A Marxist Guide to Capitalist Crises
“A Marxist Guide to Capitalist Crises,” an eBook created from the key posts on the Critique of Crisis Theory blog, is currently in production. We’ll be sharing the completed chapters between our regular postings.
Chapter 15: The Origins of Keynes’s Views
Keynesian economics represented a major retreat from economic liberalism by bourgeois political economy under the blows of the Depression of the 1930s. But what was the doctrine that Keynesian economics reacted against?
In the last few chapters, we examined the liberal doctrine of international trade, which is known by our present-day economists as the law of comparative advantage. The theory of comparative advantage, the quantity theory of money, and Say’s “law” of markets form the foundations of economic liberalism. Like many economic doctrines, economic liberalism has changed over time.
During its youth, which extends from the French Physiocrats and Adam Smith through David Ricardo, the economic liberals explained that surplus value originates in the sphere of production rather than in circulation. This overthrew the old doctrine held by the early economists, known as mercantilists, who believed that surplus value arises in the sphere of circulation. The first hints of labor value found in the work of such pre-liberal pioneers as the late 17th-century English economist William Petty were brought to the heights reached in the work of David Ricardo.
The law of labor value in its Ricardian form led straight to the conclusion that the incomes of the “propertied classes” — the capitalists and landlords — were produced by the unpaid labor of the working class. A series of pre-Marxist socialists, known as “Ricardian socialists,” based themselves on this idea.
Therefore, the whole concept that the value of commodities is determined by the quantity of labor it takes on average to produce them under the prevailing conditions of production had to go. Economic liberalism had lost its youthful innocence and was converted into a doctrine that aimed not so much at investigating the workings of the capitalist economy but rather at justifying capitalist class rule.
But what was to replace the Ricardian theory of value? The bourgeois economists could come up with nothing better than the concept that objects of utility have value because they are scarce relative to subjective human needs. As this idea was developed further and formalized mathematically during the last third of the 19th century, it morphed into what is known as “marginalism” or the “neoclassical school.” This is what is taught to university economics students today, especially in the field of modern bourgeois economics known as microeconomics.
The marginalist theory of value
The marginalists begin with the value of consumer goods. According to the marginalists, items of personal consumption have value because they are valued by consumers according to their degree of scarcity relative to the subjective human needs of the consumers. It is, therefore, scarcity that gives them economic value.
The fact that items of consumption are scarce implies that the means of producing them, what modern economists call the factors of production, are also scarce. The economists explain that the factors of production, such as land, defined as means of production provided by nature; capital, defined as factory buildings, machines, tools, raw materials, and so on; and human labor, are all scarce to varying degrees.
If the means of production were not scarce, the objects of consumption would not be scarce either, and nothing would have economic value. Therefore, each factor of production produces value according to its relative scarcity. As long as there is “free competition,” each factor of production — land represented by the landowners, capital represented by the owners of capital, and labor represented by the owners of labor — will receive incomes that correspond with the actual amount of value they produce.
According to the marginalists, as long as there is free competition, no factor of production can exploit another factor, at least not for very long. Suppose, for example, the workers get less value in wages than their labor produces. According to Marx, this must always be the case under capitalist production; otherwise, there would be no profit.
Not true, claim the marginalists. If the workers are producing more than they are receiving in wages, the capitalists will find it profitable to hire additional workers to take advantage of the situation. As a result, the demand for “labor” will go up, and so will wages. According to the marginalists, this will continue until the workers receive in wages the full value that their labor produces. Not a penny more, and not a penny less.
But where, then, does profit come from? The marginalists claim that free competition drives the economy towards an “equilibrium” position where profit disappears! At most, the capitalists will earn “interest.” Okay, but where does interest come from?
Interest, the marginalists explain, is produced by capital — just like rent is produced by land and wages are produced by labor — because capital is scarce. By abstaining from consuming their capital, the capitalists are providing a “productive service,” just like the workers do when they choose to labor for the reward of wages over “leisure.”
But the capitalists, being reasonable people, will not perform their productive “service” for free. Just as wages rise when labor grows “scarcer” and fall when labor becomes more plentiful, so “interest” — the capitalists’ reward for not squandering their capital on personal consumption — rises when capital is scarce and falls when capital is relatively plentiful.
Marginalist economic liberalism and the trade unions
Economic liberals, or neoliberals as they are now called, vehemently oppose trade unions because they claim unions are monopolies that prevent free competition in the labor market. At most, the economic liberals will concede that unions benefit some workers at the expense of other workers.
The cause of unemployment, according to the economic liberals, is not the capitalist class, as it is in reality, but rather the unions and any pro-labor legislation that the workers’ movement has forced capitalist governments to grant. The liberals — conservatives in the U.S. sense — hold that unemployment insurance, other forms of social insurance, minimum-wage laws, and unions are the real cause of chronic unemployment and the poverty it brings.
According to the economic liberals, because the unions keep the “price of labor” above the value created by unskilled labor, the less-experienced and less-skilled workers cannot find work. Since the unskilled cannot find work, they cannot improve their skills. This, according to liberal economists, is the vicious circle of poverty. The result is what modern neoliberal economists such as Milton Friedman call a high “natural rate of unemployment.”
What, then, is the solution to chronic unemployment and poverty proposed by the liberal economists? Why, of course, bust unions, eliminate unemployment insurance and other social insurance, and repeal all minimum wage laws. This will, the economic liberals promise, reduce the “natural rate of unemployment” to something approaching zero. The neoliberals promise that chronic unemployment and, with it, poverty will disappear.
From the late 19th century until the 1930s, these were the ideas that dominated the university economics departments.
In the closing decades of the 20th century, these were the theories and policies associated with Ronald Reagan and Britain’s Prime Minister Margaret Thatcher, who did their best to make these ideas again the basis of policy. Due to the resistance of the workers and their unions, Reagan and Thatcher were able to implement only a part of the neoliberal program.
The economic role of the state in liberal doctrine
The liberal doctrine of the state is sometimes called the doctrine of the “night watchman state.” The state should not, according to liberal doctrine, either engage in production itself or attempt to determine what is produced by private capitalists. Nor should it concern itself with the plight of the unemployed and destitute. That should be left to private charity, or as it is said today, “faith-based organizations.”
Assuming neither unions nor pro-labor legislation gets in the way, anybody who needs a job will always be able to find a job quickly. If they lack skills, the economic liberals argue, their wages will initially be low since their labor will create very little value. Unskilled labor is, after all, much less scarce than skilled labor.
But over time, they will become more skilled, and their wages will rise. Assuming there are no unions, minimum wage laws, and so on, only “frictional unemployment” — short-term unemployment of workers between jobs — and “voluntary unemployment” will exist.
The liberal theory of long-term unemployment
The long-term unemployed are choosing “leisure” over the wages they could earn, given their skills. If any of these long-term unemployed needed a job, they would always be able to find one, though perhaps initially at low wages corresponding to their lack of skills.
Therefore, the government should confine itself to enforcing laws that defend the “right to private property” and enforce contracts. The only legitimate function of the state, according to liberal doctrine, is, therefore, to serve as a police force.
The origins of economic liberalism
The rise of economic liberalism as an ideology coincided with the transition from early capitalist production, based on manufacture using artisan methods handed down from pre-capitalist times, to machine production with steam as the main motive power. This new stage of capitalism, which began to take hold in Britain in the latter part of the 18th century, is called industrial capitalism. The transitional period between early capitalism and industrial capitalism — about 1760 to 1830 in Britain — is called by historians the “industrial revolution.”
Before the rise of steam-powered industry, commercial capitalists, who dealt with commodities — commodity capital — rather than productive capital- dominated the capitalist world. However, industrial capitalists emerged as the dominant section of the rising capitalist class under industrial capitalism. The focus of the emerging science of political economy shifted from the accumulation of money capital in the form of gold and silver to the accumulation of ever greater quantities of industrial capital.
Economic liberalism and the climax of classical political economy
Just like a person goes through the stages of infancy, childhood, youth, mature middle age, and finally old age, so has bourgeois political economy gone through stages. In its youth, in the hands of the classical economists, the law of labor value was developed, and the origin of surplus value in the sphere of production as opposed to the sphere of circulation was discovered. And it was the English liberal classical economists who first realized that capitalist society is divided into three classes: landlords, whose income takes the form of rent on land; capitalists, whose income takes the form of profit on capital; and workers, whose income takes the form of wages of labor.
Thus, with the industrial revolution — the time of Ricardo — classical political economy reached its climax. But then, early representatives of the growing industrial proletariat began to turn Ricardo’s law of labor value against capital itself. As mentioned above, the further development of the Ricardian theory of value would inevitably emphasize the origin of surplus value in the unpaid labor of the working class. Therefore, the whole concept of labor value had to go. Economics on a bourgeois basis had reached its end as a science.
The further development of the Ricardian theory of value and of economic science itself was therefore surrendered by the bourgeois economists to representatives of the working class, first to the Ricardian socialists and then to Marx and his successors.
With the end of the Ricardian period, around 1830, not long after the first worldwide economic crisis of overproduction in 1825, economic liberalism had already left behind its youth when it had been able to afford the luxury of actually exploring the economic laws of the rising capitalist system.
There could be no more Ricardos. The basic classes of capitalist society were replaced by “households,” individuals, and “entrepreneurs” found in today’s economics textbooks. Classical political economy was a weapon in the hands of the capitalist class to fight feudal reaction as well as the working class. Marginalism, on the other hand, is only useful for fighting the working class.
Among other things, marginalism bars the door to any scientific understanding of crises. Why is this so?
Since, according to marginalist theory, value ultimately arises from scarcity, there is no possibility of a general overproduction of commodities. How could commodities be “scarce” and “overproduced” simultaneously? At most, there could be disproportionate production that would quickly be eliminated through free competition, but no general overproduction.
Unlike the case with the classical system, where Say’s Law was imposed from the outside, Say’s Law is built right into the foundations of the marginalist system. If economic crises broke out in the real world — and though they were played down, crises could not be denied completely — they were dismissed as momentary imbalances between savings and investment or a matter of temporary disproportions between the commodities that the industrial capitalists were producing and consumers’ ever-changing tastes.
According to the marginalists, while central banks such as the Bank of England would be expected to lower interest rates during periods of economic stagnation, any attempt by the government to go beyond that to combat an economic crisis would do more harm than good.
Therefore, basic marginalist theory implies that recessions will never happen, but if they do anyway, the government should take no measures to create jobs or help the unemployed. Any measures to help the unemployed will only lead to long-term involuntary unemployment since the unemployed workers might prefer to collect unemployment insurance rather than build up their skills. What begins as “voluntary unemployment” over time will then become “involuntary unemployment” due to a lack of skills on the part of the workers.
Sure, even the marginalists admit there are always workers looking for jobs. But this is, after all, a good thing. As the economics professors, who were invariably recruited from the propertied classes and never themselves had to worry about unemployment in their personal lives, explained, this was just short-term “frictional unemployment” that the government need not concern itself with.
Any long-term unemployment, the liberals economists explained, assuming the government followed liberal economic policies and trade unions were absent — was really “voluntary” unemployment. Furthermore, in a “free society,” unlike in a slave or feudal society, didn’t the people have a right to choose leisure over work? The government, the economic liberals insisted, has no right to interfere with the free choices of individuals in a free society, after all!
Economic liberalism in its old age
However, just as the neoclassical marginalist system was being developed in the universities, free competition was beginning to break down in practice. Especially after the economic crisis that began in 1873, cartels and trusts began to grow within countries. Only Britain stuck with “free trade,” but even here, Britain was increasingly getting the worst of it. Notwithstanding the claims of the marginalist economists, unemployment was growing during the “Long Depression” that followed the crisis of 1873.
A growing protectionist movement began to develop in Britain, though for the time being, it did not prevail. As the supply of commodities increasingly tended to exceed the demand — the very situation that the marginalists had “proven” mathematically to be impossible — practical governments responded with protectionist measures.
Beginning about 1896, however, world capitalism entered a period of accelerated growth and rising prices destined to last until the eve of World War I. During this “long wave of expansion,” prices and profits rose, and unemployment was relatively low, thus giving the economic liberals entrenched in the university economics departments a breather.
After World War I, economic liberalism was undermined by chronic mass unemployment, especially in Britain, the country that dominated political economy. Unlike in the United States, in Britain, this mass unemployment began with the recession of 1920-21. It did not wait until 1929.
This created a fundamentally new situation. While the professors in Cambridge and Oxford could pretend that the unemployment that existed in Britain before World War I was really all “voluntary” and “frictional,” or simply the fault of the trade unions, it was much harder to do this when unemployment hovered around the 2 million mark for an entire decade.
Against this background, the General Strike of 1926 broke out, the biggest movement of the British working class since the days of Chartism. Then came the crisis of 1929-33 itself. Mass unemployment was no longer confined to Britain and the countries that had been the losers in World War I. It now spread to the leading capitalist country, the United States. And the United States, with its very weak trade union movement and lack of any social insurance, was precisely the type of country that, according to the tenets of marginalism, should have virtually no unemployment problem.
John Maynard Keynes, the man
The collapse of the booming U.S. economy into the Great Depression profoundly shook the confidence of the capitalists in their system. Some of the scions of the ruling-class families who were studying economics in U.S. and British universities began to turn towards Marxist ideas. Even as the crisis of 1929-33 was raging, the marginalist professors were teaching a doctrine that explained why what was happening in the real world could not occur!
For example, Paul Sweezy, a banker’s son, an economics major at Harvard in the early 1930s, and considered perhaps the most promising young U.S. economist of his generation, “defected” to socialism. Unlike many other intellectuals radicalized in the 1930s, Sweezy remained a socialist throughout his life.
In this climate, Britain’s leading bourgeois economist, John Maynard Keynes, attempted to salvage bourgeois economics and prevent economists of the younger generation from turning toward Marxism and thus becoming allies of the working class. To do this, Keynes was forced to lead a retreat away from economic liberalism.
Keynes, born in 1883, was a true son of Britain’s ruling class. His father, John Neville Keynes, was also an economist. After receiving an education at Eton, a school open only to sons of the ruling class, the young Keynes had planned to study mathematics at Cambridge University. Since Keynes was interested in politics as well as mathematics, Alfred Marshall — considered the leader of British marginalism — convinced him to study economics instead. In economics, Keynes could combine his interest in mathematics with politics.
A many-sided intellectual, Keynes had interests in literature and art as well as mathematics and economics. Among other things, he was a student of the life and collector of original copies of the writings of Sir Isaac Newton, Britain’s leading natural scientist and considered by many the greatest natural scientist of all time. Nevertheless, economics was Keynes’s primary interest. At Cambridge, Keynes mastered neoclassical marginalist economics.
A man with this background would not have been expected to become a champion of the working class, and Keynes proved no exception. However, I should note that Keynes belonged to one oppressed group. He was gay. In Keynes’s time, gay men had to be discreet. No open homosexual would have been able to play a role in public affairs. Indeed, this sorry situation lasted until the rise of the modern gay liberation movement that followed the 1969 Stonewall Rebellion in New York City. I am sorry to say that, in the United States at least, there were socialist organizations that banned LGBTQ+ people from membership as late as the 1960s.
Perhaps Keynes’s membership in this oppressed group did leave him more open to “unorthodox” ideas than would have normally been expected from a man of his class and background.
Keynes on the working class and bourgeoisie
“How can I accept the [Communist] doctrine,” Keynes wrote, “which sets up as its bible, above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values.” (John Maynard Keynes, Essays in Persuasion, p. 300 [W. W. Norton & Company, 1963])
Here Keynes describes the working class as “mud.” No doubt Keynes was being ironic, which was indeed his style. Still, he does let slip his class attitudes and class loyalties. Opposite of Marx, Keynes makes clear that he takes the side of the exploiters, “who, with their faults, are the quality of life.”
Today, it would be hard to find bourgeois economists or intellectuals who are as frank as Keynes when expressing publicly where they stand in the class struggle.
According to Ben Leach, writing in the Oct. 18, 2008, edition of the British newspaper The Telegraph, Keynes described eugenics as “the most important, significant and, I would add, genuine branch of sociology which exists.” In his dreams of breeding a master race, however, Keynes was hardly that unusual among the scions of the British ruling class. Such racist ideas were commonplace among the ruling classes of Europe and the U.S. Hitler differed from these common ruling-class ideas only in the extremes to which he took them in both theory and practice and his willingness to apply them within Europe as opposed to Africa, Asia, and Latin America.
Keynes was not a stupid reactionary. He was an intelligent one. Keynes opposed the punitive provisions of the infamous Treaty of Versailles, for example. In his pamphlet “The Economic Consequences of the Peace,” he pointed out that Germany could not possibly pay the sum demanded, and any attempt to enforce the treaty would destabilize the economies of not only Germany but Europe as a whole.
Starting in the 1920s, Keynes got together with the leader of the British Liberal Party, Lloyd George, to advocate a program of public works to combat mass unemployment. George and Keynes’s proposal for public works was an attempt to undercut the new British Labor Party.
The rise of the British Labor Party
During the 19th century, Britain had a two-party system consisting of the Conservative Party, also known as the Tory Party, and the Liberal Party. The Conservatives had traditionally been the party of the large landed interests, while the Liberals had represented the industrial capitalists.
The British labor unions had historically supported the Liberals, much like the U.S. labor unions to this day support the Democrats, with similar results. After World War I, the unions shifted their support to the new Labor Party, a party based on the labor unions.
Though this party was in deeds, if not always in words, pro-capitalist and pro-imperialist, it was still a historic step forward for the British working class. One of the reasons why British workers enjoy a socialized health care system, under which health care is a right and not a privilege for those able to pay, as is still the case in the United States, is the existence of the Labor Party.
During the 1920s, the Labor Party under Ramsay MacDonald had failed to put forward any program to deal with Britain’s unemployment crisis. The abandonment of the Liberal Party by the working class had left that party without its mass electoral base. Lloyd George and Keynes hoped to win this base back with their public works proposal.
For Keynes, however, there was a problem. He “knew,” as a trained liberal neo-classical marginalist economist, that prolonged mass unemployment “could not” exist. Yet it plainly did. After the crisis began in 1929, Britain’s already grave unemployment got considerably worse, even though the global economic crisis did not affect Britain as severely as it did the United States and Germany.
Unlike some of his more obtuse colleagues, the mathematical and trained Cambridge economics professor John Maynard Keynes was bothered by the glaring contradiction between marginalist theory and reality. In 1936, Keynes published his book, “The General Theory of Employment, Interest, and Money,” in which he broke with many of the tenets of economic liberalism and considerably modified marginalist economic theory. In the next chapter, we will examine Keynes’s “General Theory,” which is considered the founding document of Keynesian economics.
A Critique of Crisis Theory 