Capitalist Economists Debate ‘Secular Stagnation’

A debate has broken out between economist Larry Summers (1954- ) (1), who fears that the U.S. and world capitalist economies are stuck in an era of “secular stagnation” with no end in sight, and blogger Ben Bernanke (1953- ). Blogger Bernanke is, no less, the Ben Bernanke who headed the U.S. Federal Reserve Board between 2006 and 2014. Bernanke claims that the U.S. and world economies are simply dealing with lingering aftereffects of the 2007-2009 “Great Recession,” which broke out while he was head of the Federal Reserve System.

In effect, Bernanke is saying that there is nothing fundamentally wrong with capitalism and that healthy growth and “low unemployment and inflation” will return once the lingering aftereffects of the crisis are fully shaken off. Bernanke is, however, alarmed by the rapid growth of German exports and the growing share of the world market going to German industry.

Last year, we “celebrated” the 100th anniversary of the outbreak of World War I. Bernanke’s concerns show that the economic fault lines that led to both World War I and II have not disappeared. Instead, they have been joined by new ones as more countries have become industrialized. And the prolonged period of slow growth—and in some countries virtually no growth—that has followed the Great Recession is once again sharpening them.

Competition both among individual capitalists and between capitalist countries is much sharper when world markets are growing slowly. World War I itself broke out when the early 20th-century “boom” was running out of steam, while World War II broke out after a decade of the Depression.

The debate between Summers and Bernanke on secular stagnation has been joined by other eminent U.S. economists such as Joseph Stiglitz (1943- ) and Brad DeLong (1960- ). Summers, Stiglitz and DeLong are Keynesian-leaning economists, while Bernanke, a Republican, leans more in the direction of “neoliberalism,” though like most U.S. policymakers, he is thoroughly pragmatic.

The debate began with Summers’ speech to the IMF’s Fourteenth Annual Research Conference in honor of Stanley Fisher (2). Summers noted that the panic of 2008 was “an event that in the fall of 2008 and winter of 2009 … appeared, by most of the statistics—GDP, industrial production, employment, world trade, the stock market—worse than the fall of 1929 and the winter of 1930. …”

At the very least, this was a major defeat for “stabilization policies” that were supposed to iron out the capitalist industrial cycle and abolish panics. But the problem extends far beyond the 2008 panic itself.

“… in the four years since financial normalization,” Summers observed, “the share of adults who are working has not increased at all and GDP has fallen further and further behind potential, as we would have defined it in the fall of 2009.”

The highly misleading unemployment rate calculated by the U.S. Department of Labor notwithstanding, there has been a massive growth in long-term unemployment in the U.S. in the wake of the crisis, as shown by the declining percentage of the U.S. population actually working.

In the days before the “Keynesian revolution” in the 1930s, the “classical” neoclassical marginalist economists, whose theories still form the bedrock of the economics taught in U.S. universities, were willing to concede that some “outside shock” to the economic system (for example, a major policy blunder by the central bank or a major harvest failure) might occasionally create a severe recession and considerable amount of “involuntary unemployment.” But these learned economists insisted that since a “free market economy” naturally tends toward an equilibrium with full employment of both workers and machines, the capitalist system should quickly return to “full employment” if a severe recession occurs.

The cost of maintaining the capitalist system

“I remember at the beginning of the Clinton administration,” Summers muses, “we engaged in a set of long run global economic projections. Japan’s real GDP today in 2013 is little more than half of what we at the Treasury or the Fed or the World Bank or the IMF predicted in 1993.”

No doubt the “long run global economic projections” were derived from models based on neoclassical marginalist theories that assume that the basic contradictions of capitalism—capital versus wage labor; commodities versus their independent value form, money; money’s role as a measure of value versus its role as a means of purchase and payments; and not least, the socialized nature of production versus the private appropriation of the product—do not exist.

In other words, models that take for granted the claims of capitalist economists that capitalism is the ultimate form of production destined to last at least for the rest of our species’ existence. Summers himself, though a thoroughly bourgeois economist, is honest enough to express his shock at how much these models and the wretched economic theory they are based on failed the supreme test of reality.

“It is,” Summers explains, “a central pillar of both classical models [Summers here means pre-Keynesian “classical” marginalist models—SW] and Keynesian models that stabilization policy is all about fluctuations—fluctuations around a given mean—and that the achievable goal and therefore the proper objective of macroeconomic policy is to have less volatility.”

Modern macroeconomics, which was developed from the 1930s onward, supposedly provided government and central bank policymakers with “tools” that smooth out economic “fluctuations” around an axis of full employment with low inflation. The “business cycle” might not completely disappear, the economists conceded, but from the 1930s onward the “macro-economists” insisted it could be rendered harmless.

After 80 years of experience and experimentation with “stabilization policies,” if we are to believe Summers, the world economy performed even worse in 2008-2009 than during the comparable stage of the super-crisis of 1929-1933, 80 years earlier. In light of these “achievements,” what does the capitalist system and its associated “stabilization policies” have in store for the next 80 years if the workers—and mother nature—allow it to last that long?

Indeed, the only difference between the super-crisis of 1929-1933 and the Great Recession, leaving aside the greater initial severity of the Great Recession, was that the super-crisis of 1929-1933 was essentially two “Great Recessions” back to back. The initial one began in the middle of 1929 and bottomed out at the end of 1930. The second one began in the second quarter of 1931 and bottomed out in the third quarter of 1932. In the U.S., there was an additional, third, recession in the first quarter of 1933. (For more on this episode, see here.)

In the 2007-2009 episode, the second “Great Recession” was avoided, but Europe did experience a second recession in 2011-2012. The United States has managed to avoid outright recession since 2009, but the U.S. recovery from the Great Recession has been far less impressive than the recovery following the super-crisis from 1933 to 1937 and again from the 1937-1938 crisis to the onset of the full-scale war economy in 1941-1942, which ended the Depression era.

If “full employment” had reigned before the Great Recession began in 2007, all this would be disturbing enough. We would be completing eight years with an economy operating below full employment of workers and machines. But Summers is honest enough to admit that the situation is actually far worse than that.

No ‘Great Boom’ before the ‘Great Recession’

Summer explains: “Almost everybody believes that wealth, as it was experienced by households, was in excess of its reality: too much easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilization wasn’t under any great pressure. Unemployment wasn’t at any remarkably low level. Inflation was entirely quiescent.”

“So,” Summer complains, “somehow, even a great bubble wasn’t enough to produce any excess in aggregate demand.” In other words, at the peak of the industrial cycle in 2006-2007, the world’s workers, armed with the means of production created by generations of workers both of the hand and brain that existed at that point, were perfectly capable of producing a considerably greater amount of wealth than was actually being produced.

The only thing that held back the workers, using Summers’ Keynesian language, was the “lack of aggregate demand.” Or, to use the language of Marx, the world’s workers in 2007 were held back from producing far more with the productive forces that then existed by the capitalist relations of production. If only the workers had been able to shake the bosses off their collective necks, they would have been able to produce considerably more.

And this does not even take into account the tremendous waste of labor that militarism represents. Nor does it take into account the massive overconsumption of the super-rich and their somewhat less rich but far more numerous hangers-on. What would have been the effect on the standard of living of the world’s peoples if the vast amount of labor and means of production that were used producing luxuries for the rich were instead making necessities for the world’s workers and peasants, who along with mother nature actually produce the wealth?

The significance of the debate

The debate initiated by Summers represents growing confusion and disarray among bourgeois economists. We know that industrial and commercial capitalists, and the capitalist system overall, require ever-expanding markets. A capitalism without expanding markets—except temporarily during crises—is inconceivable.

Summers’ complaints about insufficient effective demand are an acknowledgement that the basic economic problem facing capitalism today is that its ability to increase production far exceeds its ability to expand the market. A half century ago, Keynesian economists thought they had found the answer to this problem. Today, economists and policymakers seem further from a solution than ever.

Therefore, the “secular stagnation debate” comes down to the question of exactly how do markets grow—for individual capitalists, individual branches of capitalist industry, and the capitalist system as a whole. Why is it under the modern capitalist system that the market can’t keep up with the growth of production?

Closely linked to this question is: Why despite remarkable growth in individual branches of industry, the rise of whole new industries, and rapid growth in certain countries has the overall performance of the capitalist system been much worse since 1968 than it was during the “golden years” between 1949 and 1968?

The famous or infamous Kondratiev cycle (3) does not itself explain this poor performance. Between 1949 and 1968, we had the post-World War II golden age, though 19 years seems rather short for an “age.” Against this, we have 47 years and counting of much slower growth punctuated by the deep recessions of 1973-1975 1979-1982 and, worse of all, 2007-2009. (4)

Does this generally poor performance since 1968 indicate that the capitalist system has finally reached its limits and in historical terms is near its end? These are the questions I will take up over the next several months.

Origins of the bourgeois theory of ‘secular stagnation’

As regular readers of this blog know, the last quarter of the 19th century saw the marginalist revolution in bourgeois economics. Using mathematical methods, the founders of the marginalist school (5) claimed to have proven both logically and mathematically that a capitalist economy tends toward an equilibrium of full employment of both workers and machines.

Leaving aside short-term “frictional unemployment”—workers between jobs who will quickly find new jobs—all long-term unemployment, the marginalist school insisted, is voluntary. This type of unemployment, they claimed, is the result of potential workers choosing leisure over the income their labor would produce if they chose to work. Voluntary unemployment is therefore a matter of individual choice and should not concern the government.

As for the industrial cycle, marginalists could not deny its existence. But, they insisted—and the economists known as neoliberals insist today—that if a recession occurs and unemployment soars, it will be short-lived, assuming the government keeps its hands off the economy. The central bank might be expected to lower its discount rate, but that is about as far as government intervention—assuming the central bank is considered part the government—should go.

Mainstream marginalists variously claimed—and the neoliberals still do—that the “business cycle,” or “trade cycle,” is accidental, or caused by policy mistakes by the central bank. The claim that “the Fed” tightened “too much” is heard after every recession. (6) Or perhaps weather and bad harvests are responsible, or—and this is a favorite—business cycles are caused by unchanging human psychology.

According to this theory, periods of excessive optimism are followed by periods of excessive pessimism. Essentially, these economists claim, not only stock market speculators but bankers as well as industrial and commercial capitalists behave like people who enjoy gambling on a weekend trip to Las Vegas. When gamblers are on a winning streak, they don’t walk away with their winnings but gamble their winnings again and again, convincing themselves that they have figured out how to beat “the house.” Inevitably, they lose everything.

As profits exceed expectations, the economists explain, bankers lend hand over fist to industrial and commercial capitalists and consumers. Never mind that the bankers are running down their reserves to dangerously low levels. Likewise, the industrial capitalists invest in more and more new factories and machines and hire ever more workers. The commercial capitalists build up their inventories ever higher as both sales and profits keep beating their growing expectations. This is the stage of “irrational exuberance,” as former Federal Reserve head Alan Greenspan (1926- ) famously put it.

Inevitably, at some point sales and profits fall short of expectations. The bankers cut off credit to the industrial and commercial capitalists as well as consumers. The industrial and commercial capitalists panic; the commercial capitalists cut their inventory, and the industrial capitalists slash their investments and lay off workers. Consumers, many either facing unemployment or the threat of unemployment and no longer able to borrow from the banks, confine their own spending to bare essentials as they attempt to rebuild their savings. This is the stage of “irrational pessimism,” or recession, that follows the stage of “irrational optimism,” or boom.

What is the profound lesson that our economists draw? Capitalism is indeed a perfect system, but human nature is flawed. We can’t, after all, blame capitalism—or the free market—for the flaws of human nature.

Or perhaps the “business cycle” is somehow caused by changing tastes or fashions.
Businesspeople are therefore bound to occasionally misjudge ever-changing consumer demands for particular commodities. Every now and then, particularly bad mistakes occur and a recession results. Again, it is all due to fickle human nature.

The Austrian theory of the business cycle

Actually, beyond some valuable empirical studies and statistics, bourgeois economists of the marginalist school have been able to come up with only one business cycle theory that has a certain internal coherence. That is the theory of the Austrian wing of marginalist economics. According to the Austrian school, the rate of interest is determined by the relative desire of society to consume in the present relative to its desire to consume in the future.

Following the logic of the Austrian school, the poorer society is the more society discounts the value of future consumption over present consumption and the higher the rate of interest will be. (7) Therefore, following the logic of the Austrians, if capitalist society wishes to consume less in the present in order to consume more in the future, the market will see to it that the rate of interest is high. High interest rates encourage people to save and thus provide the financial resources necessary for the entrepreneurs—industrial capitalists—to expand to meet the demand for future consumption.

If this is true, there will be plenty of cases, the Austrians reason, where profit will be even higher than the high rate of interest and individual businesses will expand their output considerably until their rate of profit falls to the rate of interest. When industrial business expands, demand is generated for additional means of production—in Marxist terminology, expanded capitalist reproduction will proceed with vigor. While both capital goods sector—Department I—and Department II, the sector that produces means of personal consumption, will expand, the fastest growth will be in the capital goods-producing sector. The result will be that the total product produced by capitalist industry will consist more and more of capital goods and relatively less of consumer goods.

Conversely, following the Austrian school logic, if capitalist society wishes to consume more in the present compared to the future—and this will tend to be the case where “goods” are more abundant—the rate of interest will be low. Profitable opportunities where new investments yield profits in excess of interest rates will be few, and industrial concerns will find relatively few areas of investment where the rate of profit exceeds the rate of interest. As a result, businesses will expand slowly. Since interest rates will be low, people will respond by saving relatively little and spending more of their incomes in the here and now.

In a low interest-rate environment, the Austrian economists reason, the total product will consist of a much greater proportion of consumer goods and a relatively smaller proportion of capital goods. If the rate of interest were to fall all the way to zero, which would be the case where people valued goods available in the present no higher than goods available in the future, economic growth would cease. Instead of growth, we would have what Marx called “simple reproduction” and John Stuart Mill called the “steady state.”

Therefore, in the Austrian system the rate of interest determines that the overall pace of accumulation—the rate of economic growth—corresponds exactly to society’s desire to consume today as opposed to saving today so as to consume even more in the future. Or rather, it would, the Austrians reason, if the natural rate of interest corresponded to the market rate of interest.

We know that the classical economists distinguished between the exchange values, or natural prices, of commodities, determined by the quantity of labor that it takes on average to produce them under current conditions of production, and the market prices of commodities, determined by the ever-varying relationship of supply and demand.

According to the classical (not classical marginalist) theory, market prices of commodities will fluctuate around their values—natural prices—sometimes exceeding these prices and sometimes falling below them. The Austrians with their theory of marginal utility do not distinguish between exchange value and use value as the classical economists—and Marx—did, so they have no concept of natural prices versus market prices. But they do distinguish between the natural rate of interest and the market rate of interest, a distinction Marx rejected.

The Austrians hold that though the rate of economic growth will vary as society’s preference for consumption in the present over consumption in the future varies, as long as the market rate(s) of interest equal the natural rate(s) of interest, there will be no crises, though periodic waves of “innovations” will produce periods of faster or slower growth.

The Austrian theory of crisis

However, in the real world—at least since 1825—there are both business cycles and crises. How do the Austrians explain this, since they claim there will be no crises as long as the market rate of interest equals the natural rate of interest? Sometimes, they claim, the market rate of interest falls below the natural rate of interest. But why would this happen? Isn’t the market a perfect mechanism? The culprit for the Austrians is the government and the banking system, though the Austrians prefer to direct their fire at the government. And behind the government lurks the ultimate villain, the workers’ movement.

Under the pressure of the organized workers’ movement, supported by well-meaning middle-class intellectuals ignorant of the true economic principles, governments are always tempted to take measures to increase the rate of economic growth in the short run, the Austrians argue. Why is this so?

It flows from the very nature of democracy. With elections coming, politicians who control the government desire an increase in economic growth in order to win re-election. But according to Austrian theory—and marginalism in general—shouldn’t there always be “full employment” regardless of the rate or even lack of economic growth?

Yes, this is indeed the case, the Austrians argue, but only if there is free competition, especially free competition in the labor market. The trade unions, they explain, insist on collective bargaining when according to the Austrians—and indeed other schools of marginalist economics—it is only individual bargaining between the worker and the prospective buyers of their labor power—the bosses—that can ensure “full employment.”

The Austrians complain that there are plenty of potential workers with low skills who would be willing to work at low wages and not insist on “union scale.” But because the “monopolistic unions” are able to exclude all but union members from working, or because of well-meaning “socialist” legislation such as minimum-wage laws, wages cannot fall to the value that low-skilled workers can actually create. It is only through work, after all, that low-skilled workers can develop productive “work habits” and increase their skills. Only in this way, the Austrians insist, will the poor eventually find work at wages that will eventually lift them out of poverty.

For example, according to marginalists in general and the Austrians in particular, the present low-wage workers’ movement, though well-meaning, is completely misguided. If today increasing numbers of workers are low waged, it is because today’s workers simply don’t have the skills to produce much value in our “high tech” economy. Instead of forming unions and attacking Walmart, MacDonald’s, KFC and so on, low-wage workers and their allies should be fighting for repeal of minimum-wage laws and the disbanding of trade unions. Then, our marginalist—and not only Austrian—economists explain, many unemployed youth will able to get jobs at wages and the corresponding value their low-skill labor can actually create—maybe 50 cents an hour.

While wages that low would not lift low-skilled workers out of poverty, they would enable these workers to gain valuable job experience and eventually increase the value-creating power of their labor. As their skills improve, their wages would gradually rise enabling them eventually to enter the “middle class” just like earlier generations of workers did—before there were unions and “socialist” legislation.

But today’s low-wage workers are evidently not getting the Austrian message, just like earlier generations failed to get it. After all, the Austrians believe, “the masses” are pretty stupid and have always been and will no doubt always remain so. Instead of listening to the “economic science” of the Austrian economists, they listen to the “socialists.”

Unwilling to stand up to misled workers and ignorant intellectuals who make up the “socialist movement,” politicians seek to win reelection by adopting “socialist” policies. Once in office, they order the “government-controlled” central bank to print more money, which drives the market rate of interest below the natural rate of interest. (8) As a result, the market mechanism that informs the industrial capitalists how many capital goods versus how many consumer goods to produce gives out false signals.

How does this process, according to the Austrians, unfold and end in a crisis? If interest rates are below the natural rate of interest, the fields for profitable investments—defined as situations where the rate of profit exceeds the rate of interest—rise. In response to this, the industrial capitalists increase their investments and the economy expands, especially the industries producing capital goods. As economic growth accelerates temporarily, low-skilled workers are able to get jobs at wages that exceed the value their low-skilled labor is actually producing. The “socialist” policies that the government and its central bank are pursuing appear to be working, and the “socialist” politicians are re-elected.

Now according to Marx, periods of capitalist prosperity—the boom phase of the industrial cycle when investment rises and chronically unemployed or only occasionally employed workers get jobs and wages rise—represent periods of overproduction. The overproduction that is capitalist prosperity, according to Marx, is destined to end in a crisis that forcibly halts the overproduction and pulls production back into its narrow capitalist limits. Mass unemployment stages a comeback, wages fall and poverty soars because “too much” has been produced. Do the Austrians, though coming from the opposite side of the political spectrum, agree with this? Not really.

Marginalist theory implies Say’s law, which claims that commodities are purchased by other commodities—money being a mere technicality that makes the process of exchange of one commodity for another easier. The Austrians are not mere implicit supporters of Say’s law like many other marginalist are but vehement explicit supporters of this “law.” However, Say’s law does allow for the overproduction of some commodities as long as it is balanced off by an under-production of other commodities. This, the Austrians explain, is exactly what happens when the market interest rate falls below the natural rate of interest.

Generalized overproduction of commodities versus lopsided production of goods

Even in this situation, the Austrians explain, there is no generalized overproduction. Instead, production becomes increasingly “lopsided.” Relative to the desire of society to consume in the present compared to the future, there is an overproduction of capital goods and an underproduction of consumer goods. While Marx and Engels described modern capitalist crises as crises of generalized overproduction of commodities, the Austrian economists see crises as the result of lopsided production of goods. This is not an unimportant distinction.

So what is so bad about “socialist policies,” we could ask the Austrians, if they create overall capitalist prosperity that enables the unemployed to find work, while increasing their skills and bringing high, boom-time profits for the capitalists? The problem, the Austrians answer, is that soon the tendency of the market rate of interest to equal the natural rate of interest will manifest itself again. Interest rates will begin to rise toward the natural rate. As this occurs, it becomes clear to the capitalists that they have carried out unprofitable investments—defined as production and investment that yields industrial capitalists less than the rate of interest. The industrial capitalists cut back on their expansion plans and a recession is on.

How does the “socialist” government and its central bank respond to the threat of looming recession, especially if the “socialist” leaders are facing reelection? They respond by printing even more money, which again drives the market rate of interest below the natural rate of interest but at the price of production becoming even more lopsided. The recession, the Austrians explain, isn’t avoided by such “socialist” policies. It is merely postponed at the price of worsening the recession when it finally comes. In addition, inflation develops and gets progressively worse as more and more paper money is printed.

At some point, inflation becomes intolerable, and under pain of the impending collapse of the currency the “socialist” government and its central bank are finally forced to allow interest rates to rise back to the natural rate. But by then, production has become so “lopsided” that a crisis ensues leading to a surge in involuntary unemployment. Now if only the government allows the recession to run its course, the interest rate mechanism will soon correct the lopsided production leading to a sound recovery.

But, the Austrians explain, before the crisis can fully correct the lopsided production, the “socialists” insist that the government do something about the crisis and unemployment that the “socialists,” according to the Austrians, are themselves responsible for. Again, the government has the central bank print additional money to once again drive the market rate of interest below the natural rate of interest and the cycle repeats. The result, the Austrians claim, is chronic high unemployment, poverty, periodic economic crises and social disasters blamed on capitalism when it is really the “socialist” policies the workers’ movement insists on that are responsible.

The Austrian ‘medicine’

The Austrian “remedy” is to get government once and for all out the business of printing money and to close down the central bank. The current commercial banking system should be allowed to fail and be replaced by a banking system that would maintain 100 percent reserve cash behind all deposit liabilities. Under the new system, banks would be prohibited from loaning out any of their depositors’ money. Presumably, the banks would make profits by levying service charges on their depositors and confine themselves to loaning out money owned by their stockholders. Their central function under these proposed reforms would be confined to safely storing the money owned by their depositors and transferring balances between buyers and sellers through the debiting and crediting of their accounts. This would relieve people of the need to carry large amounts of money in their pockets all the time. This, the Austrians believe, is the proper role of the banks.

Currency under the proposed Austrian reforms

Since the government would no longer be issuing currency and the commercial banks would no longer be creating liabilities on themselves that can be transferred by check or electronic means, what would society use as currency? That, the Austrians explain, should be left, like virtually everything else, to the free market.

People should be free to use anything they want as money. Presumably, they would use those old standbys gold and silver, just as they did before the modern banking and credit system began to develop at the end of the middle ages. But even back then, the job of minting precious metals fell to government-owned mints. Therefore, in order to keep government completely out of the business of issuing currency, the Austrian economists would prefer that the mints be privately owned.

If all these ideas were implemented, the Austrians claim, the market rate of interest would never wander far from the natural rate of interest. Under these conditions, the interest rate mechanism and the market would see to it that industrial capitalists would produce exactly the mix of capital and consumer goods society desires. There would be no more lopsided production and crises would disappear, though their still might be fluctuations in the rate of growth generated by waves of technological innovation and changes in the rate of population growth. More on this next month.

Austrian economists seek to destroy the workers’ movement

These “reforms,” “radical” as they would be, the Austrians explain, would not in themselves eliminate “involuntary unemployment” and the poverty that goes with it. They would only eliminate poverty and unemployment associated with cycles of inflation and crises.

To end “involuntary unemployment,” the Austrians hold, unions and all other manifestations of the organized workers’ movement would have to be eliminated. If this were done, bargaining between the bosses and the workers would be on a purely individual basis. This to the Austrians, and other schools of marginalism as well, combined with the end of all “socialist” welfare and social insurance would then guarantee virtually “full employment” and the elimination of poverty as the “natural rate of unemployment” falls toward zero.

The Austrian economists on the need to abolish democracy

The problem is that “the masses are too stupid to know what is really good for them.” Instead, they keep on listening to the “socialists” with their programs of unionization, minimum wages, government intervention and inflationary monetary policies. So the Austrian economists believe that (bourgeois) democracy should be abolished. Since “the masses” lack the intelligence to understand Austrian economics, they should not elect the government. Instead, the government should be in the hands of people who do not have to face elections and are well educated in Austrian economic theory. Only such a government can achieve the elimination of poverty, chronic unemployment and economic crises of lopsided production. In addition, “liberty” will be safeguarded and minority rights guaranteed, especially the rights of the one minority that is so dear to the Austrian economists, the super-rich.

The relationship between Austrian economics and fascism

The Austrians, though they hate democracy in any form, deny that they are in favor of fascism. Indeed, Austrian economists insist that the Nazi movement, the Italian fascists and other European fascist movements were actually “left wing” socialist movements. And it is true that neither Hitler nor Mussolini dismantled the central banking system or abolished fractional reserve banking. And the Hitler government was no stranger to inflationary monetary policies as it prepared for World War II.

But these fascist dictators not only abolished democracy, they also outlawed all workers’ parties, whether Communist or Social Democratic, and they outlawed all trade unions, from Communist-led “red trade unions” to the most right-wing Christian trade unions. Therefore, the fascist governments did carry out key planks of the Austrian program.

The role of Austrian economics in mainstream bourgeois economics

As already noted, the Austrian school theories of the business cycle and crises are really the only coherent theory that any school of bourgeois economics has been able to develop. Other schools of bourgeois economics borrows bits and pieces from the Austrian school. But from the viewpoint of serious policymakers, many policy prescriptions of the Austrians are completely impractical. For example, there are no practical-minded economists who believe that it would be a good idea to dismantle the central bank, the fractional reserve banking system and the modern credit system!

If the Austrians’ advice had been followed during the Great Recession, the capitalist governments would have done absolutely nothing to combat it. Indeed, they would have greatly intensified it by halting all creation of paper money and additional bank reserves, thereby allowing the crisis to do its job of correcting decades of lopsided production. And not least, the Austrian proposals to completely smash the workers’ movement and dismantle all social programs would quickly lead to civil war, as would their demands to abolish even the pretense of democracy. (9)

However, the Austrian proposals do represent the direction—with the exception of their proposals to dismantle the modern banking and credit system (10)—the economic laws of capitalism inevitably drive the capitalists class toward as long as it does not meet decisive resistance from the people led by the working class. The more practical policymakers attempt to carry out elements of the Austrian program such as weakening the trade unions and workers’ parties as much as possible and narrowing down what is left of bourgeois democracy in a piecemeal fashion. The Austrians, therefore, act as a kind of think tank for other more “moderate” and “realistic” bourgeois economists and policymakers.

The Depression and the rise of the theory of secular stagnation

By the 1920s, the various schools of marginalist economics were well entrenched in the university economics departments. While these economists were forced to acknowledge if pressed that crises did occur from time to time, they insisted that crises were getting milder and shorter compared to the bad old days of the early 19th century. As far as the U.S. was concerned, the economists of those days—with the exception of those who supported the Austrian school—were pretty much convinced that financial panics such as had last occurred in 1907 were unlikely to recur due to the establishment of the Federal Reserve System.

But the economists explained that in the unlikely event that a “panic” did occur in the U.S., it would be short lived and prosperity would quickly return. During the super-crisis of 1929-1933, when the “unlikely” became reality on a scale that dwarfed anything that had come before, these economists found themselves in agreement with President Herbert Hoover when he insisted that “prosperity was just around the corner.” Any attempt to help the unemployed, these economists insisted, should be left to churches and other private charities.

The extreme depth of the “recession” of 1929-1933—the super-crisis that hit the U.S. harder than any major economy with the possible exception of Germany—knocked the bourgeois economists of the day off balance. The more sensitive and intelligent economics students—even though in those days they almost all came from “upper classes”—realized that what they were being taught in the classrooms had nothing to do with the reality of the debacle that was unfolding all around them.

To this day, bourgeois economists have not been able to come up with any convincing explanation for what really caused the disaster of 1929-1933, even with the benefit of hindsight. However, the economists of those days insisted, much like they do today whenever the economy heads south, that a strong recovery is “just around the corner.”

Between 1933 and 1937—in the U.S.—this appeared to be exactly what was unfolding. Figures shows that between 1933 and 1937 the U.S. experienced the greatest growth in GDP for any non-war period in its entire history. By 1936, the recovery was progressing with such vigor that not only did Roosevelt declare the Depression over, his economic advisors worried that the ongoing strong recovery would turn into another runaway boom.

The real danger, the economic advisors told the president, was that the powerful boom that appeared to be building would end in yet another panic if the recovery was not slowed down to a more sustainable pace. They convinced Roosevelt to undertake the deflationary measures that were to lead to the severe “Roosevelt recession” the following year.

True, the 1933-1937 recovery represented a recovery of capitalist production but not reproduction. Indeed, during most of the Roosevelt “prosperity,” capitalist reproduction was negative as the industrial corporations were producing fewer new means of production than they were either wearing out or sending to the junk heap because they could no longer function as capital.

However, by 1937 the period of contracted reproduction that began with the super-crisis was beginning to give way to renewed expanded capitalist reproduction. The depression phase of the cycle proper was transitioning to “average prosperity.” But as average prosperity gave way to a renewed strong boom, wouldn’t most of the remaining unemployed find jobs? To most people in the United States who were then alive, the future looked bright as shown by the overwhelming reelection of Roosevelt and his Democratic Party in 1936.

Then came a second shock, which had an impact on U.S. economists and perhaps U.S. society in general that was in many ways greater than the super-crisis itself. Instead of simply slowing the pace of the recovery, the deflationary policies adopted by the Roosevelt administration led to the short but violent Roosevelt recession. Most of the very sharp decline in industrial production and rise in unemployment took place during this recession in the fourth quarter of 1937. This was not supposed to happen. (For more on the Roosevelt recession, see here.)

Following this unexpected setback, some bourgeois economists began to fear that the U.S. economy was not facing a mere cyclical depression that was simply worse than its predecessors but would inevitably pass. They feared that the U.S. and perhaps world capitalism was facing the possibility of permanent or secular stagnation. Maybe the Depression was the new normal?

The man most associated with this view was economist Alvin Hansen (1887-1975).
Hansen was a rather pragmatic expert on the U.S. “business cycle.” At first, he reacted coolly to Keynes’ newly published “General Theory,” which appeared at the height of the Roosevelt prosperity just before the Roosevelt recession. Hansen took for granted that the U.S. was on the eve of a new period of “unparalleled prosperity” that had always followed previous recessions. But he was profoundly shaken by the 1937-38 recession and reacted by becoming an extreme Keynesian. Hansen came to believe that U.S. was facing secular stagnation.

In the brief period between the Roosevelt recession and the beginning of the World War II war economy, the fear of secular stagnation became widespread among many younger economists attracted to Roosevelt’s New Deal and the theories of John Maynard Keynes. The more radical of these economists found Marxism increasingly intriguing as well, to the extent that they understood it, while remaining under the influence of their university (mis)education in marginalist economics.

The most promising of these young U.S. economists was Paul Sweezy. Searching for an explanation of the disaster that was embracing the country—Sweezy’s own family had lost the lion’s share of their once considerable fortune as a result of the stock market debacle—Sweezy was briefly attracted to the Austrian school. But then he turned sharply toward the left, coming under the influenced of both Keynes, who was the most popular economist on the pro-New Deal left, and Marx.

Despite his flirtation with Marxist ideas, Sweezy seemed to have a bright career ahead of him as a professional economist. And he certainly would have if only he had been willing to drop his flirtation with Marx like so many other young radical economists and young intellectuals of the Depression generation were to do once both the Depression and their youth had passed. Instead, Sweezy became the founder of the Monthly Review school. (11)

Alvin Hansen and other supporters of the theory of secular stagnation were not by any means Austrian economists. Indeed, he along with other newly minted Keynesian economists stood at the opposite end of the spectrum of bourgeois economics. They believed that increasing government intervention would be needed in the future if the capitalist society that they remained thoroughly attached to was to avoid disaster. But like other bourgeois economists, Hansen and his bourgeois supporters among the young Keynesian economists—and Keynes himself—still shared many ideas of the Austrian school. They were, after all, marginalists, or they at least had been educated in marginalism and remained under its influence.

Next month, I will examine the theories of bourgeois economists on what causes the market to grow and contrast them with the ideas that I have been developing in this blog.


1 Larry Summers is a nephew of the late Paul Samuelson (1915-2009), considered one of the leading, if not the leading, mathematical neoclassical marginalist economists of the 20th century. Generations of university students were educated—or rather mis-educated—using the many editions of the introductory college textbook he authored. Summers himself was a leading candidate to succeed Ben Bernanke as head of the U.S. Federal Reserve when Bernanke’s term expired in 2006. But he lost out largely because of a series of scandals that led to his resignation as president of Harvard University after a no-confidence vote by the university faculty.

According to Wikipedia, the no-confidence vote “resulted in large part from Summers’ conflict with Cornel West, financial conflict-of-interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a ‘different availability of aptitude at the high end and less to patterns of discrimination and socialization.’” (back)

2 Stanley Fisher (1943- )is now vice chairman of the U.S. Federal Reserve System. He was born in what was then the British colony of Northern Rhodesia—Zambia. Fisher came from a white Jewish colonial family and in his youth was active in the Zionist movement. He later served as head of the central Bank of Israel (2005-2013). Fisher also taught (marginalist) economics at the University of Chicago and the Massachusetts Institute of Technology. He is a citizen both of Israel and the United States.

It is highly unusual for the former head of a foreign central bank to have a high position in the U.S. Federal Reserve System, let alone to function as its number two person behind Chairwomen Janet Yellen. While anti-Semites will point to Fisher as proof that “the Jews” control the world banking system and the U.S. government, what his role actually shows is that Israel is a virtual “white colony” of the United States. This remains true despite the current conflict between the Netanyahu government and the Obama administration over Obama’s moves to normalize relations with Iran.

Under the European colonial system that reached its peak after World War I with the seizure of Ethiopia by Italy in 1935, virtually all of Africa and large areas of Asia were outright colonies of the European colonial powers. Among these was Zambia, which was named “Northern Rhodesia” by its British colonizers after the notorious Cecil Rhodes (1853-1902).

There were generally two types of European colonies. India provides a classic example of one type. The colonizing British formed only a small proportion of the resident population of heavily populated India. The second type of colony is the “white colony.” White colonies were established in thinly populated countries where the European population could overwhelm the natives and become the majority of the population.

The classic example of the second type of colony is the English colonies in North America that were to become the United States. The English colonists for the better part of two centuries considered themselves loyal subjects of the British crown and parliament. They followed a policy of driving out the native population—the so-called Indians—or exterminating them outright. Faced by a chronic shortage of labor, the English colonists made use of the slave labor of kidnapped Africans to overcome the shortage.

Eventually, economic conflicts—for example, London did not want its North American colonies to industrialize, while the colonists had other ideas—drove the English colonists to rebel against the mother country. Though not without considerable conflict and civil war among the English colonists, within a remarkably short time the colonists came to think of themselves not as English at all but as white Americans—members of an entirely different nation.

When during the 20th century the power of the United States rose relative to the power of a declining Britain, Britain’s other white colonies, Canada, Australia, and New Zealand, reoriented from London to Washington. Later, when the old European colonial system began to crumble after World War II, the white population in both South Africa, through its notorious apartheid system, and Southern Rhodesia attempted to maintain these countries as white colonies but ultimately failed.

Israel as the youngest white colony was sponsored first by Britain and then by the United States for white European Jews who were victims of European antisemitism that ended in the Nazi holocaust. The creation of Israel and the driving out of the native Arab Palestinian population resulted in the forced exile of Arabic-speaking Jews as well as Jews from other countries in Asia and Africa. Most of these Jews also ended up in colonized Palestine, so that today most of the Jewish colonizing population in Israel is not actually “white.”

This, however, has not changed the nature of Israel, because the “white” in white colony refers to social relations between settlers sent by a colonizing country to colonize a territory at the expense of the native population. It does not involve a conflict between biological “races” of humans, though it is often falsely presented that way. For example, Northern Ireland is a white colony of Britain—the oldest white colony in the world to this day—though the native Irish nation is also “white.”

The colonial population brought in from outside of Palestine to create Israel regardless of where they originally came from or the color of their skin—which ranges from the light skin of northern Europeans to the black skin of native Africans—with the active encouragement of the United States is attempting through increasingly brutal and desperate measures to maintain Israel as a white colony.

This does not prevent the Israeli government and local capitalist ruling class from having certain interests of their own that come into conflict with the interests of the “mother country.” Could these conflicts eventually cause the Israeli colonists in Palestine to take the road of genuine independence from the mother country like the English North American colonists took in 1776? This is virtually excluded.

Despite its nuclear weapons, the Israeli colonial population in Palestine is so outnumbered and surrounded by the vastly greater Arab population it can only hold on to its status as a white colony with the active support of the mother country. Genuine independence for Israel from the United States is therefore not in the cards. This explains why Stanley Fisher can serve as vice-chairman of the U.S. Federal Reserve Board while being a citizen of a “foreign” country, Israel. Fisher as an Israeli citizen—as well as a U.S. citizen—is considered a loyal “American” who happens to hail from the “colonies.” (back)

3 The Kondratiev cycle is named after the Russian economist Nikolai Kondratiev (1892-1938), who proposed that in addition to the 10-year industrial cycle in capitalist economies, there is a 50-year “long cycle” as well, divided into a 25-year upward movement and a 25-year downward movement. I will take a fresh look at the Kondratiev cycle over the next several months as a possible explanation for today’s “secular stagnation.” (back)

4 After the gold pool collapsed in 1968, the Federal Reserve moved to raise interest rates, which led to a recession in 1970, though this recession was considerably less severe than the recessions that occurred in 1973-1975, 1979-1982, and of course the Great Recession of 2007-2009.

The 1979-1982 recession actually consisted of two dips. The U.S. economy leveled off in 1979 and then declined sharply during the first quarter of 1980 when President Carter imposed credit controls to halt the dollar’s plunge against gold and the inflationary wave that the plunge was generating. It then rebounded in the second half of 1980 and into 1981 in response to Carter’s lifting of the credit controls.

The “contraction” was then officially declared over by the National Bureau of Economic Research, and the new “expansion” was announced. This expansion, however, ended in the fall of 1981, when a new decline in the dollar against gold forced the Federal Reserve to raise interest rates, and the economy did not bottom out until the end of 1982. An expansion that lasts for only a year does not represent the upward phase of the industrial cycle but simply a fluctuation within an ongoing crisis. (For more on this crisis, see here.)

The U.S. economy also experienced official NBER recessions in 1990-1991 and 2001, though the U.S. economy was pretty obviously in recession by late 2000 and didn’t show unmistakable signs of an upturn until mid-2003. (For more on this episode, see here.) In addition, there was a Silicon Valley-centered slump in 1985 and a slowdown around 1994 that NBER does not officially classify as “contractions” but arguably should be considered as minor recessions.

I date the “golden age” from 1949, because the period 1945-49 represented the transition from the war economy of 1942-1945 to normal expanded capitalist reproduction, much like the period between 1918 and 1921 after World War I. Like the period between 1918 and 1921, the 1946-1949 period saw two NBER recessions, neither of which was a classical recession in the industrial cycle. The first was the contraction of 1945-1946, which was the re-conversion crisis proper, and the second was in 1948-1949, caused by measures to end the wartime inflation that were necessary to stabilize the U.S. dollar in the wake of the war. It is analogous to the 1920-1921 recession but was much less severe. (For a detailed comparison between these two re-conversion crises, see here.)

During the golden age between 1949 and 1968, the U.S. experienced three official NBER contractions The first was in 1953-1954, though this episode has features of a re-conversion crisis from the quasi-war economy that existed in the U.S. during the Korean War of 1950-1953, as opposed to a downturn in the industrial cycle. The second official NBER recession occurred in 1957-1958, which was felt throughout the capitalist world and represented a true downturn in the industrial cycle.

The third NBER “contraction” of the golden age occurred in 1960-1961 and was much milder and more of a continuation of the economic crisis that began in 1957 than a separate downturn in the industrial cycle. There is also the “mini-recession” that occurred at the end of 1966 and beginning of 1967. The NBER refuses to classify this episode as a contraction, but it did signal the approaching end of the golden age that I date to the collapse of the gold pool in March 1968. More on this in future posts. (back)

5 Marginalists themselves are divided into various sub-schools. The Austrian school founded by Carl Menger (1840-1921) began in Austria, though not all Austrian economists are from Austria. It developed in direct conflict with the Social Democratic Party of Austria, which was led before 1914 by the tendency known as Austro-Marxism. The most well-known Austro-Marxists include Rudolf Hilferding (1877-1941) and Otto Bauer (1881-1938), both of whom wrote extensively on economics.

The Austrian economists, regardless of their nationality, are characterized by their extreme hatred of the workers’ movement and their attempts to reach a wider audience through arguing in ordinary language as opposed to using mathematics. Essentially, they see themselves as “inverted Marxists” that seek to serve the interests of the capitalists class much the way Marxists seek to represent the interests of the working class. Despite the sharp conflict of the early Austrian economists with the Austro-Marxists, there were certain points of similarity between them. For example, both the Austro-Marxist Hilferding and the Austrian economists supported the disproportionality theory of crises.

The most influential early English marginalist was Alfred Marshall (1842-1924), though William Stanley Jevons (1835-1882) is generally considered to be the actual founder of English marginalism. Marshal’s most famous student was John Maynard Keynes (1883-1946). Reflecting the less developed level of the class struggle in England as opposed to Germany, the English marginalist school is far more pragmatic and eclectic. It combines marginalism with vulgar elements of earlier English political economy—for example, the claim that higher wages cause higher prices, a claim disproved by Ricardo. Under the influence of John Maynard Keynes, it morphed into present-day Keynesian economics.

Leon Walras (1834-1910) is considered to be the founder of French marginalism. Walras, and his successors—not necessarily French—developed “general equilibrium theory.” They put extreme emphasis on mathematics—in this sense, they are at the opposite end of the spectrum from the Austrians—so their work is in general accessible only to those who spend the increasingly lengthy time required to master the ever more elaborate mathematical symbolism through which their work is expressed.

They specialize in building complex models of economic “general equilibrium” based on marginalist principles that are highly removed from reality. In contrast to the Austrians, they make no attempt to reach the “the mass” of the educated bourgeois public and directly influence only highly trained professional economists. (back)

6 The well-known neo-liberal marginalist U.S. economist Milton Friedman (1912-2006) took this idea to an extreme, claiming that the Great Depression itself was simply the result of policy mistakes made by the leaders of the U.S Federal Reserve System. (back)

7 The Austrian theory of interest, more or less accepted by other schools of marginalism, is the Austrian answer to Marx’s theory of surplus value. It therefore sits at the center of Austrian economics, much like Marx’s theory of surplus value sits at the center of Marxist economic theory. (back)

8 According to Marx, interest is only a fraction of the surplus value produced by the unpaid labor of the working class. Marx divides profit into interest and the profit of enterprise. According to Marx, there is no such thing as the natural rate of interest, though the rate of interest cannot for long be equal to or higher than the rate of profit—defined as the sum of interest, which goes to the money capitalists, and the profit of enterprise, which goes to the industrial or commercial capitalists. (back)

9 While official U.S. ideology holds that the world is divided between the “good believers in democracy” led by the U.S. and the supporters of “evil dictatorship,” democratic ideas are coming under more and more open attack in the U.S. One example of this is the libertarian Ron Paul. Paul is a medical doctor by profession, but he is an amateur Austrian economist who demands the abolition—not the reform—of the U.S. Federal Reserve central banking system. Paul is also openly opposed even to imperialist democracy.

Yet the media that makes much of the Islamic State’s open opposition to democracy –the leaders of the Islamic State believe that God and not mere humans should rule through His representatives on Earth, the clergy—never mention Paul’s openly expressed opposition to (bourgeois) democracy. If they did, Paul and his son, Senator Rand Paul, who represents the state of Kentucky, would probably have a lot less political support than they do.

Another example of an open attack on democracy is the radio commercials for “Challenger School,” a private for-profit elementary school. One of their commercials begins with a man asking actors who pretend to be people interviewed at random off the street: “What form of government do we have in this country?” The actors answer that we have “democracy.” That is, after all, what is taught in the public schools.

Then the actor who plays the interviewer asks another actor playing a student at a Challenger School what kind of government we have in this country. The actor answering in a child’s voice explains that the “U.S. is a republic”—not a democracy—like the ignorant people who were presumably educated in “socialist” public schools believe. The child then explains how the non-democratic republic in the U.S. guarantees “liberty.”

Clearly, in Challenger Schools, as opposed to “socialist” public schools, children are taught that “democracy” is un-American and a very bad thing indeed. Though I have no way of being sure, it seems that the wealthy capitalists behind Challenger Schools and its commercials are very much taking their cues from the Austrian school of economists on the evil nature of democracy. (back)

10 And even here capitalist crises do temporarily tend in the direction of “dismantling” the banking system and the credit system that rests on it, replacing it with a cash system just like the Austrians desire. However, to the chagrin of the Austrians, capitalism then rebuilds the now more centralized banking and credit system, which once again drives production beyond its capitalist-imposed limits in the direction of socialism. (back)

11 Late in life, Sweezy explained that enough of his family’s fortune survived the 1929 crash to make it unnecessary for him to seek employment either in a university where he would be forced to teach bourgeois economics or serve the capitalists in various government agencies. This was in contrast to many of his less fortunate colleagues who had shared his radical ideas in the 1930s but had no alternative but to work for the capitalist class—whether as university teachers of bourgeois economics or work in government agencies—in order to survive and support their families.

This made it easier, Sweezy believed, for him to hold on to his Marxist ideas and eventually start Monthly Review magazine in the very teeth of the Cold War. Perhaps Sweezy speculated that many of his colleagues who were teaching bourgeois economics in the universities or working in high-level government jobs remained, in private at least, true to the radical ideas of their youth but dared not express them in public for fear of losing their well-paid positions. (back)


2 thoughts on “Capitalist Economists Debate ‘Secular Stagnation’

  1. [If interest rates are high,] there will be plenty of cases, the Austrians reason, where profit will be even higher than the high rate of interest and individual businesses will expand their output considerably until their rate of profit falls to the rate of interest. . . . [However, if interest rates are low,] [p]rofitable opportunities where new investments yield profits in excess of interest rates will be few, and industrial concerns will find relatively few areas of investment where the rate of profit exceeds the rate of interest.

    I’m not an expert in Austrian economics, but the marginalist story does not go as you say. According to the marginalist theory, savings is upward sloping wrt to interest rates, and investment is downward sloping.That means that as the interest rate rises, there are fewer, not more, investment opportunities, and more money to fund them; as rates rise, there are more, not fewer opportunities, and less money to fund them.

    As far as I know, the Austrian story is not that interest rates that are too low foreclose investment opportunities, but rather (especially coupled with fiat money, so that money available for investment is exogenous) that there is overinvestment, not stagnation.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.