WITH A SECOND economic crisis looming on Europe’s horizons, there has been a turn in the public consciousness towards the economic theories of John Maynard Keynes, famous for promoting growth as a solution to the Great Depression of the 1930s.
Groups as varied as the TUC, the Peoples Charter, the Communist Party of Britain, and Counterfire have argued that Keynesian economics provides an alternative to the austerity demanded by the world’s finance markets.
It has been over three years since the world was ‘rescued’ from the worst banking crisis in 70 years. As the globalised world economy stood on the brink of a catastrophic collapse, only the mobilisation of staggering sums of money by national governments prevented a total breakdown.
Governments embarked on an unprecedented socialisation of losses through the buying of toxic private debts, the bailout and nationalisation of failing banks and introduction of vicious austerity programmes. But the promised return to growth has not only failed to materialise, and the underlying problems that caused the first meltdown in 2008 have now brought us to the precipice of a second, even deeper crisis.
Economic indicators across the globe point towards a growing storm centred on the Greek and Eurozone crisis. Large-scale capital flight has begun to safe havens such as US and German bonds and precious metals such as gold and platinum. Capital has dramatically switched away from the higher risk areas such as the ‘peripheral economies’ of Greece, Italy and Spain, which have all seen their bond yields increase as investors lose confidence in their ability to repay their debts. This threatens to unleash a negative-feedback loop of spiralling debt and high interest rates, ending in bankruptcy for these countries and the ripping apart the Eurozone. Either outcome threatens to plunge the world economy into crisis.
Banks across the world are bolstering their reserves in preparation for the outbreak of a crisis, which many are increasingly viewing as inevitable.
To make matters worse, a spate of bad Purchasing Managers’ Index (PMI) figures show that global growth in manufacturing is beginning to slow. This has spread from the recession-hit nations of the West to the manufacturing powerhouses of China, Brazil and India. This is further confirmed by recent jobs figures in the US, which show rising unemployment in the manufacturing sector and the fall of commodity prices, as demand from the emerging economies begins to wither.
With the world heading back into recession and the risk of another banking crisis increasing, economists and commentators are scrambling to provide explanations for why the pursuit of growth has turned into a mirage in the deserts of austerity.
Those who advocate the purist neoliberalism of Milton Friedman see the continuing gloom as the result of continuing government intervention since the start of the crisis. They argue that the markets need to be free to correct themselves without the distortions created by government bailouts and rounds of quantitative easing.
For them the answer is further market deregulation, greater austerity and the principle that nobody is ‘too big to fail’.
On the other side are the advocates of Keynesianism, who maintain that what is needed is greater regulation and further state intervention in the national economy.
With austerity programmes still yet to be fully rolled out, it’s understandable that the Keynesian message of investment in jobs, infrastructure and public works is starting to appeal to those whose belts have been tightened in pursuit of non-existent ‘growth’.
Keynesianism as an alternative to the current crisis-management theory is predicated on theory of under-consumptionism, a popular explanation of how economic crisis occurs.
Keynesianism sees crises as the result of a lack of demand for goods and services, which triggers a slowdown in business, and the onset of recession. As the recession progresses people begin to lose their jobs, cut down on spending and start saving causing a further drop in demand, which triggers a negative feedback loop dragging the economy further into recession. As the slowdown progresses banks cease to lend, choosing instead to hoard their money, which not only deepens the recession but also risks triggering a banking crisis.
On this basis the Keynesians argue that to end the crisis all that is needed is to break the negative feedback cycle. This would be achieved by government intervention in the economy to bolster demand through the raising of wages, the commissioning of large infrastructure projects, the introduction of welfare and other direct stimulus measures.
For Keynes, the origins of the crisis lie in the sphere of consumption rather than production. From this comes the assumption that simply restoring demand should be sufficient to exit the crisis. This is why the New Deal of the 1930s is held up as Keynes’ big success story.
Yet on closer inspection, Keynesian policies are revealed to be far more limited than generally acknowledged.
While it is true that the New Deal did dramatically increase demand for construction materials and led to economic growth, as soon as direct stimulus of the economy ceased in 1937 the nation went back into recession. It was the stimulus of the war economy from 1939, which saw a return to GDP growth. In short Keynesianism failed to end to crisis – it merely suppressed it temporarily through state intervention.
Additionally to this, an analysis of the progress of the current crisis does not fit comfortably into the Keynesian schema.
Keynesianism sees crises progressing through stages from falling demand through to a full crisis as the economic slowdown provokes hoarding.
Yet the 2008 crisis was preceded by high demand and credit-fuelled consumption. It was the banking crisis which provoked the recession – falling demand came later. Keynesianism struggles to rationalise the post-war booms, which saw economies expand massively, despite austerity and low consumer demand.
Finally, how will the Keynesians flout the bond markets, and the attacks on economies that don’t cut quickly enough? By electing Social Democrats like Francois Hollande?
Even Roosevelt’s limited programme was only pushed through by the massive strike waves and unionisation of American workers in the 1930s – and US capital had nowhere else to go.
Massive class mobilisations to push even limited reforms would mean, a capital investment strike and flight from the country as in Greece, and make the crisis worse, if it comes without a revolutionary perspective to solve it with socialist measures to expropriate capital.
Rate of profit
Counterposed to the Keynesian theory of crisis is Karl Marx’s theory of the tendency for the rate of profit to fall. According to Marx’s theory the origin of capitalist crisis can be located in the productive sphere itself and stems from the nature of value creation.
Building upon the work of the classical liberal economists David Ricardo and Adam Smith, who discovered that additional value is created through human labour, Marx discovered that the rate of profit is derived from the ratio of surplus value to labour (variable capital) and raw materials, machinery etc. (constant capital).
This allowed him to demonstrate that only labour can add value; therefore a rise in the value of constant capital relative to labour-value reduces the rate of profit.
As those capitalists who do not innovate (expand their constant capital) tend to go bankrupt, there is a necessary drive towards a greater organic composition of capital (higher ratio of constant capital to labour) as the business cycle progresses.
The inevitable result of this is that the rate of profit tends to decline over time. Eventually the rate falls to such an extent that it is no longer profitable to reinvest in expansion of production and a new, more profitable, outlet is sought through investments in other areas, including financial instruments.
This new investment outlet creates a ballooning of ‘fictitious capital’; money which has no physical underpinning; the markets boom as a speculative bubble inflates until investors realise that the capital is massively overvalued and over-accumulated.
This triggers a confidence crisis, and the resulting banking crisis paralyses the market. The economy enters into a period of decline as a corrective devaluation begins the process of destroying the over-accumulated capital that lies at the root of the crisis.
When viewed in tersm of Marx’s theory the current crisis begins to make sense. The fall in the rate of profit led to a global speculative bubble which included the sub-prime mortgage market.
When it became clear that sub-prime mortgage holders could not repay their debts, the local problem turned into a world crisis as banks found themselves exposed to ‘toxic’ (unpayable) debts through the system of derivatives which disguised toxic debts by bundling them with other financial services and selling them on.
The panic following the realisation that huge investments were effectively worthless had the effect of a heart attack at the centre of the financial markets. Lines of credit froze as banks called in debts, in turn seizing up supply and demand.
It was against this backdrop that the first bailouts and rounds of quantitative easing occurred.
However, the underlying cause of the crisis remains the over-accumulation of capital and the consequently low rate of profit, prohibiting profitable innovation and expansion.
The massive state interventions have only served to delay the inevitable corrective devaluation.
Today our choices are couched in terms of a choice between neo-liberal austerity and, increasingly, Keynesian delay tactics.
Neither provides credible solutions for the millions who continue to suffer from what is fast becoming the worst economic crisis in history. For Marxists, there is a solution, which is not based on the countless failed experiments that seek to rationalise a market based on the atomised self-interest of the profit-motive.
Rather it is based on the destruction of this system and its replacement with a more advanced economic model; one directed by the people, and decided according to the needs of the people.
This system, socialism, is the only one that can banish the recurring human catastrophe brought by each capitalist crisis to the history books.
