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s2smodern

The “comprehensive socialisation of investment” was a key policy goal of The General Theory. And yet, empirically, we see a decline in the public investment share in most OECD countries since the economic crisis of the 1970s. In this paper we study several issues concerning this decline. First, we draw on a number of different theoretical perspectives, including those of Smith, Marx, and Keynes, to explain the importance of public investment. Second we show, using an error correction framework, that the levels of the net government saving and gross government investment shares are co-integrated. Third, we discuss the various theoretical reasons underpinning this result. Following Kalecki (1943) and Alexander (1948), we argue that the crisis of the 1970s and growing international competition enabled powerful business groups to successfully push for fiscal austerity to increase “labor market flexibility”, a policy framework that has become the conventional wisdom since then. Fourth, building on the view that the state is relatively autonomous; Keynes’s cautionary observation that the political context shapes business confidence; and Polanyi’s argument that social democratic policies always run the risk of appearing to be a threat to private investment, we discuss the challenges to such policies in the current crisis.

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