Oil as the Foundation of Keynesian Political Economy

I recently read a paper by George Caffentzis, titled “A Discourse on Prophetic Method: Oil Crises and Political Economy, Past and Future.”  It was a fascinating read, and argued that oil prices–and consequently, the class struggles around oil production–are intimately tied to the dynamics of capitalism as a whole.  There were some gaps in logic, as well as some obvious omissions, but for the most part the essay persuasively conveyed the dependence of Keynesian political economy on a particular type of global oil regime–specifically, one that relied on imperialism.

First, one has to understand what Keynesianism actually is–especially through a Marxist (or at least, a semi-Marxist) analysis.  Caffentzis defines Keynesianism along two major lines:

  1. The recognition that labor is not simply a mindless commodity, but an autonomous entity, both “an antagonist and a motor of capitalist development.”  While Labor was crucial to capitalism, it could also overthrow it, and thus pacifying measures must be undertaken to prevent a repeat of the Russian Revolution on American soil.
  2. The perception that economic growth in consumer capitalism is dependent on the increasing purchasing power of the working class.  This perception manifested in a type of “compromise” between Labor and Capital, in that wages would increase proportionally with increased productivity.  Thus, the State became the moderator of this deal.

It’s not a bad state of affairs (compared to the usual capitalist affair, and if one only looks at the compromise from the standpoint of Western society).  Both the workers and the capitalists get a “guarantee” of increased income and standard of living as long as the deal holds out.

But as Caffentzis argues, there is a hidden dependency of energy in Keynesian political economy.  Since the compromise is built on “increased productivity, increased wages”, development must focus on automation and mechanization.  This tactic, in turn, requires an ever-increasing amount of energy–lots of it, at a relatively cheap price.  And in order to guarantee this type of price stability, there had to be some degree of control over global oil production.

Thus, from 1945 to the 1973, global oil markets were dominated by the Western cartel of the “Seven Sisters,” which consisted primarily of US and UK multinational oil corporations.  This cartel managed to keep the price of oil at roughly $20/bbl, in 2008 dollars, for the entirety of their–and Keynesianism’s–dominance.  Of course, this price stability was largely due to the imbalance of power between the working class of the Global South and the multinationals who exploited their resources, as well as the support of Southern dictatorships by Western capitalist nations.  Two of the clearest examples of this were the 1953 coup against Iran, which was attempting to nationalize its oil resources, and the 1945 deal between Roosevelt and Kind Saud of Saudi Arabia, which ensured US military support against any threat to the throne (which came to fruition during the first Gulf War).

Thus, the importance of the aforementioned oil regime is revealed.  Cheap oil, extracted by the proletariat of the Global South and sold at obscenely low prices to the monospony of the Seven Sisters, is the foundation on which Keynesian political economy lies.

But this relative peace in the North did not–and could not–last.  In the late ’60s and early ’70s, the building reaction against the domination of Western multinationals culminated in a wave of nationalizations of a number of oil industries in the developing world, the creation of the Organization of the Petroleum Exporting Countries (OPEC), and the 1973 oil crisis.  Suddenly, cheap oil was no longer a guarantee, and thus, neither was the ease of increased automation.  Keynesianism promptly fell apart.  As Caffentzis writes:

OPEC presented itself as the first commodity trading organization that would realize the dreams of the International Economic Order and reverse the injustices of centuries of colonialism and imperialism.  This vision, however, was translated at the other pole of the Keynesian world as a wage nightmare.  Unemployment, abandoned factories, austerity budgets, welfare cuts, the prison-industrial complex, began to take shape in the recessions of the mid and late 1970s.

Thus, despite the fact that the economic crisis was a crisis for the system as a whole, and not just the working class, the flexibility of Capital meant that workers took the brunt of the economic trauma.  Since automation was no longer a reliable source of profit, wage repression had to once again become the primary method of capital accumulation.  Thus, the Keynesian compromise was torn apart, as businesses consolidated as a class (via institutions like the Chamber of Commerce), factories began getting outsourced, and the gap in working class demand was supplemented with the expansion of the credit markets.  Out of the ashes of Keynesianism, burned down by the revolt of the Southern nations, neo-liberalism was born.

Of course, this re-composition of capitalism was not restricted to the West.  As Caffentzis continues, even the silver lining that perhaps the populations with the newly nationalized oil industries  might have a chance at self-development from the increased oil rents was destroyed–and simultaneously re-affirmed capitalism’s dominance on the world stage.

What could have meant a major crisis for capitalism, however, became a pretext for cutting the wages of workers in Western Europe and North America, while creating an investment flow (then called “petrodollars”) that was used to make loans to formerly colonized countries (imposing a flexible interest rate that the sub-prime mortgage crisis was to emulate in the early twenty-first century) that in the 1980s forced them to near bankruptcy and then, under the pressure of the World Bank and IMF, to neo-liberalize their economies.

Even the most polemical anti-capitalist should be in awe at this brilliant economic jiu-jitsu!

Of course, the most important question is why the international working class was so easily split apart during the crisis.  It is obviously difficult to blame the South for wanting to receive a (relatively) fair share of the oil profits, especially when rabid exploitation of their resources had happened so long, and had given the Western nations such a leg up in terms of industrialization, development, and standards of living.  It is less difficult to criticize these governments for succumbing to the pressure of global capitalist institutions like the IMF and imposing austerity and privatization on their constituents.  I have a bit more confidence in analyzing the nature of the American Left at the time, in that there was a great deal of energy behind the reaction to the various progressive victories of the time (notably, the Civil Rights Movement)–enough to throw working class organizations into disarray (especially given the economic crisis), and all the more ready to accept right-wing tales of how the greedy Arabs ruined the economy.

I’m feeling lazy, so I’m not going to continue into Caffentzis’ analysis of the relationship between neoliberalism and oil.  But there certainly seems to be a dependency, albeit one that is even more shrouded than the relationship was during the reign of Keynes.  Despite the intense financialization the global economy underwent during the last few decades of neo-liberalism, there still remains a foundation on the physical economy, and on actual production; thus, it is no surprise that the last decade of recession and crisis corresponded with the highest oil prices in history.  And since these prices will probably not drop below $80/bbl, the crisis today has a lot of similarities with the crisis of the ’70s–as well as important differences (namely, that the crisis of the ’70s was one of stability and control, rather than permanently high price).

But regardless of the roots of the crisis, the fact remains that there is indeed a crisis; the objective now is to ensure that the mistakes of the ’70s–when the crisis of capitalism was inverted into a crisis for the working class–are not repeated.  The next few years could see a wave of communization and collectivization of important economic resources–or it could see the emergence of an even more vicious form of neo-liberalism.  Only time will tell.

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2 Responses to Oil as the Foundation of Keynesian Political Economy

  1. pithom says:

    And since these prices will probably not drop below $80/bbl

    -Famous last words.


    • Arjun says:

      Haha, indeed…at this time, I was under the impression that the Saudis didn’t have as much excess capacity as they did. I also thought that if oil did drop below $80/bbl, that would be the result of supply from unconventional reserves in North America, which would promptly get curtailed, sending prices back up. So on the latter point, how North American oil deals with current low prices in the medium term remains to be seen…


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