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What next for 'rootless, changeable' economists? A neo-Keynesian attack on unemployment


LONDON -- Inside an unsung organization was an unsung hero. Shahen Abrahamian, chief economist of the sadly ignored United Nations Conference on Trade and Development, died last month at the age of 49. But this Cambridge-educated Iranian left the game plan for a resurgence of Keynesian thinking in international economics.

He would have liked what John Kenneth Galbraith wrote in the current issue of World Policy Journal:

"Economists are a rootless, changeable bunch. We have a striking predilection for constructing systems of belief, preaching them for a few years, then abandoning them, often for good reasons that we should have recognized years before."

Thus, after the (highly success ful) Keynesianism of the 1960s, came the domestic supply-side economics of the 1980s, to be followed by the global supply-side nostrums of the Clinton administration.

"Crisis of both theory and performance has swamped each in turn. We are left to wonder what comes next. A force of global Keynesianism perhaps?" asks Mr. Galbraith.

Third World's double curse

No one has worked harder to put flesh on the notion of global Keynesianism than Shahen Abrahamian.

His latest and last contribution, just published by UNCTAD, is a cry for policies of full employment, not just in the Third World, from which he hailed, but first and foremost in the industrialized world -- because, he argued, until that problem is solved the Third World will go on getting the blame for northern unemployment as well as having to deal with its own miseries.

"There can be no doubt that unskilled northern labor," he wrote, "has been displaced on a significant scale in a number of industries, including footwear and clothing, by developing countries. Nonetheless, the growth of north-south trade does not provide a convincing explanation of the unemployment problem as a whole."

To prove this, Mr. Abrahamian cites the fact that differences among industrialized countries are unrelated to differences in their trade balances with developing countries.

Between 1970 and 1993, Canada, which suffered the second-largest decline in its trade balance with the developing countries, had the largest increase in total manufacturing employment. But Italy, which had the smallest decline in its Third World trade balance, lost a fifth of its manufacturing jobs.

He further refutes those who blame unemployment on new technologies, and then he seeks to provide a national answer to "why it has been so difficult for labor . . . to be deployed at remunerative wages as in the Golden Age of the 1950s and '60s."

Is it man-made rigidities -- an over-regulated labor market and the welfare state? This is the current fashion, but Mr. Abrahamian shows that if all enterprises were given the chance to operate more flexibly none might choose to expand output "unless the level of aggregate demand also rose."

Like all Keynesian theory, it is obvious once said, and yet so elusive in the torrent of supply-side propaganda. Thus we are surrounded by a massive sea of the unemployed while firms continue to downsize rather than enlarging productive capacity.

Loosen the strings

Mr. Abrahamian would do away with restrictive monetary policy, which pushes up interest rates and shunts economies into low-growth policies in which low demand growth and low potential output growth feed back on each other. Moreover, the vogue for cutting public investment in infrastructure has had a knock-on effect on reducing private investment.

The Keynesian answer is to raise the tempo of investment and growth. If the capital stock in manufacturing Europe had grown after 1973 by a modest 1 percent more than it actually did, there would now be an extra 4 million jobs in manufacturing and still more in services.

No danger of inflation

Businessmen need lower capital costs on the one hand, and improved prospects for sales on the other. This would not lead to greater inflation. Times are crucially different from the 1970s. Not only is there much greater slack and flexibility in the labor market but, most important, there is a whole new world of global competition. There is today a much closer link between wages and productivity.

It is not enough simply to expand demand. We must raise productive capacity and this involves, partly, increased public investment in infrastructure -- which should not be treated as deficit spending.

To cut the debt

We also, Mr. Abrahamian continues, have to get back to using fiscal policy in demand management, which means, first of all, tackling the overhang of public indebtedness. His brainwave is a one-time levy on holdings of financial assets.

A brave and clear voice is now prematurely stilled. Others must pick up where he left off. The economic road now being traveled produces too much failure and conflict, not to speak of wasted lives, both in the industrialized world and the Third World.

Jonathan Power writes a column on the Third World.

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