-Keynesians, including the eminent Victoria Chick, Emeritus Professor of Economics at the University of London, whose work I love and draw in the paper. I reworked it quite a bit: at HM I was explaining what I thought Marxian economics can get from Keynes, this time I reversed it to explain what Marx does that Keynes doesn’t. Back in Sydney I reworked it again to turn it into a thesis chapter, which is why you see references to other chapters, etc. I have been meaning to clean it up and submit one version or another to a journal at some point, but thesis has taken over. I’m putting it up here now because what it deals with came up in conversation over at Duncan Law’s blog.

Commodity money, state money, capitalist money

5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs Smith, Payne, and so forth.’ — ‘5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? — What can we do? The public come in, and take the circulating medium out of our hands; it does not exist.’ — ‘5308. You would only then do in London what they do in Manchester every day of the week? — Yes.’

– Chapman, a banker, testifies before the Bank Acts Committee in 1857, quoted in Marx [1981: 671]

In some respects, Marx and Keynes appear at opposite poles of monetary theory. Marx is the theorist of commodity-money, for whom “the money-form is merely the reflection thrown upon a single commodity by the relations between all other commodities” [Marx, 1976: 184], and “gold confronts the other commodities as money only because it previously confronted them as a commodity” [ibid: 162]. Keynes, on the other hand, is patron saint of modern cartalists, writing that “the Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account – when it claimed the right not only to enforce the dictionary but also to write the dictionary.” [Keynes, 1930: 5] Commodity-money versus state-money: this disagreement does indeed stem from deeper, fundamental differences of vision regarding the place of the state within capitalism. (more…)

Published in: on 1 November, 2009 at 3:11 pm  Comments (3)  

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

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.


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, 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.

1.3 (II) Thinking like a state about economic contradictions: Tinbergen

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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Much of the policy theory inspired by Tinbergen’s work took on board only the idea of the formal models. The medium really was the message here, because the lesson of representing the policy system as a system of equations is that if conflicts are to be avoided, there must be one instrument per target, just as a solvable system of equations requires one equation per unknown. The best-known result here, which I discuss in Chapter 3, is the idea pervading 1950s theories of the balance of payments: that the apparent contradiction between external balance and full employment could be resolved with an extra policy instrument, the exchange rate. But Tinbergen’s own views are more subtle, because he is also preoccupied with both the technical and the social limits to the use of policy instruments. The bare system of equations implies that so long as there are equal numbers of instruments and targets, it does not much matter which instrument is assigned to which target. But Tinbergen, a practical policymaker as well as a theorist, recognises the material reality of the instruments: that using a policy instrument is both rarely as simple as choosing a value for a variable, but works within limits, and often has ‘side-effects’ on groups within society which they resist.

Tinbergen thinks of such things in terms of ‘boundary conditions’, which could in principle be imposed as limits to variable values within the system of equations1, but for the practising policymaker are of course much more nebulous and ill-defined. A classic instance of a technical boundary condition in the neoclassical-Keynesian literature is the ‘liquidity trap’ in which expansionary monetary policy fails to influence the interest rate beyond a certain point. In practice policy is continually grappling with many kinds of slippages in the effectiveness of its instruments. For example, investment was long seen in the postwar period to be interest-inelastic, so that interest rate adjustment would affect aggregate demand only at levels which were, in practice, inconceivable. On the fiscal side, there were real practical limits to the rate at which government expenditure could increase or decrease coming from the simple fact that it was not merely a component of ‘aggregate demand’ but also spent on real things – infrastructure, etc. – which could not be turned on and off like a tap.2

Then there are the boundary conditions arising from social groups’ ‘defence lines’. Tinbergen [1966: 26] mentions, for example, limits to taxation beyond which the costs of evasion outweigh the desired effects, and wage reductions provoking worker rebellion. Here class conflict intrudes upon the system of equations, and once it does, there is no guarantee of a ‘solution’, especially when the defence lines of different groups are simply incompatible, or irreconcilable by policy in its current form. Tinbergen gives a telling example from his own experience as a Dutch policymaker:

In the situation of that year [1950] and as far as the model used was a true representation of the Dutch economy, the calculations showed that the target set would require a wage decrease of 5%, a decrease in profit margins of some 13%, an increase in labour productivity of 4% and an increase in indirect taxes equal to 2% of prices. Both the wage decrease and the profit reduction seemed to be beyond the boundary conditions. A long list of alternative targets was then studied. Accepting a boundary condition of no reduction in the nominal wage meant the necessity of still heavier reductions in profit margins and a heavier increase in indirect taxes; accepting a boundary condition of no profit margin reduction implied impossible requirements as to labour: either a reduction in real wages of 13% or a reduction of employment by the same percentage, both accompanied by increases in labour productivity. [Tinbergen, 1966: 60]

Social contradictions are then manifest as policy contradictions, and something has to give: policymakers are driven into ‘qualitative policy’, i.e., attempts to change the structure of the economy, which in such cases must involve an attack on one or more groups’ capacity to maintain their defence lines, and/or moral suasion convincing them to pull back their demands ‘for the sake of the national economy’. To complete the picture, we need to recognise that the state does not have a monopoly on initiative in the changing structure of the economy. Tinbergen [ibid: 149] gestures towards this in his distinction between (policy) ‘induced’ and ‘spontaneous’ changes in organisation, but spontaneous developments – that is, change emerging from the socio-economic system independently of policy – get no further mention. In reality, many ‘policy problems’ emerge not from any deliberate action on the part of authorities, but from the dynamics of the wider system and changes in subjective consciousness and strategy within classes, groups and institutions.

As long as we remember that Tinbergen’s instruments, parameters and targets are social relations, and ‘boundary conditions’ often tied up with the expectations and consciousness of classes and class fractions, the framework is helpful in specifying the Jessop-Poulantzas concept of ‘strategic selectivity’ for the particular realm of economic policy. It is not a deterministic approach because it acknowledges the creative agency of policymakers and other actor-groups. The projects of the latter of course impinge upon economic policy from outside policymaking in two ways: (1) through directly political attempts to influence or capture legislative and executive capacities of the state; and (2) through power bases within the economic sphere, such as those occupied by capital by virtue of their control of investment, or labour through industrial organisation. Nevertheless, the approach recognises that a serious limit is placed on economic policy by the imperative that it all hang together – that the capitalist economic system is not one which can be bent into any shape, and in fact in many ways is not very flexible at all. This imperative exerts a strategic selectivity on political projects, and even motivates policy attempts to reshape aspects of the economic system to shift the power bases of actor-groups within it, or ideological attempts to manage expectations, in order to work out contradictions.

This leads to a different analysis of the relationship between class and politics than one which seeks to explain political ebbs and flows as a consequence of the ‘balance of class forces’. Rather, the ‘balance’ can be seen as – at least in part – a result of the selective pressure of this need for the socio-economic system to function, which requires that the state do particular things and not others. Causation runs both ways. Functional failures do not force political adaptation. But when they manifest as crises, they change the political dynamic so that political actors are expected to resolve them one way or another, even though their ability to do so may be uncertain. Policy action which fails to end a crisis is likely to be ‘deselected’, along with its ideological champions in the political sphere.3

Bob Jessop

Bob Jessop

For the state involves a paradox. On the one hand, it is just one institutional ensemble among others within a social formation; on the other, it is peculiarly charged with overall responsibility for maintaining the cohesion of the social formation of which it is merely a part. Its paradoxical position as both part and whole of society means that it is continually called upon by diverse social forces to resolve society’s problems and is equally continually doomed to generate ‘state failure’ since so many of society’s problems lie well beyond its control and may even be aggravated by attempted intervention. [Jessop, 2007: 7]

Thus my thesis attempts to explain the shifts in the policy importance of inflation in my period – which, I will argue, goes some way towards explaining much wider policy shifts – in terms of its ‘strategic selection’ by the responsibility of economic policy to maintain cohesion of the socio-economic system as a whole. This is in contrast to explanations centred around ideological ‘paradigm shifts’ or those which take ‘the balance of class forces’ to be entirely causally prior to political-economic change.

1“With sufficiently complicated non-linear equations all phenomena of saturation, bottlenecks, etc., will be accounted for and no boundary conditions will have to be added. Boundary conditions are needed only as corrections on too simple linear equations.” [Tinbergen, 1966: 54]

2“This may be so for physical reasons: if government building activity were an instrument, this activity cannot surpass the production capacity present in the relevant industry.” [Tinbergen, 1966: 59]

3Radical political projects aiming to fundamentally alter the economic system face an extremely formidable challenge on this front, in that any single reform incompatible with overall cohesion is likely to be ‘rejected’ by the system as a whole; everything needs to change before anything in particular can.


Bob Jessop [2008]: State Power: a strategic-relational approach, Polity, Cambridge.

Jan Tinbergen [1966]: Economic Policy: principles and design, North-Holland, Amsterdam.

1.3 Thinking like a state about economic contradictions: Tinbergen

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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Jan Tinbergen connects to the technocracy, looking rather Dutch by the way.

Jan Tinbergen: "Get me the technocracy! Class conflict has arrived!"

The fact that the economic ‘problems’ appearing for policy resolution are plural raises the prospect that the demands made on the state pull in different directions. Even if the various branches of economic policy are pulled together as if to form a unified strategic actor, there is no guarantee of an optimal strategy capable of resolving the contradictions underlying the symptomatic problems. Rather, the contradictions reappear in the political realm. The original Keynesian objective of ‘full employment’ was in reality only one among several objectives governments attempted to steer the economic system towards, including rapid growth, ‘external balance’, and, of course, price stability. A number of objectives, then, but only one economic system, and within the system the objectives were not independent of one another. Some were very much in tension with others.

In this thesis I am concerned with the tension between price stability and other goals: first why it appeared, given the structures of the economy and state, and second, why it – originally a subsidiary goal – increasingly came to dominate policy strategy.

Australian policymakers became increasingly aware over the course of the post-war period of the tensions between their objectives, as I discuss in Chapters 3 and 4. Such a sense of contradiction and trade-off pervades the 1965 report of the Committee of Economic Enquiry, commissioned by Prime Minister Robert Menzies precisely to investigate the tangled mess policy seemed to be in following the credit crunch and recession of the early 1960s:

It must be recognised that the attainment or near attainment of any one of the seven objectives of economic policy may make the attainment of others more difficult… Thus, the nearer an economy is to full employment, the more difficult it is to achieve stability of costs and prices. On the other hand, stability of costs and prices makes for external viability, although action to achieve external viability, for example, by exchange devaluation, may operate against stable prices. In short, all objectives cannot be ‘maximised’ simultaneously… [Vernon et al, 1965: 46]

Similar conclusions had been reached in other countries, and the 1950s had seen the emergence of a new genre of economic theory examining precisely this issue. Perhaps its most clear and influential expression came from Dutch policymaker and academic economist Jan Tinbergen [1955, 1966]. In Tinbergen’s work we get something approaching a picture of how the economic policy ‘agent’ might think if it really did have a brain. The crisp formal models are still far from the messy uncertainty of diagnosis and action in the real-world economic bureaucracy. Nevertheless, his models capture with some clarity the structure of the economic policy problematic, opening the way for analysis of its contradictions and structural development – even if this aspect was not often followed up in the genre he established, with its ‘policy mix’ and ‘policy reaction functions’.

Tinbergen’s [1966] project is essentially about working out the interconnections between multiple economic objectives and assessing how, in consequence, policy instruments must be co-ordinated. This reflects the pseudo-agent-making process de Brunhoff [1978: 83] refers to:

It is not possible to define an ‘economic policy’ simply by enumerating and adding together these various elements [– isolated institutions and goals]. A certain necessary homogeneity, affected by the reduction of these elements to monetary flows and interdependent sectors, is also required. But this alone is not enough. One cannot begin with a coherent project resulting from a global objective, towards which the various complementary policy measures would be combined. Such a model presupposes the existence of the state as subject, instead of showing how, in certain circumstances, the state ‘can be called upon to function as a subject’ of economic policy, even is the policy in question does not in any sense have a coherently defined totality of objectives or the mechanisms able to attain them.

Compare Tinbergen’s complaint of – and remedy for – a “tendency to an incoherent treatment” in economic policymaking:

Measures regarding various instruments are taken separately, often at different moments and without much co-ordination. This tendency is to some extent based on the belief that there is a one-to-one correspondence between targets and instruments, that is, that each instrument has to serve one special target. Taxes and government expenditure are thought to be relevant to financial equilibrium, wage rates to employment, exchange rates to the balance of payments and so on. The interdependence is neglected or underestimated… It would seem that a better approach has now become possible. It is no longer necessary to neglect the interrelations, and a simultaneous consideration of all targets and instruments, as well as their quantitative relations, should be considered. [Tinbergen, 1966: 49]

His procedure is to build a formal model of the economic system which incorporates all the goals authorities pursue. He starts from a simple model in which only employment is targeted, and gradually adds in extra goals to show the additional complexity at each step. In each model, the relationships are corralled into a list of

  1. target variables;
  2. instrument variables directly controlled by policymakers;
  3. exogenous data neither controlled by the policymaker nor targets in themselves; and
  4. a system of equations linking the variables together.

Targets are either absolute values (e.g., absolute price stability, or a given rate of inflation, or a rate of unemployment), or ‘flexible’ values to be maximised or minimised given other conditions. Targets might be ranked, as they are in practice, so that one overriding goal has an absolute value while another is pushed as far as possible given that limitation.

Instrument variables are assumed to be set by authorities. Depending on which variable is identified, this might stretch reality quite far: for example, where Tinbergen treats aggregate expenditure as an instrument, he grants far more control to fiscal and monetary policy than they actually have. It would be more realistic to identify only those components or determinants of aggregate expenditure which are genuinely under state control as instruments: the fiscal stance and the base interest rate, for example.1 Other influences on aggregate demand could then appear as exogenous data. Where to draw the line between (2) and (3) depends on the real conditions in which policy works.

In fact much of the history of policy development involves not the working of a fixed system of instruments, but of attempts by policymakers to extend their effective reach, and counter-developments somewhere or other in the socio-economic sphere that frustrate them. All elements of ‘exogenous data’ are not equal: some are truly beyond potential state influence, while others are just beyond reach, more predictable or more susceptible to being coaxed in one way or another, holding out the prospect of pulling them fully into the policy orbit. Rather than a tight distinction between ‘instruments’ and ‘exogenous data’ then, it is better to think of a chain of causal influence between the instrument directly set by authorities and the ultimate target, with some elements closer to direct control than others. Tinbergen does not put it exactly in these terms, but he does make a distinction between ‘quantitative policy’, involving the working of an established system of policy transmission, and ‘qualitative policy’, which aims to reshape the system itself.2

Section to be continued.

1Even these variables grant too much control to the authorities – in reality fiscal stance is somewhat unpredictable, given its two-way causal interaction with private flows of expenditure, and even the stability of the central bank’s control over the base rate can come into question, while its effectiveness over other rates and quantities is uncertain and shifting.

2In fact he distinguishes between ‘qualitative policy’ “in which the structure of the economy is changed” and ‘reforms’ in which changes affect “spiritual aspects or relations between individuals”, but it seems to me that this is a difference of magnitude rather than kind. Examples he gives of the former include rationing of goods or foreign exchange, welfare measures, changes to tariff structures and anti-monopoly legislation, and his examples of the latter include the introduction of a full-scale social security system, nationalisation and industrial democracy. [Tinbergen, 1966: 149]


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

Jan Tinbergen [1955]: On the Theory of Economic Policy, 2 ed., North-Holland, Amsterdam.

Jan Tinbergen [1966]: Economic Policy: principles and design, North-Holland, Amsterdam.

J. Vernon, J. G. Crawford, P. H. Karmel, D. G. Molesworth and K. B. Myer [1965]: Report of the Committee of Economic Enquiry, Commonwealth of Australia, Canberra.

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].


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.