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Once More on the ‘Humbug of Finance’
While an expansionary monetary policy acts by respecting private rationality, an expansionary fiscal policy, involving larger government expenditure financed by a fiscal deficit or taxes on capitalists, implicitly highlights the limitations of private rationality. Finance capital not surprisingly opposes the latter, even though the proffered arguments for “fiscal responsibility” have no theoretical validity. Given the current world economic crisis, a spate of beggar-my-neighbour policies are on the horizon.
The renowned economist Joan Robinson (1962) had referred to the view that the government’s budget should always be balanced, as the “humbug of finance,” namely, as a false proposition with no theoretical merit which was nonetheless promoted by finance capital. These days, of course, the insistence is not exactly on balancing the budget as was the case during the pre-second world war years. A certain amount of fiscal deficit relative to gross domestic product (GDP), usually 3%, is considered “permissible,” though it is not clear what is so sacrosanct about the figure 3 and why 3 is better than zero. But this shift from zero to 3% does not signify any change in theoretical position: it still invokes the same logic that underlay the insistence on balancing the budget. In Robinson’s words, it still constitutes “the humbug of finance,” though with a slightly, and inexplicably, different number for the percentage of fiscal deficit to the GDP.
The argument which the insistence on balancing the budget advances is that a fiscal deficit “crowds out” private investment. Now, for this to happen there must be a fixity of supply of some economic variable, so that the government taking more of it (via a fiscal deficit) leaves less for the private sector. What exactly is this variable? Pre-Keynesian theory believed that this given variable (assuming for simplicity, a closed economy) was the magnitude of “savings”: a fiscal deficit, by drawing more “savings” towards the government would leave less “savings” for the private sector, and hence reduce private investment via a rise in the interest rate. (Even if the rise in the interest rate itself contributed towards an increase in “savings” so that their magnitude was not exactly fixed, this would still mean a partial crowding out of private investment because of the rise in the interest rate.)
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