ABSTRACT
Introduction This chapter explores how a crucial idea introduced by Keynes (1936) into the corpus of economic thought is that the level of output and employment under market capitalism depends upon interaction between total spending and the economy’s capacity to produce. Decisions to produce are made primarily by private profit-making firms; production, the source of employment, takes place only if companies anticipate a market in which goods and services can be sold at a profit. If demand is insufficient, productive capacity will stand idle and people will be without jobs. There is no automatic mechanism, which guarantees that output and spending decisions always coincide. Imbalances between aggregate demand and aggregate supply require active government policy to change either its own or private expenditure through budgetary or monetary instruments. The neoclassical assumption of an automatic tendency towards market clearing is replaced by the necessity for active government intervention in the economy to secure simultaneous internal and external balance in the economy. Such a Keynesian framework is explicitly receded by the monetarist ideology of the TEU. A clear example of its approach is its reliance upon monetary tests of convergence rather than examining real variables of output growth and rates of unemployment. Its convergence criteria include restrictions upon discretionary fiscal policy through the implementation of maximum permitted budget deficits backed by the possibility of levying fines on non-compliant economies. The transfer of monetary and exchange rate policy to an independent ECB, whose sole legally defined objective is to secure stable prices through the use of a single economic policy instrument, a common interest rate, is at complete variance to a Keynesian approach. However, a key aspect of EU integration that has been embraced, albeit it naively, by large sections of the left is EMU, which is one of the most farreaching economic developments of the current generation. Advocates claim that it would enhance competition, through price transparency and completing the SIM, thereby reducing prices for consumers and ensuring a superior allocation of resources as corporate restructuring facilitated a renewed global competitiveness. The economic infrastructure, moreover, has been established to focus upon
the delivery of low inflation, and it is claimed that this will result in a superior economic performance. In contrast, critics of participation in EMU point to the combination of substantial initial transfer costs and the danger of being trapped within a permanently fixed exchange rate system, magnified by the potentially deflationary impact of the monetarist-inspired institutional and policy framework within which the single currency has been introduced. Keynesian measures are further constrained by the SGP, which places firm limits upon budget deficits and thereby restricts the ability of counter-cyclical economic strategy. This is quite intentional, based upon monetarist assertions that Keynesian economics no longer works, if indeed it ever did. However, democratic socialists argue that the loss of national economic autonomy, combined with the multiple restrictions that EMU participation places upon the pursuit of macroeconomic policy, reduces the scope for achieving traditional democratic-socialist/social democratic objectives. The progressive democratic-socialist case rests, therefore, largely upon Keynesian rather than monetarist/neo-classical assumptions, so that the market economy is perceived as experiencing significant cases of market failure and of cumulative causation. Consequently government intervention has the potential, if properly directed and accurately timed, of improving economic performance. This therefore rejects the new classical assumption of time inconsistency, which implies that all government intervention worsens those circumstances it is intended to improve, together with the monetarist belief in a long-term equilibrium rate of unemployment determined solely by labour market factors. Moreover, it rejects the viewpoint that globalization and the international free flow of capital has rendered national economic policy instruments impotent, so that it is difficult (if not impossible) to maintain a distinctive monetary policy and pursue exchange rate management. If this were true, tying economic policy within the monetarist EMU framework would make little difference, since government autonomy would have already been effectively eroded by the external economic environment. This chapter highlights the incompatibility between the monetarist model, upon which EMU is constructed and the possibility of creating an AES grounded in Post-Keynesian tradition. Despite the inability of theorists to develop a universal Post-Keynesian theoretical model, due in large part to the complexity and dynamic nature of modern economies, it is nevertheless possible to identify a number of important themes that denote the essence of Post-Keynesian/traditional democratic-socialist thought.
