Back to development
Jaime Ornelas Delgado*
THE KEYNESIAN APPROACH ( ...continuation )

If the neoclassical school, like the classical one, is removed from real facts, and in removing the State from economic life is incapable of explaining what happens in reality, Keynes proposes an instrumental apparatus that recognizes the necessity of regulating the market through measurable, manageable and economic variables, useful to the political economy.

The ideas of Keynes and later his followers, stress the influence that a policy of compensatory public spending can have in setting the economic system into motion, an idea that received a positive response from Latin American governments. They found a viable option here for acting deliberately in overcoming underdevelopment, as characterized by the unemployment of production factors and generalized poverty due to lack of productive investment.

Keynes believed that, in the long run, the market by itself is incapable of sustaining strategic projects, and for this reason proposed the intervention of governmental apparatus in the economy to sustain effective demand by means of spending, a determining factor in productive investment.

This idea, which was taken up to a great extent by governments of the region, translated into a strategy based on policy measures aimed at strengthening effective demand. The aim was to provide the necessary stimuli to the owners of capital to direct their savings towards the constant expansion of productive investment and employment.

However, Keynes did not produce a model of growth-development: his focus was essentially statistical and short term. The analytical tools he introduced, on the other hand, were used by numerous economists to formulate a wide range of growth models. These formally launched so called Dynamic Macroeconomics, broadly connected to the growth-development assumed by different governments in Latin America. In any event, Keynesism maintained the identity of growth development in neoclassical economics, although its strategy to achieve this was significantly different.

The intervention of the State in the economic process permitted the hasty expansion of the capitalist economy over the course of three decades from 1945 to 1975, re-instating confidence not only in the possibility of obtaining sustained economic growth in the long term, but also the certainty of a sustained increase in investment, productivity, technological progress, employment and consumption. At this moment of capitalist expansion: “Western economists were no longer interested in the economic cycle and so devoted themselves fully to searching for the key indicators of internal economic growth (Galindo and Malgesini, 1994: VIII-IX).

The design of macroeconomics for development, specifies Celso Furtado, was simple, “As productivity increases, so does real social income, that is the number of assets and services available to the population” (Furtado, [1967] 1968: 119). In this case, the increase in productivity, which also increases the income of productive factors, and the strengthening of effective demand -facilitator to investment-, plays a significant role in economic policy that: “was transformed into economic growth policy which could result in better social integration” (Hinkelammert, 1997:13).

Economic policy for growth should avoid increases in output being concentrated, and look for a better distribution between factors. This ensures that sufficient resources are assigned for new increases in investment and private consumption.

The concept of macroeconomic dynamics proposed by Keynesianism is summed up by Celso Furtado in the following way:

If the economy is to continue to grow, a substantial part of output increase should be turned into income available for consumption, in the hands of the population. For investment to prosper, consumption must increase, and this interdependence sets a limit on the amount of output a free market economy can dedicate to spontaneous investment (Furtado, [1967] 1968: 131).

If the increase in output were not to translate into greater disposable income, but exclusively into greater profits, effective demand would be reduced so that there would not be sufficient incentives to increase productive investment, which would lead to economic stagnation. This is where there is a need for redistributive policies to improve the income of the population – even at the expense of decreasing profits – to sustain sufficient effective demand capable of stimulating investment and growth.

When it was recognized that increased industrial activity led to speedier and greater productivity, the criteria linking growth and development were strengthened, and this with industrialization, which in its time had permitted high indices of growth in the economies of developed countries. This certainty led Latin American governments to apply deliberate policies of industrial expansion by means of Import-substituting Industrialization (ISI).4 From now on, “The main preoccupation of the theory of growth centers upon the influence that investment has on growth, dynamic equilibrium and employment” (Sunkel and Paz, 1970: 30).

However, experience showed that although it was believed significant growth rates had been achieved in Latin America during the post war period, the population’s living conditions did not improve and in some cases worsened. Furthermore, empirical evidence made many analysts admit that growth could come about without positive social consequences for society, so from then until the 1980s economic development and social development were further distanced, maintained firstly as “a rapid and sustained increase in real output per capita with subsequent changes in the technological, economic and demographic character of society” and secondly as a concept closer to improving the population’s welfare (Castro, 2004: 4) or rather government actions intent on addressing the negative social impact that economic growth entailed.

4 In some Latin American countries, Import-substituting Industrialization (ISI) began in the 1930s (Foxley, 1980:12); in Mexico it would not be “until after the Second World War when import substituting becomes part of a more or less well defined policy of industrialization.” From the official point of view, the goal of import substituting was to facilitate industrial growth in a country by promoting new industries (substituting imports) contributing to a general increase in the industrial sector’s growth rate and therefore the economy as a whole (Trejo, 1973: 152).