posted December 27, 2009
Applications of Ideology in Economic Policy

‘Freedom of speech’ implies the presence of both speaker as well as that which is spoken. That is, both a subject and an object.

In discussing freedom of speech it is common practice to focus primarily on the rights of the subject, the speaker. Interference with the speaker’s right to communicate is an act infringing upon the speaker’s freedom to speak. But what about the object of speech? What about that which is spoken? May there not also occur interference with regard to the object of speech—i.e. the idea, thought, communication itself? Is it not possible to consider interference and infringement in relation to object as well as subject?

Interference with the subject’s right to speak freely obviously represents a distortion of ideas, as the speaker is not allowed to otherwise fully articulate and present his thought or idea. The distortion may be complete, if the speaker is totally prohibited from speaking; or distortion may be partial if the speaker is cut short in the process or otherwise forced to express views less than fully intended. In either case, the speaker is prevented from a full presentation of ideas.

But once ideas are presented (i.e spoken, written or otherwise communicated into a public arena) their very nature is to be re-presented by others as further discussion and communication of the initial idea naturally takes place. Representation in this sense might thus be considered a ‘copy’ of the original presentation. As a copy, it is consequently potentially subject to acts of mis-re-presentation. Free speech may be thus interfered with, infringed upon, by misrepresentation of the object of speech in the process of copying or representing that which has been spoken or written—no less so than via interference with the speaker, the subject, in the original act of presentation.

Misrepresentation may occur due to subjective error—i.e. due to poor information, ignorance of facts, inability to adequately reason, personal prejudice and bias, faulty logic, and a host of other causes. On the other hand, in some cases misrepresentation is intentional, carried out consciously and purposely. It is the latter form of misrepresentation with which this article is particularly interested.

The meaning of Ideology may be understood from several perspectives. One such perspective involves the relationships between the three related concepts: original presentation of an idea, the copying or representation of that idea, and the distorted copying or misrepresentation of the idea. Ideology is thus the interference with and distortion of freedom of speech through the medium or object of that speech.

The focus of this article is on how an idea may be misrepresented over time such that original meanings becomes fundamentally changed. The focus is not so much on the institutions or social groupings behind misrepresentation techniques but rather on the techniques themselves that are used to misrepresent an idea, i.e. to change elements of its fundamental meaning and evolve that meaning into something quite different and perhaps even opposite its originally intended meaning? Focus is therefore largely on the processes by which the structures and content of ideas are changed; on the alteration of concepts, definitions, propositions, and other elements.

The approach to the preceding focus is not abstract but rather historical. The content will be a case example that has played a major role in the history and evolution of economic policy. The case example is the well known statement: ‘Tax Cuts Create Jobs’. The method or approach taken my be similarly applied to other examples of ideology in economic policy ‘Free Trade Benefits All’, ‘Income Inequality is a Function of One’s Personal Productivity, and ‘Markets Are Always More Efficient Than Public Investment’. But first two preliminary comments.

First Commentary: Marx on Ideology

The methodology for approaching ideology in economic policy embraces, at least in part, Marx’s notion of Ideology. While many theories and approaches to explaining the meaning of Ideology have arisen over the past two centuries, Marx’s approach—though limited in certain respects—nonetheless provides the best foundation from which to begin to extend and deepen the understanding of the meaning of the term and its applications.

Marx’s perspective on the meaning of ideology exists as a thread across his various works, beginning at least as early as his 1845 Theses on Feuerbach, through his The German Ideology published in 1848, the 1859 Critique of Political Economy, vol. 1 of Capital, and his extensive correspondence. For Marx, Ideology comes in different forms—morality, religious, philosophy, metaphysics, etc. There are common elements throughout all the forms, but nuances and differences as well.

For example, Marx distinguished religious forms of Ideology from other forms. In religion, ideas are purely speculative; that is, are made up with no basis in material fact. Religion creates a false presentation of reality. But there are other forms of Ideology in which reality and material fact are instead simply misrepresented. These forms are not pure speculative thought. They are forms based upon some foundation in fact. It’s just that material fact is distorted, obfuscated, or by other means misrepresented. As Marx says early on in the Theses on Feuerbach, “Ideology amounts either to a distorted conception…or to a complete abstraction?.

The latter form of Ideology in the sense of a distortion of reality—in contrast to total fictional recreation of reality—is at the heart of the meaning of Marx’s metaphor in The German Ideology, in which he points out Ideology reflects reality “upside down as in a camera obscure?…?as in the inversion of objects in the retina?. Thus we have at least two (or more) possible general forms: Ideology as pure speculative thought, i.e. that which is made up, that which presents something that is not real; and Ideology as misrepresentation that distorts that which is real.

For example, an extremist fundamentalist minister/priest may declare the world is coming to an end next Tuesday, and lead his flock to the shore to watch the final sunset and await their inevitable ascent of all the chosen into heaven. That is Ideology. But of a form different from an economist who declares that lowering workers’ wages is the way to ensure the creation of jobs and a recovery from Depression. The first is a presentation of nothing; the second a misrepresentation of something. Both are illusions. But the process by which they are constructed may be different.

Both forms of illusion have their respective agents (e.g. priest and economist). For Marx, Ideology always has its agents, behind which lay institutions, both of which are enabled by the division of labor in society. It follows therefore that Ideology, for Marx, is always intentional and not accidental. Ideology is not simply a mistaken theory. It is a conscious act in falsely creating or misrepresenting reality. Agents and institutions are provided financial and other support by third party sources outside the institutions that enable them to carry on their work of ideological creation. The outside sources may be, and often are, class based interests. But not always and everywhere. Nonetheless the nexus of agent-institutional-class is central to Marx’s notion of Ideology. But that nexus addresses questions of ‘who, when, where, why’ of Ideology rather than the ‘how’ of Ideology production. The ‘how’ is about the process through which ideas originate and evolve to distort, obfuscate, or otherwise misrepresent reality. And that ‘how’ is largely about the ways and methods by which language is manipulated, changed, or employed to misrepresent reality.

For Marx, therefore, language also plays a critical role in ideology. As he put it, “language is as old as consciousness…is practical consciousness?. He acknowledged that Ideology is expressed through language. But Marx never deeply addressed the processes, techniques, and methods by which ideas, at the level of language, might originate, evolve, and perhaps develop ideologically—as opposed to scientifically—over time.

Which raises another important aspect of Marx’s view: the relationship of Science to Ideology. For Marx, Science stands in opposition to Ideology. “Where speculation ends in real life, there real positive science begins?. Science represents a true approximation of the material world, whereas Ideology either misrepresents the material world or else creates a fictitious world falsely claiming to be real. The material world is ‘revealed’ by science; but ‘concealed’ by Ideology.

As a final note on Marx’s view, central to his notion of Ideology is that it is deeply embedded in the very nature of social relations in a society. Ideology functions at all levels of society; that is, in political, legal, cultural or other social relations—as well as at the very core of economic relations of production and exchange. But as our two examples contrasting religious and economic ideology suggest, there may be differences concerning how Ideology originates and functions at the level of cultural relations compared to the level of direct economic relations. The techniques, processes and methods of manipulation of language may be different.

Along with not analyzing deeply how Ideology works at the level of language, what Marx also didn’t explore in depth was how Ideology might evolve and operate differently within different areas of social relations. There of course are commonalities how Ideology operates at all levels of social relations in general. But as the periphery of social relations evolve over time around their fundamental, more or less constant core, might not applications of ideology change over time in order to continue to effectively misrepresent those social relations as they change as well? This may also be where the language itself plays a critical role in assisting a deeper understanding of the nature of Ideological thought.

Second Commentary: Wittgenstein ‘Language Games’

In an attempt to explore in that very direction, the following article also draws from the philosopher, Ludwig Wittgenstein, and some ideas he developed to better understand how ideas are structured and how those structures and their content may change.

What follows may therefore be considered an initial effort to meld Marx’s highly fluid conception of Ideology, with its focus on the relationship between ideas and social relations, and in particular class social relationships, with Wittgenstein’s approach exploring the role of language itself might play in idea transformation. Where Marx doesn’t go, Wittgenstein begins to explore. Wittgenstein’s consideration of how elements of language may be manipulated to change initial meanings, at times almost imperceptibly, holds particular potential for an extension of the Marxist notion of Ideology.

Marx distinguished between ideas that are derived from applications of scientific method and ideas that are not. The latter originate differently than from acts of scientific discovery. While Science observes nature and discovers meaning, not all ideas originate from scientific observation. Marx understood that ideas may originate scientifically, but might be transformed and become more ideological (and thus less scientific) in character over time. However, he did not follow up with how that transformation might occur.

Wittgenstein recognized that some ideas are by nature metaphysical (i.e. fundamentally non-scientific). The meanings of metaphysical ideas do not flow from discovery, but are inputed, or assigned, by society at a given stage of development. For example, we do not ‘discover’ justice in the natural world; but all societies do ‘impute’ a particular meaning to justice—often reflecting class relations at a given time and place. This need not mean that class based notions of Justice are necessarily mystical in the Marxist sense. Not all non-scientific ideas are mystical per se. True science and mysticism lie at opposite poles of idea formation. True science is never ideological; mysticism almost always so. But between may lay a wide spectrum of ideas that are neither purely scientific nor mystical. That realm may occupy the space in which science and ideology contest.

On the other hand, imputed ideas are more typically a direct reflection of prevailing social relations. Imputed ideas are thus more susceptible than scientific ideas to ideological drift. Imputed ideas may also penetrate scientific ideas, giving the latter an ideological character as well, thus raising in turn questions about fundamental relationships between science and ideology. Wittgenstein is concerned with both sources of origin of ideas, scientific and metaphysical. There are ‘families of ideas’, with ‘family resemblances’, that allow them to become conducive to overlapping and thus fluctuation in meaning. Ideas are by nature structurally fluid. This fluidity and overlapping make for ease of ideological transformation, whether metaphysical or scientific ideas, through the use of various language techniques, methods, and devices.

Key to understanding Wittgenstein is the notion of ‘language games’. For Wittgenstein, the meaning of an idea is determined as a consequence of a social practice in which a linguistic community engages in a common language game. That language game collectively creates the meaning of an idea as well as its constant transformation over time. A language game is thus a decidedly social discourse for Wittgenstein. In the process of the language game, how an idea gets expressed influences the language game and the evolution of the meaning of an idea over time. There are certain techniques, or grammatical devices, by which an idea might be expressed differently by different participants in the language game.

Marx might add, while Wittgenstein ignores, how institutions (representing class interests) come to dominate the language game process and in effect come to achieve exceptional influence over the overall process. In so doing, representatives of those class interests in the language game process, ensconced in particular class-based institutions (e.g. today in think tanks, media, universities, etc.) come to manipulate the techniques employed in the process. Not all participants in the language game have equal influence over the process. But the process itself would not necessarily change. Nor the techniques of language change used in the process.

Wittgenstein thus asks how ideas change at the level of language. Marx asks why ideas change, in whose interests, and by whom. Wittgenstein focuses on methods and techniques. Marx on institutions, classes, and their agents. Both make essential, though partial, contributions to how and why ideas change over time and in the process may take on a more ideological character.

Some Initial Working Definitions

As a first approximation to developing a methodology for integrating the contributions of both Marx and Wittgenstein on Ideology, the following techniques of idea transformation are noted. It should be understood that this is clearly an insufficient first effort. Further development of how the following concepts might be integrated into a subsequent Marx-Wittgenstein approach to understanding how ideas change over time, and are in effect ideologically transformed from original meaning, is still required.

INVERSION: Inverting the basic relationships, and rearranging the structure, between primary and secondary elements and propositions contained within an idea.

REVERSAL: Changing the direction of a cause-effect relationship between basic propositions within an idea.

INSERTION: Introducing foreign and often contradictory elements or propositions into an original idea and in the process fundamentally redefining it. The ‘inserted’ may be an element originally ‘invented’ or taken pre-existing from another idea.

CONVERSION: Declaring and interpreting correlations as cause-effect relationships.

DELETION: Decontesting or removing altogether previously critical elements or propositions from the original idea.

SUBSTITUTION: Deleting and then inserting a fundamentally new elements or propositions. Merging two previously contradictory ideas into something new.

DE-TEMPORIZATION: Eliminating dynamic elements from an idea, creating a sense the idea is forever fixed and timeless, de-historicizing the idea

UNIVERSALIZATION: Redefining the particular as the general, the partial as the whole, the temporary as the permanent. An exception to the rule becomes the new rule.

These techniques are by no means exhaustive of devices employed at the level of language to change the meaning of an idea. And, of course, they all require further elaboration at some point as well.

Case Example: Tax Cuts Create Jobs

But at this point it is necessary to move to the next stage and consider how the above techniques are applied in a specific case. The case in question is the often-expressed economic policy idea, ‘tax cuts create jobs’.

In his first term in office, George W. Bush passed a series of tax cuts each year from 2001 to 2004. Each bill was labeled an economic growth and ‘jobs creation bill’. In 2001 it was called the ‘Economic Growth and Tax Relief Act’. In 2002, the ‘Job Creation and Worker Assistance Act’. In 2003, the ‘Jobs and Growth Tax Relief Act’. In 2004, the ‘American Jobs Creation Act’. In actual fact, however, the tax cuts were overwhelming cuts in capital gains, dividends, inheritance, and other personal capital incomes. More importantly, as it turned out they had very little to do with stimulating economic growth and virtually nothing to do with creating jobs.

The Brookings Institute Tax Policy Center, a center-liberal think tank, estimated just the first three tax cuts, 2001-2003, amounted to $3.4 trillion—80% of which went to the wealthiest 20% households, and in turn 40% of which, or half the 80%, to the wealthiest 1% households.
(1) And that $3.4 trillion did not count the 2004 tax cuts and a major corporate-only tax cut bill in 2004. Together, the four years witnessed more than $5 trillion in tax cuts to wealthy individuals and corporations. Should the tax cuts be allowed to continue after 2012, the total value of the tax reduction was $11.6 trillion, according to some estimates. (2)

By the first decade of the 21st century the claim that ‘tax cuts create jobs’ was essentially a claim that cutting taxes on wealthy capital incomes creates jobs. Yet the jobs creation record from 2001 to 2009 is equally clear that, despite the massive tax cuts for wealthy individuals and corporations, job creation was one of the weakest on record. (3)

Following the 2001 recession and the beginning of the loss of jobs in the first quarter of that year, job losses continued to rise. Jobs continued a steady decline for two and a half years thereafter, well into mid-2003. Jobs creation was weak and intermittent, barely rising in some months and falling in others. It took no less than 48 months to return to a level of jobs in the US economy that existed on the eve of the start of the recession in 2001. (4) Not much of a ‘jobs creation’ given the passage of $3.4-$5 trillion in cuts. When a net increase in jobs finally begin to occur in 2004-06 it was associated with the false boom in housing construction, with the hiring of large numbers of temporary and part time employees, and with hiring mostly by small businesses. Even that historically weak job recovery of 2004-06 began to reverse course once again in late 2006 with the beginning of the downturn of the housing sector and construction jobs. The rate of job loss began to spread to other sectors of the economy by late 2007, with the onset of the current deep recession that officially began in November-December 2007. Job losses then accelerated even more rapidly after October 2008 with the onset of mass layoffs in the last quarter of 2008, which have continued into 2009.

In short, the four consecutive so-called ‘Jobs Creation’ bills passed between 2001-2004 produced one of the briefest and weakest recovery of jobs on record in US economic history. $5 trillion plus in tax cuts for wealthy individuals and corporations yielded few jobs. The claim that tax cuts create jobs was clearly not supported by the historical record—at least so far as the past eight years in the US is concerned.

How then did the idea that ‘tax cuts create jobs’ become such a strongly embedded policy by the first decade of the 21st century? To understand the answer to that question more clearly it is necessary to trace the evolution of the idea, from the earliest periods of economic thought and the initial associations between taxes, on the one hand, and jobs on the other.

Classical Economists on Taxes and Jobs

Earliest discussions on the relationship between taxes and classes arose in the 17th century. Land speculator and sometime economist, Sir William Petty, was perhaps among the first to discuss tax policy’s income distribution effects. He argued on behalf of the landowner class, of which he was one, having himself stolen vast tracts of land as Cromwell’s chief surveyor in Ireland. Petty was concerned that taxation for financing military adventures at the time was focused almost entirely on landowners. He therefore undertook a detailed statistical analysis showing how producers—entrepreneurs and workers—created as much wealth as landowners but were virtually untaxed. Thus the idea of tax cuts on behalf of and benefiting the dominant class, and policy designed to shift tax burdens to other classes, was raised for the first time systematically in economic thought. (5)

(1) Brookings Institute, Tax Policy Center, June 3, 2003; William Gale and Peter Orszag, Tax Notes, September 27, 2004; Jason Furman, “The Effects of the 2001-06 Tax Cuts on After Tax Income?, Testimony to U.S. House, September 6, 2007.
(2) Brookings Institute, June 3, 2003
(3) Economic Policy Institute (EPI) Jobs Picture, January 4, 2008
(4) EPI, Jobs Picture, February 4, 2005; L. Mishel, “The Worst Downturn Since the Great Depression?, EPI, June 2, 2009
(5) Sir William Petty, A Treatise of Taxes and Contributions, 1664, as summarized in Antoin Murphy, The Genesis of Macroeconomics, Oxford, 2009, pp. 21-40.

In the high period of classical economics nearly a century later, in the mid-1700s, the two most notable economists of the time, David Hume and Adam Smith, proposed an explanation of the relationship between taxes and job creation that was quite different from that of today.

Hume argued that tax increases on capitalists resulted in an increase in effort on the part of capitalists, calling forth more ingenuity and enterprise on their part. That in turn resulted in more capital accumulation (i.e. investment in modern terms) and consequently more hiring of labor as well—i.e. jobs. Thus higher—not lower—taxes on business actually served to create jobs. (6) An idea the opposite of that held among contemporary economists, government policymakers, and business lobbyists. Today the causal relationship is reversed: high taxes, it is argued, reduce investment and jobs.

Hume’s view was echoed strongly by Adam Smith, who knew Hume personally and borrowed much from him. Similar to Hume, Smith argued tax increases stimulated capitalists to invest more, to seek a further division of labor, in order to offset the cost of tax increases and protect profits. In place of Hume’s more vague concepts of ‘effort, ingenuity and enterprise’, Smith expressed the positive effects of certain tax hikes on the division of labor. Moderate tax hikes resulted in efforts by capitalists to offset costs by stimulating the division of labor, which led in turn to greater productivity and a greater subsequent demand for, and hiring of, labor. Taxes on profits of certain industries could also lead to a ‘profits equalization mechanism’ that would increase competition and therefore general output and employment. (7) This was all a far cry from contemporary economic theories that maintain tax hikes on business discourage productivity and thereby reduce the hiring of labor. Once again, a kind of ‘inversion’ of original elements and propositions of Hume and Smith defining the relationship between taxes and jobs.

Another line of thought concerning the relationship between taxes and jobs can be found in Thomas Malthus, who pioneered early notions of effective demand, underconsumption, and economic ‘gluts’, or downturns of business cycles. Malthus argued that an excess of savings by the wealthy (i.e. capitalists and landowners since workers lived on subsistence wages at the time and saved nothing) resulted in an accumulated excess of savings in relation to investment. It was this imbalance that caused the gluts, i.e. depressions, and major job loss. Tax cuts on the wealthy only served to increase incomes of the wealthy and worsen savings imbalances. In other words, tax cuts on the wealthy resulted in job loss not job gains. (8)


(6) David Hume, Economic Writings, in D. P. O’Brien, The Classical Economists Revisited, Princeton, 2004, p 291.
(7) Adam Smith, The Wealth of Nations, Book V, Chapter II, “Of Taxes?.
(8) Thomas Malthus, Principles of Political Economy, Book II, pp. 398-413.

Malthus observed yet a second negative effect. Tax cuts sometime resulted in a decline of demand (i.e. consumption) that led to even further investment reduction and still more job loss, in a continuing downward cycle. This view of Malthus was all quite the opposite of economic views of recent decades that maintain tax cuts for the wealthy are necessary to increase savings, which will in turn is required to boost investment and jobs.

David Ricardo, contemporary of Malthus, expanded on the latter’s view. Ricardo argued tax cuts that increased savings led to a fall in what he called the ‘marginal productivity of capital’. Declines in the marginal productivity of capital in turn depressed investment, choking off the process of capital accumulation and subsequent employment that accompanied capital accumulation. (9)

Malthus proposed yet another interesting proposition concerning the relationship between taxes and jobs. He briefly argued (but did not follow up on) the proposition that tax cuts cause a maldistribution of income (i.e. widening income inequality gap). Maldistribution and income inequality fueled speculation and inflation. Speculation was investment that did not result in the production of real goods and services and thus did not produce jobs. Tax cuts might therefore divert largely to non-job creating speculative investment.

In arguing tax cuts create jobs today, economists and policymakers totally ignore the possibility that tax cuts on the wealthy might result in greater income inequality, feed speculative investment, and produce less real capital accumulation and therefore create fewer jobs. Malthus’s proposition about the possible relationship between tax cuts, speculative investing booms, and jobs is today largely deleted from theory and policy discussions on the relationship between taxes and jobs.

What the various views of classical economists illustrate is that they conceived of the impact of taxes both on supply (investment) and demand (consumption) but more so on supply-investment than demand-consumption. More specifically, tax hikes stimulated supply and thus jobs, while tax cuts could very well lead to an excess savings and speculative activity—both of which served to inhibit job creation.

A classical economist who stands in contradiction to all the foregoing classicalists from Petty to Ricardo-Malthus and beyond was Jean Baptiste Say. Unlike Smith and Hume, Say simply ignored the impact of tax hikes on supply and investment. He argued there could never be an imbalance between supply and investment. They were one and the same and quantitatively equivalent. He took a contrary view as well with regard to the relation between taxes and demand-consumption, maintaining tax increases reduced demand and lowered production and jobs. (10) J.B. Say would serve as a convenient source for later, neoclassical economists in the 20th century who set out to change even further the fundamental idea of the relationship between taxes and jobs.
(9) D. P. O’Brien, Classical Economists Revisited, p. 276.
(10) O’Brien, p. 276.
The point is, with the exception of Say, all the above basic propositions expressed by various classical economists about the relationships between taxes and jobs were fundamentally changed by the 21st century. Various language techniques were employed over the next two centuries, from the early 1800s, to effect the changes. There was, as previously noted, the use of the ‘reversal’ technique—that is of the original cause-effect relationships were reversed: Tax hikes don’t stimulate supply but inhibit supply. Tax cuts for the wealthy don’t create an imbalance of savings, excess speculation, ineffective demand and job loss but actually stimulate demand and create jobs.

Fundamental propositions are not only reversed (in terms of cause and effect) but are ‘inverted’ as well. Inversion is similar to reversal, but without a cause and effect. Two key elements or propositions within an idea are inverted in terms of which is primary and which secondary. (The technique of inversion, by the way, is similar to what Marx meant when he described ideology as if seeing as if in ‘a camera obscura’).

The technique of ‘deletion’ is also at work here. The role of income and speculation drops out altogether in the case of Say. No longer plays a role. No longer exists. In fact, there are no causal relations whatsoever. There is now just an identity, what came. to be known as ‘Say’s Law’. Savings (supply) and Investment (demand) are one and the same,
always equal, in balance. There can thus be no ‘gluts’, no depression or economic decline, no business cycle, and consequently no job loss.

The Neoclassical Transformation

By the mid-19th century classical economics had run its course in terms of innovated idea creation. Concepts and tools developed over the prior century had taken the analysis of economic conditions as far as possible. New concepts, tools, and analyses were necessary for a better understanding of economic reality. Marx took the development in one direction, focusing on the labor theory of value, new ideas about the nature of money, and a new set of conceptual tools explaining why the capitalist economic system tended toward stagnation and crisis. In contrast, drawing on Say’s work and other subjectivist approaches to economics, others took economic analysis in an entirely different direction—a Neoclassical one. Key elements and propositions of economic ideas formulated by Classical economics were fundamentally changed in the process, using many of the language level techniques and methods noted previously.

The Neoclassicalists heartily embraced Say’s Law and its axiom that there could be no long term economic ‘glut’, stagnation of capital accumulation, and thus job loss. Unemployment was a temporary problem in the short run, and not a problem in the longer run. Hence, no unemployment meant no need to create jobs, not by tax cuts or other means. Smith’s notion of tax hikes stimulating investment and jobs was thus deleted and disappeared altogether; as was Malthus’s notion that tax cuts could lead to income imbalances between classes, speculative excesses, inflation, and a resultant slowdown in real investment and loss of jobs.

Neoclassical analysis employed an ‘inversion’ technique with regard to the relationship between taxes and jobs. Unlike in Smith and others, the Neoclassical view was that tax hikes caused costs to rise and investment therefore to decline, resulting eventually in job loss; conversely, tax cuts meant costs fell and therefore investment and jobs rose. In other words, Smith’s view was now inverted. In addition, Supply was now the sole medium through which tax changes impacted investment and jobs. Gone altogether was any consideration of the relationship between tax changes, Demand, and jobs. The focus on Supply meant that only business tax cuts stimulated investment and jobs.

Another important characteristic of Neoclassical analysis was all this now occurred in a timeless environment. Neoclassical analysis is a ‘frozen screen’, snapshot view of the economy. There is no evolution of relationships among variables. It is static, not dynamic. It is also a-historical (and classless). Relationships are thus de-temporized. Tax cuts consequently always result in increased investment and in turn employment.

Keynes’s Challenge and Eventual Defeat

Keynes’s views, summarized in his work, The General Theory, in 1935 challenged head on Neoclassical economics and its main propositions with regard to tax cuts, investment, and employment. Keynes argued that a collapse of investment is what caused Depressions and massive job loss. But the recovery in his view was not business tax cuts to create jobs once again, but demand side consumption stimulus, in particular direct government spending. Tax cuts were only of secondary and lesser importance. Moreover, should tax cuts be part of a stimulus fiscal spending package, the cuts should be consumer focused and not business focused. To Keynes, supply side solutions were viewed as generally ineffective, and supply side tax cuts especially so.

With Keynes, taxes were not strongly correlated, either positively or negatively, with job creation—at least not in Depression periods. Job creation is primarily the result of government spending, and spending designed to stimulate consumption rather than business investment. Like Malthus, Keynes also viewed income inequality and income and wealth imbalances as playing a significant role in causing Depressions and unemployment. There was an implied nexus involving income inequality, speculative investment, and unemployment. But this too Keynes did not follow up on.

Upon his death toward the end of the Second World War, Keynes’s original views on taxes, investment and jobs underwent a major revision. Those who followed undertook a major selective restatement of his views and theory, most notable Sir John Hicks in the UK and Alvin Hansen at Harvard, as well as their numerous associated epigones. The selective revisions of Keynes by the new postwar Keynesian-Neoclassical synthesis actually began in the late 1930s. Entire sections of Keynes’ work were effectively ignored by the new generation of postwar ‘Keynesians’. That is, ‘deleted’ from consideration and substituted with contrary propositions and idea elements that were fundamentally propositions of Neoclassical economics that Keynes previously directly attacked. Anti-Keynesian notions, adapted from Neoclassical economics, were integrated into his work while other elements of his, Keynes’, analysis were simultaneously deleted. At the language level, transformation techniques of ‘deletion’, ‘insertion’ and ‘substitution’ in particular were frequently employed to achieve the synthesis in question.

As a consequence of the postwar Keynes-Neoclassical synthesis, business tax cuts found their way found their way once again into the policy applications process in the 1950s and early 1960s. A notable new development was the introduction of the Investment Tax Credit (ITC) during the Kennedy administration in the early 1960s. The ITC allowed businesses to claim a 7%, and then 10%, tax credit for investing in new plant and equipment. The pre-1930s Neoclassical focus on Supply Side was thus revived once again. Other forms of business tax cuts were also expanded at the time in the early 1970s, including faster depreciation write-offs on business equipment and other forms of business tax cuts. Worth noting, however, is that investment tax credits could not be claimed by a business unless it showed it actually created new jobs. There was thus a verification link. This link would soon be stripped from the tax cut formula, however.

The link between the tax credit and verified job creation was broken in the 1970s by then President Richard Nixon. The ITC was revised. Companies could now claim the tax credit without actually having to prove jobs were created in order to get it. On the other hand, the tax cuts creates jobs was an idea still limited to direct business-corporation tax cuts like the ITC. There was not yet any expansion of the fundamental idea that tax cuts for wealthy individuals also directly resulted in jobs. But this too was destined to change by the end of the 1970s.

In the closing years of that decade the idea that tax cuts created jobs became universalized. The Universalization technique takes a partially applicable idea and turns it into a general one—i.e. applicable no longer in any limited sense nor operative only under specific conditions or in particular cases, but applicable and operative in all instances and places at all times.

Supply Side Ideology

By the late 1970s the work of ideological transformation with regard to the idea that tax cuts create jobs moved out from purely academia to the periphery between it and the many new business financed think tanks that were created in the 1970s. Leading theorists and ideologists of the new taxes create jobs approach were figures like Jude Wanniski, George Gilder, and Arthur Laffer. They expanded on the idea. They invented and added (‘inserted’?) a new proposition that tax cuts boosting the income and savings of wealthy individuals and investors also translated directly into stimulating investment and jobs. Their views found a policy home in Congressional legislation proposals by the late 1970s and early 1980s, most notably in the form of the Kemp-Roth tax cut legislative proposals. A new, expanded version of Supply Side tax theory-policy was thus launched.

Wanniski-Laffer and Kemp-Roth argued that if top marginal personal income tax rates were lowered, investment and job creation directly resulted. By giving more money back to individuals in the top personal income brackets, it was maintained, the wealthy investors would boost their savings. That in turn meant a boost to investment, expanded production capacity, and jobs accompanying that expansion. Now not only direct business tax cuts, like the ITC and depreciation, but individual capital incomes tax cuts (i.e. capital gains, dividends, inheritance taxes, etc.) led to a direct increase in jobs.

President Ronald Reagan took up the revised idea and legislative proposals and introduced a massive $752 billion tax cut at the outset of his first term, 1980-1984. Today that $752 billion in current dollars would be equivalent to several $ trillions.
Significantly, more than two-thirds of the $752 billion were earmarked for accrual to wealthy individuals, investors, and corporations.

The empirical data on jobs creation at the time, 1980-1984, showed the most severe recession since the 1930s having occurred in 1982, with the unemployment rate rising to more than 10%. Job growth thereafter throughout the first half of the decade was particularly weak by historical standards and comparison with previous decades. Tax cuts were massive, but jobs creation quite weak. In fact, Reagan tax cut legislation provided incentives for business to relocate abroad and thus actually eliminate jobs by the millions in the US. Nevertheless, the idea became embedded in the media and public that somehow all forms of tax cuts on business as well as now personal capital incomes results in job creation.

Beginning in 2001, George W. Bush immediately took up Reagan tax cut policies. Each year for four consecutive years legislation describing tax cuts for jobs was proposed and was passed providing, as noted previously, approximately $5 trillion in cumulative tax cuts with up to 80% of that total accruing to businesses and wealthy individuals. Now the idea was fully universalized: any kind of tax cut that added to the savings and income of wealthy investors, individuals, and corporations by definition resulted in jobs. Never mind the absence of even any correlation between the two key variables in the idea, ‘tax cuts create jobs’. Forget the quite contrary interpretations expressed by even the ‘heroes’ of the economics profession, like Adam Smith and Keynes. The ideological transformation was now largely complete.

The ideological transformation of the idea, ‘Tax Cuts Create Jobs,’ has parallels with other economic policy ideas. Candidates for a similar analysis of idea transformation might be the obvious and oft-quoted ideological propositions: ‘Free Trade Benefits All’, ‘Income Inequality is a Function of One’s Personal Productivity’, and ‘Markets Are Always More Efficient Than Public Investment’. Undertaking an analysis of these latter ideas employing an approach integrating Marx and Wittgenstein and applying the techniques of idea transformation noted above, might reveal further interesting details about how such ideas assumed ideological elements over time. As in the case of ‘Tax
Cuts Create Jobs’, a similar examination of the latter might reveal similar manipulation of the ‘language game’ and reveal more about the process of transformation of ideas by means of various techniques, methods, and grammatical devices at the level of language.

Jack Rasmus, July 15, 2009

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