The political economy of public investment and public finance: challenges for social democratic policies

Jamee K. Moudud and Francisco Martinez-Hernandez
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Jamee K. Moudud: Sarah Lawrence College, USA
Francisco Martinez-Hernandez: New School for Social Research, New York, USA
Authors registered in the RePEc Author Service: Francisco Antonio Martinez Hernandez, Sr. ()

Review of Keynesian Economics, 2014, vol. 2, issue 3, 333-364

Abstract: The 'comprehensive socialization of investment' was a key policy goal of The General Theory. And yet, empirically, we have seen 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 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 since become the conventional wisdom. 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.

Keywords: public investment; public finance; state; circuit of capital; effective demand; austerity; social democracy (search for similar items in EconPapers)
JEL-codes: B1 B2 C22 E62 H4 H5 H6 I3 (search for similar items in EconPapers)
Date: 2014
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