Varoufakis on Piketty

Varoufakis on Piketty

In summary, Varoufakis (2011, 2nd edition 2013) hypothesises that, having already run the war economy successfully, the New Dealers feared, with excellent cause, a post-war recession. In charge of the only major surplus economy left after the war had demolished most of Europe, they understood that the sole alternative to a global recession, which might have threatened an already weakened western capitalism, would be to strengthen aggregate demand within the United States by (a) boosting real wages and (b) recycling America’s aggregate surpluses to Europe and to Japan so as to create the demand that would keep American factories going. If anything, Bretton Woods was the global framework within which this project was embedded. Its fixed exchange rates, capital controls and an underlying international consensus on labour market policies that would keep the wage share above a certain level, were all aspects of the same struggle to prevent the post-war world from slipping back into depression.

Naturally, the resulting wealth and income dynamics reduced inequality, increased the availability of decent jobs, and produced capitalism’s golden age. Was this an aberration? Of course it was not! The Marshall Plan, the Bretton Woods institutions, the strict regulation of banks etc. would not have been politically feasible had capitalism not threatened to commit suicide in the late 1940s, as it does once in a while (the last episode having occurred in 2008). Were these policies and new institutions inevitable? Of course they were not! While the political interventions that had the by-product of reducing income inequality were fully endogenous to the period’s capitalist dynamics, the latter are always indeterminate both in terms of the politics that they engender as well as of their economic outcomes.

Alas, Bretton Woods and the institutions the New Dealers had established in the 1940s could not survive the end of the 1960s. Why? Because they were predicated upon the recycling of American surpluses to Europe and to Asia (see above). Once the United States slipped into a deficit position, some time in 1968, this was no longer possible. America would have either to abandon its hegemonic position, together with the dollar’s ‘exorbitant privilege’, or it would have to find another way of remaining at the centre of global surplus recycling. Or, to quote a phrase coined by Paul Volcker, “if we cannot recycle our surpluses, we might as well recycle other people’s surpluses”.

This is, according to my book’s narrative, why the early 1970s, and the end of Bretton Woods, proved so pivotal: The United States, through its twin deficits, began to absorb from the rest of the world both net exports and surplus capital, therefore ‘closing’ the recycling loop. It provided net exporters (e.g. Germany, Japan and later China) with the aggregate demand they so desperately needed in return for a tsunami of foreign capital (generated in the surplus economies by their net exports to America, and to other economies energised by the United States’ trade deficit).

However, for this tsunami to materialise capital controls had to go, wage inflation in the United States had to drop below that of its competitors, incomes policies had to be jettisoned, and financialisation had to be afforded its foothold. From this perspective, inequality’s resurgence in the 1970s, the never-ending rise of finance at the expense of industry, and the diminution of collective agency around the world, were all symptoms of the reversal in the direction and nature of global surplus recycling. The manner in which by-product ‘inequality’ and by-product ‘financialisation’ coalesced to destabilise capitalism, until it hit the wall in 2008, is a process that several studies have thrown light on in recent times (e.g. see Galbraith, 2012). Professor Piketty’s single-minded effort to construct, at any cost, a simple deterministic argument is, unfortunately, not one of them.