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 20: Keynes and the falling rate of profit
Keynes, along with Adam Smith, Ricardo, Marx, and even the classical marginalists, believed that the long-term trend of the rate of profit was downward. However, Keynes and other marginalists gave different explanations than Marx for this tendency.
Marx applied his perfected law of labor value, which, unlike the Ricardian version, distinguished between (abstract) labor, the social substance of value, and labor power, which is purchased by the industrial capitalists. He showed how the tendency of the ratio of constant capital — fixed capital plus raw and auxiliary materials — to rise relative to variable capital with capitalist development would mean a fall in the rate of profit if the rate of surplus value — the ratio of unpaid to paid labor — and the turnover time of variable capital remained unchanged.
Marx also demonstrated that even if the rate of surplus value increases, the rate of profit can still fall if the ratio of constant to variable capital — the organic composition of capital — rises sufficiently.
In analyzing the effects on the rate of profit of a rising organic composition of capital, Marx abstracted a fall in the rate and mass of profit associated with problems of the realization of surplus value that are so important for analyzing short-term cyclical fluctuations. An inability to realize surplus value either fully or in part will cause a temporary fall in the rate of profit or the mass of profit, or even lead to outright losses.
In contrast, a long-term rise in the organic composition of capital, all other things remaining equal, causes a permanent fall in the rate of profit.
Keynes, as we have seen, had no notion that surplus value is even produced in the production process, let alone that surplus value is produced by variable capital alone. Keynes, in the manner of vulgar economics, assumed that profits arise in the sphere of circulation due to the scarcity of capital. Or, as Marx might have put it, Keynes’s theory of profit is profit upon alienation.
According to classical marginalism, capital yields interest to its owner because it is a scarce factor of production. Keynes modified this and said real, as opposed to money, capital has what he called marginal efficiency. He defined the marginal efficiency of capital as the expected rate of profit that real capital yields to its owner. According to Keynes, real capital bears its owner a profit only because it is scarce.
What is real capital scarce relative to? It is, according to Keynes, scarce relative to the varying needs for material use values that the real capital helps produce for the individual human beings who make up the total population. If the quantity of capital is fixed, then, according to Keynes, the scarcity of capital will be governed in the long run by the total size of the population. Therefore, Keynes held that if the quantity of real capital increases relative to the population, the total amount of real capital will become progressively less scarce, and the rate of profit will fall.
Since the population growth rate was falling in Britain — Keynes was, above all, an Englishman — he assumed that the accumulation of capital was proceeding faster than the population growth. Therefore, Keynes reasoned, in the post-World War I period, the tendency of the rate of profit, or marginal efficiency of capital, was strongly downward.
All quotes from Keynes that follow are from the concluding chapter of Keynes’s “General Theory,” entitled “Concluding Notes on the Social Philosophy Towards which the General Theory Might Lead.”
“I feel sure,” Keynes wrote, “that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.”
Keynes believed the value of capital goods, as he put it, is made up of the cost of (scarce) labor, including the labor of superintendence, plus a profit that is added to account for “risk” and the scarcity of capital goods. As society grows relatively and absolutely richer in capital, the profit included in the selling price of these goods, reflecting their scarcity, will fall and eventually disappear as the scarcity of capital goods is overcome.
If the cost of capital goods doesn’t fall to zero, it is only because the labor that is necessary to produce them remains “scarce” enough so wages don’t fall to zero, and a certain allowance for “risk” must be included; otherwise, there would be no incentive for any person to function as an industrial capitalist.
Keynes and Marx on the historical direction of the rate of interest
Marx explained that interest is merely a portion of profit, which consists of interest plus profit of enterprise. This total profit is itself a fraction of the total surplus value, which also includes rent.
Marx believed that the rate of interest would fall in the long run, not only relative to capital but also relative to the total rate of profit – interest plus the profit of enterprise. Or, what comes to the same thing, in the future, more of the total profit would go to the industrial capitalist in the form of the profit of enterprise and less to the money capitalist in the form of interest.
The lower the rate of profit, the lower the maximum rate of interest can be and still allow a positive profit of enterprise. In addition, if the rate of profit is low, the rate of interest has to be that much lower still if the rate of the profit of enterprise is to be high enough to provide sufficient incentive to produce surplus value.
Keynes, as we have seen in the preceding chapters, unlike most economists, including Marx, denied that the industrial or commercial capitalists appropriate interest. Instead, Keynes defined as interest only the “reward” the
money capitalist receives for not holding money — or in Marxist terms, the fraction of the surplus value appropriated by the pure money capitalist is the reward received for not acting as a miser. Since Keynes, unlike Marx, believed that the rate of profit, or marginal efficiency of capital, and the rate of interest tended toward equality, he believed that the fall in the rate of profit would bring about a parallel fall in the rate of interest.
The euthanasia of the rentier
Keynes wrote that “though this state of affairs [where the rate of profit has fallen to extremely low levels —SW] would be quite compatible with some measure of individualism [that is, capitalism —SW], yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist (Keynes means here the money capitalist -SW) to exploit the scarcity-value of capital.”
This is one of the few places in the “General Theory” where Keynes used that ugly word “capitalist.” And significantly, he referred to the exploitation by the capitalists not of the working class but of the scarcity-value of capital. Here, we see Keynes remains very much a marginalist economist.
Also, as was common in the 19th century, Keynes used the word capitalist to refer to the money capitalist who appropriates a share of the total surplus value under the title of interest. Marx liked to use the term “industrial capitalist” to emphasize that the owners of industrial enterprises who employ wage labor and appropriate both the interest on the capital they own — as opposed to the capital they borrow — and the profit of enterprise were also capitalists.
Keynes continued: “Interest today rewards no genuine sacrifice any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.“
Here Keynes seems to forget his distinction between interest that reflects the scarcity of money capital, and the marginal efficiency of capital — profit — which reflects the scarcity of real capital. However, according to Keynes’s equilibrium equation — marginal efficiency of capital equals interest — if real capital were to cease to be scarce and the marginal efficiency of capital were to fall to zero, so would the interest rate.
Like some other marginalists, Keynes saw the decline of the rate of profit not as pointing toward a revolutionary transformation in the mode of production but rather as representing a progressive softening in the antagonism between the capitalists and the working class. The early marginalists claimed that as capital becomes less scarce relative to labor, the rate of interest — meaning profit, will fall relative to wages. More of the total product would go to the working class and less to the capitalists.
This is the opposite of what Marx predicted. Therefore, according to the marginalists, as capital accumulation continues, the working class would be progressively reconciled to the capitalists and the capitalist mode of production.
Mass unemployment
On the way to this happy reconciliation of the capitalists and the working class, however, Keynes held that a major hitch had developed. This hitch, according to him, was, as we have seen in the preceding chapters, the growing tendency of the capitalist system to reach an equilibrium at mass unemployment, not “full or near to full employment.”
Remember, according to Keynes, capitalist equilibrium is defined as marginal efficiency of capital = rate of interest. According to Keynes, under the new conditions that prevailed after World War I, interest rates and the marginal efficiency of capital were increasingly equalizing at rates that corresponded to mass unemployment.
The problem was that in the new era, the rate of profit was very low and therefore required a corresponding extremely low rate of interest if full employment was to be achieved. In practice, it was becoming very difficult to drive interest rates down to the levels that would make full employment possible.
Unless major corrective action was taken by the government, Keynes feared, there might be a miserable outcome for the capitalist class in the form of a working-class socialist revolution. However, Keynes was convinced that if the government adopted the correct policies, things would get back on track for the happy reconciliation of the capitalists and the working class foreseen by the marginalist “classics.”
Keynes on the causes of the Great Depression
The causes of the Great Depression of 1929-40 are not only of interest to economic historians but all concerned with modern society’s fate. Why did this unprecedented economic collapse, so much worse than any of the crises that preceded it, occur in the first place? What are the chances of something like the Depression repeating itself? And is it within the power of capitalist governments to prevent a repeat of such a debacle in the future?
And finally, what is the relationship of the Depression as a concrete historical economic episode in the history of capitalism to the ultimate historical limits of capitalist production?
Since the Great Depression of 1929-40 occurred long after the deaths of Marx and Engels, the founders of Marxism wrote nothing about it. The Depression also happened after the deaths of Rosa Luxemburg and V.I. Lenin, so they, too, had nothing to say about it. We examine the Great Depression and its causes in the sections that deal with the controversial theory of long cycles or long waves, and take yet another look at this question in the section on the so-called breakdown theory.
But here, since I am dealing with Keynes, I will summarize Keynes’s view of the Depression, which clearly inspired him to write the “General Theory.”
Keynes’s explanation of the Depression
According to Keynes, during the 19th century, the high rate of population growth caused the rate of profit, or marginal efficiency of capital, to be high. Or, what comes to the same thing, the marginal efficiency of capital was high because capital was scarce. Therefore, economic equilibrium as defined by Keynes — the marginal efficiency of capital = the rate of interest — was pretty close to, if not at, full employment. There was, of course, the unemployment associated with trade cycle “recessions” and “panics,” but nothing like the chronic mass unemployment that Britain experienced in the 1920s and 1930s.
Therefore, Keynes reasoned, because in the good old days before World War I, the unemployment created by recessions was short-lived, this misled the classical marginalists into believing that the only equilibrium possible in the capitalist economy was at full employment. This was qualified only by the influence of the labor unions, which kept the labor market from being completely free.
But according to Keynes, as population growth slowed after World War I, the increase in the quantity of real capital began to exceed the change in the population. The marginal efficiency of capital — the rate of profit — began to plummet. Indeed, the fall in the rate of profit was far beyond anything that Marx would have thought possible due to the increase in the organic composition of capital, with all its counteracting forces.
However, according to Keynes, since the equilibrium equation — marginal efficiency of capital = money rate of interest — still held good, the level of employment was still fluctuating around its equilibrium. But now, the equilibrium was increasingly an equilibrium of mass unemployment, not full or near-to-full employment as it had been before World War I.
But the central bankers, unaware of the radical change in economic conditions after World War I — after all, they could not have read the “General Theory” before Keynes published it — mistakenly kept interest rates too high. In addition, the banking interests, which dominated the central banks, profited from high interest rates. Finally, because the marginal efficiency of capital had fallen to such low levels, especially after the crash of 1929, it was very difficult to lower the interest rate to the low level that would correspond to full employment equilibrium.
Keynes’s solution
Keynes was well aware that the persistence of the mass unemployment that prevailed during the Depression would threaten the very existence of his beloved capitalist system. His ultimate nightmare was that sooner or later, the British working class, radicalized by endless mass unemployment, would rise up much as the workers in Russia had done in October 1917.
If the rate of population growth picked up again and real capital again became scarcer, the rate of profit would recover, making full employment or at least fuller employment easier to achieve. But Keynes did not look forward to such a solution since that would push capitalist society into the horrors of Malthusian overpopulation.
Keynes did not, however, think the situation was hopeless for capitalism; far from it. On the contrary, he felt he had a program that would save capitalism. One plank of Keynes’s solution was that everything should be done to lower interest rates as much as possible by ending the gold standard and printing plenty of money to drive down interest rates, particularly long-term interest rates. But he suspected that would not be enough. Secondly, he thought that investment would have to be socialized.
At first glance, this would indicate that Keynes, who had been an economic liberal during most of his professional life, had become a socialist, at least to a certain extent, under the influence of the Depression.
But Keynes did not mean that productive investment should be socialized since that would imply the end of private property in the means of production. One of the reasons Keynes, in some passages, seems much more radical than he was is that marginalists had dropped the distinction made by the classical economists and Marx between productive labor that produces surplus value and unproductive labor that does not. If you don’t make the distinction between productive and unproductive labor, you can’t make the distinction between productive investments that produce surplus value on an increasing scale and expenditures that merely consume the existing capital of bourgeois society.
What Keynes was actually advocating was an increase of what the classical economists and Marx would have called unproductive expenditures. The government would not be spending more to produce surplus value and accumulate capital, acting as an industrial capitalist, but instead would consume capital already in existence. This was very similar to the program that Malthus had advocated in the days of, and against the strong opposition of, Ricardo.
An increase in the number of productive investments by the state would only increase the quantity of real capital and thereby lower the rate of profit even more. What was needed, according to Keynes, was the kind of government expenditures that would increase demand without increasing the quantity of capital, thereby raising, not lowering, the rate of profit.
As the rate of profit, or marginal efficiency of capital, rose, it would become possible to achieve full employment without interest rates being driven lower than was possible. The rate of profit and economic growth would be lower than in the pre-1914 days, but there was now less need for economic growth since society was approaching the age of genuine abundance, and “full employment” would return.
What Keynes wanted was to reconcile increasing economic stagnation — that is, the cessation or slowing down of the development of the productive forces, which he saw as inevitable, indeed even desirable — with the continued existence of the capitalist system. Keynes had no use for Ricardo’s “production for the sake of production” philosophy.
In essence, Keynes foresaw a capitalism that would have only simple, not expanded, reproduction. Marx, in contrast, considered this to be impossible.
Public works in a growing, as opposed to a stagnant, capitalist economy
During the 19th century, the political parties that championed industrial capitalism in the United States, such as the Federalists and the Whigs, and later the Republican Party, had strongly supported public works’ internal improvements against the opposition of the Democratic Party, which represented the slave-owning interests.
Rapidly developing capitalist countries like the 19th-century United States often find themselves short of both money and real capital. Developing railroads, canals, and later roads and airports usually requires raising sums of money far beyond the ability of individual capitalists or even corporations to raise.
Also, it is not always possible to run basic infrastructure projects on a for-profit basis. Once upon a time, highways were run as private, for-profit toll roads. But if this practice had continued, the U.S. auto industry would never have developed to the extent it did during the last century. If infrastructure projects such as highways or airports are not run on a for-profit basis, they cannot be developed by for-profit corporations. Therefore, the government must step in and finance them directly through taxes or borrowed funds.
In a country where capitalism is developing rapidly, internal improvements, to use the 19th-century U.S. term for government public works programs, act as a powerful lever for increasing the rate of economic growth — and stimulating capitalist expanded reproduction. This is true whether these are financed directly through taxes or borrowed funds.
For example, the development of canals, railroads, and highways greatly increases the turnover of (variable) capital, thereby increasing the rate of profit. The resulting higher rate of profit increases private investment and thus accelerates the whole process of capitalist expanded reproduction.
But these kinds of public works were not what Keynes had in mind. The Keynes of the “General Theory” was a prophet of economic stagnation, not growth. Characteristically, Keynes pointed to the full employment of World War I as an example of full employment created by the deficit spending he advocated to reduce unemployment.
It would be unfair to Keynes to claim that he advocated war to achieve full employment. Keynes hoped that the increased government expenditures would somehow produce useful things. But since the real purpose of this kind of deficit spending was to increase demand and not produce additional wealth, the production of useful things was not necessary.
Therefore, military Keynesianism is very much in the spirit of Keynes’s economics. When the government buys bombs, tanks, bombers, and destroyers and purchases the labor power of soldiers, it does not produce surplus value. Indeed, the use value of these commodities to their buyer, the government, is not that it increases wealth but instead that it destroys wealth as well as human lives.
Keynes on the redistribution of the national income
Unlike the classical economists, especially Ricardo, who emphasized economic growth, Keynes was the economist of stagnation. If continued economic growth would be neither possible nor desirable in the future, why not redistribute the national income in favor of the workers? The workers, after all, spend almost their entire incomes on personal consumption, as opposed to the capitalists, whose historical justification is that they, unlike the workers, are in a position to spend a substantial portion of their much larger incomes on expanding the productive forces of society.
Keynes answered this question in the affirmative, with reservations. Indeed, as we saw above, this is exactly what the classical marginalists predicted would happen. In the future, there would be little, if any, net investment. If capitalist society, Keynes reasoned, depended on net investment, the very heart of expanded capitalist reproduction, to generate demand, it would suffer from a chronic insufficiency of demand and resulting mass unemployment. If the amount of personal consumption increased in the economy so that it took the place of net investment — in other words, if expanded reproduction gave way to simple reproduction — the economy, Keynes believed, would become more stable.
As we saw in the preceding chapter, Keynes believed that violent swings in (productive) investment corresponding to the mood swings between excessive optimism and excessive pessimism about future profits were behind the violent booms and slumps of the trade or industrial cycle. Wouldn’t an economy in which a much larger percentage of the total expenditures was for personal as opposed to productive consumption be more stable, even if there would be little or no economic growth? Keynes answered yes to both questions.
At first, you would think that Keynes would have been a great champion of labor unions. Isn’t the elementary function of labor unions to increase wages and reduce profits? But no. Remember, Keynes claimed that if the labor unions win higher money wages, this leads to higher prices. Therefore, labor union activity, the independent activity of the working class through its own organizations, though at its most elementary level, would not be able to bring about the necessary redistribution if we accept Keynes’s assertion that higher money wages mean higher prices.
But undoubtedly, Keynes, a very class-conscious bourgeois, had another reason in mind. Though labor union struggles are simply about the rate of exploitation and not about the continued existence of exploitation, it still involves the actual organization of the working class on a class basis. Wouldn’t a labor union organization lead sooner or later to political organization?
Indeed, by the time Keynes wrote the “General Theory,” the British workers had already organized the Labor Party, a party based on the labor unions. While the British Labor Party, like the labor unions it was based on, did not challenge the existence of the capitalist system, couldn’t the Labor Party turn out to be simply a first step toward an eventual conquest of political power by the British working class?
The fact that the British working class had progressed from organizing itself on a labor-union basis to organizing itself as a political party reflected this historical trend. Keynes was unhappy about this trend and sought ways to reverse it. In his politics, Keynes leaned toward the Liberal Party; he never supported the Labor Party.
Keynes first began to advocate practical “Keynesian economics” — large-scale deficit-financed spending by the government on public works to combat mass unemployment — after the General Strike of 1926. Keynes had teamed up with British Liberal Party leader Lloyd George in advocating a public works program to be financed through government borrowing to combat the mass unemployment Britain was already experiencing.
Keynes hoped to lure the British workers away from the Labor Party and back into the Liberal Party. Indeed, Keynes wrote the “General Theory” largely to find a theoretical justification within bourgeois marginalist economics for the practical economic policies he had advocated for some time.
Despite the thoroughly bourgeois policies of the British Labor Party, Keynes was no supporter of the Labor Party any more than he was a supporter of redistributing the national income through labor union struggles against his beloved capitalist class. Instead, Keynes advocated a redistribution through the spending and taxing mechanisms of the state. In this way, the redistribution of the national income would be achieved through the bourgeois state, perhaps headed by a government led by a revived Liberal Party, thus keeping the whole process of income redistribution safely under the control of the ruling class itself.
Keynes’s view of a future society
According to Keynes, economic growth would peter out as the scarcity value of capital vanishes. Expanded reproduction would give way to simple reproduction. Interest rates would fall to zero or very close to zero, causing the gradual extinction of the hateful money capitalists, who perform no work but simply “save.” This would leave the industrial and commercial capitalists, who receive the wages of superintendence and can earn windfall “economic profits” by satisfying and creating consumer wants. So even in the absence of overall expanded reproduction, Keynes believed, capitalism could continue, with the growth of some capitalist enterprises balanced off by the contraction or disappearance of others.
However, ownership of the means of production would remain safely in private hands. Since real capital would have lost most of its scarcity value, the gap between the incomes of these entrepreneurial working capitalists and the ordinary wage workers would shrink, though by no means disappear altogether. After all, “entrepreneurial” labor is scarcer than the labor of most workers. But the income gap would be less than it was in the period when real capital was “scarce” and profits were high. Just like the case with the classical marginalists, the working class and the capitalist would be happily reconciled.
Unlike Ricardo, who championed the boundless development of the productive forces and supported industrial capitalism precisely because it tended to develop the productive forces without limit, Keynes looked forward to the end of the development of the forces of production. Marx pointed out that in Ricardo’s time, Malthus had advocated the development of the productive forces only to the extent that it enabled the members of the old semi-feudal class to enjoy a higher standard of living.
Keynes, who greatly admired Malthus, was afraid that further development of the forces of production would pull the rug out from under the feet of the capitalist class. Marx pointed out that Ricardo was always willing to sacrifice classes and sections of classes if it meant the further development of production — humanity’s mastering of the forces of nature. In contrast, Keynes wanted to sacrifice the development of production to preserve capitalist class rule for its own sake.
Ricardo was the economist of the rise of capitalism. Keynes, in contrast, was the economist of the decay and decline of capitalism.
The fate of Keynesian economics
The traditional marginalists gradually launched a counterattack against the “General Theory.” Pointing to the ultimate contradiction between Keynes’s admission that overproduction is possible under capitalism and his retention of the marginalist notion that use values acquire value because of their scarcity, they were able to show, using marginalist assumptions accepted by Keynes, that contrary to Keynes the economy would still move in the long run toward an equilibrium of full employment.
Assume that the economy is in a deep depression and its associated liquidity trap. Wouldn’t prices, the marginalist traditionalists argued, including the price of labor, inevitably fall until all excess capacity would disappear and labor would again be fully employed?
The marginalist critics gave an affirmative answer to this question. Even if the monetary authority fails to expand the money supply during a deep depression, they claimed, the consequent fall in prices, including the price of labor, will expand the real money supply allowing interest rates to fall to whatever level is necessary to allow once again a positive rate of profit on new investment. And once the positive rate of profit appears on new marginal investment, wouldn’t the economy start to recover? Ultimately, no matter how you throw the marginalist cat, it always lands on its full-employment feet.
The traditional marginalists split into two camps. One is made up of the diehards of economic liberalism, primarily economists of the so-called Austrian school, represented by men such as Frederick von Hayek and Ludwig von Mises. They blamed the Depression on the labor unions, the alleged inflationary policies of the central banks, and the “socialist” policies of governments. These economists are the founders of what today is called “neoliberalism.” They say the old-time marginalism is good enough for us; we don’t need all these Keynesian qualifications.
Many of these economists were to find jobs at the University of Chicago, where a young economist named Milton Friedman had also found employment. The department of economics of that university became the center of the neoliberal counterattack against Keynesian economics. They became the darlings of business interests opposed to the concessions, limited though they were to the working class by the New Deal under the pressure of the CIO industrial unions and other mass struggles.
Neo-Keynesians
But more moderate marginalists were chastened by the Depression. Even if the capitalist economy tended toward full employment in the long run, the long run was much longer than the classical marginalists had assumed. The 1930s, and in Britain the 1920s as well, showed that in practice, mass involuntary unemployment could drag on for decades.
The moderate marginalists agreed with Keynes that increased government spending, accompanied by tax cuts during periods of recession, was a good idea, even necessary if capitalism were to survive. Deficits during periods of recession were now viewed as a positive good, not a necessary evil, as in the past. The marginalist moderates also agreed that governments and monetary authorities should follow policies encouraging a moderate but persistent rise in prices of about 1% to 3% yearly.
As the marginalist moderates saw it, the necessary reduction in interest rates during a recession could be achieved in two ways. One, the traditional method, was to allow prices to fall, thereby increasing the real money supply, which would help lower interest rates. But didn’t falling prices encourage buyers, especially the industrial capitalists, to postpone purchases until prices fell even more? This, the moderate marginalists argued, tended to transform recessions into prolonged depressions with all the accompanying mass unemployment. If another Great Depression were to occur, the workers might finally rise and overthrow capitalism.
But there was another way to achieve the necessary reduction in interest rates, the moderate marginalists claimed, the way advocated by Keynes. As long as unemployment was at levels that were dangerous to capitalism, the monetary authorities should accelerate the growth of the money supply and drive interest rates lower.
They should continue to do this until full employment, by which they mean the optimal-for-capitalism level of unemployment high enough to intimidate the workers and their labor unions but not so high as to dangerously radicalize them, is reached. Only when unemployment falls to a level that dangerously strengthens the labor unions, which our moderate marginalist economists call over-employment, should the monetary authorities curb the growth of the money supply.
A policy of permanent, if moderate, inflation has the advantage of putting continuous downward pressure on the workers’ real wages, thereby overcoming the tendency for real wages on an hourly basis to rise during recessions.
According to the moderate marginalists, it is very dangerous to do nothing to combat a recession beyond having the central bank cut its discount rate, the traditional policy advocated by marginalists before Keynes, and thus allow a recession to feed on itself. If this were done, there would be a good chance that sooner or later, a recession would turn into a new Great Depression with perhaps fatal consequences for the capitalist system. But as long as the government runs increased deficits and the monetary authorities make whatever cuts in interest rates are necessary during recessions, there will be no danger of a new Depression.
Perhaps recessions cannot, in practice, be avoided entirely, the moderate marginalists argue, as Keynes dreamed of in the “General Theory.” The point was not necessarily to prevent recessions completely but to prevent a recession from getting out of hand and turning into a 1930s-style Depression. The moderate marginalists were confident that their policies would prevent this from happening.
These moderate marginalists came to be called neo-Keynesians. These pro-capitalist, pro-imperialist economists came to dominate the university economics departments after World War II. They combined classical marginalism, expressed in ever-increasing mathematical formalization, which is called neoclassical economics, with the insights of Keynes. Marginalism, sweetened with just a dash of Keynesianism dubbed the “neoclassical synthesis” by Paul Samuelson, the leading U.S. economist of the post-World War II era, became the new economic orthodoxy. Over time, Samuelson’s “neoclassical synthesis” was challenged by the more traditional marginalists of the Chicago School on the right.
There were shadings, of course. Some neo-Keynesians thought that sufficiently bold economic policies by capitalist governments could eliminate recessions entirely or almost entirely. Such views began to get the upper hand during the powerful economic boom of the 1960s. Other, more conservative neo-Keynesians doubted that recessions could be wholly eliminated. The point was, these conservative Keynesians argued, to control recessions and prevent a recession from degenerating into a new Great Depression that would bring into question the continued existence of the capitalist system.
No falling rate of profit?
After World War II, the neo-Keynesians, in sharp contrast to Keynes himself and even to the classical marginalists, came to deny any tendency toward a falling rate of profit. Perhaps the Cold War led to increased awareness among professional bourgeois economists of Marx’s law of the tendency of the rate of profit to fall, even if the law was not well understood by minds trained in marginalism.
The neo-Keynesians were afraid that any concept of a falling tendency in the rate of profit might imply that capitalism was something other than an eternal system. Especially during the Cold War, all speculation in that direction had to be quashed. Therefore, these neo-Keynesians explained that Keynes had been mistaken about a falling tendency in the rate of profit because, happily, human material needs are infinite and can never be satisfied.
Therefore, these economists proclaimed scarcity and capital itself have happily turned out to be eternal categories after all. Undoubtedly, the high profits of the post-World War II economic boom encouraged these ideas. Didn’t the postwar prosperity show that there was still plenty of life in the profit system after all? And barring suicidally stupid deflationary policies by the government and/or the central banks, wouldn’t this be the case forever?
In addition, the challenge to capitalism represented by the Soviet bloc with its high post-World War II growth rates meant that capitalism could hardly enjoy the luxury of resigning itself to economic stagnation in the manner of Keynes of the “General Theory.” Once again, capitalism had to be pictured as a system of endless economic growth. So anything even suggesting a falling tendency of the rate of profit had to go.
On the other hand, mainstream economists didn’t want to claim that the rate of profit tends to rise since that would imply an intensification of the social contradiction between the workers and the capitalists. Therefore, they compromised and claimed that the rate of profit was pretty much fixed, tending neither to decline nor fall.
Radical Keynesians
In addition to the pro-capitalist, mainstream neo-Keynesians, there arose a tendency that drew radical, even socialist, conclusions from Keynes’s work. On the left of this tendency, there were attempts to combine Marx with Keynes. The radical left-wing Keynesians have become known as post-Keynesians. The left Keynesians initially hoped that the growth of state intervention, necessary they believed to avoid permanent depression conditions, would lead to a gradual democratic transition to a socialist society.
Unlike Keynes himself, the radical Keynesians developed the concept of monopolistic or “imperfect” competition. The classical marginalists were only interested in the “monopolies” in the labor market imposed by the labor unions. But though it was largely ignored by the traditional marginalists and Keynes, the role of cartels, syndicates, and huge monopolistic corporations, also called trusts, was growing.
In the 1930s, economists, including the young Paul Sweezy, the future founder of the Monthly Review school, expanded marginalism into a theory of monopolistic or “imperfect” competition to deal with the situation where the competition among the industrial and commercial capitalists was far removed from the free competition models of the classical marginalists. The alleged economic laws of marginalism were modified, including the introduction by Michal Kalecki of the “degree of monopoly.”
Unlike the case with “perfect competition,” if we assume “a degree of monopoly,” the individual industrial corporations will exercise a considerable influence on the total supply of the commodity and therefore on its price.
Therefore, according to this extension of marginalist price theory to a situation of monopoly as defined above — which Sweezy himself helped to pioneer in the 1930s — the industrial corporations will find it in their interests to produce at levels that are likely to be well below full employment. To maximize their profits, they will tend to leave some of their productive capacity idle and therefore hire fewer workers than they would if they produced at full capacity. This, according to Sweezy and indeed the Monthly Review School, is the “microeconomic” foundation for “macroeconomic” stagnation.
The post-Keynesian economists, viewed as dangerous radicals by the ruling capitalist class, have been far less influential than the pro-capitalist, pro-imperialist neo-Keynesians. It is pretty difficult for post-Keynesians to get university posts and, if they do, to receive tenure. The economics departments of the universities, dominated as they have been since the 1980s by neoliberals, generally want to hire only strongly pro-capitalist economists. This means hiring mostly neoliberals along with the occasional neo-Keynesian for balance on the “left.”
The Monthly Review school
Paul Sweezy, the founder of the Monthly Review school, as it has become known, was strongly influenced by Keynes as well as Marx. During the 1930s, the young Sweezy, as we mentioned above, was involved in developing the theory of monopolistic competition, which left its mark on the Monthly Review school. Unlike Keynes, Sweezy became a socialist during the 1930s and remained one until he died in 2004. He looked forward to the end of capitalism and its replacement by socialism.
Sweezy was an instructor of economics at Harvard during the 1930s and 1940s. As the Cold War set in, despite the support of his friend, the famed conservative economist Joseph Schumpeter, Sweezy was unable to get tenure, and Harvard did not renew his contract to teach, though he was widely considered one of the most brilliant, perhaps the most brilliant, economist of his generation. So much for democracy at Harvard. Sweezy was therefore forced to abandon any hope of pursuing an academic career and devoted himself instead to editing the socialist magazine he founded, from which the Monthly Review school gets its name.
Initially, Sweezy accepted the Keynesian claim that Depressions could be avoided by massive government spending. He hoped, like many left Keynesians, that such spending would be carried out in the interests of the working class, leading to a gradual democratic transition to socialism that would avoid the dictatorial excesses of the Soviet Union — though Sweezy was also a supporter of the Soviet Union.
But as the Cold War unfolded, Sweezy progressively abandoned these hopes since the only form of massive government spending that the Democrats and Republicans would agree to was for war purposes. He put little hope in the U.S. working class and the working classes of the other imperialist countries, seeing them as hopelessly integrated into the capitalist system. Instead, he looked to the struggles of the oppressed countries and revolutionary movements within them as the most likely route toward a socialist society. In his later years, Sweezy became a strong supporter of the Chinese Revolution and a great admirer of its leader, Mao Zedong.
In his final years, Sweezy also began to move away from his earlier position, still expressed in “Monopoly Capital,” the book that he wrote with Paul Baran and first published in 1966, that capitalist governments could stabilize the economy sufficiently to avoid another Depression. The later Sweezy emphasized the explosion of debt and “financialization” and its implications for future crises, but complained that he was too old — Sweezy was well into his eighties at the time — to analyze the new conditions.
Bourgeois economics splits in two
The pro-capitalist, pro-imperialist neo-Keynesians have split economics into two sub-disciplines. One, called “microeconomics,” is simply the traditional unmodified marginalist theory developed by the marginalist “classics” before Keynes. A new sub-discipline, inspired by Keynes’s work, was named “macroeconomics” and deals with the practical questions of what came to be called stabilization policy.
Stabilization policy is aimed, above all, at avoiding deep, prolonged depressions or runaway inflations. For these purposes, the assumptions of marginalism could be tactfully disregarded if they got in the way of the need to devise policies aimed at stabilizing the capitalist economy.
Individual bourgeois economists tend to specialize in either microeconomics or macroeconomics. The more “theoretical-minded” bourgeois economists stick to microeconomics, which develops the so-called “general equilibrium” theory. It uses ever denser mathematics to prove how “perfect competition” leads to the “optimum outcomes” that maximize the satisfaction of human needs within the limits imposed by “scarcity.” It has little to say about the problems of the real world.
Macroeconomics, in contrast, is very concerned about the practical problems confronting the capitalist economy. How great is the danger of recession over the next year? What must the government do to prevent or moderate the recession threat? Is inflation a danger next year? Should the central bank increase or lower interest rates? Should taxes be increased or cut, and should the government increase or reduce its spending plan over the next year? These economists are pragmatic and care relatively little for the fine points of marginalism or any other economic theory.
A Critique of Crisis Theory 