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.
Section 2
The Form of Value — Money
Introduction: Do crises originate in the real or the monetary economy?
In the wake of the Great Depression, progressive economists played down the importance of monetary policy as opposed to fiscal policy. Instead, the progressive economists of the New Deal and post-New Deal eras saw the source of capitalist economic instability in either the instability of private investment or its chronic insufficiency. Progressives gave little weight to the importance of what is called monetary policy – the policies of the central bank. Instead, progressive economists emphasized the importance of fiscal policy. Fiscal policy refers to the central government’s taxation, spending, and borrowing policies. This view is supported by the belief that economic crises such as the one that led to the Great Depression arise in the sphere of production and not in circulation.
There were two reasons for this stance by progressive economists, which continues to the present day. One was that policies favored by the left, such as public works and public housing, must be carried out by the central government, not the central bank. The second reason was that between the end of the super-crisis of 1929-33 and the 1970s, capitalism experienced an unusually long period of financial stability. During this period, there were relatively few bank failures and nothing like the chain reaction banking panics that had played such an important role in the crises of the 19th century, the crisis of 1907, or the bank runs of 1931-33. It was widely assumed among left- and right-wing economists alike that with the weakening and finally the total abandonment of the gold standard, combined with government-sponsored bank deposit insurance, old-time financial banking panics had been banished for good.
In contrast to the progressives, economists on the right, such as Milton Friedman, claimed that the source of capitalist instability lay in the banking-monetary sector, the sphere of circulation. The “real sector” of the capitalist economy was stable, the right-wing “anti-New Deal” economists insisted. As long as the central bank maintained financial banking stability, the profit-driven private industrial sector would not only maintain prosperity and “full employment” but would be the solution to all social problems. Therefore, the right-wing economists argued that there was no need for the central government to spend money on public works or public housing to stabilize the economy. All that was needed was a correct policy by the central bank. Called “monetarist” in the 1970s, these economic views are now called neoliberal.
Friedman claimed that capitalist crises are the result of violent fluctuations in the quantity of money. According to Friedman, except for these purely monetary fluctuations, the capitalist system is extremely stable. Friedman and his supporters hold that as long as the “monetary authority” — such as the U.S. Federal Reserve System — keeps the rate of growth of the quantity of money on a slow and stable path — something well within their power, according to Friedman — cyclical fluctuations and crises would all but disappear.
In the 30 years preceding the crash of 2008, Friedman’s “neoliberal” claim that capitalism was a stable economic system had dominated university economic departments and policy-making circles in Washington, London, and elsewhere. This claim of capitalist stability is sometimes called the “Washington Consensus.”
The crisis of 2007-09 brings a resurgence of Keynes
However, with the panic of 2008, the views of John Maynard Keynes staged a dramatic comeback. Keynes was considered — and still is by many — to have been the leading (bourgeois) economist of the 20th century, at least before the rise of Friedman’s influence during the final decades of the 20th century.
We will be examining and criticizing the views of Keynes throughout this work because Keynes has not only influenced bourgeois economic thinking from the late 1930s onward but also influenced many Marxists.
Who was John Maynard Keynes?
Keynes had begun as a student of the English liberal — in the European, not American, sense — economist Alfred Marshall. Marshall was a pioneer of English marginalist economics. According to the marginalists, material use values — or objects of utility — acquire “economic value” because of their scarcity relative to subjectively determined human needs.
The marginalist theory of value dominates university economics departments down to the present day. The marginalist theory of value contrasts sharply with classical theory and Marx’s theory of value, which holds that commodities have value because they are created by human labor and are exchanged for other commodities that are also products of human labor but have different use values.
Marginalists are divided into the Austrian school and the more mathematical neoclassical school. Many right-wing amateur economists prefer the Austrian school associated with such figures as Ludwig von Mises and Frederick von Hayek, but most university economists are neoclassicals.
Marshall and adherents of other schools of marginalism also believed, just like Milton Friedman did, that capitalism is a stable economic system. Like Friedman later on, Marshall also believed that as long as markets were “free” — with no “monopolies” such as trade unions — the system had a strong tendency toward full employment of both workers and machines. As a student of Marshall, the young Keynes believed, like his teacher, that capitalism tended toward stability and “full employment.”
However, Keynes, confronted by Britain’s chronic unemployment crisis that began with the post-World War I recession of 1920-21, which was further intensified by the infamous crisis of 1929-32, began to move away from the view that capitalism is a stable economic system with a strong tendency toward “full employment.” In his General Theory of Employment, Interest and Money, first published in 1936, Keynes concluded that capitalism was a highly unstable system.
To this extent, Keynes, late in life, had come to agree with Karl Marx. Left to its own devices, Keynes now conceded, capitalism was prone to violent swings from boom to deep depression. Even worse, Keynes feared that capitalism was tending to sink into a more or less permanent state of mass unemployment that could prove its undoing.
Despite these conclusions, Keynes never became a socialist, though many socialists have been strongly influenced by Keynes’s views on capitalist instability and tendency toward chronic mass unemployment, or “secular stagnation.” Instead, Keynes remained a supporter of capitalism in general and British imperialism in particular. To his dying day, Keynes believed that through a skillful application of “stabilization policies,” the capitalist system could maintain an “approximation” of full employment.
Keynes versus the classical economists and Marx on class
One thing that strikes a reader of Keynes coming from a Marxist background is how far Keynes goes to avoid the mention of the social classes that characterize a capitalist society. In this, Keynes is not only in sharp contrast to Marx but also Marx’s economic predecessors, the classical bourgeois economists. Indeed, it was the classical economists, especially Adam Smith, who developed what today is considered the “Marxist” analysis of the classes of capitalist society.
According to Smith, there are three classes in (capitalist) society. The owners of capital (frequently called stock in Smith’s time) receive the profits of capital, the owners of land receive the rent of land, and the workers live off the wages of their labor. Therefore, when it comes to the analysis of class, Marx was merely Smith’s pupil.
Adam Smith’s successor, David Ricardo, also used Smith’s three-class analysis of (capitalist) society. This classical Marxist approach to class contrasts with Keynes’s approach in the “General Theory,” where he talks about “households” and “entrepreneurs.” Households might be poor — proletarian — or they might be very rich — capitalist. This was a fine way of dodging the question of class!
According to Keynes, “households” save some of their “income” — no distinction between wages, profits, and rents — and the rest is spent on consumer goods. Entrepreneurs, on the other hand, carry out “investments.”
Keynes divided the total spending in a capitalist economy into three parts. One part is spent by “households” on consumer goods, a second part is spent on “investment” by entrepreneurs, and a third part is spent by the government.
It is the part of the total spending represented by the “investment” of the entrepreneurs that, according to Keynes, is dangerously unstable. Sometimes, the “entrepreneurs” are carried away by their “animal spirits,” investment soars, and the economy booms. (1) But if profits prove less than expected, the “entrepreneurs” become dejected, investment plunges, and the economy spirals into a deep recession. Therefore, unlike Friedman, Keynes is generally seen as locating the cause of capitalist crises in the real economy, not the money economy.
Keynes, therefore, came to advocate large-scale deficit spending by the government during periods of economic recession or stagnation and higher-than-average unemployment. If the spending by the “entrepreneurs” is inadequate to maintain an approximation to “full employment,” he argued, the government should make up the difference through increased spending.
This spending, Keynes stressed, should be financed by borrowing. If the increased government spending is financed by current taxes on the “entrepreneurs” or “households,” the latter will be forced to reduce their spending accordingly. In that case, the increased spending by the government will be matched by reduced spending by entrepreneurs and households, and there will be no net stimulus.
According to Keynes, while such deficit spending should ideally be for useful public works, the most important thing in a “stimulus package” is the spending itself, not whether it is useful. Indeed, Keynes noted that during World War I, when deficit spending was being carried out on an immense scale, there was no problem with unemployment! The implication was clear. Spending on war just as much as on useful public works can be equally viable ways of combating economic depression and mass unemployment.
Contrary to what is commonly believed, Keynes was not the first bourgeois economist to advocate large-scale government spending to combat economic stagnation and unemployment. Long before Keynes, the English clergyman and economist Thomas Robert Malthus, much admired by Keynes, advocated just this kind of government spending during the economic stagnation and widespread unemployment after the world war that followed the Great French Revolution. Malthus argued that large-scale unproductive expenditures by landlords, clergy, as well as the government would be necessary to combat capitalism’s tendency toward “general gluts” — a general overproduction of commodities.
In contrast, David Ricardo, Jean-Baptiste Say, and other economic liberals denied that “general gluts” of commodities were even possible in theory and thus opposed “stimulus packages,” which they saw as simply squandering the wealth of the nation.
A key difference between Keynes and Marx
Keynes had come to agree with Marx that capitalism was an unstable economic system. But in contrast to Marx, Keynes thought that prompt action by the capitalist government would be able to compensate for the natural instability of capitalist investment and thus largely eliminate both cyclical economic crises and mass unemployment within the framework of capitalist production. Therefore, according to Keynes, there was nothing fundamentally wrong with capitalism that a correct policy on the part of the government and the “monetary authority” could not fix.
Deficit spending and ‘crowding out’
The liberal economists who oppose Keynesian-style “stimulus packages” claim that the more the government borrows, the more that investment by the industrial capitalists and consumers will be “crowded out.” Since these economists hold that “full employment” of both workers and machines is the natural state of a capitalist economy, they believe that any output that the government or its dependents consume comes out of production that would be used “more efficiently” by the private sector.
This argument, however, assumes that “full employment” is the normal state of a capitalist economy. But what if it isn’t? The Belgian Marxist economist Ernest Mandel pointed out that there is much idle plant and equipment during an economic recession, not to mention massive numbers of unemployed workers. (2) Under these conditions, the extra demand created by deficit spending would not absorb output otherwise destined for the private economy but rather stimulate additional output that would otherwise not have been produced at all.
The well-known American Marxist economist Paul Sweezy, the founder of the Monthly Review school, also praised Keynes for realizing that capitalism did not tend toward “full employment” and, in fact, had a growing need for massive government spending to make up for the chronic weakness of private investment. Therefore, where the right-wing economists see a zero-sum game, Keynes and Marxist economists such as Mandel and Sweezy see the possibility of additional output made possible by the creation of additional demand. Or, as “Keynes’ Law” puts it, demand creates its own supply.
The concrete history of capitalism gives more than adequate refutation in practice to the economic liberal claim that capitalism tends toward “full employment.” As far as the “real economy” is concerned, the views of Keynes, Mandel, Sweezy, and many other economists rest on solid ground.
But what about the monetary side of the economy? Could deficit spending lead to crowding out private investment and spending due to a shortage of money or credit?
Keynes himself realized that it was not enough to simply look at the “real economy.” The monetary economy had to be considered as well. If insufficient money is available for lending, government deficits will raise long-term interest rates. The government will be able to borrow, but the private capitalists will be cut off — or crowded out. In Marxist terminology, there would be a danger that the average long-term rate of interest will rise above the average rate of profit, reducing the profit of enterprise to less than nothing. If this happens, capitalist investment will collapse and thus offset the effects of the “stimulative package.” In contrast to many of his followers, Keynes was acutely aware of this danger.
Closely related to this is that if the government deficit rises too quickly and interest rates on long-term government bonds either fail to fall or fall much more slowly than they would without the increased deficit spending, mortgage rates and rates on loans for consumer durables, in general, might stay higher longer, postponing or at least weakening the recovery in the durable consumer goods industries. Durable consumer commodities such as houses and automobiles are generally purchased on credit and depend on the availability of long-term loans.
Therefore, if the quantity of money is insufficient, a situation can arise where the government, the industrial capitalists, and would-be homeowners and purchasers of other durable consumer goods are all competing for a limited amount of credit.
However, Keynes thought the danger of such a purely monetary “crowding out” could always be overcome by the “monetary authority,” such as the Bank of England or the U.S. Federal Reserve System. Keynes claimed that during periods of high unemployment among workers and machines, there would be no danger of inflation since production could always be quickly increased to meet any increase in “monetarily effective demand.” Doesn’t inflation arise because the demand for commodities cannot be fully met at existing prices? Demand is then reduced to the level of supply by raising prices — inflation.
This, indeed, is the “common sense” view. However, in the 1970s, a situation arose where prices were rising much faster than they had during the generally prosperous years of the 1950s and 1960s, but there was much more unemployment of workers and machines than there had been during the 1950s and 1960s.
Friedman versus Keynes on monetary policy
Using what amounted to a “common sense” analysis of money, Keynes believed inflation does not happen in times of substantial unemployment. Only when “full employment” makes it impossible to increase production further in the “short run” does the extra demand created by deficit spending and expansionary monetary policies by the central bank manifest itself through increases in prices and money wages rather than an increase in the supply or commodities.
When it came to “monetary policy” — the attempts by the central banking systems of the capitalist countries to control the rate of growth of the quantity of money and manipulate interest rates — Friedman advocated a slow and, above all, steady and thus predictable growth in the money supply. Friedman reasoned that since the “real economy” was “remarkably stable,” all that was necessary to ensure its stability was to make sure that the monetary side of the economy was equally stable.
What Keynes and Friedman had in common
The differences between Milton Friedman and John Maynard Keynes, though real, should not obscure what these bourgeois economists had in common. Both men hated socialism and supported the continued rule of the capitalist class. They both also believed that given correct policies by the governments and the “monetary authorities” — even if they differed on exactly what these policies should be — crisis-free capitalism could be achieved. To explore whether capitalism can be stabilized through fiscal policies as progressive economists hold, or through monetary policies alone like the right-wing economists hold, or through some combination of the two, such as Keynes himself believed, or cannot be stabilized at all, we have to explore the relationship between the real economy and money.
(1) A summary of Keynes on Animal Spirits can be found on Wikipedia at https://en.wikipedia.org/wiki/Animal_spirits_(Keynes) (back)
(2) Ernest Mandel, “The Generalized Recession of the International Capitalist Economy,” 1974. https://www.marxists.org/archive/mandel/1974/12/generalized_recession.htm (back)
A Critique of Crisis Theory 